<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended June 30, 1998
-------------
OR
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
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
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of August 12, 1998, the Registrant had outstanding 21,061,053 shares of
Common Stock.
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CELTRIX PHARMACEUTICALS, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 1998
and March 31, 1998.................................................. 3
Condensed Consolidated Statements of Operations for the three-
month periods ended June 30, 1998 and 1997.......................... 4
Condensed Consolidated Statements of Cash Flows for the three-
month periods ended June 30, 1998 and 1997.......................... 5
Notes to Condensed Consolidated Financial Statements.................. 6
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 8
PART II. OTHER INFORMATION
Item 2: Changes in Securities and Use of Proceeds............................. 13
Item 6: Exhibits and Reports on Form 8-K...................................... 14
SIGNATURES .................................................................... 15
</TABLE>
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PART I. FINANCIAL INFORMATION
CELTRIX PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
---------- ---------
(Unaudited) (1)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,372 $ 1,608
Short-term investments 2,166 6,305
Receivables and other current assets 31 219
--------- ---------
Total current assets 4,569 8,132
Property and equipment, net 6,757 7,062
Intangible and other assets, net 2,724 2,682
--------- ---------
$ 14,050 $ 17,876
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 723 $ 751
Accrued compensation and other accrued liabilities 1,181 1,483
Current portion of capital lease obligations -- 8
--------- ---------
Total current liabilities 1,904 2,242
Deferred rent 853 890
Stockholders' equity:
Preferred stock -- --
Common stock 211 211
Additional paid-in capital 131,542 131,542
Accumulated deficit (120,460) (117,009)
--------- ---------
Total stockholders' equity 11,293 14,744
--------- ---------
$ 14,050 $ 17,876
========= =========
</TABLE>
- ------------
(1) Derived from audited financial statements at that date but does not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See accompanying notes.
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CELTRIX PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
Revenues $ 36 $ 24
-------- --------
36 24
Costs and expenses:
Research and development 3,001 3,005
General and administrative 563 548
-------- --------
3,564 3,553
-------- --------
Operating loss (3,528) (3,529)
Interest income, net 75 224
Gain on sale of investment in
Prograft Medical, Inc. -- 737
-------- --------
Net loss $ (3,453) $ (2,568)
======== ========
Basic and diluted net loss per share $ (0.16) $ (0.12)
======== ========
Shares used in basic and diluted per
share computation 21,061 20,985
======== ========
</TABLE>
See accompanying notes.
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CELTRIX PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-----------------------
1998 1997
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,453) $ (2,568)
Adjustments to reconcile net loss to net cash
used in operating activities:
Gain on sale of investment in Prograft Medical, Inc. -- (737)
Depreciation and amortization 395 444
Other adjustments related to changes in operating
accounts (142) (37)
------- --------
Net cash used in operating activities (3,200) (2,898)
Cash flows from investing activities:
Decrease (increase) in available-for-sale securities 4,141 (9,635)
Capital expenditures (56) (19)
Increase in intangible and other assets (113) (117)
------- --------
Net cash provided by (used in) investing activities 3,972 (9,771)
Cash flows from financing activities:
Proceeds from issuance of common stock, net -- 13,352
Principal payments under lease obligations (8) (119)
------- --------
Net cash (used in) provided by financing activities (8) 13,233
------- --------
Net increase in cash and cash equivalents 764 564
Cash and cash equivalents at beginning of period 1,608 2,734
------- --------
Cash and cash equivalents at end of period $ 2,372 $ 3,298
======= ========
</TABLE>
See accompanying notes.
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CELTRIX PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Condensed Consolidated Interim Financial Statements
The condensed consolidated balance sheet as of June 30, 1998 and the
condensed consolidated statements of operations and cash flows for the
three-month periods ended June 30, 1998 and 1997, have been prepared by the
Company, without audit. In the opinion of management, the accompanying unaudited
interim condensed consolidated financial statements include all adjustments,
which include normal recurring adjustments, necessary to present fairly the
Company's financial position, results of its operations and its cash flows.
Interim results are not necessarily indicative of results to be expected for a
full fiscal year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the audited financial
statements and notes thereto for the fiscal year ended March 31, 1998 in the
Company's 1998 Annual Report to Stockholders.
The accompanying financial statements have been prepared assuming that
the Company continues as a going concern. At June 30, 1998, the Company had net
working capital of $2.7 million and an accumulated deficit of $120.5 million,
and incurred a net loss of $3.5 million for the quarter ended June 30, 1998.
Current cash, cash equivalents and short-term investments will not be sufficient
to fund operations for the next twelve months. The Company is currently in the
process of raising additional capital through an equity offering. The Company
also pursues the possibility of securing additional capital through corporate
partner arrangements that are consistent with the Company's product development
and commercialization strategies and evaluating other options including mergers
and acquisitions. There can be no assurance that the Company will be able to
raise any additional funds or enter into any collaborative arrangement on terms
favorable to the Company, or at all. If the Company is unable to obtain the
necessary capital, significant reduction in spending and the delay or
cancellation of planned activities or more substantial restructuring options
will be necessary. These actions will have material adverse effects on the
Company's business, results of operations and prospects.
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2. Recent Pronouncement
As of April 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income". Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net loss or shareholders' equity.
Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities and foreign currency translation adjustments,
which prior to adoption were reported separately in shareholders' equity to be
included in other comprehensive income. Total comprehensive income was not
significant during the periods ended June 30, 1998 and 1997.
3. Stockholders' Equity
In May 1998, the Board of Directors approved an increase to the
Company's authorized shares of Common and Preferred Stocks to 60,000,000 and
10,000,000 shares, respectively. This action received majority shareholder
approval and the Company amended and restated its Certificate of Incorporation
to effect the increase in July 1998.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
condensed consolidated financial statements and notes thereto included in Part I
- -- Item 1 of this Quarterly Report and the financial statements and notes
thereto in the Company's 1998 Annual Report to Stockholders.
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 focus is on regenerating lost tissue and metabolic processes
essential for the patient's health and quality of life. Ongoing product
development programs target severe osteoporosis, including hip fracture surgery
in the elderly, traumatic burns and diabetes. Other potential indications
include protein wasting diseases associated with cancer, AIDS, advanced kidney
failure and other life-threatening conditions.
The Company's development focus is on SomatoKine, a naturally occurring
complex comprised of the anabolic hormone insulin-like growth factor-I (IGF-I)
and its primary binding protein, BP3. IGF-I is known to play a major role in
diverse biological processes, including muscle and bone formation, tissue repair
and endocrine regulation. However, limitations associated with administering
free IGF-I therapeutically have proven significant because IGF-I does not
naturally exist in quantity free of its binding proteins. SomatoKine delivers
IGF-I complexed with BP3, which contains biological information important for
the body's natural regulation of IGF-I bioavailability and biodistribution, and
the resulting complex does not display the acute limitations seen in free IGF
administration.
Results from the Company's three earlier Phase I studies demonstrated
that the repeated or continuous administration of SomatoKine safely delivers
IGF-I at substantially higher dosage levels than have ever been achievable with
free IGF-I, increasing the peak blood concentration of IGF-I up to 35-fold its
normal level. Furthermore, the elevated levels substantially stimulated bone and
connective tissue metabolism.
Based on these positive results, the Company initiated a Phase II
clinical feasibility study in early 1997, using SomatoKine to treat severe
osteoporosis patients recovering from
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hip fracture surgery. Following the trauma of hip fracture, patients typically
suffer an accelerated loss of hip bone mineral density (BMD) which predisposes
them to a high risk of refracture. Interim results from patients treated with
SomatoKine for eight weeks showed a substantial retention in their hip bone
mineral density, particularly in the hip joint area (femoral neck). Final
patient follow-up and data analysis are anticipated in fourth quarter 1998. The
Company intends to establish corporate partnership(s) to continue the global
development of SomatoKine for severe osteoporosis.
In mid-1997, the Company began a Phase II clinical feasibility study in
severely burned patients. Severe burns patients typically have low IGF-I levels
which may be connected to the disruption of the biological processes that are
essential for efficient and successful healing and protection from
complications. Interim results provided evidence that SomatoKine improved the
metabolic processes involved in maintaining muscle protein and, furthermore,
appeared to have a positive effect on the immune system of these severely burned
patients. Positive findings from this study will serve as the basis for a
pivotal Phase III clinical study in burn patients in 1999.
In July 1998, Celtrix initiated a Phase II feasibility study in Type I
diabetes. This 12-patient study will investigate SomatoKine's potential to
reduce the need for exogenous (injected) insulin and improve blood glucose
control. A number of parameters are being measured including the amount of
insulin required for optimal glycemic control. Clinical findings from this study
will be used to establish corporate partnership(s) for future development of
SomatoKine in diabetes.
The Company 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. Under amended terms in December 1997, the
Company granted Genzyme expanded territory rights to TGF-beta-2 to include
Japan, China, Korea and Taiwan. Additionally, under a separate license
agreement, Genzyme was granted a worldwide royalty-bearing license to TGF-beta
antibodies and receptor technology. The Company is not currently pursuing an
in-house TGF-beta-2 program.
The Company entered into a license agreement with The Green Cross
Corporation ("Green Cross") in 1994, covering the development and
commercialization of SomatoKine for the treatment of osteoporosis in Japan. In
April 1998, Green Cross was acquired by Yoshitomi Pharmaceuticals Industries,
Ltd. ("Yoshitomi"), and in May 1998, Yoshitomi terminated the
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Green Cross license agreement with Celtrix. The result of the termination is
loss of potential revenues from milestone and license payments and royalties on
future product sales. However, Celtrix regains the rights to the treatment of
osteoporosis in Japan.
Celtrix has not earned substantial revenues from product sales and at
June 30, 1998 has an accumulated deficit of $120.5 million. The Company expects
to incur additional operating losses, which may fluctuate from quarter to
quarter, for at least the next several years as the Company expands its
development activities, including clinical trials and manufacturing.
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
Celtrix incurred a net loss of $3.5 million or $0.16 per share for the
quarter ended June 30, 1998, compared to $2.6 million or $0.12 per share for the
same period in 1997. The increase in net loss for the three-month period ended
June 30, 1998 is due primarily to a gain on investment and higher interest
income recorded for the same period in 1997.
Revenues increased to $36,000 for the three-month period ended June 30,
1998 from $24,000 for the same period in 1997 due primarily to the sale of
material for research purposes.
Operating expenses of $3.6 million for the three-month period ended June
30, 1998 were comparable to the three-month period ended June 30, 1997.
Net interest income of $75,000 for the three-month period ended June 30,
1998 decreased from $224,000 for the same period in 1997 due primarily to
the decrease in average cash, cash equivalent and short-term investment
balances.
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The $737,000 gain on investment reported in the quarter ended June 30,
1997 was the result of the sale of 43,750 shares of Prograft Medical, Inc.
("Prograft") preferred stock, held by the Company since 1993.
LIQUIDITY AND CAPITAL RESOURCES
Celtrix has funded its activities with proceeds from public and private
offerings, advances from Collagen, research and development revenues from
collaborative arrangements, lease and debt financing arrangements, proceeds from
liquidating its equity investments and, to a lesser extent, other revenues and
product sales.
At June 30, 1998, Celtrix's cash, cash equivalents and short-term
investments were $4.5 million compared to $7.9 million at March 31, 1998. The
net decrease of $3.4 million was due primarily to cash outlays consisting of
$3.2 million in net cash and investments used in operating activities and
$177,000 used in investing and financing activities.
The Company's financial statements are prepared and presented on a basis
assuming it continues as a going concern. At June 30, 1998, the Company had net
working capital of $2.7 million and an accumulated deficit of $120.5 million,
and incurred a net loss of $3.5 million for the quarter ended June 30, 1998.
Current cash, cash equivalents and short-term investments will not be sufficient
to fund operations for the next twelve months. The Company is currently in the
process of raising additional capital through an equity offering. The Company
also pursues the possibility of securing additional capital through corporate
partner arrangements that are consistent with the Company's product development
and commercialization strategies and evaluating other options including mergers
and acquisitions. There can be no assurance that the Company will be able to
raise any additional funds or enter into any collaborative arrangement on terms
favorable to the Company, or at all. If the Company is unable to obtain the
necessary capital, significant reduction in spending and the delay or
cancellation of planned activities or more substantial restructuring options
will be necessary. These actions will have material adverse effects on the
Company's business, results of operations and prospects.
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, progress with clinical
trials, the cost of scaling up manufacturing and establishing facilities, the
time and costs
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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 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 funds 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.
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, the ability to obtain
financing for the Company's working capital, the ability to enroll a sufficient
number of patients in clinical feasibility studies, as well as future company
research, clinical study results, the regulatory approval process, competitive
products, and other risk factors which are described in the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1998.
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PART II. OTHER INFORMATION
CELTRIX PHARMACEUTICALS, INC.
Item 2. Changes in Securities and Use of Proceeds.
(a) Securities Sold
(I) On April 1, 1997, the Company issued and sold to purchasers in a
private placement 5,721,876 shares of the Company's Common Stock
(the "Shares") and warrants exercisable for 2,860,934 shares of
the Company's Common Stock (the "Warrants"). The Shares and
Warrants were sold in the form of "Units" which consisted of two
Shares of Common Stock to purchase one share of Warrant.
(II) On December 15, 1995, the Company issued and sold to Genzyme
Corporation pursuant to a 1994 Product Development, License and
Marketing Agreement, 1,472,829 shares (the "Genzyme Shares") of
the Company's Common Stock.
(b) Underwriters and Other Purchasers
There were no underwriters for the foregoing transactions mentioned in
(a)(I) and (a)(II). A finders fee of $520,000 was paid to BioAsia LLC
in connection with the private placement described in (a)(I) above.
The Shares and Warrants were offered only to a group of accredited
investors. The Genzyme Shares were offered only to Genzyme
Corporation, an accredited investor.
(c) Consideration
(I) The Shares and Warrants from the April 1997 private placement
were sold for an aggregate offering price of $13,949,955.60.
(II) The shares issued to Genzyme Corporation were sold for an
aggregate price of $4,418,487.00.
(d) Exemption from Registration Claimed
(I) The foregoing transaction under (a)(I) was exempt from
registration under the Securities Act of 1933, as amended (the
"Act") pursuant to Rule 506 of Regulation D, which provides an
exemption for sales without regard to the dollar amount of the
offering, provided that there are no more than 35 purchasers, and
the sale satisfies all terms and conditions of Rules 501 and 502
under the Act.
(II) The foregoing transaction under (a)(II) was exempt from
registration under the Act pursuant to Rule 505 of Regulation D,
which provides an exemption for sales of securities not exceeding
$5 million, provided that there are no more than 35 purchasers,
and the sale satisfies all terms and conditions of Rules 501 and
502 under the Act.
(e) Terms of Conversion or Exercise
In connection with the April 1997 private placement, the Warrants are
exercisable at a price of $2.6818 per share and expire on April 1,
2000. If the holder of a Unit sold any Shares between April 1, 1997
and April 1, 1998, the number of shares issuable upon exercise of that
holder's Warrant would have been reduced by an amount equal to 0.5
multiplied by the number of Shares sold or otherwise disposed of
during such
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period. Also, in the event that the average of the daily high and low
bid price per share of the Company's Common Stock as reported on the
Nasdaq National Market (or such other equivalent market or exchange)
exceeds $4.876 for a period of thirty (30) consecutive trading days (a
"Callable Event"), then the Company may, on or before the tenth (10th)
trading day after such Callable Event has occurred, send a written
notice to the Warrantholder that a Callable Event has occurred and
that the Warrant shall terminate on the thirtieth (30th) day after the
date the notice became effective.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27.1 Financial Data Schedule
(b) The Company filed the following reports on Form 8-K during the quarter
ended June 30, 1998:
Report Date: April 20, 1998
Item 5. Other Events
The Registrant announced that SomatoKine(R) demonstrates effectiveness
in preventing muscular atrophy.
Report Date: May 4, 1998
Item 5. Other Events
The Registrant announced initial clinical results on Celtrix's
SomatoKine(R) treatment for severe burns.
Report Date: May 14, 1998
Item 5. Other Events
The Registrant announced its fiscal year-end financial results.
Report Date: June 3, 1998
Item 5. Other Events
The Registrant announced that its Japanese partner, Yoshitomi
Pharmaceutical Industries, Ltd., changed development plans regarding
the SomatoKine(R) program in Japan.
Report Date: June 15, 1998
Item 5. Other Events
The Registrant announced that SomatoKine(R) demonstrates potential to
treat protein wasting diseases.
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SIGNATURES
Pursuant to the requirements 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. (Registrant)
Date: August 13, 1998 By: /s/ DONALD D. HUFFMAN
----------------------------------------------
Donald D. Huffman
Vice President, Finance and Administration and
Chief Financial Officer (Duly authorized
principal financial and accounting officer)
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS INCLUDED IN ITS FORM 10-Q FOR THE FISCAL QUARTER
ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,372
<SECURITIES> 2,166
<RECEIVABLES> 6
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,569
<PP&E> 20,068
<DEPRECIATION> 13,311
<TOTAL-ASSETS> 14,050
<CURRENT-LIABILITIES> 1,904
<BONDS> 0
0
0
<COMMON> 211
<OTHER-SE> 11,082
<TOTAL-LIABILITY-AND-EQUITY> 14,050
<SALES> 10
<TOTAL-REVENUES> 36
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,001
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,453)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,453)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
