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FILED PURSUANT TO RULE 424(B)(5)
FILE NUMBER 333-39275
PROSPECTUS SUPPLEMENT
(To Prospectus Dated November 12, 1997)
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$7,000,000
CYGNUS, INC.
Common Stock
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Cygnus, Inc. is selling shares of common stock that will yield gross
proceeds to us of up to $7,000,000. The shares are being sold by Cygnus to
Cripple Creek Securities, LLC in accordance with a Structured Equity Line
Flexible Financing-SM-Agreement, as amended.
The number of shares sold, purchase price and total proceeds to Cygnus
will be set forth in the Pricing Supplement to this Prospectus Supplement.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD CAREFULLY READ AND CONSIDER THE "RISK FACTORS" BEGINNING ON PAGE S-9.
Cripple Creek has advised Cygnus that it anticipates that the shares
will be sold from time to time primarily in transactions (which may include
block transactions) on the Nasdaq National Market at the market price prevailing
at the time of sale. Sales may also be made in negotiated transactions with
institutional investors or otherwise.
Cripple Creek is an "underwriter" as defined in the Securities Act of
1933 in connection with the sale of the shares. Any broker-dealers or agents
that participate with Cripple Creek in selling the shares may be deemed to be
"underwriters." Any commission received by such broker-dealers or agents and any
profit on resale of the shares purchased by them may be deemed to be
underwriting discounts or commissions under the Securities Act.
The common stock is listed on the Nasdaq National Market under the
symbol "CYGN." On March 31, 2000, the last reported sale price of the common
stock on the Nasdaq National Market was $14.50 per share.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this Prospectus Supplement is April 3, 2000.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS...........................S-1
IMPORTANT INFORMATION INCORPORATED BY REFERENCE.............................S-1
OUR COMPANY.................................................................S-3
RISK FACTORS................................................................S-9
USE OF PROCEEDS............................................................S-15
EQUITY LINE................................................................S-15
PLAN OF DISTRIBUTION.......................................................S-17
LEGAL MATTERS..............................................................S-18
PROSPECTUS
Available Information ........................................................2
Incorporation of Certain Documents by Reference...............................3
The Company...................................................................4
Recent Developments...........................................................4
Risk Factors..................................................................5
Use of Proceeds...............................................................5
Ratio of Earnings to Fixed Charges............................................5
Description of Capital Stock..................................................5
Plan of Distribution.........................................................25
Legal Opinions...............................................................26
Experts......................................................................26
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Our Company" and "Risk Factors" and
elsewhere in this prospectus supplement and prospectus, including in the
documents incorporated by reference, are forward-looking statements that involve
risks and uncertainties. These forward-looking statements include statements
about our plans, objectives, expectations, intentions and assumptions and other
statements contained in this prospectus supplement and prospectus, including in
the documents incorporated by reference, that are not statements of historical
fact. You can identify these statements by words such as "may," "will,"
"should," "estimates," "predicts" "potential," "continue," "strategy,"
"believes," "anticipates," "plans," "expects," "intends" and similar
expressions. We cannot guarantee future results, levels of activity, performance
or achievements. Our actual results and the timing of certain events may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a discrepancy include those discussed in "Risk
Factors" and elsewhere in this prospectus supplement and prospectus, including
in the documents incorporated by reference. You should rely only on the
information contained in this prospectus supplement and prospectus. No dealer,
salesperson or other person is authorized to give information that is not
contained in this prospectus supplement and prospectus. This prospectus
supplement and prospectus is not an offer to sell nor is it seeking an offer to
buy these securities in any jurisdiction where the offer or sale is not
permitted. The information contained in this prospectus supplement and
prospectus is current only as of its date, regardless of the time of its
delivery or any sale of these securities.
IMPORTANT INFORMATION INCORPORATED BY REFERENCE
THE SECURITIES AND EXCHANGE COMMISSION ALLOWS CYGNUS TO "INCORPORATE BY
REFERENCE" THE INFORMATION CYGNUS FILES WITH THEM, WHICH MEANS THAT WE CAN
DISCLOSE IMPORTANT BUSINESS AND FINANCIAL INFORMATION ABOUT CYGNUS TO YOU THAT
IS NOT INCLUDED IN OR DELIVERED WITH THIS PROSPECTUS SUPPLEMENT AND PROSPECTUS
BY REFERRING YOU TO THOSE DOCUMENTS.
The information incorporated by reference is considered to be part of
this document. Information that we file later with the Securities and Exchange
Commission will automatically update and supersede this information. We
incorporate by reference the documents listed below and any filing we will make
with the Securities and Exchange Commission under Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934 following the date of this
prospectus supplement:
1. Annual Report on Form 10-K of Cygnus for the fiscal year ended December
31, 1999; and
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2. The description of common stock contained in Cygnus' registration
statement on Form 8-A.
YOU MAY REQUEST A COPY OF THESE FILINGS, AT NO COST, BY WRITING OR
TELEPHONING US AT THE FOLLOWING ADDRESS:
CYGNUS, INC.
400 PENOBSCOT DRIVE
REDWOOD CITY, CALIFORNIA 94063
ATTENTION: SECRETARY
TELEPHONE REQUESTS MAY BE DIRECTED TO: (650) 369-4300
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OUR COMPANY
We are engaged in the development and manufacture of diagnostic medical
devices, utilizing proprietary technologies to satisfy unmet medical needs cost
effectively. Our current efforts are focused on a frequent, automatic and
non-invasive glucose monitoring device, the GlucoWatchs biographer, and
enhancements thereto.
Cygnus was incorporated in California in 1985 and was merged into a
Delaware corporation in September 1995. Our principal executive offices are
located at 400 Penobscot Drive, Redwood City, California 94063, our telephone
number at that address is (650) 369-4300 and our facsimile number at that
address is (650) 369-5318. Additionally, our website is www.cygn.com.
On July 9, 1999, John C Hodgman, President and Chief Executive Officer,
succeeded Gary W. Cleary, Ph.D., as Chairman of the Board of Directors. (Dr.
Cleary resigned as Chief Technical Officer effective the same date.) Dr. Cleary
served as Chairman Emeritus of the Board from July 9,1999 until February 22,
2000, when he resigned from the Board of Directors.
CYGNUS' BUSINESS STRATEGY.
In 1999 we chose to focus solely on glucose monitoring systems and sold
our drug delivery business to Ortho-McNeil Pharmaceutical, Inc., a Johnson &
Johnson company. Our GlucoWatchs system represents a potential advance in
glucose monitoring technology as compared to the currently prevailing "finger
stick" blood monitoring methods. The GlucoWatch system is designed to measure
glucose frequently, automatically and non-invasively through the ease and
convenience of a device worn like a wristwatch. Worldwide sales of blood glucose
self-monitoring products were approximately $2.5 billion in 1997 (Boston
Biomedical Consultants, Inc.). More than forty million people in North America,
Europe, Japan and Korea have diabetes. In the United States alone, more than ten
million people have been diagnosed with diabetes, with another five million
believed to have the condition. The number of people with diabetes is expected
to continue to grow with the aging of the population, while the number of
diagnosed cases is also expected to increase with changes in diagnostic
standards and new diagnostic technologies.
Clinical studies sponsored by the National Institutes of Health (NIH)
indicate that better management of glucose levels through more frequent testing
and more frequent insulin injections would enable people with diabetes to reduce
or significantly delay many serious diabetes-related health complications.
However, largely due to the pain of repetitive finger sticking and the
associated disruption of daily life, most people with diabetes currently test
their glucose levels less than half as often as recommended, resulting in
limited glucose information to make decisions that could better control glucose
fluctuations. We believe this lack of information presents a significant unmet
need for a new type of glucose monitoring device.
To address this unmet need, our GlucoWatch system provides frequent,
automatic and non-invasive glucose measurements and is intended for detecting
trends and tracking patterns of glucose levels in adults, 18 years and older,
who have diabetes. The device is intended for use at home and in healthcare
facilities to supplement, not replace, information obtained from standard
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home blood glucose monitoring devices. Following a three-hour warm-up period and
calibration from a fingerstick blood measurement, the device is capable of
providing up to thirty-six non-invasive glucose measurements over twelve hours.
The extracted glucose is collected in a consumable component called the
AutoSensor, which is attached to the back of the biographer and replaced after
twelve hours of measurements. The GlucoWatch system (i.e., the biographer and
AutoSensor ) offers features such as alerts indicating hypoglycemic and
hyperglycemic conditions, and event markers that record factors affecting
glucose levels.
On December 6, 1999, we announced that our Premarket Approval
application (PMA) for the GlucoWatch system received a unanimous recommendation
for approval with conditions by the United States Food and Drug Administration's
(FDA) Clinical Chemistry and Clinical Toxicology Devices Panel of the Medical
Devices Advisory Committee. The Advisory Committee suggested three conditions
for approval. The first is the creation of an education program, about which we
have already been in discussions with the FDA concerning the substance of such a
program. The second condition is that our product labeling will be revised in
accordance with recommendations given to the FDA by the Committee, and we are
currently in discussions with the FDA on proposed labeling. Third, the Committee
suggested a post-market study of detection of hypoglycemia and hyperglycemia.
This lattermost condition does not need to be satisfied prior to FDA approval.
Although the FDA is not bound by the decisions of the Advisory Committee, the
agency typically follows its advisory committees' advice. By way of background,
our 5,000-page PMA application included analyses of clinical studies conducted
on more than 600 people with diabetes, who used the device from a few hours to
up to six weeks. The studies, which were performed at more than 15 clinical
sites across the United States, involved over 25,000 hours of use of the
GlucoWatch system. The participants consisted of a cross-section of racial and
age groups, diabetes types (both type 1 and type 2), and other defining
characteristics. Approximately 19,000 paired data points were generated from the
studies, comparing interstitial fluid glucose measurements obtained by the
GlucoWatch system to glucose measurements obtained with finger stick monitors
using capillary blood.
On December 2, 1999, we announced the receipt of a CE Certificate for
the GlucoWatch system, indicating that the product has met the essential
requirements and other criteria of the European Community Directive 93/42/ECC,
Annex V, Section 3.2. The CE Certificate is required for selling products in the
European Community. We are compliant with ISO 9002 and EN 46002.
In December 1999, we entered into a five-year Supply Agreement with
Hydrogel Design Systems, Inc. relating to the manufacture of the AutoSensor
hydrogel laminate used in the GlucoWatch system. Also, in December 1999, we
entered into a three-year Supply Agreement with Key Tronic Corporation relating
to the manufacture of the biosensor component of the AutoSensor. Both of these
agreements contain percentage minimum requirements of product that we must
purchase from these companies if and when the GlucoWatch system is
commercialized. Additionally, we are currently in negotiations with a
third-party manufacturer for the GlucoWatch system.
In September 1999, we were awarded a six-month Phase I Small Business
Innovative Research Grant for "High Performance Biosensor Electrode Materials"
from the National Institute of Diabetes and Digestive and Kidney Diseases
division of the National Institutes of
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Health (NIH) in the amount of $0.1 million. This funding is used to investigate
advancements in biosensor materials used for glucose detection and measurement,
potentially to include in future versions of the GlucoWatch system.
In June 1998, we entered into long-term agreements with E. I. du Pont
de Nemours & Company ("DuPont") for the development and supply of thick film
materials for our GlucoWatch system. In July 1997, we entered into a Product
Supply Agreement with Contract Manufacturing, Inc. relating to the assembly of
the AutoSensor and also the final packaging of the GlucoWatch system starter
kits. This latter agreement continues for five years from date of first
commercial sale, and contains minimum requirements of product that we must
purchase from this company if and when the GlucoWatch system is commercialized.
In 1996, we entered into a collaboration agreement with Yamanouchi
Pharmaceutical Co., Ltd. for the commercialization of the GlucoWatch system in
Japan and Korea, and also a collaboration agreement with Becton Dickinson &
Company for the commercialization of the GlucoWatch system in the rest of the
world. Under the Yamanouchi agreement, we are eligible to receive milestone
payments prior to commercialization and to receive a percentage of the product's
future commercial success in Japan and Korea. In March of 1998, we announced the
termination of our agreement with Becton Dickinson. One of our priorities is to
establish an alliance or alliances for the commercialization of the GlucoWatch
system in North America and Europe. The purpose of such an alliance or alliances
is for us to secure certain commercialization functions, such as distribution,
sales and customer service. We are in discussions with several companies
regarding this objective. Some of the companies are international in scope and
would provide the requisite commercialization functions worldwide. Other
companies focus on certain geographies and/or certain commercialization
functions. The potential signing of a worldwide commercialization agreement may
or may not coincide with the launch of our GlucoWatch system, assuming we
receive FDA approval. We are evaluating out-sourced capabilities for a U.S.
launch without a worldwide commercialization alliance. There can be no assurance
that we will be able to enter into a commercialization alliance or alliances or
that we will be able to out-source certain commercialization capabilities for
launch without a worldwide commercialization alliance in place.
In 1995, we entered into an exclusive license agreement with The
Regents of the University of California relating to patents and patent
applications relating to devices for iontophoretic non-invasive sampling of
substances. Under this license, if our GlucoWatch system is commercialized
and is covered by the scope of the license, we will pay the University of
California certain royalties.
SALE OF OUR TRANSDERMAL DRUG DELIVERY SYSTEMS.
On December 15, 1999, we completed the sale of substantially all of our
drug delivery business assets to Ortho-McNeil Pharmaceutical, Inc., a Johnson &
Johnson company. The transaction was finalized upon receiving clearance under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976. We sold all of the
assets of our drug delivery business to Ortho-McNeil except those relating to
a nicotine patch under development and one other early-stage project, both of
which were terminated before year end.
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Cygnus products that were sold to Ortho-McNeil include certain
assets related to the Nicotrol-Registered Trademark-(Pharmacia AB, Stockholm,
Sweden) nicotine system (currently marketed by Pharmacia & Upjohn in Europe
and by McNeil Consumer Healthcare, a Johnson & Johnson company, in the U.S.);
two hormone replacement transdermal products (a 7-day estrogen patch recently
approved by the U.S. Food and Drug Administration and an estrogen/progestin
combination product that completed Phase III clinical trials); and the
EVRA-TM- (Johnson & Johnson, New Brunswick, New Jersey) contraceptive patch
we were developing with the R.W. Johnson Pharmaceutical Research Institute.
Under the terms of the agreement with Ortho-McNeil, we received $20
million in cash at closing, and Ortho-McNeil will pay up to an additional $55
million in cash, contingent on the achievement of certain milestones. The
contingent payments relate to the achievement by Ortho-McNeil of certain
technical, regulatory and commercialization milestones related to the EVRA
transdermal contraceptive patch. We are eligible to receive up to $14.8 million
of these contingent milestones in the year 2000; however, because the
achievement of these milestones is not within our control, we cannot predict the
likelihood or timing of these contingent payments in the year 2000 and beyond.
The Final Award in an arbitration matter between Sanofi, S.A. and
Cygnus relating to transdermal hormone replacement therapy systems, however,
remained with Cygnus and is not part of the Ortho-McNeil sale. This Final Award
was entered as a judgment of the U.S. District Court for the Northern District
of California on December 11, 1997. Cygnus' obligations under the Final Award
are as follows: (i) the $14.0 million cash payment already made by Cygnus to
Sanofi in January 1998, (ii) payments of an aggregate amount equal to $17.0
million, commencing in 2001 and ending in2005, and (iii) a convertible
promissory note in the principal amount of $6.0 million, issued in December
1997, payable in full at the end of four years and bearing interest at 6.5% per
annum. (The note will be convertible into our Common Stock at Sanofi's option,
exercisable at any time during the four year term, at a conversion rate of
$21.725 per share.) The underlying agreement, which was the subject matter of
the arbitration, was terminated on December 15, 1999.
The primary reason for selling the drug delivery business was to focus
management attention and corporate resources on our glucose monitoring business.
We will use the proceeds to accelerate commercialization activities for the
GlucoWatch system.
OUR FREQUENT, AUTOMATIC AND NON-INVASIVE GLUCOSE MONITORING SYSTEMS.
MARKET OPPORTUNITY
People with diabetes measure blood glucose levels to adjust their diet,
medication and insulin use to better control their glucose levels in order to
prevent diabetes-related complications. Currently, to measure their glucose
levels, people with diabetes must prick their fingers, draw blood and place a
drop of blood on a glucose reagent strip inserted in an instrument that provides
a glucose reading. Each day of testing can involve numerous sticks and the
complete procedure is not only painful but disruptive to daily life. As a result
of this pain and disruption, most people with diabetes monitor their blood
glucose levels less than twice per day, instead of the recommended four to seven
times per day. Even at the recommended level of
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testing, the market for products for self-monitoring of glucose levels by people
with diabetes is quite substantial.
Worldwide sales of products for the self-monitoring of blood glucose
levels were approximately $2.5 billion in 1997. Approximately 80% to 90% of the
sales were related to disposable glucose reagent strips for finger stick
monitoring (Boston Biomedical Consultants, Inc.). In the U.S., a majority of
glucose level testing is conducted by a relatively small segment of people with
diabetes; for example, of these people, just 19% (about 1.6 million) account for
52% of the tests performed. The number of people diagnosed with diabetes has
been growing and is expected to continue to grow due to the aging of the
population, changes in diagnostic standards and new diagnostic technologies.
Specifically, the diagnostic standards in the U.S. have been changed such that a
fasting plasma glucose value of greater than or equal to 126 mg/dL now indicates
a diagnosis of diabetes, whereas such diagnosis previously required a value of
greater than or equal to 140 mg/dL. Diabetes can lead to severe complications
over time, including blindness, loss of kidney function and
peripheralneuropathy, causing circulation problems to the arms and legs, pain
and potential amputation. The American Diabetes Association (ADA) estimated that
the complications arising from diabetes cost the U.S. healthcare system in
excess of $45 billion in 1992. These complications are largely a consequence of
years of poor management of glucose levels by people with diabetes. Results of
the Diabetes Control and Complication Trial, a major clinical trial sponsored by
the National Institutes of Health and published in 1993, showed that more
frequently monitored blood glucose levels and rigid adherence to a program of
diet, exercise and insulin injections could prevent or significantly delay the
onset of many of the long-term complications of diabetes.
THE GLUCOWATCH-Registered Trademark- SYSTEM.
We believe that there is an unmet need for automatic, frequent and
non-invasive glucose monitoring. In an effort to address this unmet need, we
have developed the GlucoWatch biographer, which is worn like a wristwatch and,
after calibrating each new AutoSensor with a standard blood glucose monitor,
automatically extracts and measures glucose levels through intact skin
approximately every twenty minutes. The durable GlucoWatch biographer displays
and stores current and past glucose levels and trend data. The extracted glucose
is collected in a consumable AutoSensor attached to the back of the device and
replaced after twelve hours of readings. The GlucoWatch system offers, in a
portable and discreet device, features not available in currently marketed
devices. These include frequent data collection, electronic memory to store and
display glucose levels, alerts indicating hypoglycemic and hyperglycemic
conditions and event markers that record factors that affect glucose levels. The
GlucoWatch biographer is designed to be worn day and/or night for glucose
monitoring, and is expected to reduce significant drawbacks of the finger stick
technique, such as the pain of repetitive sticking and the disruption of normal
activities caused by cumbersome procedures. We believe that the GlucoWatch
system can provide additional information that can help people with diabetes
understand fluctuations in their glucose levels.
Specifically, our GlucoWatch system extracts glucose molecules through
intact skin utilizing a patented sampling process called electroosmosis (or
"reverse iontophoresis"). The glucose is extracted from interstitial fluid, not
blood, and is collected and measured by the consumable AutoSensor, which
includes an enzyme-containing hydrogel and electrodes for
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electro-osmotic extraction and biosensing. The glucose collected in the
AutoSensor triggers an electro-chemical reaction in the AutoSensor, generating
electrons. The biosensor measures the electrons and an application-specific
integrated circuit ("ASIC") in the GlucoWatch system equates the number of
electrons to a concentration of blood glucose. The GlucoWatch system
automatically measures glucose levels at twenty-minute intervals, and displays
the most recent readings and trends at the push of a button. Its electronic
memory capabilities permit the retrieval of past data, allowing longer-term
trend analysis. Additionally, we are developing future generation glucose
monitoring products, as well as enhancements to the GlucoWatch system. Such
enhancements include, but are not limited to, features for increased user
convenience such as a shorter warm-up period, extension of the AutoSensor
measurement duration beyond twelve hours, an increase in the number of glucose
measurements per hour, addition of a delayed start feature, and personal
computer linkages for downloading data, as well as various cost reductions in
the manufacturing process. Other enhancements are also under consideration. We
are in the early developmental stages for a future telemetric product that
allows both greater flexibility in the location of the glucose extraction
component and a new form of the monitor that stores and displays glucose data.
REGULATORY STATUS.
On January 25, 1999, we submitted the first part of our PMA for the
GlucoWatch system to the FDA. This submission included a variety of information,
including manufacturing documentation. We submitted the remainder of the PMA in
June 1999, including analysis of a series of clinical studies totaling more than
600 people with diabetes, at more than 15 clinical sites across the U.S., who
used our biographer from a few hours to up to six weeks, as well as two
additional studies. The participants in our clinical studies consisted of a
cross-section of racial and age groups, diabetes types (both type 1 and type 2),
and other defining characteristics. This represented over 25,000 hours of use of
the GlucoWatch biographer. Approximately 19,000 paired data points were
generated from the studies, comparing glucose measurements obtained by the
GlucoWatch biographer to glucose measurements obtained with finger stick
monitors using capillary blood. In July 1999, the FDA notified Cygnus that our
PMA was deemed suitable for filing and was granted expedited review status. On
December 6, 1999, our PMA for the GlucoWatch biographer received a unanimous
recommendation for approval with conditions by the FDA's Clinical Chemistry and
Clinical Toxicology Devices Panel of the Medical Devices Advisory Committee. The
Advisory Committee suggested three conditions for approval. The first is the
creation of an education program, about which we have already been in discussion
with the FDA concerning the substance of such a program. The second condition is
that our product labeling will be revised in accordance with recommendations
given to the FDA by the Committee, and we are currently in discussions with the
FDA on proposed labeling. Third, the Committee suggested post-market study of
detection of hypoglycemia and hyperglycemia. This lattermost condition does not
need to be satisfied prior to FDA approval. Although the FDA is not bound by the
decisions of the advisory committee, the agency typically follows its Advisory
Committees' advice; however, no assurance can be given that the FDA will approve
our GlucoWatch biographer and we cannot predict the timing of such approval, if
given. Furthermore, we are in the process of preparing an Investigational Device
Exemption (IDE) for filing with the FDA so that we can conduct clinical trials
on an ongoing basis. We also anticipate commencing clinical trials with children
and adolescents if the IDE is obtained.
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RISK FACTORS
IN DETERMINING WHETHER TO INVEST IN THE COMMON STOCK, YOU SHOULD
CAREFULLY CONSIDER THE INFORMATION BELOW IN ADDITION TO ALL OTHER INFORMATION
PROVIDED TO YOU IN THIS PROSPECTUS, INCLUDING THE INFORMATION INCORPORATED BY
REFERENCE IN THIS PROSPECTUS.
OUR PRODUCT PIPELINE IS SEVERELY LIMITED.
With the sale of the majority of the drug delivery business assets to
Ortho-McNeil Pharmaceutical, Inc., and the termination of the remaining drug
delivery projects, we are now exclusively focused on diagnostic medical devices,
initially on a line of frequent, automatic and non-invasive glucose monitoring
devices. There is an inherent risk in not having a broad base of products in
development and we cannot assure you that we will be successful with this narrow
line of products.
WE MAY NOT RECEIVE FDA APPROVAL ON OUR PRODUCTS.
Although the FDA's Clinical Chemistry and Toxicology Devices Panel of
the Medical Devices Advisory Committee has recommended the GlucoWatch biographer
for approval for sale with three conditions, there can be no assurance that we
can meet these conditions or, if we can, that the recommendation of the Advisory
Committee will convince the FDA to approve the product. Additionally, there can
be no assurance that the FDA will approve the GlucoWatch biographer on the same
terms, if at all. Furthermore, as we seek regulatory approval for enhancements
and possible manufacturing changes through the PMA supplement process, there can
be assurances that such supplements will be approved or that one or more new
PMAs will not need to be filed.
Even if we receive the necessary regulatory approvals for the
GlucoWatch system, there can be no assurance that unforeseen problems will not
occur in product manufacturing and commercial scale-up or marketing or product
distribution. Any such occurrence could significantly delay the
commercialization of the GlucoWatch system or prevent its market introduction
entirely. Furthermore, even if the GlucoWatch system is successfully developed,
the commercial success of the GlucoWatch system will depend on its acceptance in
the market.
WE HAVE LIMITED MARKETING, DISTRIBUTION, MANUFACTURING AND SALES
EXPERIENCE.
We have limited experience marketing, distributing, manufacturing or
selling medical device products. To successfully market, distribute, manufacture
and sell the GlucoWatch system or our other glucose monitoring products under
development, we must either develop a more extensive marketing, distributing,
manufacturing and sales force or enter into arrangements with third parties to
market, distribute, manufacture and sell our products. We cannot assure you that
we will be able to successfully develop a more extensive marketing,
distributing, manufacturing and sales force or that we will enter into
acceptable marketing, distributing, manufacturing and sales agreements with
third parties. If we maintain our own marketing, distributing, manufacturing and
sales capabilities, we will compete with other companies that have experienced
and well-funded marketing, distributing, manufacturing and sales operations. If
we enter into a marketing arrangement with a third party, any revenues we
receive will depend on
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the third party, and we will likely have to pay a sales commission or similar
amount. We may be unable to successfully commercialize our products.
WE CANNOT PREDICT THE MARKET ACCEPTANCE OF OUR PRODUCTS.
We are focusing our efforts predominantly on a line of frequent,
automatic, and non-invasive glucose monitoring devices. No one can predict
market acceptance or penetration of such products, given that they are entirely
different from any glucose diagnostic product currently on the market. There is
a risk in introducing a very new type of product in a market of established
finger stick glucose monitors, and we cannot assure you that our products will
be accepted or to what degree. Additionally, some of our competitors have
announced, and others may be developing, new, frequent, automatic, and
non-invasive (or minimally invasive, semi-invasive or less-invasive) glucose
monitoring devices. We cannot predict what impact introduction of competing
products will have on our market sales.
WE DEPEND ON PROPRIETARY TECHNOLOGY.
Our success depends in large part on our ability to obtain patent
protection for our products, preserve our trade secrets and operate without
infringing upon the proprietary rights of others, both in the U.S. and abroad.
Since currently patent applications in the U.S. are maintained in secrecy until
issuance, and publication of discoveries in the scientific or patent literature
tends to lag behind actual discovery by several months, we cannot be certain
that we were the first to file our patent applications or that we will not
infringe upon third-party patents. We cannot assure you that any patents will be
issued or upheld with respect to any of our patent applications or that any
patents will provide competitive advantages for our products or will not be
challenged or circumvented by our competitors. We also rely on trade secrets and
proprietary know-how that we seek to protect, in part, by confidentiality
agreements with our licensees, employees and consultants. We cannot assure you
that these agreements will not be breached, that we would have adequate remedies
for any breach or that our trade secrets will not otherwise become known or be
independently developed by our competitors. Any litigation, in the U.S. or
abroad, as well as foreign opposition and/or domestic interference proceedings,
could result in substantial expense to us and significant diversion of effort by
our technical and management personnel. We may resort to litigation to enforce
our patents or protect trade secrets or know-how, as well as to defend against
infringement charges. A negative determination in such proceedings could subject
us to significant liabilities or require us to seek licenses from third parties.
Although patent and intellectual property disputes in the pharmaceutical product
area have often been settled through licensing or similar arrangements, costs
associated with such arrangements may be substantial and could include ongoing
royalties. Furthermore, we cannot assure you that necessary licenses would be
available to us on satisfactory terms, if at all. Accordingly, an adverse
determination in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent us from manufacturing and selling certain of
our products, and could materially adversely affect us.
WE FACE INTENSE COMPETITION.
The medical device industry in general, and the market in which we
expect to offer the GlucoWatch system in particular, is intensely competitive.
Even if we successfully develop the
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GlucoWatch system, we will compete with other providers of personal glucose
monitors. A number of our competitors are currently marketing traditional
glucose monitors. These monitors are widely accepted in the healthcare industry
and have long histories of accuracy and effective use. Furthermore, a number of
companies have announced that they are developing products that permit less
painful or painless, as well as continual or continuous, glucose monitoring.
Accordingly, we expect competition to increase. Many of our competitors have
substantially greater resources than we do and have greater name recognition and
lengthier operating histories in the healthcare industry. We cannot assure you
that we will be able to compete effectively against our competitors.
Additionally, we cannot assure you that the GlucoWatch system or our other
enhanced products under development will replace any currently used devices or
systems. Furthermore, we cannot assure you that our competitors will not succeed
in developing, even before we develop and commercialize the GlucoWatch system or
our other enhanced products under development, devices and technologies that
permit more-efficient and less-expensive glucose monitoring devices.
Pharmaceutical or other healthcare companies may also develop therapeutic drugs,
treatments or other products that will substantially reduce the prevalence of
diabetes or otherwise render our products obsolete.
THIRD PARTIES MAY NOT REIMBURSE PATIENTS, HOSPITALS AND PHYSICIANS FOR
THE COSTS OF MEDICAL DEVICES.
Successful commercialization of certain of our products may depend in
part on the availability of reimbursement from third-party healthcare payers,
such as private insurance plans and the government. There can be no assurance
that such reimbursement will be available. Third-party payers are increasingly
attempting to contain healthcare costs by limiting both coverage and the level
of reimbursement for new therapeutic and diagnostic products. There can be no
assurance that adequate levels of reimbursement will be available to enable us
to achieve market acceptance of the GlucoWatch system or other new products
under development or to maintain price levels sufficient to realize an
appropriate return on our investment. In certain international countries, the
period of time needed to obtain such reimbursement can be lengthy. We may delay
the launch of our products in certain countries until eligibility for
reimbursement is established. This could potentially harm our business,
financial condition and results of operations.
WE HAVE INCURRED SUBSTANTIAL LOSSES, HAVE A HISTORY OF OPERATING
LOSSES, HAVE AN ACCUMULATED DEFICIT AND EXPECT CONTINUED OPERATING
LOSSES.
We reported a net loss from continuing operations of $22.2 million
for the year ended December 31, 1999 and have experienced annual operating
losses since our inception. We expect to continue to incur operating losses
at least until we have significant sales, if we ever do, of the GlucoWatch
system. We cannot assure you that we will generate significant revenues or
achieve profitability. We do not have experience in manufacturing, marketing
or selling our medical device products. Our future development efforts may
not result in commercially viable products. We may fail in our efforts to
introduce our products or to obtain required regulatory clearances. Our
products may never gain market acceptance, and we may never generate revenues
or achieve profitability. Our revenues to date have been derived primarily
from product development and licensing fees related to our products under
development, and manufacturing and royalty revenues from our discontinued
operations, including Nicotrol-Registered Trademark-(Pharmacia AB, Stockholm,
Sweden) nicotine patch and the Fempatch-Registered Trademark-(Warner-Lambert
Co., Morris Plains, New Jersey)
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system. As a result of the sale of our drug delivery business, we will no longer
receive manufacturing revenue or royalty payments from the Nicotrol patch or the
Fempatch system. If we obtain regulatory approvals, we expect that a substantial
portion of our future revenues will be derived from sales of the GlucoWatch
system and other diagnostic products currently under development.
WE ARE HIGHLY LEVERAGED AND MAY BE UNABLE TO SERVICE OUR DEBT.
As of December 31, 1999, we had indebtedness of approximately $47.0
million. The degree to which we are leveraged could materially adversely affect
our ability to obtain financing for working capital, acquisitions or other
purposes and could make us more vulnerable to industry downturns and competitive
pressures. Our ability to meet our debt service obligations depends upon our
future performance, which will depend upon financial, business and other
factors, many of which are beyond our control. Although we believe our cash
flows will be adequate to meet our interest payments, we cannot assure you that
we will continue to generate cash flows in the future sufficient to cover our
fixed charges or to permit us to satisfy any redemption obligations pursuant to
our indebtedness. If we cannot generate cash flows in the future sufficient to
cover our fixed charges or to permit us to satisfy any redemption obligations
pursuant to our indebtedness, and we cannot borrow sufficient funds either under
our credit facilities or from other sources, we may need to refinance all or a
portion of our existing debt, to sell all or a portion of our assets, or to sell
equity securities. There is no assurance that we could successfully refinance,
sell our assets or sell equity securities, or, if we could, we cannot give any
assurance as to the amount of proceeds we could realize. In the event of
insolvency, bankruptcy, liquidation, reorganization, dissolution or winding-up
of our business or upon default or acceleration relating to our debt
obligations, our assets will first be available to pay the amounts due under our
debt obligations. Holders of Common Stock would only receive the assets
remaining, if any, after payment of all indebtedness and Preferred Stock.
WE MAY NEED ADDITIONAL FINANCING AND IT MAY NOT BE AVAILABLE.
In order to continue to develop our diagnostic products, we will
require substantial resources to conduct research and development and clinical
trials necessary to bring our products to market and to establish production and
marketing capabilities. We may seek additional funding through public or private
financings, including debt or equity financings. We may also seek other
arrangements, including collaborative arrangements. Any additional equity
financings may dilute the holdings of current stockholders. Debt financing, if
available, may restrict our ability to issue dividends in the future and take
other actions. We may not be able to obtain adequate funds when we need them
from financial markets or arrangements with corporate partners or other sources.
Even if funds are available, they may not be on acceptable terms. If we cannot
obtain sufficient additional funds, we may have to delay, scale back or
eliminate some or all of our research and product development programs or
license or sell products or technologies that we would otherwise seek to develop
ourselves. We believe that our existing cash, cash equivalents and investments,
plus cash from revenues, other fundings such as potential product funding
collaborations or financings, and earnings from investments, will suffice to
meet our operating expenses, debt servicing and repayments and capital
expenditure requirements at least through the end of the year 2000. The amounts
and timing of future expenditures will depend on progress of ongoing research
and development, results of clinical trials, rates at which operating
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losses are incurred, executing possible development and licensing agreements
with corporate partners, developing our products, manufacturing scale-up for the
GlucoWatch system, the FDA regulatory process, and several other factors, many
of which are beyond our control.
WE DEPEND ON LICENSEES, DISTRIBUTORS AND COLLABORATIVE ARRANGEMENTS.
Our strategy to develop, clinically test, obtain regulatory approval
for, manufacture and commercialize our products depends, in large part, upon our
ability to selectively enter into and maintain collaborative arrangements with
third-party partners, distributors, licensees, and other such parties. If we
commercialize our GlucoWatch system, we will depend upon Yamanouchi
Pharmaceutical Co., Ltd. to market and distribute the GlucoWatch system in Japan
and Korea. We do not have any marketing or distribution agreements for the
GlucoWatch system other than the Yamanouchi collaboration. One of our priorities
is to establish an alliance or alliances for the commercialization of the
GlucoWatch system in North America and Europe. The purpose of such an alliance
or alliances is for us to secure certain commercialization functions, such as
distribution, sales and customer service. We are in discussions with several
companies regarding this objective. Some of the companies are international in
scope and would provide the requisite commercialization functions worldwide.
Other companies focus on certain geographies and/or certain commercialization
functions. The potential signing of a worldwide commercialization agreement may
or may not coincide with the launch of our GlucoWatch system, assuming we
receive FDA approval. We are evaluating outsourced capabilities for a U.S.
launch without a worldwide commercialization alliance. There can be no assurance
that we will be able to enter into a commercialization alliance or alliances or
that we will be able to out-source certain commercialization capabilities for
launch without a worldwide commercialization alliance in place. We cannot assure
you that such third parties will not, for competitive reasons, support, directly
or indirectly, a company or product that competes with one of our products.
Furthermore, any dispute between us and such a third party might require us to
initiate or defend against expensive litigation or arbitration proceedings. If
one of our partners, distributors or licensees terminates an arrangement, cannot
fund or otherwise satisfy its obligations under its arrangements, or
significantly disputes or breaches a contractual commitment, then we would
likely be required to seek an alternative partner, distributor, or licensee. We
cannot assure you that we would be able to reach agreement with a replacement
third party. If we were unable to find a replacement third party, we might not
be able to perform or fund the activities of the current partner, distributor or
licensee. Even if we were able to perform and fund these activities, our capital
requirements would increase substantially. Additionally, we may choose to
self-fund certain research and development projects in order to exploit our
technologies. If these activities result in a commercial product, they will help
our long-term operating results but will negatively affect our short-term
operating results. Furthermore, as discussed above, we have limited marketing,
manufacturing, distribution and sales experience.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS.
The design, development, manufacture and use of our medical products
involve an inherent risk of product liability claims and associated adverse
publicity. Producers of medical products may face substantial liability for
damages in the event of product failure or allegations that the product caused
harm. We currently maintain product liability insurance, but it is expensive and
difficult to obtain and may not be available in the future on acceptable terms.
We
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cannot assure you that we will not be subject to product liability claims,
that our current insurance would cover any claims, or that adequate insurance
will continue to be available on acceptable terms in the future. In the event we
are held liable for damages in excess of the limits of our insurance coverage,
or if any claim or product recall creates significant adverse publicity, our
business, financial condition and results of operations could be materially
adversely affected.
WE MAY NOT BE ABLE TO RETAIN OR HIRE KEY PERSONNEL.
Our ability to operate successfully and manage our potential future
growth significantly depends upon retaining key scientific, technical,
managerial and financial personnel, and attracting and retaining additional
highly qualified scientific, technical, managerial and financial personnel. We
face intense competition for qualified personnel in these areas, and we cannot
assure you that we will be able to attract and retain qualified personnel. The
loss of key personnel or our inability to hire and retain additional qualified
personnel in the future could adversely affect our business, financial condition
and operating results.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS HAVE ANTI-TAKEOVER
PROVISIONS.
Our Restated Certificate of Incorporation and Bylaws contain several
provisions that may make the acquisition of control of Cygnus more difficult or
expensive. The Certificate of Incorporation and Bylaws, among other things: (i)
provide that directors may be removed only for cause and only upon the
affirmative vote of the holders of at least a majority of the outstanding shares
of voting stock entitled to vote for such directors, (ii) permit the remaining
directors (but not the stockholders, unless the directors so resolve) to fill
vacancies and newly created directorships on the Board, (iii) eliminate the
ability of stockholders to act by written consent and (iv) require the vote of
stockholders holding at least 66 2/3 % of the outstanding shares of voting stock
to amend, alter or repeal the Bylaws and certain provisions of the Restated
Certificate of Incorporation, including the provisions described in (i) through
(iv).
Such provisions may make the removal of incumbent directors more
difficult and time-consuming and may have the effect of discouraging a tender
offer or other takeover attempt not previously approved by the Board of
Directors. Under the Restated Certificate of Incorporation, the Board of
Directors also has the authority to issue shares of Preferred Stock in one or
more series and to fix the powers, preferences and rights of any such series
without stockholder approval. The Board of Directors could, therefore, issue,
without stockholder approval, Preferred Stock with voting and other rights that
could adversely affect the voting power of the holders of Common Stock and could
make it more difficult for a third party to gain control of Cygnus. In addition,
we have adopted a Stockholder Rights Plan which, under certain circumstances,
would significantly dilute the equity interest of persons seeking to acquire
control over us without the prior approval of the Board of Directors.
OUR STOCK PRICE IS VOLATILE.
The trading price of our Common Stock substantially fluctuates in
response to factors such as, but not limited to: announcements by us or our
competitors of results of regulatory approval filings or clinical trials or
testing, developments or disputes governing proprietary rights, technological
innovations or new commercial products, government regulatory action,
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and general conditions in the medical technology industry, changes in securities
analysts' recommendations, or other events or factors, many of which are beyond
our control. In addition, the stock market in general has experienced extreme
price and volume fluctuations in recent years that have particularly affected
the market prices of many medical technology companies, unrelated to the
operating performance of these companies. Fluctuations or decreases in the
trading price of our Common Stock may adversely affect the market for our Common
Stock. In the past, following periods of volatility in the market price for a
company's securities, securities class action litigation often has been
instituted. Such litigation could result in substantial costs and a diversion of
management attention and resources, which could have a material adverse effect
on our business, financial condition and operating results.
WE DO NOT PAY DIVIDENDS.
We have never declared or paid cash dividends on our Common Stock. Our
current bank term loan precludes us from paying dividends to stockholders. We
currently intend to retain any earnings for use in our business and therefore do
not anticipate paying any dividends in the future.
USE OF PROCEEDS
The total proceeds to us from this offering will be set forth in the
Pricing Supplement to this Prospectus Supplement. The net proceeds of this
offering will be used for working capital and general corporate purposes.
EQUITY LINE
Cygnus and Cripple Creek entered into the Structured Equity Line
Flexible Financing Agreement, dated as of June 30, 1999. Cygnus and Cripple
Creek subsequently entered into the Amendment No. 1 to the Structured Equity
Line Flexible Financing Agreement, dated as of September 29, 1999 and the
Amendment No. 2 to the Structured Equity Line Flexible Financing Agreement,
dated as of March 27, 2000. The shares covered by this prospectus supplement are
being issued under the Equity Line Agreement.
Under the Equity Line Agreement, as amended, subject to the
satisfaction of conditions, Cygnus may require Cripple Creek to purchase shares
of common stock over a period of 24 months from June 30, 1999, for an aggregate
purchase price of up to $30 million. Cygnus has also agreed to issue to Cripple
Creek warrants to purchase 10,000 shares for every $1,000,000 in gross proceeds
from the sale of common stock under the Equity Line Agreement. The warrants will
be issued after the end of each calendar year. The warrants are exercisable for
5 years from the date they are issued at an exercise price equal to the weighted
average price at which shares were sold during the preceding calendar year.
Under the Equity Line Agreement, as amended, Cygnus, at our sole option
and discretion, subject to the satisfaction of conditions and limitations, can
require Cripple Creek to purchase shares of common stock for an aggregate
purchase price of up to $4.0 million, and Cripple Creek, subject to the approval
of Cygnus, can require Cygnus to sell it additional common stock for an
aggregate purchase price of up to $3.0 million. Cripple Creek may satisfy these
obligations by purchasing up to 5% more or less than the total aggregate dollar
amount of
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these obligations. Three (3) trading days prior to the beginning of each
monthly investment period, we are required to notify Cripple Creek of the
dollar amount of common stock required to be purchased by Cripple Creek, if
any, during the monthly investment period. The purchase price per share to be
paid by Cripple Creek for the shares of common stock acquired under the
Equity Line Agreement will equal 98% of the two lowest sales prices of the
common stock during the six trading days immediately preceding the date of
each notice sent to Cygnus by Cripple Creek specifying a dollar amount of
shares.
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PLAN OF DISTRIBUTION
Cripple Creek may, from time to time, sell all or a portion of the
shares:
- on the Nasdaq National Market, or such other exchange on which the
common stock may from time to time be trading;
- in privately negotiated transactions or otherwise;
- at fixed prices that may be changed;
- at market prices prevailing at the time of sale; or
- at prices related to such market prices or at negotiated prices.
The shares may be sold by Cripple Creek by one or more of the following
methods, without limitation:
- block trades in which the broker or dealer so engaged will attempt
to sell the shares as agent but may position and resell a portion
of the block as principal to facilitate the transaction;
- purchases by a broker or dealer as principal;
- an exchange distribution in accordance with the rules of such
exchange;
- ordinary brokerage transactions and transactions in which the
broker solicits purchasers; privately negotiated transactions;
- short sales; and
- a combination of any of the above methods of sale.
In effecting sales, brokers and dealers engaged by Cripple Creek may
arrange for other brokers or dealers to participate. Brokers or dealers may
receive commissions or discounts from Cripple Creek, or, if any broker-dealer
acts as agent for the purchaser of the shares, from the purchaser, in amounts to
be negotiated which are not expected to exceed those customary in the types of
transactions involved. Broker-dealers may agree with Cripple Creek to sell a
specified number of shares at a stipulated price per share. To the extent a
broker-dealer is unable to sell a specified number of shares acting as agent for
Cripple Creek, it will purchase as principal any unsold shares at the price
required to fulfill the broker-dealer commitment to Cripple Creek.
Broker-dealers who acquire shares as principal may resell the shares from time
to time in transactions which may involve block transactions of the nature
described above, in the over-the-counter market or otherwise at prices and on
terms then prevailing at the time of sale, at prices related to the then-current
market price or in negotiated transactions. In connection with resales,
broker-dealers may pay to or receive from the purchasers of the shares
commissions as described above. Cripple Creek may also sell the shares in
accordance with Rule 144 under the Securities Act, rather than under this
prospectus.
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Cripple Creek is an "underwriter" as defined in the Securities Act of
1933 in connection with the sale of the shares offered by this prospectus. Any
broker-dealers or agents that participate with Cripple Creek in sales of the
shares may be considered to be "underwriters" within the meaning of the
Securities Act in connection with sales in which they participate. If any
broker-dealers or agents are considered to be "underwriters," then any
commissions they receive and any profit on the resale of the shares purchased by
them may be considered to be underwriting commissions or discounts under the
Securities Act.
From time to time Cripple Creek may engage in short sales, short sales
against the box, puts and calls and other transactions in Cygnus' common stock,
and may sell and deliver the shares in connection with these transactions or to
settle securities loans. If Cripple Creek engages in such transactions, the
price of our common stock may be affected. Under the equity line, Cripple Creek
may not make any sales with the intention of reducing the price of our common
stock. From time to time Cripple Creek may pledge its shares pursuant to the
margin provisions of its agreements with its brokers. Upon a default by Cripple
Creek, the broker may offer and sell the pledged shares from time to time.
Cripple Creek and any other persons participating in the sale or
distribution of the shares will be subject to the Securities Exchange Act of
1934 and the related rules and regulations, including Regulation M, to the
extent it applies. The Exchange Act and related rules may limit the timing of
purchases and sales of any of the shares by Cripple Creek or any other such
person which may affect the marketability of the shares. Cripple Creek also must
comply with the applicable prospectus delivery requirements under the Securities
Act in connection with the sale or distribution of the shares.
We are required to pay certain fees and expenses incident to the
registration of the shares.
We have agreed to indemnify in certain circumstances Cripple Creek
against certain liabilities, including liabilities under the Securities Act.
Cripple Creek has agreed to indemnify us in certain circumstances against
certain liabilities, including liabilities under the Securities Act.
We have agreed to use our best efforts to keep the registration
statement, of which this prospectus supplement and prospectus is a part,
effective until the shares may be or have been sold under Rule 144(k) of the
Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the validity of the common stock
offered hereby have been passed upon for Cygnus by Pillsbury Madison & Sutro
LLP, San Francisco, California.
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