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UNITED STATES,
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee required) For the fiscal year ended March 31,
1997 or
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required) For the transition period from
to .
---------------- ----------------
Commission File Number: 0-18976
CELTRIX PHARMACEUTICALS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3121462
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3055 PATRICK HENRY DRIVE, SANTA CLARA, CA 95054-1815
(Address of principal executive offices and zip code)
Registrant's Telephone Number: (408) 988-2500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: NONE Name of each exchange on which registered: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( X)
The aggregate market value of the voting stock held by nonaffiliates of the
registrant based upon the closing price of the Common Stock on June 19, 1997 in
the Nasdaq National Market was approximately $32.4 million as of such date.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of June 20, 1997, the Registrant had outstanding 20,985,305 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following document are incorporated by reference in Part III of
this Form 10-K Report: the Proxy Statement for the Registrant's 1997 Annual
Meeting of Stockholders scheduled to be held on September 9, 1997.
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PART I
ITEM 1. BUSINESS
GENERAL
Celtrix Pharmaceuticals, Inc. ("Celtrix" or the "Company") is a
biopharmaceutical company developing novel therapeutics for the treatment of
seriously debilitating, degenerative conditions primarily associated with severe
trauma, chronic diseases or aging. The Company's focus is on regenerating lost
muscle, bone and other tissues essential for the patient's health and quality of
life. Initial product development programs target acute traumatic injury, such
as hip fracture surgery in the elderly, and severe burns. Other potential
indications include osteoporosis and protein wasting diseases associated with
cancer, AIDS and other life-threatening conditions.
The Company's development focus is on SomatoKine, a naturally occurring
complex formed by the anabolic hormone insulin-like growth factor-I (IGF-I) and
its major binding protein, BP3, which shows therapeutic potential for patients
suffering from severe physical trauma and serious illness. IGF-I, a key anabolic
hormone, is known to play a major role in diverse biological processes,
including muscle and bone formation, and tissue repair. However, IGF-I does not
naturally exist in quantity free of its binding proteins, and limitations
associated with administering free IGF-I therapeutically have proven
significant, such as acute insulin effects (e.g. hypoglycemia,
hypophosphatemia).
Human clinical study results from three Phase I studies have shown that
(1) repeated or continuous administration of SomatoKine safely delivers IGF-I at
substantially higher dosage levels than have ever been achievable with free
IGF-I; (2) SomatoKine safely increases the peak blood concentration of IGF-I up
to 35-times normal levels; and (3) elevated levels of SomatoKine substantially
stimulate bone and connective tissue metabolism, based on measures of metabolic
markers in blood and urine of subjects.
Based on these findings, the Company initiated Phase II clinical
feasibility studies in January 1997, using SomatoKine to treat patients
recovering from hip fracture surgery. Studies have shown that blood levels of
IGF-I drop significantly following hip fracture surgery and patients begin
losing lean body and bone mass rapidly. Current clinical studies are
investigating the ability of short-term treatment with SomatoKine to help build
muscle mass, restore mobility, and increase the patient's functional
independence. The Company plans to use the results from these feasibility
studies to expand into a full Phase II clinical study planned for early 1998. In
addition, the Company is expected to begin a Phase II feasibility study in
severe burns in mid-1997. Studies have shown that patients with severe burns
typically suffer from destructive metabolic processes (catabolism), and
SomatoKine offers potential short-term treatment by stimulating healthy
metabolic processes (anabolism) that speed tissue repair. All of these studies
will contain measurements of bone and connective tissue metabolism in support of
a potential feasibility trial in severe osteoporosis planned for calendar
1998/99. Celtrix is currently manufacturing SomatoKine according to current Good
Manufacturing Practices (GMP) at its Santa Clara, California facility.
The Company has a licensing agreement with The Green Cross Corporation
("Green Cross", a Japanese pharmaceutical company who currently is negotiating
to merge with Yoshitomi Pharmaceutical Industries Ltd.), covering the
development and commercialization of SomatoKine for the treatment of
osteoporosis in Japan. The Company also has a product development, license and
marketing agreement with Genzyme Corporation ("Genzyme") for TGF-beta-2. Genzyme
is currently developing TGF-beta-2 for tissue repair and the treatment of
systemic indications. The Company is not currently pursuing an in-house
TGF-beta-2 program.
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PRODUCTS UNDER RESEARCH AND DEVELOPMENT
The following table summarizes potential products currently under research
and development, alone or in collaboration with others.
<TABLE>
<CAPTION>
POTENTIAL PRODUCTS U.S. PATIENT
INDICATION (MODE OF DELIVERY) BIOLOGICAL ACTION STATUS POPULATION
- ---------- ------------------ ----------------- ------ ----------
<S> <C> <C> <C> <C>
CELTRIX PROGRAMS
-Recovery from SomatoKine Prevent muscle loss Phase II 300,000
Hip Fracture Surgery (systemic) and build muscle & bone Feasibility Studies
-Severe Burns SomatoKine Reverse catabolic condition In preparation for 8,000
(systemic) and stimulate tissue repair Phase II
Feasibility Studies
-Severe Osteoporosis SomatoKine Build bone & muscle In preparation for 1.5 million(2)
(systemic) potential Phase II
Feasibility Studies(1)
-Protein Wasting diseases: SomatoKine Prevent muscle loss Preclinical 2.6 million(3)
GI Surgery/Damage/ (systemic) and build muscle;
Dysfunction, AIDS, Improve nutritional status;
Cancer Cachexia, Kidney Reduce intravenous feeding
Failure, Chronic (TPN) requirements
Pulmonary Disease
CORPORATE PARTNER PROGRAMS
-Osteoporosis SomatoKine Build bone and muscle Preclinical
Green Cross (systemic)
-Dermal Ulcers TGF beta in a Stimulate local tissue repair; Phase II
Genzyme collagen matrix Speed and strengthen healing Clinical Trial
(local)
</TABLE>
NOTES:
(1) Initiation will be based on results from bone formation markers & body
composition measurements conducted in hip fracture & severe burns studies.
(2) Of the estimated 24 million people in the United States with osteoporosis,
there are an estimated 1.5 million fractures per year due to osteoporosis. This
population is believed to represent the patients with severe osteoporosis.
(3) Patient Population is broken down as follows for patients suffering from
muscle wasting diseases associated with: GI surgery/damage/dysfunction -
500,000; AIDS - 350,000; cancer cachexia - 500,000; kidney failure - 1 million;
chronic pulmonary disease - 250,000.
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BACKGROUND: THERAPEUTIC AGENTS
Many of the body's physiological functions, such as tissue healing,
immune processes and growth of bone and muscle, are controlled by proteins
(growth factors, cytokines, and protein hormones) that bind to specific cells to
modulate their function. When the body produces appropriate levels of these
proteins and when the target cells respond properly, the body functions
normally. When the body encounters adverse situations such as trauma,
infections, or chronic disease, the production and regulation of these factors
can become unbalanced. Normally, the body has the ability to naturally modulate
the production of these regulating proteins to return to a balanced
physiological state (homeostasis). However, when the ability to make these
changes is lost, it can result in a number of undesirable consequences
including, but not limited to, poor nutritional status and an impaired ability
to maintain and repair tissues and organs normally. Celtrix is developing
biopharmaceuticals, alone or in collaboration with others, based on such
naturally occurring, regulating proteins.
SOMATOKINE
SomatoKine is a human recombinant equivalent of the naturally occurring
complex formed by insulin-like growth factor-I (IGF-I) and its major binding
protein (BP3). The therapeutic potential of SomatoKine stems from a variety of
demonstrated IGF-I bioactivities which include:
-Bone formation
-Muscle formation
-Tissue and organ repair
-Nutrient utilization
-Immune system stimulation
-Neurotrophic activity
The anabolic activities of IGF-I suggest that SomatoKine may provide a
safe and effective therapeutic approach to treating debilitating wasting
conditions. Clinical and preclinical studies have demonstrated that circulating
IGF-I levels are lower than normal in a variety of conditions including severe
physical trauma, extended illnesses, and advanced age. Low levels of IGF-I are
often associated with destructive metabolic processes (catabolism) which
interfere with nutrient utilization, cause serious bone and muscle loss, delay
healing, and increase the patient's risk of life-threatening complications. The
overall development of SomatoKine is aimed at elevating the circulating
reservoir of IGF-I thereby overcoming destructive metabolic processes. Upon
administration into the bloodstream, SomatoKine attaches to another naturally
occurring protein known as an acid labile subunit, or ALS, which circulates in
the bloodstream. This resulting larger complex emulates what is observed in
nature, safely storing and transporting IGF-I throughout the patient's body. It
extends the hormone's half life, is non-hypoglycemic and contains important
biological information used by the body in regulating IGF-I bioavailability and
biodistribution. In addition, IGF-I can separate from this circulating
reservoire and bind to target cells whenever it is needed by the body. Through
its specific receptor, the hormone then stimulates healthy metabolic activities
important for nutrient utilization, regeneration of bone and muscle, tissue
repair, and other critical biological processes.
Although several biopharmaceutical companies have development programs
involving IGF-I, Celtrix does not believe that any other companies are currently
in clinical trials for the development of IGF-BP3 (SomatoKine) complex. This is
important because most naturally occurring IGF-I does not circulate in its free
form, but is bound to its major binding protein,
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BP3. The natural association of the two molecules appears to be of fundamental
biological significance.
Preclinical experimentation, including toxicology studies, indicates
that SomatoKine substantially improves IGF-I safety and efficacy. In addition, a
variety of biological effects have been demonstrated with SomatoKine that could
not be demonstrated upon the administration of IGF-I alone. This is believed to
be related to the observation that SomatoKine significantly removes the known
dose limitations associated with IGF-I. By removing dosage limitations and
improving safety while still providing the benefits of IGF-I, SomatoKine has the
potential to serve as a superior IGF-I therapeutic composition for a wide range
of applications.
Realization of the therapeutic potential of IGF-I, although pursued by
several companies over the past years, has been hampered by a number of
limitations mainly associated with the administration of IGF-I in its free form.
As demonstrated in clinical and preclinical studies, SomatoKine given over a
range of doses is well tolerated, whereas equivalent doses of IGF-I without BP3
can cause serious side effects, such as hypoglycemia. Human clinical studies
with IGF-I, administered without BP3, have shown that IGF-I must be administered
in low-dose daily injections in order to avoid acute side effects and this, in
turn, may limit the observed clinical efficacy. In contrast, the Company's
recent Phase I clinical data suggested that injectable, higher doses of
SomatoKine are feasible and provide the benefits of IGF-I without dose-limiting
side effects often observed. The higher safety margins of SomatoKine, in
combination with potentially less frequent dosing, should make it possible to
use SomatoKine to treat a variety of conditions that may be difficult to treat
successfully with IGF alone.
Because IGF-BP3 is involved in a wide variety of essential biological
processes, Celtrix believes that SomatoKine therapy could have broad range
potential. This potential is supported by both clinical and preclinical
laboratory and animal studies conducted by Company scientists and other academic
collaborations.
PHASE I HUMAN CLINICAL RESULTS
In January 1997, the Company completed three Phase I human clinical
studies of SomatoKine. Safety, pharmacokinetic and metabolic data have led to
three important findings: 1) repeated or continuous administration of SomatoKine
safely delivers IGF-I at substantially higher dosage levels than have ever been
feasible before, 2) SomatoKine safely increases the peak blood concentration of
IGF-I up to 35-times normal levels, and 3) elevated levels of SomatoKine
substantially stimulate bone and connective tissue metabolism, based on measures
of metabolic markers in blood and urine of subjects.
In the first Phase I study in humans, SomatoKine was administered in
single intravenous doses to 12 healthy volunteers. Four escalating dosage levels
were evaluated, providing the equivalent of 60, 200, 600 or 1200 microgram/kg
IGF-I. The first three dosage levels were safe and well tolerated, with no
significant abnormalities observed in follow-up blood tests. Minor, reversible
side effects were observed at the highest dosage level, containing 1200
microgram/kg IGF-I, and appeared to be related to mild decreases in blood
glucose and/or phosphorus. These results represent a substantial improvement
over what has been seen with free (unbound) IGF-I. As published in July 1992,
the FDA has indicated that the maximum amount of free IGF-I which could be
administered safely in a single intravenous bolus injection was 24 microgram/kg.
In the second Phase I study, SomatoKine was administered in multiple
intravenous doses, one per day for six days, to 18 healthy volunteers. This
dose-escalating, double-blinded and placebo-controlled study was designed to
evaluate the safety and metabolic effects of administering multiple doses of 60,
200 and 600 microgram/kg IGF-I delivered as SomatoKine. Results demonstrated
that SomatoKine safely raised the blood concentration of IGF-I to a peak of
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7000 ng/ml, which is approximately 35-times normal IGF-I levels. Because the
therapeutic effectiveness of IGF-I appears to be dose-dependent, these findings
increase prospects for achieving significantly enhanced or novel therapeutic
efficacy.
In the third and final Phase I study, SomatoKine was administered as
continuous subcutaneous infusions by mobile minipump over a period of seven days
in 12 females, ages 55 to 70. Three dosage levels were evaluated, and the study
was double-blinded and placebo-controlled. Importantly, SomatoKine was well
tolerated in the elderly population and was shown to rapidly induce a
biochemical marker of collagen synthesis. Procollagen C-peptide, a marker of
bone and connective tissue formation, was elevated approximately 50 percent as
early as day four of treatment and remained elevated for at least one week
following the cessation of treatment.
CLINICAL INDICATIONS
Hip Fracture Surgery
Celtrix's initial treatment targets are elderly patients who have undergone
hip fracture surgery. Each year in the United States, approximately 300,000
primarily elderly patients undergo hip surgery to repair fractures of the femur
that have occurred during falls. Studies have shown that blood levels of IGF-I
drop significantly following hip fracture surgery and patients begin losing lean
body and bone mass. In addition, the cost of hip repair and rehabilitation is
high, and the patient's immobility and consequential rapid loss of muscle and
bone threatens recovery and interferes with quality of life. The Company's goal
is to provide SomatoKine as a short-term therapeutic treatment to prevent muscle
loss, build muscle and bone mass, restore mobility, and increase the patient's
functional independence.
The Phase II clinical feasibility studies initiated in January 1997 will
involve up to 30 patients, ages 65-90, who will receive either systemic
SomatoKine or a placebo over a period of four to eight weeks. Multiple dosage
levels are being tested. End points being evaluated include change in the
patient's body composition (muscle and bone mass), trends in measures of daily
activity (ADL and IADL scores), bone metabolism markers, rehabilitation time and
complication rates.
Severe Burns
Another treatment target is expected to be severe burns. The length of time
spent in a burn trauma center is directly related to the time required for
harvesting sufficiently healthy tissue and grafting it at burn sites. Tissue
harvested from burn patients may be slow to graft and donor sites may be slow to
heal due to the patient's severely catabolic (nutritionally inefficient) state.
Research has shown that naturally occurring IGF-I plays a significant role in
tissue repair and that IGF-I supplementation in patients suffering major trauma
may potentially aid healing. The goal in the severe burns study that will be
initiated mid-1997 will involve up to 40 burn patients, including both adults
and children, who will receive either systemic SomatoKine or a placebo during
standard burn care. The patients will be evaluated through two graft cycles, and
the primary end points will be increased frequency of donor site harvesting
during which the length of hospitalization and complication rates will also be
monitored.
Severe Osteoporosis
Data related to markers of bone and connective tissue metabolism collected
from the above hip fracture and severe burns studies will be used to support a
potential severe osteoporosis Phase II feasibility trial in calendar 1998/99.
This patient population consists of primarily post-menopausal women who have
already lost a substantial quantity of bone and are at high
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risk of fractures of the hip, wrist or spine. While estrogens, calcitonins, or
bisphosphonates and other therapies are prescribed for osteoporosis, these
treatments are used primarily to prevent further bone loss rather than to form
new bone. The Company believes that a relatively short period of treatment with
SomatoKine offers the potential for substantially increasing the patient's bone
content, building bone density, and adding lean body mass, thus improving the
patient's strength and mobility. Celtrix intends to establish new corporate
partnerships to advance product development for severe osteoporosis.
CORPORATE COLLABORATIONS
THE GREEN CROSS CORPORATION
In July 1994, Celtrix entered into a license agreement with Green Cross,
a Japanese pharmaceutical company currently in the process of merging with
Yoshitomi Pharmaceutical Industries Ltd., which covers the development and
commercialization of SomatoKine for the treatment of osteoporosis in Japan.
Under the terms of the agreement, Green Cross is responsible for all related
research, development and marketing, as well as product manufacturing to support
its needs in Japan. Celtrix receives license fees and milestone payments and,
upon commercialization, will receive royalties on product sales. In addition,
Celtrix has an exclusive royalty-bearing license to related know-how and
technology development by Green Cross and has retained full rights to SomatoKine
outside of Japan.
GENZYME CORPORATION
In June 1994, the Company entered into a product development, license and
marketing agreement with Genzyme on TGF-beta-2 which included equity
investments, milestone payments and potential royalties to Celtrix. The
objective was to commercialize TGF-beta-2 for tissue repair and treatment of
systemic applications. Genzyme has been granted exclusive commercialization
rights for all systemic applications and select local applications of
TGF-beta-2. Celtrix has retained all rights to applications of TGF-beta-2
concerning ophthalmic disease, but has discontinued its in-house program as a
result of disappointing clinical results. The Company has the option to
reacquire rights to other product applications not pursued by Genzyme. Genzyme
is conducting a 12-center, double-blinded, randomized Phase II clinical study to
evaluate the treatment of 200 diabetic patients suffering from neurotrophic
diabetic foot ulcers.
OTHER CORPORATE AGREEMENTS
Genentech, Inc.
In March 1993, the Company entered into a cross-license agreement with
Genentech. Under the terms of the agreement, Genentech granted Celtrix rights to
certain process patents which may have application in the manufacturing of
TFG-beta-2 and TGF-beta receptors, in return for a $4.0 million licensing fee
and future product royalties. Celtrix granted Genentech patent rights to
TGF-beta for certain fields of use for future product royalties. The license fee
was balanced by an equity purchase by Genentech of 572,450 shares of newly
issued Celtrix common stock for a total value of $4.0 million, resulting in a
non-cash transaction.
RESEARCH
The Company's research staff has substantial expertise with IGF-I and
BP3. Through in-house programs and an extensive collaboration program with
leading scientists world-wide, research and development efforts are focused on
demonstrating the safety and effectiveness of
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SomatoKine in animal models that are relevant to the human disease conditions
being evaluated. Studies to evaluate optimal formulations, doses and dosing
frequencies are being conducted to aid in the development of SomatoKine. Other
activities include determining IGF-I and BP3 levels in blood and tissue of
various patient populations. These collaborative efforts have made progress
toward the Company's understanding of the underlying causes and potential
treatment strategies for conditions leading to muscle and bone loss and other
catabolic conditions. Celtrix is continuing to expand collaborations into other
fields where SomatoKine therapy may be of benefit.
The Company's research staff is developing a novel protein expression
technology for SomatoKine. Recent advances by the Company in this area provide
Celtrix the potential to significantly increase SomatoKine production and
streamline purification methods. Use of this proprietary technology will be an
important component of Celtrix's ability to produce SomatoKine in a cost
efficient manner. Efforts in this area will continue to focus on ways that this
technology can advance the SomatoKine program. The Company believes that this
technology not only provides benefits to Celtrix programs, but also offers the
potential of being useful to other biopharmaceutical companies in need of novel
protein expression technology. Licensing options will be evaluated.
MANUFACTURING
Celtrix currently manufactures human recombinant SomatoKine according to
current Good Manufacturing Practices (GMP) at its Santa Clara location. This
facility has the capacity to meet anticipated SomatoKine supply needs for
current and future clinical studies at least through Phase II testing. When
larger-scale manufacturing is needed, Celtrix may elect to further expand its
manufacturing capabilities or to work through collaborative relationships or
contract manufacturers.
INTELLECTUAL PROPERTY
Proprietary protection for Celtrix's potential products is important to its
business. Celtrix's policy is to protect its technology by filing patent
applications for technology that it considers important to the development of
its business. Celtrix intends to file additional patent applications, when
appropriate, relating to improvements in its technology and other specific
products that it develops.
In the United States, Celtrix currently holds a total of 12 issued or
allowed patents related to the composition, production, antibodies and methods
of use for SomatoKine, including one issued patent with claims to a BP3
composition-of-matter, and two issued and one allowed therapeutic use patent for
SomatoKine, and four issued, one allowed, and four pending patent applications
regarding novel expression and production methods which may be used for the
manufacture of SomatoKine. Celtrix has 13 families of applications, pending in
the U.S. or abroad, regarding the therapeutic use of BP3, antibodies to BP3 and
their uses, and therapeutic uses of the complex, SomatoKine. These applications
are in various stages of review. In Europe, Celtrix has an issued patent with
claims to: a BP3 composition-of-matter; certain therapeutic uses of that BP3;
and certain therapeutic uses of a complex of IGF and the claimed BP3. Celtrix
has received notice of the European Patent Office's intent to grant an European
patent with claims to: recombinantly produced BP3; therapeutic uses of BP3; and
therapeutic uses of the complex, SomatoKine.
The Company also owns or co-owns 21 issued patents and 3 allowed and 3
pending applications regarding the composition-of-matter, methods of
purification, and therapeutic uses of TGF-beta-2. Celtrix also owns one issued
U.S. patent relating to products and methods for
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topical wound healing using collagen and heparin-containing matrices. Celtrix
owns the rights to a collection of patents and patent applications relating to
TGF-beta antagonists.
Celtrix is in the process of seeking patent protection for its inventions
and discoveries in the United States and, in most instances, at least Australia,
Canada, Japan and various countries in Europe. As with any pending patent
application, there can be no assurance that any of these applications will be
issued in the United States or foreign countries.
At least three large biotechnology and pharmaceutical companies with
substantial financial and legal resources have patent applications on file in
the United States and abroad directed at the production of recombinant IGF-I by
various methods. The earliest date of filing of these patent applications is
April 25, 1983. Unless and until these applications issue in the United States,
it is not possible to determine the breadth of these claims regarding a process
for IGF-I production. Furthermore, a large biotechnology and pharmaceutical
company with substantial financial and legal resources has a patent issued in
the United States directed toward certain DNA molecules encoding BP3 and the
corresponding BP3 protein. This same patent was granted in Europe and was
successfully opposed by Celtrix. There can be no assurance that the company will
not appeal such result or that any appeal will not be successful. In the case
that the company does appeal, it is not possible to determine what, if any,
claims will be reinstated or the breadth of such claims. In addition, this
company has been issued a patent directed toward the subcutaneous administration
of IGF-BP3. Each of the referenced companies can be expected to defend its
patent position vigorously.
Celtrix has developed a new process for the production of IGF and BP3 which
it does not believe will infringe on other patents relating to recombinant
protein production in general or on other patents relating to the production of
IGF and BP3 in particular, although there can be no assurance that a contrary
position will not be asserted. Celtrix also does not believe that its sale or
use of its SomatoKine will infringe on other IGF or BP3 patents although there
can be no assurance that a contrary position will not be asserted. There can be
no assurance that third parties will not claim the Company's technology, current
or future products or manufacturing processes infringe the proprietary rights of
others. If other companies were to successfully bring legal actions against the
Company claiming patent or other intellectual property infringements, in
addition to any potential liability for damages, then the Company could be
required to obtain a license in order to continue to use the affected process or
to manufacture or use the affected products or cease using such products or
process if enjoined by a court. Any such claim, with or without merit, could
result in costly litigation or might require the Company to enter into royalty
or licensing agreements. If any licenses are required, there can be no assurance
that the Company will be able to obtain any such license on commercially
favorable terms, if at all, and if these licenses are not obtained, the Company
might be prevented from pursuing the development of certain of its potential
products. The Company's breach of an existing license or failure to obtain or
delay in obtaining a license to any technology that it may require to
commercialize its products may have a material adverse impact on the Company.
Litigation, which could result in substantial costs to the Company, may
also be necessary to enforce any patents issued or licensed to the Company or to
determine the scope and validity of another party's proprietary rights. There
can be no assurance that the Company's issued or licensed patents would be held
valid by a court of competent jurisdiction. An adverse outcome in litigation or
an interference or other proceeding in a court or patent office could subject
the Company to significant liabilities to other parties, require disputed rights
to be licensed from other parties or require the Company to cease using such
technology, any of which could have a material adverse effect on the Company.
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Celtrix also relies on trade secrets to protect technology, especially
where patent protection is not believed to be appropriate or obtainable. Celtrix
attempts to protect its proprietary technology and processes in part by
confidentiality agreements with its employees, consultants and certain
contractors. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
discovered by competitors in such a manner that the Company has no practical
recourse. To the extent that the Company or its consultants or research
collaborators use intellectual property owned by others in their work for the
Company, disputes may also arise as to the rights in related or resulting
know-how and inventions.
COMPETITION
In each of the Company's potential product areas, competition from large
pharmaceutical companies, biotechnology companies and other companies,
universities and research institutions is substantial. Relative to the Company,
most of these entities have greater capital resources, research and development
staffs, facilities and experience in conducting clinical trials and obtaining
regulatory approvals, as well as in manufacturing and marketing pharmaceutical
products. Furthermore, the Company believes that competitors have used, and may
continue to use, litigation to gain competitive advantage. In addition, these
and other entities may have or develop new technologies or use existing
technologies that are, or may in the future be, the basis for competitive
products.
Any potential products that the Company succeeds in developing and for
which it gains regulatory approval will have to compete for market acceptance
and market share. For certain of the Company's potential products, an important
factor in such competition may be the timing of market introduction of
competitive products. Accordingly, the relative speed with which the Company can
develop products, complete the clinical testing and regulatory approval
processes and supply commercial quantities of the product to the market are
expected to be important competitive factors. The Company expects that
competition will be based, among other things, on product efficacy, safety,
reliability, availability, timing and scope of regulatory approval and price.
There can be no assurance that the Company's competitors will not succeed in
developing technologies and products that are more effective than any that are
being developed by the Company or that would render the Company's technology and
products obsolete or noncompetitive. In addition, many of the Company's
competitors may achieve product commercialization or patent protection earlier
than the Company.
GOVERNMENT REGULATION
The production and marketing of Celtrix's product and its research and
development activities are and will be subject to regulation for safety and
efficacy by numerous governmental authorities in the United States and other
countries. The regulatory process, which includes preclinical testing and
clinical trials of each compound in order to establish its safety and efficacy,
can take many years and requires the expenditure of substantial resources.
In the United States, pharmaceutical products are subject to rigorous Food
and Drug Administration ("FDA") regulation. The Federal Food, Drug and Cosmetic
Act and the regulations promulgated thereunder, as well as other federal and
state statutes and regulations, govern, among other things, the testing,
manufacture, safety, effectiveness, labeling, storage, record-keeping, approval,
advertising and promotion of Celtrix's potential products. The steps required
before a pharmaceutical product may be marketed in the United States include (i)
preclinical laboratory and animal tests, (ii) the submission to the FDA of an
Investigational New Drug ("IND") application, which must become effective before
human
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clinical trials may commence, (iii) the conduct of adequate and well-controlled
human clinical trials to establish the safety and efficacy of the product, (iv)
the submission to the FDA of a New Drug Application ("NDA") for pharmaceuticals,
and (v) FDA approval of the NDA prior to any commercial shipment or sale of the
product.
Although SomatoKine is a DNA-derived protein complex and is manufactured
using biotechnology techniques, the FDA has indicated to Celtrix that products
containing SomatoKine will fall into the category of hormones and will be
reviewed as drugs. The review has been assigned to the Division of Endocrine and
Metabolism Products, Center for Drug Evaluation and Research (CDER). During the
investigational phase, the IND requirements will govern the development of the
drug. Prior to marketing, FDA approval of products containing SomatoKine will be
based on submission of an NDA containing the results of preclinical and clinical
studies, and complete manufacturing and controls information. Furthermore, NDA
approval requires preapproval inspection by the FDA of the proposed commercial
manufacturing facilities.
Prior to the commencement of clinical trials for its potential products,
Celtrix must conduct preclinical tests of its products, which include laboratory
evaluation of laboratory product characterization of the products and the
conduct of animal studies to assess preliminarily the safety and pharmacological
effect of the products. The preclinical safety tests must be conducted in
compliance with FDA regulations regarding good laboratory practices. The results
of preclinical tests must be submitted to the FDA as part of the IND application
and reviewed by the FDA during the course of the agency's determination as to
whether the clinical trials described in the IND application may commence. There
is no certainty that submission of an IND application will result in FDA
authorization to commence clinical trials.
Clinical trials involve the administration of the investigational compound
to healthy volunteers or to patients under the supervision of a qualified
principal investigator. Clinical trials are conducted in accordance with
protocols that detail the objectives of the study, the parameters to be used to
monitor safety and the efficacy criteria to be evaluated. Each protocol must be
submitted to the FDA as part of the IND application. Further, each clinical
study must be conducted under the auspices of an independent Institutional
Review Board at the institution at which the study will be conducted, and
informed consent must be obtained from each clinical subject.
Clinical trials of drug products are typically conducted in three phases,
but the phases may overlap. In Phase I, the product is tested for safety
(adverse effects) and may include dosage tolerance, metabolism, distribution,
excretion and clinical pharmacology. Phase II involves studies in a limited
patient population to (i) determine the efficacy of the product for specific,
targeted indications, (ii) determine dosage tolerance and optimal dosage, and
(iii) identify possible adverse effects and safety risks. When a compound is
found to be effective and to have an acceptable safety profile in Phase II
evaluations, Phase III trials are undertaken to further confirm clinical
efficacy and to further test for safety within an expanded patient population at
geographically dispersed clinical study sites. There can be no assurance that
Phase I, Phase II or Phase III testing will be completed successfully within any
specified time period, if at all, with respect to any of Celtrix's products
subject to such testing. Furthermore, Celtrix or the FDA may suspend clinical
trials at any time if it is felt that the subjects or patients are being exposed
to an unacceptable health risk.
The results of the product development efforts, preclinical studies and
clinical studies are submitted to the FDA in the form of an NDA for approval to
permit marketing and commercial shipment and sales of the pharmaceutical
product. The testing and approval process is likely to require substantial time
and effort and there can be no assurance that any approval will be granted on a
timely basis, if at all. The FDA may deny an NDA if applicable
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regulatory criteria are not satisfied, may require additional testing or
information if it does not view the NDA as containing adequate evidence of the
safety and efficacy of the product, or may require post-marketing testing and
surveillance to monitor the safety of Celtrix's products. Notwithstanding the
submission of such data, the FDA may ultimately decide that the application does
not satisfy its regulatory criteria for approval. Finally, product approvals may
be withdrawn if compliance with regulatory standards is not maintained or if
problems occur following initial marketing.
Among the conditions for NDA approval is the requirement that the
manufacturer's manufacturing procedures and quality control must comply with the
FDA regulations as published in the current GMP regulations, as well as any
additional standards or guidelines issued for specific drug or biological
products. The FDA monitors compliance with these requirements by requiring all
drug manufacturers to register with the FDA, which subjects them to biennial FDA
inspections of manufacturing facilities. In addition, a precondition for NDA
approval is that the FDA conducts an inspection of the manufacturing facility
and determines that it complies with all applicable regulatory requirements. In
order to assure compliance with those requirements, manufacturers must continue
to expend time, resources and effort in the areas of production and quality
control to ensure full technical compliance.
For marketing outside the United States, Celtrix is also subject to foreign
regulatory requirements governing human clinical trials and marketing approval
for drugs. The Company is conducting clinical trials in Europe and the
considerations set forth above also apply to European clinical trials; for
example, clinical trials must be conducted in several phases and there can be no
assurance that such phases of testing in Europe will be completed successfully
within any specified time period, if at all, with respect to the Company's
product. Although the new drug approval process has been centralized for the
European Union ("EU"), clinical research is still controlled at the national
level. For its current clinical trials in Europe, the Company is required to
give a simple notification process and no submission is required. Other European
countries may require the submission of a Clinical Trial Exemption (CTX), which
is the equivalent of the United States IND and which must be effective before
human clinical trials may be commenced. Once submitted, the review and approval
process typically takes three months, although there can be no assurance that an
approval will be obtained within that time period, or at all.
For the marketing and commercial shipment and sales of new biotechnology
products, the EU has centralized the process for new drug approval. The
centralized approval process involves the submission of a Marketing Application
("MA"), the equivalent of a United States NDA, to the European Medicines
Evaluation Authority ("EMEA"). The EMEA uses the centralized scientific body of
reviewers from the Committee for Proprietary Medicinal Products to assess the
new drug product and obtains a recommendation whether or not to approve the new
product. A single approval from the centralized EMEA is typically applicable to
the entire European Community.
Because Celtrix intends to have its products marketed in certain foreign
countries in the future, approval by these countries' regulatory authorities may
need to be obtained. The approval procedures vary from country to country, and
the time required for approval may be longer or shorter than that required for
FDA approval. Even after foreign approvals are obtained, further delays may be
encountered before products may be marketed. For example, many countries require
additional government approval for price reimbursement under national health
systems. Such approvals can be critical to any extensive marketing of drug
products in such countries.
The Company is also subject to licensure in California as a drug
manufacturer by the Food and Drug Branch of the California Department of Health
Services. Licensure requires
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annual inspections of the Company's manufacturing facilities by inspectors from
the Food and Drug Branch, to ensure continued compliance with applicable GMP
requirements. In addition to regulations enforced by the FDA, Celtrix also is
subject to regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other present and potential future federal,
state or local regulations.
INSURANCE; PRODUCT LIABILITY
The Company currently has in force general liability insurance, with
coverage limits of $3.0 million per incident and $3.0 million in the aggregate
annually, and product liability insurance with coverage limits of $1.0 million
per incident and $1.0 million in the aggregate annually. The Company's insurance
policies provide coverage for product liability and general liability on a
claims made basis. These policies are subject to annual renewal.
EMPLOYEES
As of March 31, 1997, Celtrix employed 73 full-time and part-time
employees. No employee is represented by a union and the Company believes its
employee relations are good. The Company is highly dependent on the principal
members of its management and scientific staff and its future success depends in
large part upon its ability to attract and retain highly qualified scientific
and management personnel. Celtrix faces significant competition for such
personnel from other companies, academic institutions, government entities and
other organizations. There can be no assurance that Celtrix will be successful
in hiring or retaining requisite personnel.
EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth certain information with respect to the executive
officers of Celtrix and their ages as of June 20, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Andreas Sommer, Ph.D. 55 Chief Executive Officer, President and Director
Mary Anne Ribi 34 Vice President, Finance and Administration,
Chief Financial Officer and Assistant Secretary
Malcolm J. McKay, Ph.D. 41 Vice President, Regulatory Affairs & QA
David M. Rosen, Ph.D. 41 Vice President, Research and Development
</TABLE>
Dr. Sommer has served as President and CEO of Celtrix since April 1995.
Prior to that, Dr. Sommer served as Celtrix's Senior Vice President from July
1993 to April 1995 and as a member of the Board of Directors since May 1994.
Previously, Dr. Sommer served as Vice President, Research of Celtrix since 1992,
following Celtrix's merger with BioGrowth, Inc., where he served as Vice
President, Research and Development since 1989. He previously was a member of
the scientific management team at Synergen. Also during his professional career,
Dr. Sommer served as an advanced research fellow in the Department of
Microbiology at the University of Basel Biocenter and was a postdoctoral fellow
in the Department of Biological Chemistry at the University of California,
Davis. He received his Ph.D. in Microbiology from the University of California,
Davis, and has published extensively in noted scientific journals.
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Ms. Ribi has served as Vice President of Finance and Administration and
Chief Financial Officer since January 1995. Previously, she served as Celtrix's
director of finance and administration and controller since 1990. Prior to
joining Celtrix, Ms. Ribi helped found and organize Biocircuits Corporation, a
medical instrumentation company, and previously was with Ernst & Young LLP. She
is a certified public accountant with a M.B.A. with an emphasis in Finance from
Golden Gate University, San Francisco.
Dr. McKay was appointed Vice President of Regulatory Affairs and Quality
Assurance in August 1996. He was formerly a director of quality assurance and
quality control at COR Therapeutics since 1995. Previously, he served for four
years at Celtrix as director of quality assurance, and prior to 1991, oversaw
this function at Triton Biosciences. In addition, he served as group leader of
technical support at Abbott Laboratories. Dr. McKay received his Ph.D. in
biochemistry at the University of London and was a postdoctoral fellow at the
Medical College of Virginia.
Dr. Rosen has served as Vice President of Research and Development since
April 1995. Previously, he served as Celtrix's director of research since
January 1994. He has served at Celtrix since its founding by Collagen
Corporation and has extensive research and project management experience, as
well as an in-depth working knowledge of SomatoKine. Dr. Rosen worked at
Collagen since 1982, initially serving as a scientist in the Company's
connective tissue research laboratories. Dr. Rosen received his Ph.D. in
biochemistry from the University of California, Riverside and has over forty
research publications to his credit.
The Board of Directors elects Celtrix's officers and such officers serve at
the discretion of the Board of Directors of Celtrix. There are no family
relationships among the directors or officers of Celtrix.
RISK FACTORS
Early Stage of Development; No Developed or Approved Products
The Company's potential products are in research and development and no
material revenues have been generated to date from product sales. To achieve
profitable operations, the Company, alone or with others, must successfully
develop, obtain regulatory approval for, introduce and market its potential
products. Much of the clinical development work for the Company's potential
products remains to be completed. No assurance can be given that the Company's
product development effort will be successfully completed, that required
regulatory approval will be obtained or that any products, if developed and
introduced will be successfully marketed or achieve market acceptance.
History of Operating Losses; Accumulated Deficit
The Company has incurred net operating losses in every year of operation
since its inception. As of March 31, 1997, the Company had an accumulated
deficit of approximately $104.1 million, which includes non-recurring, non-cash
charges of $17.3 million for acquired in-process research and development and
licensing fees. Losses have resulted principally from costs incurred in
connection with the Company's research and development activities and from
general and administrative costs associated with the Company's operations. The
Company expects to incur substantial and increasing operating losses for at
least the next several years. The Company's ability to achieve profitability
will depend in part on completing the research and development of, and obtaining
regulatory approvals for, its products and successfully commencing product
commercialization.
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Possible Volatility of Stock Price; Dividend Policy
The market prices for securities of biopharmaceutical and biotechnology
companies have historically been highly volatile, and the market has from time
to time experienced significant price and volume fluctuations that are unrelated
to the operating performance of particular companies. Since the Company's Common
Stock became listed for public trading, its market price has fluctuated over a
wide range and the Company expects that it will continue to fluctuate.
Announcements concerning the Company or its competitors, including the results
of testing (including clinical trials), technological innovations or new
commercial products, government regulations, developments concerning proprietary
rights, litigation or public concern as to safety of the Company's potential
products as well as changes in general market conditions may have a significant
effect on the market price of Celtrix's common stock.
The Company has never paid dividends on its capital stock and the Company
does not anticipate paying any cash dividends in the foreseeable future.
Future Capital Requirements and Uncertainty of Future Funding
The Company expects that its current cash, cash equivalents and short term
investments, together with the proceeds from its April 1997 financing
(approximately $13.3 million, net), will be sufficient to fund the Company's
operations through mid-1998. The development of the Company's products will
require the commitment of substantial resources to conduct the time-consuming
research and development, clinical studies and regulatory activities necessary
to bring any potential therapeutic products to market and to establish
production, marketing and sales capabilities. The Company will need to raise
substantial additional funds for these purposes. The Company may seek such
additional funding through collaborative arrangements and through public or
private financings, including equity financings. Any additional equity financing
may be dilutive to shareholders, and any debt financing, if available, may
involve restrictions on the Company's ability to pay future dividends on its
capital stock or the manner in which the Company conducts its business.
There can be no assurance that any such financings will be available to the
Company or that adequate funds for the Company's operations, whether from
financial markets, collaborative or other arrangements with corporate partners
or from other sources, will be available when needed or on terms attractive to
the Company. The inability to obtain funds may require the Company to delay,
scale back or eliminate some or all of its research and product development
programs or to license third parties to commercialize products or technologies
that the Company would otherwise seek to develop itself.
Stringent Government Regulation; Need for Product Approvals
The preclinical testing and clinical trials of any compounds developed by
the Company or its collaborative partners and the manufacturing and marketing of
any drugs resulting therefrom are subject to regulation by numerous federal,
state and local governmental authorities in the United States, the principal one
of which is the United States Food and Drug Administration (the "FDA"), and by
similar agencies in other countries in which drugs developed by the Company or
its collaborative partners may be tested and marketed (each of such federal,
state, local and other authorities and agencies, a "Regulatory Agency"). Any
compound developed by the Company or its collaborative partners must receive
Regulatory Agency approval before it may be marketed as a drug in a particular
country. The regulatory process, which includes preclinical testing and clinical
trials of each compound in order to establish its safety and efficacy, can take
many years and requires the expenditure of substantial resources. Data obtained
from preclinical and clinical activities are susceptible to varying
interpretations which
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<PAGE> 16
could delay, limit or prevent Regulatory Agency approval. In addition, delays or
rejections may be encountered based upon changes in Regulatory Agency policy
during the period of drug development and/or the period of review of any
application for Regulatory Agency approval for a compound. Delays in obtaining
Regulatory Agency approvals could adversely affect the marketing of any drugs
developed by the Company or its collaborative partners, impose costly procedures
upon the Company's and its collaborative partners' activities, diminish any
competitive advantages that the Company or its collaborative partners may attain
and adversely affect the Company's ability to receive royalties, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
There can be no assurance that, even after such time and expenditures,
Regulatory Agency approvals will be obtained for any compounds developed by or
in collaboration with the Company. Moreover, if Regulatory Agency approval for a
drug is granted, such approval may entail limitations on the indicated uses for
which it may be marketed that could limit the potential market for any such
drug. Furthermore, if and when such approval is obtained, the marketing and
manufacture of the Company's products would remain subject to extensive
regulatory requirements, and discovery of previously unknown problems with a
drug or its manufacturer may result in restrictions on such drug or
manufacturer, including withdrawal of the drug from the market. Failure to
comply with regulatory requirements could, among other things, result in fines,
suspension of regulatory approvals, operating restrictions and criminal
prosecution. In addition, Regulatory Agency approval of prices is required in
many countries and may be required for the marketing of any drug developed by
the Company or its collaborative partners in such countries.
Uncertainties Related to Clinical Trials
Before obtaining regulatory approvals for the commercial sale of any of its
products under development, the Company must demonstrate through preclinical
studies and clinical trials that the product is safe and efficacious for use in
each target indication. The results from preclinical studies and early clinical
trials may not be predictive of results that will be obtained in large-scale
testing, and there can be no assurance that the Company's clinical trials will
demonstrate the safety and efficacy of any products or will result in marketable
products. A number of companies in the biotechnology industry have suffered
significant setbacks in advanced clinical trials, even after promising results
in earlier trials. For example, in fiscal year 1995, Celtrix discontinued its
in-house TGF-beta-2 program for the treatment of ophthalmic conditions as a
result of disappointing clinical study results.
The rate of completion of the Company's clinical trials is dependent upon,
among other factors, the rate of patient enrollment. Patient enrollment is a
function of many factors, including the size of the patient population, the
nature of the protocol, the proximity of patients to clinical sites and the
eligibility criteria for the study. Delays in planned patient enrollment may
result in increased costs and delays, which could have a material adverse effect
on the Company.
No Assurance of Market Acceptance
There can be no assurance that any products successfully developed by the
Company, if approved for marketing, will achieve market acceptance. The products
and therapies which the Company is attempting to develop will compete with a
number of well-established traditional drugs and therapies manufactured and
marketed by major pharmaceutical companies. The degree of market acceptance of
any products developed by the Company will depend on a number of factors,
including the establishment and demonstration in the medical community of the
clinical efficacy and safety of the Company's product candidates, their
potential advantage over existing treatment methods, and reimbursement policies
of government and third-party
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<PAGE> 17
payors. Competitors may also develop new technologies or products which are
considered more effective or less costly than SomatoKine or perceived to be more
cost-effective. There is no assurance that physicians, patients or the medical
community in general will accept and utilize any products that may be developed
by the Company. The Company's business, financial condition and results of
operations may be materially adversely affected if SomatoKine does not receive
market acceptance for any reason.
Substantial Competition
In each of the Company's potential product areas, competition from large
pharmaceutical companies, biotechnology companies and other companies,
universities and research institutions is substantial. At least three large
biotechnology and pharmaceutical companies with substantial financial and legal
resources have patent applications on file in the United States and abroad
directed at the production of recombinant IGF-I by various methods. Relative to
the Company, most of these entities have substantially greater capital
resources, research and development staffs, facilities and experience in
conducting clinical trials and obtaining regulatory approvals, as well as in
manufacturing and marketing pharmaceutical products. Furthermore, the Company
believes that competitors have used, and may continue to use, litigation to gain
competitive advantage. In addition, these and other entities may have or develop
new technologies or use existing technologies that are, or may in the future be,
the basis for competitive products.
Any potential products that the Company succeeds in developing and for
which it gains regulatory approval will have to compete for market acceptance
and market share. For certain of the Company's potential products, an important
factor in such competition may be the timing of market introduction of
competitive products. Accordingly, the relative speed with which the Company can
develop products, complete the clinical testing and regulatory approval
processes and supply commercial quantities of the product to the market are
expected to be important competitive factors. The Company expects that
competition will be based, among other things, on product efficacy, safety,
reliability, availability, timing and scope of regulatory approval and price.
There can be no assurance that the Company's competitors will not succeed in
developing technologies and products that are more effective than any that are
being developed by the Company or that would render the Company's technology and
products obsolete or noncompetitive. In addition, many of the Company's
competitors may achieve product commercialization or patent protection earlier
than the Company. The failure of the Company to compete effectively would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Proprietary Technology; Uncertainty of Patent Protection
The Company's success will depend in part on its ability to obtain patents,
maintain trade secrets and operate without infringing on the proprietary rights
of others, both in the United States and in other countries. The patent
positions of pharmaceutical, biopharmaceutical and biotechnology companies,
including the Company, are highly uncertain and involve complex legal and
factual questions. Patent law relating to the scope of claims in the technology
fields in which the Company operates is still evolving. The degree of future
protection for the Company's proprietary rights is therefore uncertain. No
consistent policy has emerged regarding the permissible breadth of coverage of
claims in biotechnology patents. Therefore, no assurance can be given that any
of the Company's or its licensors' patent applications will issue as patents or
that any such issued patents will provide competitive advantages for the
Company's products or will not be successfully challenged or circumvented by its
competitors. In addition, there can be no assurance that others will not
independently develop substantially equivalent proprietary technology that is
not covered by the Company's patents or that others
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<PAGE> 18
will not be issued patents that may prevent the sale of the Company's proposed
products or require licensing and the payment of significant fees or royalties
by the Company.
At least three large biotechnology and pharmaceutical companies with
substantial financial and legal resources have issued patents and/or patent
applications on file in the United States and abroad directed at the production
and/or use of recombinant IGF-I by various methods. The earliest date of filing
of these patent applications is April 25, 1983. Unless and until all of these
applications issue, it is not possible to determine the breadth of these claims
regarding a process for IGF-I production or for the use of IGF-I for any
particular indication. Furthermore, a large biotechnology and pharmaceutical
company with substantial financial and legal resources has a patent issued in
the United States directed towards certain DNA molecules encoding BP3 and the
corresponding BP3 protein. This same patent was previously granted in Europe and
was successfully opposed by Celtrix. There can be no assurance that the company
will not appeal such result or that any appeal will not be successful. In the
case that the company does appeal, it is not possible to determine what, if any,
claims will be reinstated or the breadth of such claims. In addition, this
company has been issued a patent directed toward specific methods of
subcutaneous administration of IGF-BP3. Each of the referenced companies can be
expected to defend its patent position vigorously.
Celtrix has developed a new process for the production of IGF and BP3 which
it does not believe will infringe on other patents relating to recombinant
protein production in general or on other patents relating to the production of
IGF and BP3 in particular, although there can be no assurance that a contrary
position will not be asserted. Celtrix also does not believe that its sale or
use of its SomatoKine will infringe on other IGF or BP3 patents although there
can be no assurance that a contrary position will not be asserted. There can be
no assurance that third parties will not claim the Company's technology, current
or future products or manufacturing processes infringe the proprietary rights of
others. If other companies were to successfully bring legal actions against the
Company claiming patent or other intellectual property infringements, in
addition to any potential liability for damages, then the Company could be
required to obtain a license in order to continue to use the affected process or
to manufacture or use the affected products or cease using such products or
process if enjoined by a court. Any such claim, with or without merit, could
result in costly litigation or might require the Company to enter into royalty
or licensing agreements. If any licenses are required, there can be no assurance
that the Company will be able to obtain any such license on commercially
favorable terms, if at all, and if these licenses are not obtained, the Company
might be prevented from pursuing the development of certain of its potential
products. The Company's breach of an existing license or failure to obtain or
delay in obtaining a license to any technology that it may require to
commercialize its products may have a material adverse impact on the Company.
Litigation, which could result in substantial costs to the Company, may
also be necessary to enforce any patents issued or licensed to the Company or to
determine the scope and validity of another party's proprietary rights. There
can be no assurance that the Company's issued or licensed patents would be held
valid by a court of competent jurisdiction. An adverse outcome in litigation or
an interference or other proceeding in a court or patent office could subject
the Company to significant liabilities to other parties, require disputed rights
to be licensed from other parties or require the Company to cease using such
technology, any of which could have a material adverse effect on the Company.
Celtrix also relies on trade secrets to protect technology, especially
where patent protection is not believed to be appropriate or obtainable. Celtrix
attempts to protect its proprietary technology and processes in part by
confidentiality agreements with its employees, consultants and certain
contractors. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach, or that
the
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Company's trade secrets will not otherwise become known or be independently
discovered by competitors in such a manner that the Company has no practical
recourse. To the extent that the Company or its consultants or research
collaborators use intellectual property owned by others in their work for the
Company, disputes may also arise as to the rights in related or resulting
know-how and inventions.
Limited Manufacturing Experience and Capacity
The Company's products must be manufactured in compliance with regulatory
requirements and at acceptable costs. At present, the Company's manufacturing
operations have been designed to address the Company's anticipated needs through
the completion of Phase II clinical trials. In the future, the Company will
either need to expand these operations or subcontract its manufacturing
operations in anticipation of Phase III studies and commercialization. There can
be no assurance that the Company will be able to manufacture any of its current
or future products on a commercial scale, nor that such products can be
manufactured by the Company or any other party at a cost or in quantities to
make commercially viable products. Failure to obtain sufficient commercial
quantities of SomatoKine at acceptable terms will have an adverse impact on the
Company's attempts to seek approval for this product, or to commercialize this
product.
Limited Sales and Marketing Experience
If the Company is permitted to commence commercial sales of products, it
will face commercial competition with respect to sales, marketing or
distribution, areas in which it has no experience. To market any of its products
directly, the Company must develop a marketing and sales force with technical
expertise and with supporting distribution capability. Alternatively, the
Company may obtain the assistance of a pharmaceutical company with a large
distribution system and a large direct sales force. There can be no assurance
that the Company will be able to establish sales and distribution capabilities
or be successful in gaining market acceptance for its proprietary products. To
the extent the Company enters into co-promotion or other licensing arrangements,
any revenues received by the Company will be dependent on the efforts of third
parties and there can be no assurance that such efforts will be successful.
Reliance on Qualified and Key Personnel
The Company is highly dependent on the principal members of its scientific
and management staff, the loss of whose services might significantly delay or
prevent the achievement of research, development, or business objectives. In
addition, the Company relies on consultants and advisors to assist the Company
in formulating its research and development strategy. Retaining and attracting
qualified scientific and management personnel, consultants and advisors is
therefore critical to the Company's success. There can be no assurance that the
Company will be able to hire sufficient qualified personnel on a timely basis or
retain such personnel. The loss of key management or scientific personnel could
adversely affect the Company's business.
The Company's potential expansion into areas and activities requiring
additional expertise, such as clinical trials, governmental approvals,
manufacturing and marketing, are expected to place a significant strain on the
Company's management, operational and financial resources. These demands are
expected to require a substantial increase in management and scientific
personnel and the development of additional expertise by existing management
personnel. The failure to attract and retain such personnel or to develop such
expertise could materially adversely affect prospects for the Company's success.
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Product Liability; Availability of Insurance
The Company currently has in force general liability insurance, with
coverage limits of $3.0 million per incident and $3.0 million in the aggregate
annually, and product liability insurance with coverage limits of $1.0 million
per incident and $1.0 million in the aggregate annually. The Company's insurance
policies provide coverage for product liability and general liability on a
claims made basis. These policies are subject to annual renewal. Such insurance
may not be available in the future on acceptable terms or at all. There can be
no assurance that the Company's insurance coverage will be adequate or that a
product liability claim or recall would not materially adversely affect the
business or financial condition of the Company.
The use of the Company's potential products or technology in clinical
trials and the sale of such products may expose the Company to liability claims.
Such risks exist even with respect to those potential products, if any, that
receive regulatory approval for commercial sale. Although Celtrix has taken and
will continue to take what it believes are appropriate precautions, there can be
no assurance that it will avoid significant product liability exposure. There
also can be no assurance that the Company's insurance coverage will be adequate
or that a product liability claim or recall would not materially adversely
affect the business or financial condition of the Company.
Environmental Liability
The Company is subject to federal, state and local laws and regulations
governing the use, generation, manufacture, storage, discharge, handling and
disposal of certain materials and wastes used in its operations. There can be no
assurance that the Company will not be required to incur significant costs to
comply with environmental laws and regulations as its research activities are
increased, or that the operations, business and future profitability of the
Company will not be adversely affected by current or future environmental laws
and regulations.
Concentration of Stock Ownership
The Company's directors and officers and their affiliates beneficially own
approximately 30% of the outstanding Common Stock. As a result, these
stockholders will be able to exercise significant influence over all matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. Such concentration of ownership may have
the effect of delaying or preventing a change in control of the Company.
FORWARD-LOOKING STATEMENTS
The Company notes that certain of the foregoing statements are forward
looking within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Actual results may differ materially from the statements made
due to a variety of factors including, but not limited to, (i) the efficacy and
safety of SomatoKine and other of the Company's products, (ii) results of
clinical studies, (iii) significant unforeseen delays in the regulatory approval
process, (iv) complications relating to the use of SomatoKine, (v) competitive
products and technology, and (vi) other risk factors described herein.
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<PAGE> 21
ITEM 2. PROPERTIES
Celtrix leases a 69,000 square foot facility at 3055 Patrick Henry Drive,
Santa Clara, California 95054-1815. At present, the Company's manufacturing
operations have been designed to address the Company's anticipated needs through
the completion of Phase II clinical trials. In the future, the Company will
either need to expand these operations or subcontract its manufacturing
operations in anticipation of Phase III studies and commercialization. There can
be no assurance that the Company will be able to manufacture any of its current
or future products on a commercial scale, nor that such products can be
manufactured by the Company or any other party at a cost or in quantities to
make commercially viable products.
ITEM 3. LEGAL PROCEEDINGS
As of the date hereof, there are no legal proceedings pending against or
involving Celtrix or its assets that, in the opinion of management, could result
in a materially adverse change in the business or financial condition of
Celtrix.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
fiscal quarter ended March 31, 1997.
21
<PAGE> 22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the Nasdaq National Market under
the symbol CTRX. The following table represents quarterly information on the
high and low closing prices of Celtrix's common stock for the last two fiscal
years:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal Year 1997
First Quarter ......................................................... $ 3 15/16 $ 2 5/16
Second Quarter ........................................................ $ 3 3/8 $ 2
Third Quarter ......................................................... $ 2 21/32 $ 1 13/16
Fourth Quarter ........................................................ $ 3 7/8 $ 2 1/16
Fiscal Year 1996
First Quarter ......................................................... $ 3 $ 1 1/4
Second Quarter ........................................................ $ 2 7/8 $ 2
Third Quarter ......................................................... $ 2 5/8 $ 1 11/16
Fourth Quarter ........................................................ $ 2 7/8 $ 2 3/16
</TABLE>
As of March 31, 1997, there were approximately 1,300 stockholders of
record. No cash dividends have been paid to date by the Company on its common
stock. Celtrix does not anticipate the payment of dividends in the foreseeable
future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total revenues $ 658 $ 1,750 $ 2,220 $ 858 $ 776
Acquired in-process research and
development and licensing fees -- -- -- -- $ 5,050(1)
Operating loss $(13,160) $(11,334) $(21,592) $(18,457) $(23,773)
Net loss $(12,696) $ (7,246) $(20,749) $(17,760) $(22,302)
Net loss per share $ (0.83) $ (0.51) $ (1.57) $ (1.64) $ (2.71)
Shares used in per share computation 15,238 14,161 13,255 10,805 8,240
Total assets $ 16,956 $ 30,145 $ 35,024 $ 44,089 $ 41,499
Long-term obligations -- $ 238 $ 828 $ 1,456 $ 2,030
Total stockholders' equity $ 14,210 $ 26,786 $ 29,436 $ 39,121 $ 35,195
</TABLE>
- ---------------------------
(1) The acquired in-process research and development and licensing fee charges
of approximately $5.0 million for the year ended March 31, 1993 resulted from
the Genentech, Inc. licensing fee in March 1993 ($4.0 million) and the Baltimore
Biotech, Inc. acquisition in September 1992 ($1.0 million).
22
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Celtrix Pharmaceuticals, Inc. is a biopharmaceutical company developing
novel therapeutics for the treatment of seriously debilitating, degenerative
conditions primarily associated with severe trauma, chronic diseases or aging.
The Company's programs are focused on the use of SomatoKine(R), a novel IGF-BP3
complex, for use in regenerating lost muscle, bone and other tissues essential
for the patient's health and quality of life. Initial product development
programs target acute traumatic injury, such as hip fracture surgery in the
elderly, and severe burns. Potential chronic indications include osteoporosis
and protein wasting diseases associated with cancer, AIDS and other
life-threatening conditions.
The Company's development focus is on SomatoKine, the recombinant
equivalent of the naturally occurring complex formed by the anabolic hormone
insulin-like growth factor-I (IGF-I) and its major binding protein, BP3, which
shows potential as a therapy for patients suffering from severe physical trauma
and serious illness. Research has shown that IGF-I is known to play a major role
in diverse biological processes, including muscle and bone formation, and tissue
repair. However, IGF-I does not naturally exist in quantity free of its binding
proteins, and limitations associated with administering free IGF-I have proven
significant. When IGF-I is bound to BP3, as it is in nature, it does not display
these acute limitations. Human clinical studies from three Phase I studies in
fiscal 1997 have shown that not only does administration of SomatoKine safely
deliver IGF-I at substantially higher dosage levels than have ever been feasible
before with free IGF-I, elevated levels of SomatoKine also substantially
stimulated bone and connective tissue metabolism.
Based on these positive Phase I results, the Company initiated Phase II
clinical feasibility studies in January 1997, using SomatoKine to treat patients
recovering from hip fracture surgery. The Company plans to use the results of
the feasibility studies to expand into a full Phase II clinical study.
SomatoKine also offers potential in the treatment of severe burns; accordingly,
a Phase II feasibility study in patients undergoing skin grafts to treat burns
is expected to begin in mid-1997. All of these studies will contain measurements
of bone and connective tissue metabolism in support of a potential feasibility
trial in severe osteoporosis. The Company believes that major opportunities may
include the treatment of osteoporosis and wasting conditions associated with
cancer and AIDS. Through current and future collaborative agreements, Celtrix
plans to pursue these large markets with SomatoKine. Celtrix is currently
manufacturing SomatoKine, according to current Good Manufacturing Practices
(GMP) at its Santa Clara, California facility.
The Company has a license agreement with The Green Cross Corporation
("Green Cross"), a Japanese pharmaceutical company, covering the development and
commercialization of SomatoKine for the treatment of osteoporosis in Japan. The
Company also has a product development, license and marketing agreement with
Genzyme Corporation ("Genzyme") for TGF-beta-2, a potential pharmaceutical based
on a naturally occurring compound which appears to play an important role in
regulating healthy cell functions. The Company is not currently pursuing an
in-house TGF-beta-2 program.
Celtrix has not earned substantial revenues from product sales and at
March 31, 1997 has an accumulated deficit of $104.1 million, which includes
non-recurring, non-cash charges of $17.3 million for acquired in-process
research and development and licensing fees. The Company expects to incur
additional operating losses, which may fluctuate quarter to quarter,
23
<PAGE> 24
for at least the next several years as the Company expands its development
activities, including clinical trials and manufacturing.
The Company's product revenues in the prior years consist primarily of
revenues from sales of Vitrogen(R)100 Collagen, a sterile solution of collagen
purchased from Collagen Corporation ("Collagen") under a long-term supply
agreement. In May 1995, pursuant to a distribution rights and option to purchase
agreement, Collagen exercised its option to purchase the Vitrogen business. As a
result, no further Vitrogen sales have been recorded. The Company also sells
other products for use in research and assay applications. To date, sales of
these products, along with Vitrogen, have not been material.
There can be no assurance that Celtrix will ever achieve either
significant revenues from product sales or profitable operations. To achieve
profitable operations, the Company, alone or with others, must successfully
develop, obtain regulatory approval for and market its potential products. No
assurance can be given that the Company's product development efforts will be
successfully completed, that required regulatory approvals will be obtained, or
that any products, if developed and introduced, will be successfully marketed or
achieve market acceptance.
RESULTS OF OPERATIONS
The Company incurred net losses of $12.7 million, $7.2 million, and $20.7
million in 1997, 1996, and 1995, respectively. Net losses per share for these
years were $0.83, $0.51, and $1.57, respectively.
Revenues decreased 63% to $658,000 in 1997 from $1.8 million in 1996 due
primarily to proceeds received from Collagen for sale of the Vitrogen business
in 1996, receipts from an Orphan Drug Grant, and reimbursement from Genzyme for
development work on TGF-beta-2. Revenues decreased 18% in 1996 from $2.2 million
in 1995 due primarily to an initial licensing fee received from Green Cross in
1995.
Operating expenses increased 5% to $13.8 million in 1997 from $13.1
million in 1996 due primarily to costs associated with Phase I human clinical
trials and increased manufacturing of SomatoKine for clinical studies. Operating
expenses decreased 45% in 1996 from $23.8 million in 1995 due primarily to the
Company's restructuring and cost-reduction program implemented in the second
half of 1995 when Celtrix discontinued its in-house TGF-beta-2 program for the
treatment of ophthalmic conditions as a result of disappointing clinical
results.
Restructuring costs of $2.1 million were charged in 1995 primarily for
severance costs relating to the Company's restructuring and reduction in
workforce of 65 employees, or approximately 44% of the Company's employees.
Interest income, net of interest expense, decreased 26% to $464,000 in
1997 from $625,000 in 1996, and decreased 26% in 1996 from $843,000 in 1995. The
decreases are due to the lower interest income resulting from lower average
cash, cash equivalent and short-term balances, partly offset by lower interest
expense. Interest expense was $89,000, $176,000, and $264,000 in 1997, 1996, and
1995, respectively.
During 1996, the Company sold its equity investment in Metra Biosystems,
Inc. ("Metra"), a biomedical company, resulting in a reported gain of $3.5
million.
24
<PAGE> 25
At March 31, 1997, the Company had net operating loss and tax credit
carryforwards for federal income tax purposes of approximately $99.8 million and
$3.6 million, respectively, expiring in the years 2006 through 2012. Due to
ownership changes as defined by the Internal Revenue Code, the Company's
utilization of its net operating loss carryforwards and tax credits is subject
to substantial annual limitations. The Company has determined that a valuation
allowance for deferred tax assets of $99.8 million and $3.6 million at March 31,
1997 and 1996, respectively, is required to reduce the deferred tax assets to
the amount realizable, zero, based upon the Company's earnings history of
losses.
LIQUIDITY AND CAPITAL RESOURCES
Celtrix has funded its activities with proceeds from public and private
offerings, advances from Collagen, research and development revenues and
licensing fees from collaborative arrangements, lease and debt financing
arrangements, proceeds from liquidating its equity investment in Metra, and, to
a lesser extent, other revenues and product sales.
At March 31, 1997, Celtrix's cash, cash equivalents and short-term
investments were $5.8 million (including restricted cash of $520,000 related to
certain equipment leases) compared to $17.6 million at March 31, 1996. This net
decrease of $11.8 million was due primarily to cash outlays consisting of $10.8
million in net cash used in operating activities and $1.0 million used for
investing and financing activities. During the third quarter of 1997, the
Company was not in compliance with certain financial covenants under its
equipment leases due to a lower than required cash and short-term investment
balance; as a result, the Company secured a $470,000 Standby Letter of Credit.
Under the Letter of Credit agreement, the deposit will be released under certain
conditions. As a result of a recent financing, Celtrix is now in compliance with
the lease covenants and is in the process of obtaining a release on the Letter
of Credit.
In April 1997, Celtrix completed a private placement of 5,721,876 shares
of newly issued shares of common stock at $2.438 per share. For every two shares
of stock issued, the Company also issued a three-year warrant to purchase an
additional share of Celtrix common stock at $2.682 per share. The warrants are
exercisable only if the shares of stock are held for at least one year; Celtrix
has the right to call the warrants under certain conditions. The net proceeds to
the Company, after fees and expenses, were $13.3 million. The Company believes
that its existing capital resources, along with the proceeds from this offering,
will be adequate to satisfy its anticipated requirements through the middle of
calendar 1998. The Company continues to pursue the possibility of securing
additional corporate partner arrangements that are consistent with the Company's
product development and commercialization strategies, raising additional capital
by means of selling equity or debt securities, and evaluating other options
including mergers and acquisitions. The Company's future success may depend, in
part, on its relationships with third parties including their willingness to
collaborate in the development of any potential products under development,
their strategic interest in such products and, eventually, their success in
marketing.
The Company anticipates that it will expend significant capital resources
in product research and development, which is typical in the biopharmaceutical
industry. Capital resources may also be used for the acquisition of
complementary businesses, products or technologies. The Company's future capital
requirements will depend on many factors, including scientific progress in its
research and development programs, the magnitude of these programs, progress
with preclinical and clinical trials, the cost of scaling up manufacturing and
establishing facilities, the time and costs involved in obtaining regulatory
approvals, the time and costs involved in filing, prosecuting, enforcing and
defending patent claims, competition in technological and market developments,
the establishment of and changes in collaborative
25
<PAGE> 26
relationships and the cost of commercialization activities and arrangements. The
Company anticipates that it will be required to raise substantial additional
capital over a period of several years in order to continue its research and
development programs, including clinical trials, and to prepare for
commercialization by expanding manufacturing and marketing capabilities. No
assurance can be given that such additional capital will be available on
reasonable terms or at all. The unavailability of such financing could delay or
prevent the development and marketing of the Company's potential products.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Financial Statement Schedules of the Company
required by this item are incorporated herein and listed under Item 14(a)(1) and
(2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this report
because the Registrant will file a definitive proxy statement within 120 days
after the end of its fiscal year pursuant to Regulation 14(A) (the "Proxy
Statement") for its Annual Meeting of Stockholders scheduled to be held on
September 9, 1997 and the information included therein is incorporated herein by
reference to the extent detailed below.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Registrant's directors required by this
Item is incorporated by reference to the information under the caption "Election
of Directors--Nominees" in the Registrant's Proxy Statement.
The information concerning the Registrant's executive officers is set
forth in "Item 1--Business--Executive Officers of the Company" in this Annual
Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
information under the captions "Election of Directors--Compensation of
Directors," "Compensation of Executive Officers--Summary Compensation Table,"
and "Compensation of Executive Officers--Aggregated Option Exercises in Last
Fiscal Year and Fiscal Year-End Option Values" in the Registrant's Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
information under the caption "Common Stock Ownership of Certain Beneficial
Owners and Management" in the Registrant's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
information under the caption "Transactions with Management and Others" in the
Registrant's Proxy Statement.
26
<PAGE> 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) INDEX TO FINANCIAL STATEMENTS
The financial statements required by this item are submitted in a separate
section beginning on page 29 of this report:
Page
----
Report of Ernst & Young LLP, Independent Auditors .......... 35
Consolidated Balance Sheets - March 31, 1997 and 1996 ...... 36
Consolidated Statements of Operations
Years Ended March 31, 1997, 1996 and 1995 .............. 37
Consolidated Statements of Stockholders' Equity
Years Ended March 31, 1997, 1996 and 1995 .............. 38
Consolidated Statements of Cash Flows
Years Ended March 31, 1997, 1996 and 1995 .............. 39
Notes to the Consolidated Financial Statements ............. 40
(a) (2) FINANCIAL STATEMENT SCHEDULES
Schedules have been omitted because they are not applicable or are not
required or the information required to be set forth therein is included in the
Financial Statements or notes thereto.
(a) (3) EXHIBITS
EXHIBIT
NO. DESCRIPTION
2.1 - Stock Exchange Agreement dated September 14, 1992, among
Registrant, Baltimore Biotech, Inc. ("BBI") and holders of
outstanding stock of BBI. (6) (10)
3.1 - Certificate of Incorporation of the Registrant. (4)
3.2 - Bylaws of the Registrant. (1)
4.1 - Certificate of Incorporation of the Registrant. (See Exhibit 3.1)
4.2 - Bylaws of the Registrant. (See Exhibit 3.2)
4.3 - Warrant of the Registrant dated November 17, 1993 to Warburg,
Pincus Investors, L.P. (13)
27
<PAGE> 28
EXHIBIT
NO. DESCRIPTION
10.1 - Distribution Agreement dated January 23, 1991, between Collagen
Corporation and the Registrant. (2)
10.2a - Registrant's 1991 Directors' Stock Option Plan. (3)
10.3a - Registrant's 1991 Employee Stock Purchase Plan. (3)
10.4a - Registrant's 1991 Stock Option Plan. (3)
10.5 - Agreement by the Registrant to provide services to Collagen
Corporation dated as of February 1, 1991, between Collagen
Corporation and the Registrant. (2)
10.6 - Supply and License Agreement from the Registrant to Collagen
Corporation effective as of February 1, 1991, between Collagen
Corporation and the Registrant. (2) (8)
10.7 - Agreement by Collagen Corporation to provide services to the
Registrant dated as of February 1, 1991, between Collagen
Corporation and the Registrant. (2)
10.8 - Supply and License Agreement from Collagen Corporation to the
Registrant effective as of February 1, 1991, between Collagen
Corporation and the Registrant. (2) (8)
10.9 - Distribution Agency Agreement dated as of February 1, 1991, among
the Registrant, Collagen Corporation and the Bank of New York. (2)
10.11 - Tax Allocation Agreement dated as of February 1, 1991, between
Collagen Corporation and the Registrant. (2)
10.12 - Vitrogen(R) Agreement Between Collagen Corporation and the
Registrant effective as of February 1, 1991. (2) (8)
10.14 - Joint Venture Agreement dated as of March 26, 1987, between
Collagen Corporation and Hercules Incorporated. (1)
10.15 - Letter Agreement dated as of July 21, 1989, by and among
Collagen Corporation, Hercules Incorporated and Epicor
Laboratories, Inc. (1)
10.16 - License Agreement for Wound Healing Composition dated as of April
15, 1987, between the University of Washington and Collagen
Corporation. (1)
10.18 - Form of Indemnification Agreement between the Registrant and each
of its executive officers and directors. (1)
10.19 - Form of Loan and Security Agreement between the Registrant and
certain of its employees. (1)
10.20 - Agreement Between Bristol-Myers Squibb and Collagen Corporation
dated September 7, 1990. (1)
28
<PAGE> 29
EXHIBIT
NO. DESCRIPTION
10.21 - License Agreement dated as of December 4, 1991, among
Massachusetts Institute of Technology, Whitehead Institute and the
Registrant. (4) (9)
10.22 - License Agreement dated as of June 15, 1990, between the Board of
Trustees of the Leland Stanford Junior University and BioGrowth,
Inc. (4)
10.23 - Lease Agreement dated as of August 1, 1991, between Spieker French
Foster #249, a California General Partnership, and the Registrant,
as amended. (4)
10.24 - Escrow Agreement dated as of December 12, 1991, among the
Registrant, BioGrowth, Inc., The Bank of New York, and Larry Brown
and James Bennington, M.D., as representatives of and on behalf of
the BioGrowth, Inc. Shareholders. (4)
10.25 - Form of Non-Competition Agreement between the Registrant and each
of Edward O. Lanphier II, Andreas Sommer, Christopher Maack and E.
Martin Spencer. (4)
10.26 - Form of Affiliate's Agreement between the Registrant and each of
Edward O. Lanphier II, Andreas Sommer and certain other
shareholders of BioGrowth, Inc. (4)
10.28 - Loan and Security Agreement dated as of January 28, 1992, between
the Registrant and Andreas Sommer. (4)
10.29 - Master Lease Agreement Number 10439 between the Registrant and
Lease Management Service, Inc. (5)
10.30 - Master Lease Agreement Number 9131 between the Registrant and
LeasTec Corporation. (6)
10.31 - Master Lease Agreement dated November 16, 1992, between the
Registrant and General Electric Capital Corporation. (7)
10.33 - License Agreement dated April 1, 1993, between the Registrant and
Genentech, Inc. (11) (12)
10.34 - Registration Rights Agreement dated April 1, 1993, between the
Registrant and Genentech, Inc. (12)
10.37 - Common Stock Purchase Agreement dated June 2, 1993, between the
Registrant and Certain Purchasers of its Common Stock. (12)
10.38 - Common Stock and Warrant Purchase Agreement dated October 27,
1993, between the Registrant and Warburg, Pincus Investors, L.P.
(14)
10.39 - Registration Rights Agreement dated November 17, 1993, between the
Registrant and Warburg, Pincus Investors, L.P. (13)
10.40 - Common Stock Purchase Agreement dated June 22, 1994, between the
Registrant and Genzyme Corporation (15)
10.41 - Registration Rights Agreement dated June 22, 1994, between the
Registrant and Genzyme Corporation (15)
29
<PAGE> 30
EXHIBIT
NO. DESCRIPTION
10.42 - License and Development Agreement dated June 22, 1994, between the
Registrant and Genzyme Corporation (15) (16)
10.43 - License Agreement dated July 5, 1994, between the Registrant and
The Green Cross Corporation. (17) (18)
10.44 - Common Stock Purchase Agreement dated September 2, 1994, between
the Registrant and Kingsbury Capital Partners, L.P. (19)
10.45 - Registration Rights Agreement dated September 2, 1994, between
the Registrant and Kingsbury Capital Partners, L.P. (19)
10.46 - Vitrogen Distribution Agreement and Option to Purchase dated
January 1, 1995, between the Registrant and Collagen Corporation.
(20) (21)
10.48 - Separation Agreement and Mutual Release between the Registrant
and the employees who participated in the Registrant's
reductions-in-force. (22) (23)
10.49 - Amendment dated September 29, 1995 to Common Stock Purchase
Agreement dated June 24, 1994, between the Registrant and Genzyme
Corporation. (24)
10.50 - Common Stock and Warrant Purchase Agreement dated April 1, 1997,
between the Registrant and each of the Selling Stockholders. (25)
10.51 - Employment Agreement dated January 7, 1997 between the Registrant
and Dr. Andreas Sommer.
10.52 - Management Continuity Agreement dated February 10, 1997 between
the Registrant and Mary Anne Ribi.
21 - Subsidiaries of the Registrant. (4)
23.1 - Consent of Ernst & Young LLP, Independent Auditors.
24 - Power of Attorney. (See page 34 of this report.)
27 - Financial Data Schedule
- --------------------
(1) Incorporated by reference to identically numbered exhibits filed with
Registrant's Form 10 Registration Statement, filed with the Securities
and Exchange Commission on January 14, 1991.
(2) Incorporated by reference to identically numbered exhibits filed with
Registrant's Form 8 Amendment to Form 10 Registration Statement, filed
with the Securities and Exchange Commission on January 30, 1991.
(3) Incorporated by reference to identically numbered exhibits filed with
Registrant's Registration Statement on Form S-1 (File No. 33-40915),
filed with the Securities and Exchange Commission declared effective on
July 23, 1991.
30
<PAGE> 31
(4) Incorporated by reference to identically numbered exhibits filed with
Registrant's Registration Statement on Form S-1 (File No. 33-45370),
filed with the Securities and Exchange Commission declared effective on
March 6, 1992.
(5) Incorporated by reference to identically numbered exhibits filed with
Registrant's Form 10-K for the year ended March 31, 1992, filed with
the Securities and Exchange Commission on June 26, 1992.
(6) Incorporated by reference to identically numbered exhibits filed with
Registrant's Form 10-Q for the quarterly period ended September 30,
1992, filed with the Securities and Exchange Commission on November 9,
1992.
(7) Incorporated by reference to identically numbered exhibits filed with
Registrant's Form 10-Q for the quarterly period ended December 31,
1992, filed with the Securities and Exchange Commission on February 11,
1993.
(8) Confidential treatment has been granted with respect to portions of
this exhibit by order dated February 1, 1991.
(9) Confidential treatment has been granted with respect to portions of
this exhibit by order dated March 6, 1992.
(10) Confidential treatment has been granted with respect to portions of
this exhibit by order dated December 1, 1992.
(11) Confidential treatment has been granted with respect to portions of
this exhibit by order dated August 6, 1993.
(12) Incorporated by reference to identically numbered exhibits filed with
Registrant's Form 10-K for the year ended March 31, 1993, filed with
the Securities and Exchange Commission on June 18, 1993.
(13) Exhibit to the Registrant's Current Report on Form 8-K dated November
18, 1993.
(14) Exhibit to the Registrant's Current Report on Form 8-K dated October
29, 1993.
(15) Incorporated by reference to identically numbered exhibits filed with
Registrant's Form 10-K for the year ended March 31, 1994, filed with
the Securities and Exchange Commission on June 28, 1994.
(16) Confidential treatment has been granted with respect to portions of
this exhibit by order dated August 16, 1994.
(17) Incorporated by reference to identically numbered exhibits filed with
Registrant's Form 10-Q for the quarterly period ended June 30, 1994,
filed with the Securities and Exchange Commission on August 15, 1994.
(18) Confidential treatment has been granted with respect to portions of
this exhibit by order dated February 17, 1995.
(19) Incorporated by reference to identically numbered exhibits filed with
Registrant's Form 10-Q for the quarterly period ended September 30,
1994, filed with the Securities and Exchange Commission on November 15,
1994.
31
<PAGE> 32
(20) Incorporated by reference to identically numbered exhibits filed with
Registrant's Form 10-Q for the quarterly period ended December 31,
1994, filed with the Securities and Exchange Commission on February 13,
1995.
(21) Confidential treatment has been granted with respect to portions of
this exhibit by order dated March 31, 1995.
(22) Incorporated by reference to identically numbered exhibits filed with
Registrant's Form 10-K for the year ended March 31, 1995, filed with
the Securities and Exchange Commission on June 28, 1995.
(23) Confidential treatment has been granted with respect to portions of
this exhibit by order dated June 26, 1995.
(24) Incorporated by reference to identically numbered exhibits filed with
Registrant's Form 10-Q for the quarterly period ended December 31,
1995, filed with the Securities and Exchange Commission on February 12,
1996.
(25) Incorporated by reference to identically numbered exhibits filed with
Registrant's Registration Statement on Form S-3 (File No. 333-27263),
filed with the Securities and Exchange Commission on May 16, 1997.
(b) REPORTS ON FORM 8-K
The Company filed the following report on Form 8-K during the quarter
ended March 31, 1997:
None
32
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CELTRIX PHARMACEUTICALS, INC.
By: /s/ ANDREAS SOMMER
-----------------------
Andreas Sommer, Ph.D.
Chief Executive Officer and President
Date: June 20, 1997
--------------------
33
<PAGE> 34
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints jointly and severally, Andreas Sommer and Mary Anne
Ribi, and each one of them, his or her attorneys-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any and all
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ----------------------------------------------------------------------------------
<S> <C> <C>
/s/ANDREAS SOMMER
- -----------------------
(Andreas Sommer) Chief Executive Officer, June 20, 1997
President and Director
/s/MARY ANNE RIBI
- -----------------------
(Mary Anne Ribi) Vice President, Finance June 20, 1997
and Administration,
Chief Financial Officer
and Assistant Secretary (Principal
Financial and Accounting Officer)
/s/HENRY E. BLAIR
- -----------------------
(Henry E. Blair) Director June 20, 1997
/s/JAMES E. THOMAS
- -----------------------
(James E. Thomas) Chairman of the Board June 20, 1997
</TABLE>
34
<PAGE> 35
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Celtrix Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Celtrix
Pharmaceuticals, Inc. as of March 31, 1997 and 1996 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 1997. These financial statements are
the responsibility of the company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Celtrix
Pharmaceuticals, Inc. at March 31, 1997 and 1996, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended March 31, 1997, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
April 25, 1997
35
<PAGE> 36
CELTRIX PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
March 31, March 31,
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,684 $ 10,133
Short-term investments 2,584 7,460
Restricted cash 520 50
Receivables and other current assets 197 195
--------- ---------
Total current assets 5,985 17,838
Property and equipment, at cost:
Leasehold improvements 11,118 11,065
Machinery and equipment 8,802 8,657
--------- ---------
19,920 19,722
Less accumulated depreciation and amortization (11,497) (9,709)
--------- ---------
8,423 10,013
Intangible and other assets, net of accumulated amortization of
$678 and $477 at March 31, 1997 and 1996, respectively 2,548 2,294
--------- ---------
$ 16,956 $ 30,145
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 486 $ 488
Accrued compensation 221 208
Other accrued liabilities 673 605
Current portion of long-term obligations 328 633
--------- ---------
Total current liabilities 1,708 1,934
Deferred rent 1,038 1,187
Long-term obligations -- 238
Commitments
Stockholders' equity:
Preferred stock, $.01 par value, authorized 2,000,000
shares; none issued and outstanding -- --
Common stock, $.01 par value, authorized 30,000,000
shares; 15,263,429 shares and 15,213,992 shares issued
and outstanding at March 31, 1997 and 1996, respectively 153 152
Additional paid-in capital 118,152 118,052
Accumulated deficit (104,095) (91,418)
--------- ---------
Total stockholders' equity 14,210 26,786
--------- ---------
$ 16,956 $ 30,145
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE> 37
CELTRIX PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Product sales $ 31 $ 99 $ 296
Related party -- 420 60
Licensing revenues and other 627 1,231 1,844
-------- -------- --------
658 1,750 2,200
Costs and expenses:
Cost of sales 5 31 134
Research and development 11,999 10,990 18,091
General and administrative 1,814 2,063 3,459
Restructuring costs -- -- 2,108
-------- -------- --------
13,818 13,084 23,792
-------- -------- --------
Operating loss (13,160) (11,334) (21,592)
Interest income, net 464 625 843
Gain on sale of investment in Metra
Biosystems, Inc. -- 3,463 --
-------- -------- --------
Net loss $(12,696) $ (7,246) $(20,749)
======== ======== ========
Net loss per share $ (0.83) $ (0.51) $ (1.57)
======== ======== ========
Shares used in per share computation 15,238 14,161 13,255
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE> 38
CELTRIX PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Accumulated Stockholders'
Stock Capital Deficit Equity
--------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at March 31, 1994 $ 120 $ 102,612 $ (63,611) $ 39,121
Issuance of 1,550,388 shares of common
stock to Genzyme Corporation 16 9,875 -- 9,891
Issuance of 156,000 shares of common
stock to Kingsbury Capital Partners, L.P. 1 991 -- 992
Issuance of 5,890 shares of common stock
upon exercise of stock options -- 33 -- 33
Issuance of 50,000 shares of common stock
under the Employee Stock Purchase Plan -- 111 -- 111
Unrealized gain on available-for-sale
securities -- -- 37 37
Net loss -- -- (20,749) (20,749)
--------- --------- --------- ---------
Balance at March 31, 1995 137 113,622 (84,323) 29,436
Issuance of 1,472,829 shares of common
stock to Genzyme Corporation 15 4,382 -- 4,397
Issuance of 21,944 shares of common stock
under the Employee Stock Purchase Plan -- 48 -- 48
Unrealized gain on available-for-sale
securities -- -- 151 151
Net loss -- -- (7,246) (7,246)
--------- --------- --------- ---------
Balance at March 31, 1996 152 118,052 (91,418) 26,786
Issuance of 20,249 shares of common stock
upon exercise of stock options -- 51 -- 51
Issuance of 29,188 shares of common stock
under the Employee Stock Purchase Plan 1 49 -- 50
Unrealized gain on available-for-sale
securities -- -- 19 19
Net loss -- -- (12,696) (12,696)
--------- --------- --------- ---------
Balance at March 31, 1997 $ 153 $ 118,152 $(104,095) $ 14,210
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE> 39
CELTRIX PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(12,696) $ (7,246) $(20,749)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,840 2,234 2,164
Gain on sale of investment -- (3,463) --
Changes in operating accounts:
Receivables and other current assets (2) 112 235
Accounts payable, accrued restructuring
costs, accrued compensation and other
accrued liabilities 79 (1,485) 1,332
-------- -------- --------
Net cash used in operating activities (10,779) (9,848) (17,018)
Cash flows from investing activities:
Sales and maturities of available-for-sale
securities 35,210 34,544 25,050
Purchase of available-for-sale securities (30,315) (24,940) (14,578)
Increase (decrease) in restricted cash (470) 948 --
Capital expenditures (198) (8) (2,184)
Increase in intangible and other assets (455) (192) (302)
-------- -------- --------
Net cash provided by (used in) investing
activities 3,772 10,352 7,986
Cash flows from financing activities:
Proceeds from issuance of common stock, net 101 4,445 11,027
Proceeds from lease and debt transactions -- -- 985
Principal payments under long-term obligations (543) (596) (563)
-------- -------- --------
Net cash provided by financing activities (442) 3,849 11,449
Net increase (decrease) in cash and cash equivalents (7,449) 4,353 2,417
Cash and cash equivalents at beginning of year 10,133 5,780 3,363
-------- -------- --------
Cash and cash equivalents at end of year $ 2,684 $ 10,133 $ 5,780
======== ======== ========
Supplemental disclosure:
Interest paid $ 89 $ 176 $ 264
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE> 40
CELTRIX PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Celtrix Pharmaceuticals, Inc. is a biopharmaceutical company focused on
developing novel therapeutics for the treatment of seriously debilitating,
degenerative conditions primarily associated with severe trauma, chronic
diseases or aging. Celtrix was a wholly owned subsidiary of Collagen Corporation
("Collagen") prior to February 1991. Collagen distributed Celtrix's common stock
as a special dividend to the Collagen stockholders in February 1991.
The consolidated financial statements include the accounts of Celtrix and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates.
Cash Equivalents and Short-term Investments
Celtrix considers all highly liquid investment securities with maturity
from date of purchase of three months or less to be cash equivalents and
investment securities with maturity from date of purchase of more than three
months to be short-term investments.
To date, all marketable securities have been classified as
available-for-sale and are carried at fair value, with unrealized gains and
losses reported in accumulated deficit. Fair values of investment securities are
based on quoted market prices, and the costs of securities sold are based on the
specific identification method. Premiums and discounts are amortized over the
period from acquisition to maturity and are included in investment income, along
with interest and dividends.
Property and Equipment
Depreciation and amortization of property and equipment is provided on
the straight-line method over the term of the lease for equipment under capital
lease obligations and leasehold improvements or the life of the asset, whichever
is shorter, and three to seven years for other machinery and equipment.
Intangible Assets
Patents, carried at cost, are amortized using the straight-line method
over the estimated useful lives of the related intellectual property, generally
12 years.
Revenue Recognition
Licensing revenues are recorded when contractually earned. Revenue from
product sales is recognized at time of shipment.
40
<PAGE> 41
Stock-Based Compensation
The Company grants stock options for a fixed number of shares to
employees with an exercise price equal to the fair value of the shares at the
date of grant. The Company accounts for stock option grants in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees", and,
accordingly, recognizes no compensation expense for the stock option grants.
Net Loss Per Share
Net loss per share is calculated using the weighted-average number of
common shares outstanding. Common equivalent shares from stock options and
warrants are excluded from the calculation as their effect is antidilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share" ("SFAS 128"), which is required to be
adopted on December 31, 1997. Although SFAS 128 will simplify the current
earnings per share ("EPS") calculation by excluding common stock equivalents
from the computation of basic EPS, adoption of SFAS 128 will have no impact on
the Company's computation of net loss per share in the periods ended March 31,
1997 and 1996, or in previously disclosed periods as common stock equivalents
have been excluded due to their antidilutive effect.
Reclassifications
Certain reclassifications have been made to prior year financial
statements to conform with the 1997 presentation.
2. INVESTMENT SECURITIES
The following is a summary of available-for-sale securities at March 31,
1997 and 1996 (in thousands). Gross unrealized gains were immaterial for the two
years.
<TABLE>
<CAPTION>
1997 1996
------------------------------- -------------------------------
Net Estimated Net Estimated
Unrealized Fair Unrealized Fair
Cost Gains Value Cost Gains Value
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. treasury securities and
obligations of U.S. government
agencies $ 3,381 $ (1) $ 3,380 $ 15,021 $ (18) $ 15,003
U.S. corporate securities -- -- -- 1,021 (2) 1,019
------------------------------- -------------------------------
$ 3,381 $ (1) $ 3,380 $ 16,042 $ (20) $ 16,022
=============================== ===============================
Classified as:
Cash equivalents $ 796 $ -- $ 796 $ 8,564 $ (2) $ 8,562
Short-term investments 2,585 (1) 2,584 7,478 (18) 7,460
------------------------------- -------------------------------
$ 3,381 $ (1) $ 3,380 $ 16,042 $ (20) $ 16,022
=============================== ===============================
</TABLE>
During fiscal year 1997, sales of available-for-sale debt securities amounted to
$1,985,000, resulting in $8,000 of gross realized gains. During fiscal year
1996, sales of available-for-sale debt securities amounted to $3,832,000,
resulting in $20,000 of gross realized gains. At March 31, 1997, by contractual
maturity, all of the available-for sale securities are due in one year or less.
41
<PAGE> 42
3. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist primarily of patents and employee
receivables. Amounts due from employees as of March 31, 1997 and 1996 of
$167,000 and $164,000, respectively, consist primarily of secured promissory
notes that bear interest between five and seven percent and have terms of up to
nine years. Principal and interest are due and payable upon maturity.
4. DEBT AND COMMITMENTS
The Company is obligated under capital leases and debt arrangements for
certain equipment and leasehold improvements with a carrying value of $385,000,
net of $2,737,000 accumulated amortization at March 31, 1997, and $485,000, net
of $2,469,000 accumulated amortization at March 31, 1996. Amortization expense
for leased assets is included in depreciation and amortization expense. These
obligations bear interest ranging from ten to fifteen percent, have up to five
year terms, and contain various buy-out options at the term expiration,
including purchasing the assets at fair market value. Under the obligations, the
Company is required to meet various financial covenants. Due to lower than
required cash and short-term investment balances during third quarter of 1997,
the Company had to secure a Standby Letter of Credit in the amount of $470,000
representing remaining lease payments. Under the Letter of Credit agreement,
this requirement will be released upon satisfaction of the lease covenants.
As a result of a private placement in April 1997 (see Note 11), Celtrix is in
the process of obtaining a release on the Letter of Credit.
Future minimum payments under capital leases and debt arrangements total
$309,000 (including $18,000 in interest) and $37,000, respectively, due in 1998.
The Company leases its office, laboratory and manufacturing facility
under a noncancelable operating lease which expires in the year 2004 and
contains several option periods to extend the lease up to an additional 18
years. Payments are adjusted based on changes in the Consumer Price Index
("CPI"), under the terms of the facility lease agreement. Deferred rent reflects
the landlord's funding of certain leasehold improvements prior to lease
commencement and is amortized over the lease term to offset rent expense. The
Company also leases certain equipment under noncancelable operating leases. Rent
expense was $1.2 million, $1.2 million, and $2.1 million for the years ended
March 31, 1997, 1996, and 1995 respectively.
Future minimum lease payments under operating leases at March 31, 1997
(exclusive of potential CPI adjustments) are as follows (in thousands):
<TABLE>
<CAPTION>
Operating
Leases
---------
<S> <C>
1998 $ 1,283
1999 1,122
2000 968
2001 968
2002 968
Thereafter 1,938
-------
Total minimum lease payments $ 7,247
=======
</TABLE>
5. INCENTIVE AND BENEFIT PLANS
Under Celtrix's 1991 Stock Option Plan and the 1991 Directors' Stock
Option Plan, 1,500,000 and 200,000 shares of Celtrix's common stock have been
reserved for issuance, respectively. The exercise prices under these plans are
determined by the Board of Directors
42
<PAGE> 43
or its committee and may not be less than 100% of the fair market value of
Celtrix's common stock at the time of grant. The options expire ten years from
the date of grant, unless otherwise provided in the option agreement. The
options generally become vested and exercisable over four years.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its stock options because, as discussed below,
the alternative fair value accounting provided for under Financial Accounting
Standards Board Statement No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of the grant, no compensation expense is
recognized.
Pro forma information regarding net loss and net loss per share is
required by SFAS 123, which also requires that the information be determined as
if the Company has accounted for its employee stock options granted subsequent
to March 31, 1995 under the fair value method of that Statement. The fair value
of these options was estimated at the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions for 1997
and 1996, respectively: risk-free interest rates of 6.55% and 5.87%; dividend
yields of zero; volatility factors of the expected market price of the Company's
common stock of .733; and an expected life of the options of 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility and expected option life. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
Under Celtrix's 1991 Employee Stock Purchase Plan, of which 250,000
shares of common stock have been reserved for issuance, employees have an
opportunity to purchase common stock of Celtrix at 85% of the fair market value
at the beginning or end of each 12 month offering period, whichever is lower.
The first offering period commenced January 1, 1994. As of March 31, 1997,
101,132 shares of common stock have been issued to company employees. The fair
value of the employees' purchase rights was estimated using the Black-Scholes
option pricing model with the following weighted-average assumptions for 1997
and 1996, respectively: risk-free interest rates of 5.66% and 5.09%; dividend
yields of zero; volatility factors of the expected market price of the Company's
common stock of .733; and an expected life of the options of 1 year.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for net loss per share
information):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Pro forma net loss $(12,929) $(7,342)
Pro forma net loss per share $ (0.85) $ (0.52)
</TABLE>
43
<PAGE> 44
The weighted-average fair value of options granted during 1997 and 1996
was $1.47 and $1.55, respectively. Because SFAS 123 is applicable only to
options granted subsequent to March 31, 1995, its pro forma effect will not be
fully reflected until fiscal 1999.
A summary of the Company's stock option activity, which includes the 1991
Stock Option Plan and the 1991 Directors' Stock Option Plan, for the years ended
March 31 follows:
<TABLE>
<CAPTION>
Outstanding Options
------------------------------------------
Shares Weighted-
Available Number of Price Average
For Grant Shares Per Share Exercise Price
--------- ---------- ------------ --------------
<S> <C> <C> <C> <C>
Balance at March 31, 1994 591,539 1,102,426 $5.50-$11.50 $8.21
Options granted (949,667) 949,667 $2.50-$9.50 $3.67
Options exercised -- (5,890) $ 5.50 $5.50
Options canceled 1,145,715 (1,145,715) $2.50-$10.50 $7.88
--------- ---------- ------------ -----
Balance at March 31, 1995 787,587 900,488 $2.50-$11.50 $3.87
Options granted (640,699) 640,699 $1.25-$2.63 $2.39
Options canceled 506,447 (506,447) $2.50-$9.50 $3.90
--------- ---------- ------------ -----
Balance at March 31, 1996 653,335 1,034,740 $1.25-$11.50 $2.94
Options granted (137,116) 137,116 $1.94-$3.94 $2,45
Options exercised -- (20,249) $1.31-$2.63 $2.52
Options canceled 191,249 (191,249) $1.31-$9.50 $4.30
--------- ---------- ------------ -----
Balance at March 31, 1997 707,468 960,358 $1.25-$11.50 $2.94
========= ========== ============ =====
</TABLE>
The following table summarizes information concerning outstanding options
at March 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- ----------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Remaining Exercise Options Exercise
Range of Exercise Price Outstanding Contractual Life Price Exercisable Price
- ----------------------- ------------------------------------------ -----------------------------
<S> <C> <C> <C> <C> <C>
$1.25 - $2.50 446,258 8.2 $2.19 265,050 $2.28
$2.63 - $3.94 508,850 8.5 $2.71 190,360 $2.75
$5.50 - $11.50 5,250 5.4 $7.71 5,015 $7.77
------- -------
960,358 460,425
======= =======
</TABLE>
Under Celtrix's 1991 retirement savings plan ("401(k) Plan"), employees
may elect to defer up to 16% of their total compensation, not to exceed the
amount allowed by applicable Internal Revenue Service guidelines. There were no
employer contributions to the plan as of March 31, 1997.
6. RELATED PARTY TRANSACTIONS
In February 1991, pursuant to the distribution of Celtrix common stock by
Collagen, Celtrix entered into various agreements with Collagen, including
supply and license agreements (up to 20-year terms), and a Vitrogen(R) 100
Collagen manufacturing agreement (up to 15-year term). Any materials supplied
are provided at prices equal to a multiple of fully burdened manufacturing
costs. In January 1995, Celtrix entered into a separate agreement with Collagen
under which Collagen was granted distribution rights and an option to purchase
the Vitrogen business; Collagen exercised the purchase option for $400,000 in
May 1995. These revenues are reported as related party revenues in 1995 and
1996.
44
<PAGE> 45
7. LICENSE AND COLLABORATIVE ARRANGEMENTS
In July 1994, Celtrix entered into a license agreement with The Green
Cross Corporation ("Green Cross"), a Japanese pharmaceutical company, covering
the development and commercialization of SomatoKine for the treatment of
osteoporosis in Japan. Under the terms of the agreement, Green Cross is
responsible for all related research, development and marketing, as well as
manufacturing the product to support its preclinical, clinical and commercial
needs in Japan. Celtrix receives licensing fees and additionally, could receive
milestone payments upon reaching specific product development activities and
royalties on product sales. In addition, Celtrix has full rights outside of
Japan to SomatoKine and also to related know-how and technology developed by
Green Cross such as product formulation, manufacturing scale-up and osteoporosis
clinical study design and data.
In June 1994, the Company entered into a product development, license and
marketing agreement with Genzyme Corporation ("Genzyme") on TGF-beta-2 which
includes equity investments, milestone payments and potential royalties to
Celtrix. Under the terms of the agreement, Genzyme has been granted worldwide
commercialization rights, excluding Asia, for all systemic applications and
select local applications of TGF-beta-2. Celtrix has retained rights to select
applications of TGF-beta-2, including all ophthalmic diseases and disorders, as
well as certain localized tissue damage. The Company has the option to reacquire
rights to other product applications not pursued by Genzyme. As part of this
agreement, in June 1994, Celtrix sold to Genzyme 1,550,388 shares of Celtrix
common stock resulting in net proceeds to the Company of $9.9 million. In
December 1995, Celtrix exercised the option to receive an additional investment
by Genzyme for 1,472,829 shares of Celtrix common stock, at $3.00 per share,
resulting in $4.4 million of net proceeds to the Company.
Since inception, Celtrix has entered into various other research and
development and licensing arrangements. Some of these agreements contain royalty
and other obligations.
8. GAIN ON SALE OF INVESTMENT IN METRA BIOSYSTEMS, INC.
In 1996, Celtrix liquidated an equity investment, held since 1990, in
Metra Biosystems, Inc. ("Metra"), a biomedical company. The $3.5 million gain on
investment was the result of the Company's sale of 231,480 shares of Metra
common stock.
9. RESTRUCTURING COSTS
During 1995, the Company canceled its ophthalmic program, restructured,
and reduced its work force by 65 employees (approximately 44%) from all job
levels. Consequently, in 1995, the Company expensed $1.4 million for severance
costs and $682,000 for equipment leases and a purchase commitment related to the
ophthalmic program. In 1996, the Company paid $1.2 million in restructuring
costs.
10. INCOME TAXES
At March 31, 1997, the Company had net operating loss and tax credit
carryforwards for federal income tax purposes of approximately $99.8 million and
$3.6 million, respectively, expiring in the years 2006 through 2012. The federal
net operating loss carryforward differs from the accumulated deficit principally
due to (i) the nondeductibility for tax purposes of the charges for in-process
research and development resulting from the BioGrowth, Inc. merger and the
Baltimore Biotech, Inc. acquisition, and (ii) timing difference in the
recognition of certain revenue and expense items for financial and federal tax
reporting purposes (primarily certain expenses not currently deductible).
Approximately $8.0 million of the total federal net
45
<PAGE> 46
operating losses are available only to offset future consolidated taxable income
to the extent contributed by the Company's wholly owned subsidiary, BioGrowth
Inc.
Utilization of the net operating losses and credits is subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986.
Significant components of the Company's deferred tax assets and
liabilities for federal and state income taxes as of March 31 are as follows (in
thousands):
<TABLE>
<CAPTION>
Deferred tax assets: 1997 1996
-------- --------
<S> <C> <C>
Net operating loss carryforwards $ 35,100 $ 29,800
Research credits 4,800 4,300
Acquired intangibles -- 1,000
Research expenses capitalized for tax purposes 3,700 2,200
Other-net (2,600) (1,500)
-------- --------
Net deferred tax assets 41,000 35,800
Valuation allowance for deferred tax assets (41,000) (35,800)
-------- --------
Total deferred tax assets $ -- $ --
======== ========
</TABLE>
The valuation allowance increased by $5.2 million, $2.9 million, and
$8.2 million during the years ended March 31, 1997, 1996 and 1995, respectively.
11. SUBSEQUENT EVENTS
In April 1997, the Company completed a private placement of 5,721,876
shares of newly issued shares of common stock at $2.438 per share. For every two
shares of stock issued, the Company also issued a three-year warrant to purchase
an additional share of Celtrix common stock at $2.68 per share. The warrants are
exercisable only if the shares of stock are held for at least one year; Celtrix
has the right to call the warrants under certain conditions. The net proceeds to
the Company, after fees and expenses, were $13.3 million.
The following unaudited pro forma financial data gives effect as of
March 31, 1997 to the private placement described above:
<TABLE>
<CAPTION>
Actual Pro-Forma
Balance Balance
------- ---------
<S> <C> <C> <C>
Cash, cash equivalents and short-term investments (1) $ 5,788 $19,088
Working capital $ 4,277 $17,577
Stockholders' equity $14,210 $27,510
</TABLE>
(1)including restricted cash
46
<PAGE> 47
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
10.51 - Employment Agreement dated January 7, 1997 between the Registrant
and Dr. Andreas Sommer.
10.52 - Management Continuity Agreement dated February 10, 1997 between
the Registrant and Mary Anne Ribi.
23.1 - Consent of Ernst & Young LLP, Independent Auditors.
24 - Power of Attorney. (See page 34 of this report.)
27 - Financial Data Schedule
<PAGE> 1
EXHIBIT 10.51
CELTRIX PHARMACEUTICALS, INC.
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is dated as of January 7, 1997
by and between Dr. Andreas Sommer ("Employee") and Celtrix Pharmaceuticals,
Inc., a Delaware corporation (the "Company").
RECITALS
Employee has served as the Company's President and Chief Executive Officer
since April 1995 and has served in various officer positions with the Company
since 1992. The Company's Board of Directors believes it is in the best
interests of the Company to retain Employee and incentivize Employee to
continue in the service of the Company. Accordingly, the Board of Directors of
the Company and Employee agree to enter into this Employment Agreement.
Now therefore, in consideration of the mutual promises, covenants and
agreements contained herein, the parties hereto agree as follows:
1. TERM OF AGREEMENT. This Agreement shall commence on the date hereof and
shall have a term of two years (2) (the "Original Term"). This Agreement may be
extended for an additional one (1) year beyond the end of the Original Term if
the parties hereto mutually agree in writing to such extension. Subject to the
Company's severance payment obligations set forth in Section 5 below, this
Agreement may be terminated by either party, with or without cause, on thirty
(30) days' written notice to the other party.
2. DUTIES.
(a) POSITION. Employee shall be employed as President and Chief
Executive Officer, and as such will have responsibility for the overall
operation of the Company and will report to the Company's Board of Directors
(the "Board").
(b) OBLIGATIONS TO THE COMPANY. Employee agrees to the best of
his ability and experience that he will at all times loyally and
conscientiously perform all of the duties and obligations required of and from
Employee pursuant to the express and implicit terms hereof, and to the
reasonable satisfaction of the Company. During the term of Employee's employment
relationship with the Company, Employee further agrees that
<PAGE> 2
he will devote all of his business time and attention to the business of the
Company, the Company will be entitled to all of the benefits and profits arising
from or incident to all such work services and advice, Employee will not render
commercial or professional services of any nature to any person or organization,
whether or not for compensation, without the prior written consent of the
Company's Board of Directors, and Employee will not directly or indirectly
engage or participate in any business that is competitive in any manner with the
business of the Company. Nothing in this Agreement will prevent Employee from
accepting speaking or presentation engagements in exchange for honoraria or from
serving on boards of charitable organizations, or from owning no more than one
percent (1%) of the outstanding equity securities of a corporation whose stock
is listed on a national stock exchange. Employee will comply with and be bound
by the Company's operating policies, procedures and practices from time to time
in effect during the term of Employee's employment.
3. AT-WILL EMPLOYMENT. The Company and Employee acknowledge that Employee's
employment is and shall continue to be at-will, as defined under applicable law,
and that Employee's employment with the Company may be terminated by either
party at any time for any or no reason. If Employee's employment terminates for
any reason, Employee shall not be entitled to any payments, benefits, damages,
award or compensation other than as provided in this Agreement. The rights and
duties created by this Section 3 may not be modified in any way except by a
written agreement executed by the Board.
4. COMPENSATION. For the duties and services to be performed by Employee
hereunder, the Company shall pay Employee, and Employee agrees to accept, the
salary, stock options, bonuses and other benefits described below in this
Section 4.
(a) SALARY. Employee shall receive an annual salary of $215,000
per year. Employee's salary will be payable pursuant to the Company's normal
payroll practices. In the event this Agreement is extended beyond the Original
Term, the then current base salary shall be reviewed at the time of such
extension by the Board or its Compensation Committee, and any increase will be
effective as of the date determined appropriate by the Board or its
Compensation Committee. Employee's salary shall be reviewed on at least an
annual basis for possible adjustment.
<PAGE> 3
(b) STOCK OPTIONS AND OTHER INCENTIVE PROGRAMS. Employee shall be
eligible to participate in any stock option or other incentive programs
available to officers or employees of the Company.
(c) BONUSES. Employee's entitlement to incentive bonuses from the
Company is discretionary and shall be determined by the Board or its
Compensation Committee in good faith based upon the extent to which Employee's
individual performance objectives and the Company's profitability objectives
and other financial and nonfinancial objectives are achieved during the
applicable bonus period. In the event of Employee's death or disability
during the term of this Agreement, the Company shall pay to Employee or
Employee's estate the bonus Employee would have earned during the entire year
in which death or disability occurred.
(d) ADDITIONAL BENEFITS. Employee will be eligible to participate in
the Company's employee benefit plans of general application, including without
limitation, those plans covering medical, disability and life insurance in
accordance with the rules established for individual participation in any such
plan and under applicable law. Employee will be eligible for vacation and sick
leave in accordance with the policies in effect during the term of this
Agreement and will receive such other benefits as the Company generally
provides to its other employees of comparable position and experience.
(e) REIMBURSEMENT OF EXPENSES. Employee shall be authorized to incur on
behalf and for the benefit of, and shall be reimbursed by, the Company for
reasonable expenses, provided that such expenses are substantiated in
accordance with Company policies.
5. TERMINATION OF EMPLOYMENT AND SEVERANCE BENEFITS.
(a) TERMINATION OF EMPLOYMENT. This Agreement may be terminated during
its Original Term (or any extension thereof) upon the occurrence of any of the
following events:
(i) The Company's determination in good faith that it is
terminating Employee for Cause (as defined in Section 6 below) ("Termination
for Cause");
(ii) The Company's determination that it is terminating
Employee without Cause, which determination may be made by the Company at any
time at the Company's sole discretion, for any or no reason ("Termination
Without Cause"); or
<PAGE> 4
(iii) The effective date of a written notice sent to the
Company from Employee stating that Employee is electing to terminate his
employment with the Company ("Voluntary Termination").
(b) SEVERANCE BENEFITS. Employee shall be entitled to receive severance
benefits upon termination of employment only as set forth in this Section 5(b):
(i) VOLUNTARY TERMINATION. If Employee's employment terminates
by Voluntary Termination, then Employee shall not be entitled to receive payment
of any severance benefits. Employee will receive payment(s) for all salary and
unpaid vacation accrued as of the date of Employee's termination of employment
and Employee's benefits will be continued under the Company's then existing
benefit plans and policies in accordance with such plans and policies in effect
on the date of termination and in accordance with applicable law.
(ii) VOLUNTARY TERMINATION WITH CASH SHORTFALL. If Employee's
employment terminates by Voluntary Termination and a Cash Shortfall (as defined
below) exists, Employee (A) will be paid a lump sum payment on the date of
termination equal to twelve (12) months of Employee's then current base salary,
(B) the principal and interest owed to the Company by Employee pursuant to the
loan made to Employee in January 1992 (the "Loan") shall be forgiven and the
promissory note evidencing the Loan shall be canceled and (C) Employee shall be
retained as a consultant by the Company and receive consulting fees equal to
$18,000 per month for services performed for a period of six (6) months (the
"Consulting Period"). During the Consulting Period, Employee shall perform such
services for the Company as may be reasonably requested from time to time by
the Board or the Chief Executive Officer of the Company. The terms of the
consulting arrangement shall be more fully described in the Consulting
Agreement between Employee and the Company substantially in the form attached
hereto as Exhibit A. Such consulting payments shall be made ratably over the
Consulting Period according to the Company's standard payroll schedule and
invoices submitted by Employee for the consulting services. Employee will also
be entitled to receive payment on the date of termination of any bonus payable
under Section 4(c). Employee shall also be entitled to continue to participate
during the Consulting Period in all of the Company's health insurance benefits
(e.g. medical, dental, optical, mental health, life) in the same manner and
with the same coverage provided to Employee prior to the date of termination and
in all other respects significantly comparable to those in place immediately
prior to such termination. Any unvested
<PAGE> 5
stock options held by Employee as of the date of Employee's termination of
employment shall continue to vest through the end of the Consulting Period
according to the vesting schedule set forth in any agreement between Employee
and the Company governing the issuance to Employee of such securities.
(iii) INVOLUNTARY TERMINATION POST CHANGE OF CONTROL. If
Employee's employment is terminated after a Change of Control (as defined below)
has occurred for any reason (including a Constructive Termination (as defined
below)) other than by reason of Employee's Voluntary Termination and other than
by reason of a Termination for Cause (an "Involuntary Termination"), Employee
(A) will be paid a lump sum payment on the date of termination equal to twelve
(12) months of Employee's then current base salary, (B) the principal and
interest owed to the Company by Employee pursuant to the Loan shall be forgiven
and the promissory note evidencing the Loan shall be canceled and (C) Employee
shall be retained as a consultant by the Company and receive consulting fees
equal to $6,000 per month for services performed for a period of eighteen (18)
months (the "Consulting Period"). During the Consulting Period, Employee shall
perform such services for the Company as may be reasonably requested from time
to time by the Board or the Chief Executive Officer of the Company. The terms of
the consulting arrangement shall be more fully described in the Consulting
Agreement between Employee and the Company substantially in the form attached
hereto as Exhibit A. Such consulting payments shall be made ratably over the
Consulting Period according to the Company's standard payroll schedule and
invoices submitted by Employee for the consulting services. Employee will also
be entitled to receive payment on the date of termination of any bonus payable
under Section 4(c). Employee shall also be entitled to continue to participate
during the Consulting Period in all of the Company's health insurance benefits
(e.g. medical, dental,, optical, mental health, life) in the same manner and
with the same coverage provided to Employee prior to the date of termination and
in all other respects significantly comparable to those in place immediately
prior to such termination. Any unvested stock options held by Employee as of the
date of Employee's termination of employment shall continue to vest through the
end of the Consulting Period according to the vesting schedule set forth in any
agreement between Employee and the Company governing the issuance to Employee of
such securities.
(iv) INVOLUNTARY TERMINATION PRE CHANGE OF CONTROL. If
Employee's employment is terminated before a Change of Control has occurred for
any reason (including a Constructive Termination)
<PAGE> 6
other than by reason of Employee's Voluntary Termination and other than by
reason of a Termination for Cause, Employee (A) will be paid a lump sum payment
on the date of termination equal to twelve (12) months of Employee's then
current base salary, (B) the principal and interest owed to the Company by
Employee pursuant to the Loan shall be forgiven and the promissory note
evidencing the Loan shall be canceled and (C) Employee shall be retained as a
consultant by the Company and receive consulting fees equal to $6,000 per month
(up to an aggregate of $108,000 (the "Aggregate Consulting Payment")) for
services performed for a period of time equal to eighteen (18) months (the
"Consulting Period"); provided, however, that the Aggregate Consulting Payment
shall be reduced on a dollar-for-dollar basis for each dollar Employee receives
during the Consulting Period from other employment and/or consulting sources in
excess of an aggregate of $214,500. To the extent Employee secures other
employment or consulting work during the Consulting Period that pays Employee
cash compensation in excess of an aggregate of $322,500, and as a result,
Employee's consulting fees from the Company are reduced to zero, Employee and
the Company shall either mutually agree to terminate Employee's consulting
relationship or negotiate an alternative consulting arrangement. During the
Consulting Period, Employee shall perform such services for the Company as may
be reasonably requested from time to time by the Board or the Chief Executive
Officer of the Company. The terms of the consulting arrangement shall be more
fully described in the Consulting Agreement between Employee and the Company
substantially in the form attached hereto as Exhibit A. Such consulting
payments shall be made ratably over the Consulting Period according to the
Company's standard payroll schedule and invoices submitted by Employee for the
consulting services. Employee will also be entitled to receive payment on the
date of termination of any bonus payable under Section 4(c). Employee shall
also be entitled to continue to participate during the Consulting Period in all
of the Company's health insurance benefits (e.g. medical, dental, optical,
mental health, life) in the same manner and with the same coverage provided to
Employee prior to the date of termination and all other respects significantly
comparable to those in place immediately prior to such termination. Any
unvested stock options held by Employee as of the date of Employee's
termination of employment shall continue to vest through the end of the
Consulting Period according to the vesting schedule set forth in any agreement
between Employee and the Company governing the issuance to Employee of such
securities.
(v) TERMINATION FOR CAUSE. If Employee's employment is
terminated for Cause, then Employee shall not be entitled to receive payment of
any severance benefits. Employee will receive
<PAGE> 7
payment(s) for all salary and unpaid vacation accrued as of the date of
Employee's termination of employment and Employee's benefits will be continued
under the Company's then existing benefit plans and policies in accordance with
such plans and policies in effect on the date of termination and in accordance
with applicable law. In addition, the principal and interest owed to the
Company by Employee pursuant to the Loan shall be forgiven and the promissory
note evidencing the Loan shall be canceled.
6. DEFINITIONS.
(a) "Cash Shortfall" shall mean a reduction in the Company's cash
and cash equivalents to an amount less than that necessary to continue the
Company's operations for a period of three (3) months based on the Company's
average monthly "burn rate" for the six (6) months prior to the date hereof.
(b) "Cause" shall mean (i) Employee's dishonest or fraudulent
conduct, deliberate attempt to do an injury to the Company, or Employee's
conduct that materially discredits the Company or is materially detrimental to
the reputation of the Company, including conviction of a felony; or (ii)
Employee's incurable material breach of any element of the Company's
Confidential Information and Invention Assignment Agreement, including without
limitation, Employee's theft or other misappropriation of the Company's
proprietary information.
(c) "Change of Control" shall mean the acquisition of the Company by
means of merger, reorganization or other transaction in which the stockholders
of the Company do not own a majority of the outstanding shares of the surviving
corporation or a sale of all or substantially all of the assets of the Company.
(d) "Constructive Termination" shall be deemed to occur if (A)(1)
there is a material adverse change in Employee's position causing such position
to be of less stature or of less responsibility than President and Chief
Executive Officer, (2) a reduction of more than 10% of Employee's base
compensation unless in connection with similar decreases of other similarly
situated employees of the Company, or (3) Employee's refusal to relocate to a
facility or location more than fifty (50) miles from the Company's current
location; and (B) within the ninety (90) day period immediately following such
material change or retention Employee elects to terminate his employment
voluntarily.
7. CONFIDENTIALITY AGREEMENT. Employee has signed a Confidential
Information and Invention Assignment Agreement (the
<PAGE> 8
"Confidentiality Agreement") substantially in the form attached hereto as
Exhibit B. Employee hereby represents and warrants to the Company that he has
complied with all obligations under the Confidentiality Agreement and agrees to
continue to abide by the terms of the Confidentiality Agreement and further
agrees that the provisions of the Confidentiality Agreement shall survive any
termination of this Agreement or of Employee's employment relationship with the
Company.
8. NONSOLICITATION COVENANT. Employee hereby agrees that he shall not,
during the term of his employment pursuant to this Agreement or the Consulting
Period, without the prior written consent of the Board, solicit or influence or
attempt to influence any person employed by the Company to terminate or
otherwise cease his or her employment with the Company or become an employee of
any competitor of the Company. This Section 8 is to be read in conjunction with
the Confidential Information and Invention Assignment Agreement executed by
Employee.
9. CONFLICTS. Employee represents that his performance of all the terms
of this Agreement will not breach any other agreement to which Employee is a
party. Employee has not, and will not during the term of this Agreement, enter
into any oral or written agreement in conflict with any of the provisions of
this Agreement. Employee further represents that he is entering into or has
entered into an employment relationship with the Company of his own free will
and that he has not been solicited as an employee in any way by the Company.
10. SUCCESSORS. Any successor to the Company (whether direct or
indirect and whether by purchase, lease, merger, consolidation, liquidation or
otherwise) to all or substantially all of the Company's business and/or assets
shall assume the obligations under this Agreement and agrees expressly to
perform the obligations under this Agreement and the Consulting Agreement in
the same manner and to the same extent as the Company would be required to
perform such obligations in the absence of a succession. The terms of this
Agreement, the Consulting Agreement and all of Employee's rights hereunder and
thereunder shall inure to the benefit of, and be enforceable by, Employee's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
11. MISCELLANEOUS PROVISIONS.
(a) NO DUTY TO MITIGATE. Except as specifically provided in Section
5(b)(iv) of this Agreement, Employee shall not be required to mitigate the
amount of any payment contemplated by this Agreement
<PAGE> 9
(whether by seeking new employment or in any other manner), nor shall any such
payment be reduced by any earnings that Employee may receive from any other
source.
(b) AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended
or waived only with the written consent of the parties.
(c) SOLE AGREEMENT. This Agreement, including any Exhibits hereto,
constitutes the sole agreement of the parties and supersedes all oral
negotiations and prior writings with respect to the subject matter hereof.
(d) NOTICES. Any notice required or permitted by this Agreement shall
be in writing and shall be deemed sufficient upon receipt, when delivered
personally or by a nationally-recognized delivery service (such as Federal
Express or UPS), or forty-eight (48) hours after being deposited in the U.S.
mail as certified or registered mail with postage prepaid, if such notice is
addressed to the party to be notified at such party's address as set forth
below or as subsequently modified by written notice.
(e) CHOICE OF LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California, without giving effect to the principles of conflict of laws.
(f) SEVERABILITY. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, the parties agree to renegotiate such
provision in good faith. In the event that the parties cannot reach a mutually
agreeable and enforceable replacement for such provision, then (i) such
provision shall be excluded from this Agreement, (ii) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (iii)
the balance of the Agreement shall be enforceable in accordance with its terms.
(g) COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together will constitute
one and the same instrument.
(h) ARBITRATION. Any dispute or claim arising out of or in connection
with this Agreement will be finally settled by binding arbitration in San Jose,
California in accordance with the rules of the American Arbitration Association
by one arbitrator appointed in
<PAGE> 10
accordance with said rules. The arbitrator shall apply California law, without
reference to rules of conflicts of law or rules of statutory arbitration, to
the resolution of any dispute. Judgment on the award rendered by the arbitrator
may be entered in any court having jurisdiction thereof. Notwithstanding the
foregoing, the parties may apply to any court of competent jurisdiction for
preliminary or interim equitable relief, or to compel arbitration in accordance
with this paragraph, without breach of this arbitration provision. This
Section 11(h) shall not apply to the Confidentiality Agreement.
(i) ADVICE OF COUNSEL. EACH PARTY TO THIS AGREEMENT ACKNOWLEDGES THAT,
IN EXECUTING THIS AGREEMENT, SUCH PARTY HAS HAD THE OPPORTUNITY TO SEEK THE
ADVICE OF INDEPENDENT LEGAL COUNSEL, AND HAS READ AND UNDERSTOOD ALL OF THE
TERMS AND PROVISIONS OF THIS AGREEMENT. THIS AGREEMENT SHALL NOT BE CONSTRUED
AGAINST ANY PARTY BY REASON OF THE DRAFTING OR PREPARATION HEREOF.
[Signature Page Follows]
<PAGE> 11
The parties have executed
this Agreeement the date first
written above.
CELTRIX PHARMACEUTICALS, INC.
By:
-------------------------------
James E. Thomas, Chairman
Address: 3055 Patrick Henry Drive
Santa Clara, California 95054
DR. ANDREAS SOMMER
Signature:
----------------------------
Address:
------------------------------
------------------------------
<PAGE> 12
EXHIBIT A
CONSULTING AGREEMENT
<PAGE> 13
EXHIBIT B
CONFIDENTIAL INFORMATION
AND
INVENTION ASSIGNMENT
AGREEMENT
<PAGE> 14
Exhibit A
CELTRIX PHARMACEUTICALS, INC.
CONSULTING AGREEMENT
Andreas Sommer
Celtrix Pharmaceuticals, Inc.
3055 Patrick Henry Drive
Santa Clara, CA 95054
Dear Andreas:
1. Celtrix Pharmaceuticals, Inc., a Delaware corporation (the
"Company") wishes to obtain your services as a consultant. This letter shall
constitute an agreement between you and the Company with respect to the services
you are to provide (the "Agreement").
2. This Agreement shall become effective on the date hereof and shall
remain in effect until ___ [insert applicable time period from Employment
Agreement] months following termination of Mr. Sommer from the Company. You may
terminate this Agreement at any time by at least fifteen (15) days written
notice to the Company. The Company may terminate this Agreement only for Cause
at any time. For this purpose, "Cause" means your willful breach of your
obligations under this Agreement or the Employment Agreement between you and the
Company dated as of December __, 1996 (the "Employment Agreement").
3. As consideration for your services and other obligations you will be
paid a monthly retainer of $______ [insert applicable amount from Employment
Agreement] for the period of this Agreement. In the event this Agreement is
terminated before the end of the term for any reason other than by reason of
Consultant's voluntary termination of this Agreement and other than by reason of
termination for Cause (as such term is defined in the Employment Agreement), all
amounts that that would otherwise be payable to Consultant under the terms of
this Agreement and the Employment Agreement shall be immediately due and payable
to Consultant in a lump sum and shall be paid to Consultant as of the effective
date of termination of this Agreement.
4. Your relationship with the Company shall be that of an independent
contractor and not that of an employee. The Company will not make deductions
from payments made to you for taxes, which shall be your responsibility unless
required by relevant taxing authorities. You shall have no authority to enter
into contracts which bind the Company or create obligations on the part of the
Company without the express prior authorization of the President of the Company.
<PAGE> 15
5. All services to be performed by you will be as agreed between you
and the President of the Company. You shall be required to report to the
President of the Company concerning your services performed under this
Agreement, or such other party designated by the President. The nature and
frequency of these reports will be left to the discretion of the President or
such other party.
6. You shall keep in confidence and shall not disclose or make
available to third parties or make any use of any information or documents
relating to your services under this Agreement or to the products, methods of
manufacture, trade secrets, processes, business or affairs or confidential or
proprietary information of the Company (other than information in the public
domain through no fault of your own), except with the prior written consent of
the Company or to the extent necessary in performing tasks assigned to you by
the Company. Upon termination of this Agreement, you will return to Company all
documents and other materials related to the services provided hereunder or
furnished to you by the Company. Your obligations under this Paragraph 6 shall
survive termination of this Agreement for any reason.
7. You shall promptly disclose and hereby transfer and assign to the
Company all right, title and interest to all techniques, methods, processes,
formulae, improvements, inventions and discoveries made or conceived or reduced
to practice by you, solely or jointly with others, in the course of providing
services hereunder or with the use of materials or facilities of the Company
during the period of this Agreement or which relate to the Company's business or
its actual or demonstrably anticipated research or development (except as
otherwise provided below). When requested by the Company you will make available
to the Company all notes, drawings, data and other information relating to the
above. You will promptly sign any documents (including U.S. and foreign patent
assignments) requested by the Company related to the above assignment of rights
and inventions and will cooperate with the Company at the Company's request and
expense in preparation and prosecution of any U.S. or foreign patent
applications related to such rights and inventions. Your obligations under this
Paragraph 7 shall survive termination of this Agreement for any reason. This
Agreement does not apply to inventions covered by Section 2870 of the California
Labor Code, a copy of which is attached hereto as Exhibit A, or to inventions
which were made prior to the date of this Agreement and which are listed on
Exhibit B attached hereto (if any).
8. You shall refrain from any disparagement, criticism, defamation or
slander of the Company or its products, employees, officers or processes, or
tortious interference with the contracts and relationships of the Company.
9. Any amendment to this Agreement must be in writing signed by you and
the Company.
10. All notices, requests and other communications called for by this
Agreement shall be deemed to have been given if made in writing and mailed,
postage prepaid, if to you at the
-2-
<PAGE> 16
address set forth above and if to the Company at 3055 Patrick Henry Drive, Santa
Clara, California 95054-8203, or to such other addresses as either party shall
specify to the other.
11. The validity, performance and construction of this Agreement shall
be governed by the laws of the State of California.
12. This Agreement supersedes any prior consulting or other similar
agreements between you and the Company, other than the Employment Agreement.
If this Agreement is satisfactory, you should execute and return the
original and one copy to us, retaining the third copy for your file.
Dated as of: ________________, 199__
Very truly yours,
CELTRIX PHARMACEUTICALS, INC.
By:_______________________________________
Title: President, Chief Executive Officer
AGREED AND ACCEPTED:
______________________________
Andreas Sommer
-3-
<PAGE> 17
EXHIBIT A
Section 2870 of the California Labor Code is as follows:
(a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(1) Relate at the time of conception or reduction to practice of
the invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer.
(2) Result from any work performed by the employee for the
employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
<PAGE> 18
EXHIBIT B
INVENTIONS MADE PRIOR TO THIS AGREEMENT AND EXCLUDED FROM
PARAGRAPH 9 (IF NONE, SO STATE):
<PAGE> 1
EXHIBIT 10.52
CELTRIX PHARMACEUTICALS, INC.
MANAGEMENT CONTINUITY AGREEMENT
This Management Continuity Agreement (the "Agreement") is made and
entered into effective as of February 10, 1997, by and between Mary Anne Ribi
("Employee") and Celtrix Pharmaceuticals, Inc., a Delaware corporation (the
"Company").
RECITALS
The Board of Directors of the Company (the "Board") believes that, in
light of the increasing difficulty in recruiting and retaining high quality
senior executives, it is in the best interests of the Company and its
shareholders to provide Employee with an incentive to continue her employment
with the Company. The Board believes that it is imperative to provide Employee
with certain benefits upon termination of Employee's employment in connection
with a Change of Control, which benefits are intended to provide Employee with
financial security and provide sufficient income and encouragement to Employee
to remain with the Company notwithstanding the possibility of a Change of
Control. To accomplish the foregoing objectives, the Board has directed the
Company, upon execution of this Agreement by Employee, to agree to the terms
provided in this Agreement.
AGREEMENT
In consideration of the mutual covenants contained in this Agreement,
and in consideration of the continuing employment of Employee by the Company,
the parties agree as follows:
1. DEFINITIONS OF TERMS. The following terms referred to in this
Agreement shall have the following meanings:
(a) CHANGE OF CONTROL. "Change of Control" shall mean the occurrence
of any of the following events:
(i) OWNERSHIP. Any "Person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or
becomes the "Beneficial Owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company
<PAGE> 2
representing fifty percent (50%) or more of the total voting power represented
by the Company's then outstanding voting securities without the approval of the
Board; or
(ii) MERGER/SALE OF ASSETS. A merger or consolidation of the
Company whether or not approved by the Board, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or approval by the
shareholders of the Company of a plan of complete liquidation of the Company or
of an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets.
(b) CAUSE. "Cause" for Employee's termination will exist at any time
after the happening of one or more of the following events:
(i) Employee's willful misconduct or gross negligence in
performance of her duties hereunder, inducing Employee's refusal to comply in
any material respect with the legal directives of the Company's Board of
Directors so long as such directives are not inconsistent with the Employee's
position and duties, and such refusal to comply is not remedied within ten (10)
working days after written notice from Company, which written notice shall state
that failure to remedy such conduct may result in Termination for Cause;
(ii) Dishonest or fraudulent conduct, a deliberate attempt to do
an injury to the Company, or conduct that materially discredits the Company or
is materially detrimental to the reputation of the Company; or
(iii) Employee's incurable material breach of any element of the
Company's Confidential Information and Assignment of Inventions Agreement,
including, without limitation, Employee's theft or other misappropriation of
proprietary information of the Company.
(c) VOLUNTARY TERMINATION. "Voluntary Termination" shall mean
termination by Employee of Employee's employment relationship with the Company
upon the effective date of a written notice sent to the Company from Employee
stating that Employee is electing to terminate her employment with the Company.
<PAGE> 3
(d) TERMINATION FOR CAUSE. "Termination for Cause" shall mean
termination by the Company of Employee's employment relationship with the
Company upon determination in good faith by the Board that Cause exists for such
termination.
(e) CONSTRUCTIVE TERMINATION. "Constructive Termination" shall be
deemed to occur in the event of (i)(A) a material adverse change in Employee's
position causing such position to be of less stature or of less responsibility,
(B) a reduction of more than 20% of Employee's base compensation unless in
connection with similar decreases of other similarly situated employees of the
Company, or (C) Employee's refusal to relocate to a facility or location more
than fifty (50) miles from the Company's current location if (ii) within the
thirty (30) day period immediately following such event Employee elects to
terminate her employment voluntarily.
(f) INVOLUNTARY TERMINATION. "Involuntary Termination" shall mean
termination of Employee's employment other than by reason of Employee's
Voluntary Termination and or a Termination for Cause and including a
Constructive Termination.
(g) TERMINATION WITHOUT CAUSE. "Termination Without Cause" shall
mean termination by the Company of Employee's employment relationship with the
Company at any time at the Company's sole discretion without Cause.
2. AT-WILL EMPLOYMENT. The Company and Employee acknowledge that
Employee's employment is and shall continue to be at-will, as defined under
applicable law.
3. CHANGE OF CONTROL.
(a) TERMINATION UPON A CHANGE OF CONTROL. Subject to Section 4
below, if Employee's employment with the Company is terminated at any time
within twenty-four months after the effective date of a Change in Control,
Employee shall be entitled to receive severance benefits as follows:
(i) VOLUNTARY TERMINATION OR TERMINATION FOR CAUSE. In the event
of Voluntary Termination or Termination for Cause, Employee shall not be
entitled to receive payment of severance benefits. Employee's benefits will be
terminated under the Company's then existing benefit plans and policies in
accordance with such plans and policies in effect of the date of termination or
as otherwise determined by the Board;
<PAGE> 4
(ii) INVOLUNTARY TERMINATION. Upon any Involuntary Termination,
Employee shall be entitled to receive the following severance benefits: (A) a
lump sum payment of $79,327 (less applicable employment tax withholding), which
represents thirty (30) weeks of Employee's current base salary; and (B)
continuation of the Company's standard medical and dental insurance benefits
under the Company's health insurance programs as provided by the Consolidated
Budget Reconciliation Act of 1985 as amended ("COBRA"), with COBRA premiums
being paid by the Company until the earlier of June 10, 1997 or the date
Employee becomes ineligible for COBRA coverage under applicable law, provided
that Employee completes the requisite forms to obtain such continued coverage.
Employee agrees to execute an Agreement and Mutual Release with the Company in
exchange for the payment of such severance benefits.
(iii) TERMINATION APART FROM CHANGE OF CONTROL. In the event
Employee's employment terminates for any reason, with or without Cause, either
prior to the occurrence of a Change of Control or after the 24-month period
following the effective date of a Change of Control, then Employee shall not be
entitled to receive any payments of severance benefits under this Agreement.
Employee's benefits shall be terminated under the Company's then existing
benefit plans and policies in accordance with such plans and policies in effect
on the date of termination or as otherwise determined by the Board.
4. EXCISE TAX PAYMENTS. In the event that any payments or benefits to
be received by Employee pursuant to this Agreement would result in the
imposition of an excise tax pursuant to Section 4999 of the Internal Revenue
Code of 1986, as amended (the "Code") or any corresponding provisions of state
income tax law, Employee shall receive whichever of (a) or (b) results in the
larger dollar amount of payments or benefits (calculating such dollar amount in
accordance with the principles of Section 280G of the Code), after taking into
account such excise taxes: (a) that portion of the payments or benefits to be
received by Employee under this Agreement which, when aggregated with any other
payments treated as contingent on a change in the ownership or effective control
of the Company or the ownership of a substantial portion of the assets of the
Company under Section 280G(b)(2) of the Code, does not exceed 2.99 times
Employee's "Base Amount" as defined in Section 280G of the Code, or (b) 100% of
the payments or benefits to which Employee is entitled under this Agreement, in
which event Employee shall be responsible for the payment of all such excise
taxes imposed with respect to such payments or benefits. If clause (a) produces
the larger payment, then each payment or benefit to
<PAGE> 5
which Employee would otherwise be entitled under this Agreement shall be
proportionately reduced to the extent necessary to comply with the limitation of
that subsection.
5. SUCCESSORS. Any successor to the Company (whether direct or indirect
and whether by purchase, lease, merger, consolidation, liquidation or otherwise)
to all or substantially all of the Company's business and/or assets shall assume
the obligations under this Agreement and agree expressly to perform the
obligations under this Agreement in the same manner and to the same extent as
the Company would be required to perform such obligations in the absence of a
succession. The terms of this Agreement and all of Employee's rights hereunder
shall inure to the benefit of, and be enforceable by, Employee's personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
6. TERM OF AGREEMENT. The terms of this Agreement shall terminate upon
the earlier of (a) the date that all obligations of the parties have been
satisfied, or (b) February 10, 1999. A termination of this Agreement pursuant to
the preceding sentence shall be effective for all purposes, except that such
termination shall not affect the payment or provision of compensation or
benefits on account of a termination of employment occurring prior to the
termination of the terms of this Agreement.
7. MISCELLANEOUS PROVISIONS.
(a) NO DUTY TO MITIGATE. Employee shall not be required to mitigate
the amount of any payment contemplated by this Agreement (whether by seeking new
employment or in any other manner), nor, except as otherwise provided in this
Agreement, shall any such payment be reduced by any earnings that Employee may
receive from any other source.
(b) AMENDMENTS AND WAIVERS. Any term of this Agreement may be
amended or waived only with the written consent of the Company (or a permitted
assignee of the Company) and Employee.
(c) SOLE AGREEMENT. No agreements, representations or understandings
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof. This Agreement supersedes any agreement of
the same title and concerning similar subject matter dated prior to the date of
this
<PAGE> 6
Agreement, and by execution of this Agreement both parties agree that any such
predecessor agreement shall be deemed null and void. The parties further agree
that the terms of this Agreement shall remain in effect until the date that all
obligations of the parties hereunder have been satisfied.
(d) LEGAL FEES AND EXPENSES. The parties shall each bear their own
expenses, legal fees and other fees incurred in connection with this Agreement.
(e) NO ASSIGNMENT OF BENEFITS. The rights of any person to payments
or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this Section 7(e) shall be
void.
(f) EMPLOYMENT TAXES. All payments made pursuant to this Agreement
will be subject to withholding of applicable income and employment taxes.
(g) ASSIGNMENT BY COMPANY. The Company may assign its rights under
this Agreement to an affiliate, and an affiliate may assign its rights under
this Agreement to another affiliate of the Company or to the Company; provided,
however, that no assignment shall be made if the net worth of the assignee is
less than the net worth of the Company at the time of assignment. In the case of
any such assignment, the term "Company" when used in a section of this Agreement
shall mean the corporation that actually employs Employee.
(h) NOTICES. Any notice required or permitted by this Agreement
shall be in writing and shall be deemed sufficient upon receipt, when delivered
personally or by a nationally-recognized delivery service (such as Federal
Express or UPS), or forty-eight (48) hours after being deposited in the U.S.
mail as certified or registered mail with postage prepaid, if such notice is
addressed to the party to be notified at such party's address or as set forth
below or as subsequently modified by written notice.
(i) CHOICE OF LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California, without giving effect to the principles of conflict of laws.
<PAGE> 7
(j) SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (i) such
provision shall be excluded from this Agreement, (ii) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (iii)
the balance of the Agreement shall be enforceable in accordance with its terms.
(k) COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
(l) ARBITRATION. Any dispute or claim arising out of or in
connection with this Agreement will be finally settled by binding arbitration IN
SAN JOSE, CALIFORNIA in accordance with the then-current Commercial Arbitration
Rules of the American Arbitration Association by one arbitrator appointed in
accordance with said rules. The arbitrator shall apply California law, without
reference to rules of conflicts of law or rules of statutory arbitration, to the
resolution of any dispute. Judgment on the award rendered by the arbitrator may
be entered in any court having jurisdiction thereof. Notwithstanding the
foregoing, the parties may apply to any court of competent jurisdiction for
preliminary or interim equitable relief, or to compel arbitration in accordance
with this paragraph, without breach of this arbitration provision.
(M) ADVICE OF COUNSEL. EACH PARTY TO THIS AGREEMENT ACKNOWLEDGES
THAT, IN EXECUTING THIS AGREEMENT, SUCH PARTY HAS HAD THE OPPORTUNITY TO SEEK
THE ADVICE OF LEGAL COUNSEL, AND HAS READ AND UNDERSTOOD ALL OF THE TERMS AND
PROVISIONS OF THIS AGREEMENT. THIS AGREEMENT SHALL NOT BE CONSTRUED AGAINST ANY
PARTY BY REASON OF THE DRAFTING OR PREPARATION HEREOF.
[Signature Page Follows]
<PAGE> 8
Each of the parties has executed this Agreement as of the date first
above written.
CELTRIX PHARMACEUTICALS, INC. MARY ANNE RIBI, an individual
By:________________________ _____________________________
Signature
Title:_____________________
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-55482) pertaining to the Celtrix Pharmaceuticals, Inc. 1991 Stock
Option Plan and 1991 Directors' Stock Option Plan, in the Registration Statement
(Form S-8 No. 33-42703) pertaining to the Celtrix Pharmaceuticals, Inc. 1991
Stock Option Plan, 1991 Employee Stock Purchase Plan, and 1991 Directors' Stock
Option Plan and in the Registration Statements (Form S-3 No. 33-66008 and No.
333-27263) of Celtrix Pharmaceuticals, Inc. of our report dated April 26, 1996
with respect to the consolidated financial statements of Celtrix
Pharmaceuticals, Inc. included in this Annual Report (Form 10-K) for the year
ended March 31, 1997.
/s/ ERNST & YOUNG LLP
Palo Alto, California
June 23, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS INCLUDED IN ITS FORM 10-K FOR THE FISCAL YEAR
ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 2,684
<SECURITIES> 2,584
<RECEIVABLES> 65
<ALLOWANCES> 46
<INVENTORY> 0
<CURRENT-ASSETS> 5,985
<PP&E> 19,920
<DEPRECIATION> 11,497
<TOTAL-ASSETS> 16,956
<CURRENT-LIABILITIES> 1,708
<BONDS> 0
0
0
<COMMON> 153
<OTHER-SE> 14,057
<TOTAL-LIABILITY-AND-EQUITY> 16,956
<SALES> 31
<TOTAL-REVENUES> 658
<CGS> 5
<TOTAL-COSTS> 5
<OTHER-EXPENSES> 11,999
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 89
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,696)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,696)
<EPS-PRIMARY> (0.83)
<EPS-DILUTED> (0.83)
</TABLE>
