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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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$5,000,000
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 $5,000,000. 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 April 27, 2000, the last reported sale price of the common
stock on the Nasdaq National Market was $12.4375 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 28, 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-16
EQUITY LINE....................................................................................................S-16
PLAN OF DISTRIBUTION...........................................................................................S-18
LEGAL MATTERS..................................................................................................S-19
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PROSPECTUS
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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;
2. Quarterly Report on Form 10-Q of Cygnus for the fiscal quarter ended
March 31, 2000; and
3. The description of common stock contained in Cygnus' registration
statement on Form 8-A.
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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 GlucoWatch
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 condition is the
creation of an education program, and 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 last
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 can be 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 features 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 Tintact 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
condition is the creation of an education program, and 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 last 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.
WE MAY NOT RECEIVE FDA APPROVAL ON OUR PRODUCTS.
Although in December 1999 the FDA's Clinical Chemistry and Toxicology
Devices Panel of the Medical Devices Advisory Committee recommended the
GlucoWatch system 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 result in the FDA deciding to
approve the product. Furthermore, as we seek regulatory approval for
enhancements and possible manufacturing changes to the GlucoWatch system through
the PMA supplement process, there can be no assurance that such supplements will
be approved or that one or more new PMAs will not need to be filed. The timing
for approval of PMA supplements could result in substantial delays in the
introduction of product enhancements and our capability to manufacture large
quantities of AutoSensors at reduced cost. 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.
OUR PRODUCT PIPELINE IS SEVERELY LIMITED.
With the sale of substantially all of our drug delivery business
segment 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, nondiversified line of products.
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WE DO NOT HAVE MEDICAL DEVICE MARKETING, DISTRIBUTION, MANUFACTURING OR SALES
EXPERIENCE.
We do not have any experience marketing, distributing, manufacturing or
selling medical device products. To successfully market, distribute, manufacture
and sell the GlucoWatch system and our other glucose monitoring products under
development, we must either develop a more extensive capability for marketing,
distributing, manufacturing and sales 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 capabilities 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 the third party, and we will likely have
to pay a sales commission or similar amount to the third party. We may be unable
to successfully commercialize our products after FDA approval or may experience
delays in commercialization.
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 they will be accepted. Additionally, some of our
competitors have announced, and others may be developing, new glucose monitoring
devices that are frequent, automatic, and non-invasive (or minimally invasive,
semi-invasive or less-invasive). We cannot predict what impact the introduction
of competing products will have on our market sales.
WE DEPEND ON THIRD-PARTY SUPPLIERS.
The GlucoWatch system is manufactured from components purchased from
outside suppliers, most of which are our single source for such components. In
the event that we are unable, for whatever reason, to obtain these components
from our suppliers or that the components obtained from these suppliers do not
pass quality standards, we will be required to obtain the components from
alternative suppliers. Additionally, we cannot assure you that, in the event a
current supplier were unable to meet our component requirements, we would be
able to rapidly find another supplier of the particular component or that the
alternate supply would be at the same price or have the same lead time. Any
interruption in the supply of the GlucoWatch system components or the pricing of
these components could have a material effect on our business, financial
condition and results of operations.
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, gain
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FDA approval for and manufacture the GlucoWatch system, we will compete with
other providers of personal glucose monitors. A number of our competitors are
currently marketing traditional finger stick 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.
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.
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. Thus, we cannot be
certain that we were the first to file patent applications on our inventions or
that we will not infringe upon third-party patents. We cannot assure you that
any patents will issue or will be 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 suppliers, 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 medical device 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.
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WE DEPEND ON COLLABORATIVE ARRANGEMENTS.
If we commercialize our GlucoWatch system, we will depend upon
Yamanouchi Pharmaceutical Co., Ltd. to market and distribute the GlucoWatch
system in Japan. 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;
however, it is not likely that such a worldwide commercialization partner, if
obtained, will be in place before we receive FDA approval, assuming such
approval occurs and is in second quarter 2000. There can be no assurance that we
will enter into an agreement with a worldwide commercialization partner. Other
companies focus on certain geographies and/or certain commercialization
functions. We are evaluating out-sourced capabilities for launch without a
worldwide commercialization alliance. There can be no assurance that we will be
able to out-source certain commercialization capabilities for launch. 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 such a third party 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 third party. 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 third party. 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 lack
marketing, manufacturing, distribution and sales experience in the medical
device field.
THIRD PARTIES MAY NOT REIMBURSE PATIENTS, HOSPITALS AND PHYSICIANS FOR THE COSTS
OF MEDICAL DEVICES.
Successful commercialization 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.
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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 commercialization 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 financings or potential product
funding collaborations), and earnings from investments, will suffice to meet our
operating expenses, debt servicing and repayments, and capital expenditure
requirements at least for the next twelve months. The amounts and timing of
future expenditures will depend on progress of ongoing research and development,
results of clinical trials, rates at which operating losses are incurred,
executing possible commercialization agreements, developing our products,
manufacturing of the GlucoWatch system, the FDA regulatory process, and other
factors, many of which are beyond our control.
WE ARE HIGHLY LEVERAGED AND MAY BE UNABLE TO SERVICE OUR DEBT.
As of March 31, 2000, we had indebtedness of approximately $46.6
million. The degree to which we are leveraged could materially adversely affect
our ability to obtain financing for working capital, commercialization of
products 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 any Preferred Stock.
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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 $5.1 million for
the quarter ended March 31, 2000 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) 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 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 cannot assure you that we will not be subject to product liability claims,
that our current insurance will 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, sales,
marketing, managerial and financial personnel, and attracting and retaining
additional highly qualified scientific, technical, sales, marketing, 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.
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OUR STOCK PRICE IS VOLATILE.
The trading price of our Common Stock fluctuates substantially 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, 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 and even in recent months 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.
OUR RESTATED 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.
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WE DO NOT PAY DIVIDENDS.
We have never declared or paid cash dividends on our Common Stock. Our
current bank term loan agreement 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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