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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, 1998 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 .
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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
of incorporation or organization) Identification No.)
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 29, 1998 in
the Nasdaq National Market was approximately $22.2 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 29, 1998, the Registrant had outstanding 21,061,053 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 1998 Annual
Meeting of Stockholders scheduled to be held on September 10, 1998.
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K, and in particular the Management's
Discussion and Analysis of Financial Condition and Results of Operations,
contains forward-looking statements regarding future events or the future
performance of the Company that involve certain risks and uncertainties
including those discussed in "Risk Factors" below. In this report, the words
"anticipates", "believes", "expects", "future", "plans" and similar expressions
identify forward-looking statements.
Actual events or the actual future results of the Company may differ
materially from any forward-looking statements due to a variety of factors
including, but not limited to, (i) the ability to enter into collaborative
arrangements with corporate partners for osteoporosis, hip fractures, diabetes,
and protein wasting conditions, (ii) the efficacy and safety of SomatoKine and
other of the Company's products, (iii) results of clinical trials, (iv) the
ability to timely enroll patients in the Company's clinical studies, (v)
significant unforeseen delays in the regulatory approval process, (vi)
complications relating to the use of SomatoKine(R), (vii) competitive products
and technology, (viii) the ability to raise additional working capital, and (ix)
other risk factors described herein.
The Company assumes no obligation to update these forward-looking
statements to reflect actual results or changes in factors or assumptions
affecting such forward-looking assumptions. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect management's
analysis only as of the date hereof. The Company undertakes no obligation to
publicly release the results of any revision to these forward-looking
statements, which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
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 aging,
chronic diseases and severe trauma. The Company's focus is on restoring lost
tissues and metabolic processes essential for the patient's health and quality
of life. Product development programs target severe osteoporosis, including hip
fracture surgery in the elderly, diabetes, and acute traumatic injury as in
severe burns. Other potential indications include protein wasting diseases
associated with cancer, AIDS, advanced kidney failure, and other
life-threatening conditions.
The Company's leading drug candidate is 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 bone and muscle formation, tissue
repair, and endocrine regulation. 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. When IGF-I is
bound to BP3, as it is in nature, it does not display these acute limitations.
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
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SomatoKine substantially stimulate bone and connective tissue metabolism, based
on measures of metabolic markers in blood and urine of subjects.
Based on these findings, Celtrix initiated a Phase II clinical feasibility
study in January 1997 using SomatoKine to treat severely osteoporotic patients
recovering from hip fracture surgery. Studies have shown that blood levels of
IGF-I drop significantly following hip fracture surgery. These patients, whose
bone mineral density already is reduced, begin rapidly to lose even further bone
and lean body mass, leading to impaired recovery and diminished patient
independence. Interim results from the Phase II study have suggested that
short-term treatment with SomatoKine may help to minimize, or even prevent this
loss, sustantially improving patient recovery. Celtrix plans to establish
corporate partnership(s) for the continued global development of SomatoKine for
severe osteoporosis, including recovery from hip fracture surgery.
The Company began a Phase II feasibility study in patients with severe
burns in July 1997. Studies have shown that patients with severe burns typically
have very low IGF-I levels along with major tissue damage which disrupt the
biological processes that are essential for efficient and successful healing and
protection from burn complications. Preliminary data from the study suggest that
SomatoKine has a normalizing effect on protein synthesis and immune function
which offers the potential to provide critical protection from serious
infection, speed recovery and reduce the patient's hospital stay.
Celtrix is also evaluating SomatoKine as a potential therapeutic in
managing glucose homeostasis in diabetic patients because research by other
investigators has demonstrated the importance of IGF-I in hormonal regulation of
insulin and growth hormone.
Furthermore, Celtrix plans to seek corporate collaborations to develop
SomatoKine for treatment of protein wasting in patients suffering from cancer,
AIDS, advanced kidney failure, and other life-threatening conditions.
SomatoKine's anabolic effects offer the potential to preserve and restore muscle
strength and mobility important for these patients' survival and quality of
life.
Celtrix manufactures SomatoKine for clinical trials at its Santa Clara,
California facility.
Celtrix 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. Celtrix
is not currently pursuing an in-house TGF-beta-2 program.
BACKGROUND: MEDICAL NEED
Many of the body's physiological functions, such as growth of bone and
muscle, tissue healing, immune processes and endocrine functions are controlled
by regulatory 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, infection, 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, an impaired ability to
maintain and repair tissues and organs normally, and impaired immune and
endocrine functions. Celtrix, alone or in collaboration with others, is
developing biopharmaceuticals based on such naturally occurring, regulating
proteins.
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SOMATOKINE
SomatoKine is a human recombinant equivalent to the naturally occurring
complex formed by insulin-like growth factor-I (IGF-I) and its primary binding
protein (BP3). The therapeutic potential of SomatoKine stems from a variety of
demonstrated IGF-I bioactivities which include:
o Bone formation
o Muscle formation
o Prevention of muscle degradation
o Tissue and organ repair
o Nutrient utilization
o Hormonal regulation of insulin and growth hormone
o Immune system stimulation
o Neurotrophic activity
The metabolic activities of IGF-I suggest that SomatoKine may provide a
safe and effective therapeutic approach to treating debilitating conditions
associated with adverse metabolic, immune and hormonal functions. Clinical and
preclinical studies have demonstrated that circulating IGF-I levels are lower
than normal in a variety of conditions including aging, chronic disease, and
severe trauma. Low levels of IGF-I are often associated with destructive
metabolic processes (catabolism) causing bone and muscle loss, delay healing,
and increase the patient's risk of life-threatening complications and
infections. Low levels of IGF-I may also exacerbate immunocompromised and
diabetic conditions. The overall development of SomatoKine is aimed at elevating
the circulating reservoir of IGF-I thereby overcoming these destructive
metabolic processes.
Once in the bloodstream, the SomatoKine complex attaches to a third
naturally occurring protein known as an acid labile subunit, or ALS. The
resulting larger complex emulates what is observed in nature, safely storing and
transporting IGF-I throughout the patient's body with an extended half life
compared to free IGF. The BP3 contains important biological information used by
the body in regulating IGF-I bioavailability and biodistribution. In addition,
IGF-I can separate from this circulating reservoir and bind to target cells
whenever it is needed by the body. Through its specific receptor, IGF-I then
stimulates essential metabolic activities important for regeneration of bone and
muscle, tissue repair, regulation of blood glucose levels and other critical
biological processes.
Although other biopharmaceutical companies may have development programs
involving IGF-I, Celtrix does not believe that any other company is currently
developing the IGF-BP3 (SomatoKine) complex. This complex is of key importance
because most naturally occurring IGF-I does not circulate in its free form, but
is bound to its primary binding protein, 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 free (unbound) 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.
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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 preclinical and clinical 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, joint pain and swelling,
and parotid discomfort. 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, Celtrix's 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. 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-I 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 preclinical laboratory and animal
and clinical studies conducted by Company scientists and other academic
collaborations.
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PRODUCTS UNDER RESEARCH AND DEVELOPMENT
The following table summarizes potential products currently under research
and development, alone and in collaboration with others.
CELTRIX PRODUCT PORTFOLIO: SOMATOKINE(R)
<TABLE>
<CAPTION>
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PATIENT
INDICATION BIOLOGICAL ACTION STATUS POPULATION
(U.S./WORLD)
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<S> <C> <C> <C>
Recovery from Build bone and muscle Phase II 300,000/
Hip Fracture Surgery Prevent muscle loss Feasibility Study 1,700,000
Severe Osteoporosis Build bone and muscle Assessing bone and muscle 1,500,000(1)/
formation in hip fracture 5,000,000
feasibility study
Severe Burns Reverse catabolic condition Phase II 10,000/
Stimulate tissue repair Feasibility Study 25,000
Protein Wasting: Prevent muscle loss Preclinical 2,600,000(2)/
Cancer cachexia, and build muscle Also assessing effect 6,000,000
AIDS, advanced on protein wasting in
kidney failure, and severe burn feasibility
other life-threatening study
conditions
Diabetes Improve glycemic control Feasibility Study 10,300,000(3)/
Reduce insulin usage 58,000,000
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CORPORATE PARTNER
- -------------------------------------------------------------------------------------------------------
INDICATION PRODUCT(DELIVERY) BIOLOGICAL ACTION STATUS
- -------------------------------------------------------------------------------------------------------
Dermal Ulcers TGF-beta-2 in a Stimulate local tissue repair; Phase II
(Genzyme Corporation) collagen matrix accelerate healing Clinical
(local) Trial
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</TABLE>
1 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.
2 The population of patients suffering from muscle wasting diseases is
comprised of the following groups: Protein wasting associated with
gastrointestinal surgery/damage/dysfunction - 500,000; AIDS - 350,000;
kidney failure - 1 million; chronic pulmonary disease - 250,000.
3 This population size represents the diagnosed cases of diabetes.
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CLINICAL DEVELOPMENT
Recovery from Hip Fracture Surgery
Celtrix's initial treatment targets have been elderly patients who have
undergone hip fracture surgery, a subset of the severe osteoporosis patient
population. Each year approximately 300,000 patients in the United States (1.7
million worldwide) 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 that these osteoporotic elderly
patients begin to rapidly lose even further bone and lean body mass. This loss
can prolong patient immobility, further threaten recovery and survival,
interfere with quality of life and add to the high cost of hip repair and
rehabilitation. Celtrix's goal is to provide SomatoKine as a short-term
therapeutic treatment to prevent bone loss, improve muscle function, restore
mobility, and increase the patient's functional independence.
In January 1997, Celtrix initiated a multi-center Phase II clinical
feasibility study in osteoporotic elderly women (ages 65-90) who have undergone
hip fracture surgery. This study, currently ongoing in Belgium, is evaluating
approximately 24 patients (eight patients per dose group), who receive either
SomatoKine or placebo over a period of eight weeks. Multiple dosage levels are
being tested. End points being evaluated include change in the patient's body
composition (bone, lean mass and fat mass), muscle function (measured by grip
strength), trends in measures of daily activity (ADL, or activities of daily
living scores) and bone metabolism markers.
Interim results from this Phase II study demonstrate potentially important
trend information. Hip fracture patients typically suffer an accelerated loss of
hip bone mineral density. In fact, at three months following fracture, the hip
bone mineral density of placebo-treated patients had declined approximately 7%
from baseline value. Following an initial characteristic loss,
SomatoKine-treated patients who were administered drug for eight weeks at 1.0
mg/kg per day, regained a substantial portion of their hip bone mineral density.
At the same three-month time point (one month post-treatment),
SomatoKine-treated patients showed a hip bone mineral density average decrease
of less than 2% from baseline value. Hip bone mineral density is a strong
predictor of fracture risk where loss of hip bone mineral density predisposes
hip fracture patients to a high risk of refracture; population studies show that
a 5% decrease in hip bone mineral density increases the risk of fracture by
approximately 25%.
Initial results also demonstrated that hand grip strength improved
approximately 25% from baseline value for patients treated with 1.0 mg/kg dose
of SomatoKine, versus approximately 7% for those receiving the placebo. Whether
improved grip strength is related to the anabolic effects of SomatoKine on
muscle remains to be determined. Preclinical studies, however, suggest
SomatoKine has an effect on building lean body mass. Additionally, fat body mass
decreased approximately 13% from baseline for SomatoKine treated patients,
versus an approximately 7% decrease in placebo treated patients. Increased grip
strength and reduced fat body mass may indicate improved functionality and
health.
This Phase II feasibility study was designed to demonstrate trends in
parameters which might be most affected by SomatoKine, rather than establish
statistical significance. The initial data on hip bone mineral density and fat
mass reported here are based on findings from seven (of eight) patients per
group. Grip strength data are from five patients per group. Celtrix plans to
announce the final results of this Phase II feasibility study in fourth quarter
1998, when final patient follow-up and data analysis are completed.
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Severe Osteoporosis
Osteoporosis is a chronic, debilitating disorder in which the bones become
increasingly porous, brittle and subject to fracture. Severe osteoporosis
(defined by the number of patients suffering osteoporotic fractures) affects
approximately 1.5 million elderly people in the United States (5 million
worldwide). Celtrix believes the findings from the Phase II feasibility study in
hip fracture surgery present a strong argument for development of SomatoKine for
the short-term treatment of severe osteoporosis. This patient population
consists largely of post-menopausal women who already have lost a substantial
quantity of bone and are at high risk of fractures of the hip, wrist or spine.
In fact, it is estimated that 25% of all women over age 60 will suffer an
osteoporosis-related fracture. While estrogens, calcitonins, bisphosphonates and
other therapies are prescribed for osteoporosis, these treatments are used
primarily to prevent further bone loss rather than to form new bone in this
population. A relatively short period of treatment with SomatoKine offers the
potential to substantially restore the patient's bone mineral density and form
supportive muscle, thus reducing fracture risk and improving the patient's
strength and mobility. SomatoKine could provide a much needed therapeutic
complement to the existing preventative therapies. Celtrix is actively seeking
to establish corporate collaborations for continued global development of
SomatoKine for the treatment of severe osteoporosis, including recovery from hip
fracture surgery.
Severe Burns
Another treatment target is severe burns. Annually, approximately 10,000
people in the United States (25,000 worldwide) suffer from traumatic burns over
greater than 20% of their body surface. Very low IGF-I levels, along with major
tissue damage, are associated with disruption of biological processes that are
essential for efficient and successful healing and protection from burn
complications. Furthermore, the length of time spent in a burn trauma center is
directly related to the time required to conduct the skin grafting required to
heal the burn wound. Research has shown that IGF-I plays a significant role in
tissue repair and that IGF-I supplementation can potentially promote the healing
process and reduce hospital stay.
In July 1997, Celtrix initiated a Phase II feasibility trial in severely
burned patients, collaborating with leaders in burn care at key burn trauma
centers throughout the United States. In addition to their standard burn care,
approximately 40 patients, both children and adults, are to receive systemic
SomatoKine and/or placebo through two skin graft cycles. The primary endpoint is
healing time of the skin donor sites. Celtrix also will evaluate incidence of
infection and other complications, length of hospitalization, and a number of
parameters important to normalizing key biological processes.
Results to date show positive trends. Preliminary data provided evidence
supporting the use of SomatoKine to attenuate the degradation of muscle tissue
(protein wasting) that is associated with severe trauma such as burn injury. In
burn patients, the balance between protein synthesis and degradation is shifted
towards degradation, leading to muscle and weight loss which in turn leads to
delayed wound healing and increases in infectious complications and mortality.
Data obtained from the treatment of six severely burned adults with two doses of
SomatoKine showed a 34-58% improvement in the balance between protein synthesis
and degradation which is a prerequisite for accelerated wound healing and
reduced hospital stay.
Additionally, initial data indicate that SomatoKine may have a positive
effect on the immune system of severely burned patients. After severe burn,
patients typically experience immune system effects that impair their ability to
resist infection (i.e. an adverse shift in cytokines produced by T-cell
lymphocytes). However, lymphocytes collected from six severely burned
SomatoKine-treated patients (ages 2-18) showed an approximately 280% increase in
the
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production of interleukin-2 and a 25-90% increase in the production of
interferon gamma, both vital immune system proteins.
SomatoKine appears to have a normalizing effect on immune functions and
protein synthesis which offers the potential to provide critical protection from
serious infection and protein wasting response that occur in severe burn
patients. Positive findings from this feasibility study will guide the design of
a pivotal Phase II/III clinical study in burn patients in 1999.
Protein Wasting
Many critically ill patients suffer from serious protein wasting conditions
which contribute to physical weakness and increase their risk of morbidity and
mortality. Annually, the total is estimated at 2.6 million people in the United
States (6 million worldwide). They include patients with chronic, debilitating
conditions such as cancer cachexia, AIDS, and advanced kidney failure, as well
as those with acute traumatic injuries, such as severe burns. SomatoKine's
anabolic effects offer the potential to preserve and restore muscle strength
important to patient survival and quality of life.
Celtrix is actively seeking to establish corporate partnerships to address
these major opportunities. Currently, relevant human data are being assessed
from the ongoing clinical trial in burn patients, a patient population subject
to severe protein wasting. Additionally, preclinical studies are continuing in
collaboration with academic researchers.
Results from a collaboration demonstrate SomatoKine's potential to
effectively prevent loss of both muscle weight and muscle protein in a
laboratory model of muscular atrophy (conditions similar to that of a long-term
bedridden patient). SomatoKine-treated animals experienced 24% less muscle
weight loss and 37% less muscle protein loss compared to untreated animals. More
importantly, recent preliminary results from the ongoing severe burns trial
provided encouraging human data which demonstrated an improvement in the balance
between protein synthesis and degradation in six SomotoKine-treated severely
burned adults. This finding demonstrates efficacy for SomotoKine to treat
serious medical conditions associated with muscle and weight loss, and provides
further evidence supporting the use of SomatoKine to potentially treat wasting
diseases associated with cancer cachexia, AIDS and advance kidney failure.
Diabetes
Diabetes is typically characterized by the inadequate production or
utilization of insulin, a vital hormone needed by the body for normal control of
blood glucose levels. It afflicts over 5% of the populations of Europe, Japan
and North America. In the United States alone, an estimated 10.3 million people
have been diagnosed with diabetes. The endocrine activities of IGF-I suggest
that SomatoKine may provide an effective therapeutic approach to treating
diabetes patients. A number of clinical studies conducted by other researchers
have shown that administration of free IGF-I can significantly increase insulin
sensitivity and glucose tolerance in patients with diabetes, and IGF-I treatment
substantially reduced the requirement for injected insulin and improved glycemic
control. In a number of studies, the use of free IGF-I, however, without its
primary binding protein, resulted in substantial side effects that limited the
therapeutic value of the molecule.
Celtrix will evaluate whether the SomatoKine complex will provide similar
beneficial therapeutic effects on glycemic control as free IGF-I without its
limiting side effects. The Company initiated a Phase II feasibility study in
July 1998 to treat patients with Type I diabetes. These patients typically
produce little or no insulin of their own, and although they require frequent
insulin injections, their tissue may become resistant to insulin over time.
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They also have low blood levels of IGF-I due to lack of normal insulin
secretion. This study will evaluate SomatoKine's potential in patients (ages
18-40) who have established Type I diabetes and will measure a number of
treatment parameters, including the amount of insulin required for optimal
glucose control. Positive study findings will support future corporate
collaborations for expanded studies in diabetes.
CORPORATE COLLABORATIONS
YOSHITOMI PHARMACEUTICALS INDUSTRIES, LTD.
In July 1994, Celtrix entered into a license agreement with The Green
Cross Corporation covering the development and commercialization of SomatoKine
for the treatment of osteoporosis in Japan. Under the terms of the agreement,
Green Cross was to be responsible for all related research, development and
marketing, as well as product manufacturing to support its needs in Japan. The
agreement provided for Celtrix to receive license fees, milestone payments, and
upon commercialization, royalties from product sales. Celtrix had an exclusive
royalty-bearing license to related know-how and technology development by Green
Cross and retained full rights to SomatoKine outside of Japan. In April 1998,
Green Cross was merged with Yoshitomi Pharmaceuticals Industries, Ltd. In May
1998, Celtrix received notice from Yoshitomi of its intent to terminate this
license agreement. The impact of dissolving the collaboration is the loss of
licensing and potential milestone revenues; however, upon termination, Celtrix
will regain the rights to the treatment of osteoporosis in 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. In December 1997, under amended terms, the Company granted Genzyme
expanded territory rights to TGF-beta-2 to include Japan, China, Korea and
Taiwan. In exchange, Genzyme released Celtrix from certain service and royalty
obligations under the original agreement. Celtrix has retained all rights to
applications of TGF-beta-2 concerning ophthalmic disease and has the option to
reacquire rights to other product applications not pursued by Genzyme. Genzyme
is conducting a 15-center, double-blinded, randomized Phase II clinical study to
evaluate the treatment of 177 diabetic patients suffering from neurotrophic
diabetic foot ulcers.
Additionally, in December 1997, under a separate license agreement,
Genzyme was granted a worldwide royalty-bearing license to TGF-beta antibodies
and receptor technology. Under the terms of the agreement, Genzyme will assume
the licensing and royalty obligations of Celtrix related to TGF-beta receptor.
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.
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RESEARCH AND DEVELOPMENT
The Company's research and development 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 SomatoKine (IGF-I in
combination with BP3) in human clinical studies that are relevant to the
indications being evaluated. Studies to evaluate optimal formulations, doses and
dosing frequencies are being conducted to aid in the development of SomatoKine.
These collaborative efforts have effectively contributed to 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.
Recent advances by the Company's research staff in the development of a
novel protein expression technology for SomatoKine provide Celtrix with a
proprietary manufacturing method which will position the Company for large-scale
commercial manufacturing. 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. The Company intends to evaluate its
options to license such technology to other biopharmaceutical companies in the
future.
MANUFACTURING
Celtrix currently manufactures human recombinant SomatoKine according to
current Good Manufacturing Practices (cGMP) at its Santa Clara location. This
facility has the capacity to meet anticipated SomatoKine supply needs through
current Phase II studies and Phase III severe burns clinical trials. 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 the
Company's 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 15 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, four issued therapeutic use patents for SomatoKine, and
four issued, three allowed, and two 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 a European patent with claims to: recombinantly produced BP3;
therapeutic uses of BP3; and therapeutic uses of the complex, SomatoKine. This
patent has been opposed by another company.
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<PAGE> 12
The Company also owns or co-owns 23 issued patents and one allowed
application 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 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 seeks patent protection for its inventions and discoveries which
the Company believes are patentable in the United States and, in most instances,
in 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, nor can
there be any assurance that any United States or foreign patents issuing from
any of these applications will not later be held invalid or unenforceable.
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. However, this large biotechnology and
pharmaceutical company has recently appealed the decision and there can be no
assurance that the appeal will not be successful, and it is not possible to
determine what, if any, claims will be reinstated or the breadth of such claims.
In addition, this large biotechnology company has been issued a patent directed
toward the subcutaneous bolus administration of IGF-BP3 for certain limited
areas of use. 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. A large number of other companies have pending
patent applications and/or issued patents which claim certain methods of use of
IGF. There can be no assurance that third parties will not claim that 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, 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, all of which could delay
or otherwise adversely impact the Company's potential products for commercial
use. 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
12
<PAGE> 13
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 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 research and development, production and marketing of Celtrix's
products are and will be subject to substantial regulation 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,
13
<PAGE> 14
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 clinical trials
may commence, (iii) the conduct of adequate and well-controlled human clinical
trials to establish the safety and efficacy of the drug product for its intended
indications, (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 a drug. 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 to assess compliance with GMP.
Prior to the commencement of clinical trials for its potential products,
Celtrix must conduct preclinical tests of its products, which include laboratory
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.
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<PAGE> 15
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 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
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<PAGE> 16
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 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 $2.0 million per incident and $4.0 million in the aggregate
annually, and product liability insurance with coverage limits of $1.0 million
per incident and $3.0 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, 1998, Celtrix employed 87 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 current
executive officers of Celtrix and their ages as of March 31, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- --- --------------------------------------------------------------------
<S> <C> <C>
Andreas Sommer, Ph.D. 56 Chief Executive Officer, President and Director
Donald D. Huffman 51 Vice President, Finance and Administration, Chief Financial Officer
David M. Rosen, Ph.D. 42 Senior Vice President, Research and Development
Malcolm J. McKay, Ph.D. 42 Vice President, Regulatory Affairs & Quality Assurance
</TABLE>
Dr. Sommer has served as President and CEO of Celtrix since April 1995 and
as a member of the Board of Directors since May 1994. He served as Celtrix's
Senior Vice President from July 1993 to April 1995. Previously, Dr. Sommer
served as Vice
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<PAGE> 17
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.
Mr. Huffman was appointed Vice President of Finance and Administration and
Chief Financial Officer in October 1997. Previously, he was Vice President and
Chief Financial Officer of Endosonics Corporation and served in the same
capacity at Qualimatrix, Inc. prior to 1995. Mr. Huffman has an extensive
background in finance and strategic planning for Fortune 200, mid-size and
emerging growth companies. He received an MBA from State University of New York
at Buffalo and a B.S. from Pennsylvania State University.
Dr. Rosen was appointed Senior Vice President of Research and Development
in April 1998. He served as Vice President of Research and Development from
April 1995 to March 1998. 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
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.
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.
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.
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
current Phase II studies and Phase III severe burns clinical trials. In the
future, the Company will either need to expand these operations or subcontract
its manufacturing operations in anticipation of expanded 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.
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<PAGE> 18
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, 1998.
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>
Fiscal Year 1998 High Low
---- ---
<S> <C> <C>
First Quarter .............................. $ 3.00 $ 2.00
Second Quarter ............................. $ 2.94 $ 2.00
Third Quarter .............................. $ 2.63 $ 1.66
Fourth Quarter ............................. $ 3.88 $ 1.72
Fiscal Year 1997
First Quarter .............................. $ 3.94 $ 2.31
Second Quarter ............................. $ 3.37 $ 2.00
Third Quarter .............................. $ 2.66 $ 1.81
Fourth Quarter ............................. $ 3.88 $ 2.06
</TABLE>
As of March 31, 1998, there were approximately 1,230 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.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------------------------------------
Statement of Operations Data: 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Total revenues $ 661 $ 658 $ 1,750 $ 2,200 $ 858
Costs and expenses:
Cost of sales 1 5 31 134 206
Research and development 13,006 11,999 10,990 18,091 16,286
General and administrative 1,985 1,814 2,063 3,459 2,823
Restructuring costs(1) -- -- -- 2,108 --
-------- -------- -------- -------- --------
14,992 13,818 13,084 23,792 19,315
-------- -------- -------- -------- --------
Operating loss $(14,331) $(13,160) $(11,334) $(21,592) $(18,457)
Interest income, net 681 464 625 843 697
Gain on sale of investment 737 -- 3,463 -- --
-------- -------- -------- -------- --------
Net loss $(12,913) $(12,696) $ (7,246) $(20,749) $(17,760)
======== ======== ======== ======== ========
Basic and diluted net loss per share $ (0.61) $ (0.83) $ (0.51) $ (1.57) $ (1.64)
======== ======== ======== ======== ========
Shares used in basic and diluted
per share computation 21,004 15,238 14,161 13,255 10,805
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
March 31,
----------------------------------------------------------------------------
Balance Sheet Data: 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
short-term investments(2) $ 7,913 $ 5,788 $ 17,643 $ 19,929 $ 27,948
Total assets $ 17,876 $ 16,956 $ 30,145 $ 35,024 $ 44,089
Long-term obligations -- -- $ 238 $ 828 $ 1,456
Total stockholders' equity $ 14,744 $ 14,210 $ 26,786 $ 29,436 $ 39,121
</TABLE>
(1) Restructuring costs for the year ended March 31, 1995 resulted from the
termination of the Company's ophthalmic program in 1995 and included charges for
severance, equipment leases and purchase commitments.
(2) Cash, cash equivalents and short-term investments balances for the years
1994-1997 include restricted cash related to equipment leases.
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<PAGE> 20
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 seriously debilitating, degenerative conditions primarily
associated with aging, chronic diseases, and severe trauma. The Company's
development focus is on SomatoKine(R), a novel IGF-BP3 complex, for use in
restoring lost tissues 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, diabetes and acute
traumatic injury, such as severe burns. Other potential indications include
protein wasting diseases associated with cancer, AIDS, advanced kidney failure,
and other life-threatening conditions.
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, shows potential as a therapy for patients suffering
from severe physical trauma and serious illness. 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. Phase I human clinical trials demonstrated that
SomatoKine safely delivers IGF-I at substantially higher dosage levels than have
ever been feasible before with free IGF-I and thus substantially stimulated bone
and connective tissue metabolism.
In calendar 1997, the Company initiated two Phase II clinical feasibility
studies, using SomatoKine to treat patients recovering from hip fracture surgery
and severe burns. Hip fracture patients typically suffer an accelerated loss of
hip bone mineral density, which predisposes them to a high risk of refracture.
Recent interim results from the hip fracture surgery feasibility trial show a
positive effect of SomatoKine on hip bone mineral density which is a strong
predictor of reduced refracture risk. Additionally, increased grip strength and
reduced body fat were also observed which may indicate improved health and
functionality. The Company plans to use these findings to establish corporate
partnership(s) for the continued global development of SomatoKine for treatment
of hip fracture surgery and osteoporosis.
For severe burns, preliminary data provided evidence supporting the use
of SomatoKine to attenuate the degradation of muscle tissue that is associated
with severe trauma such as burn injury. The balance between protein synthesis
and degradation in burn patients is shifted towards degradation, leading to
muscle and weight loss which in turn leads to delayed wound healing and
increases in infectious complications and mortality. Data obtained from the
treatment of six severely burned adults with SomatoKine showed an improvement in
the balance between protein synthesis and degradation which is a prerequisite
for accelerated wound healing and reduced hospital stay.
Furthermore, data from the severe burns feasibility trial also
demonstrated a positive effect of SomatoKine on the immune system of severely
burned children. Severe burns can cause significant imbalances in the immune
functions. However, SomatoKine appears to have a normalizing effect on the
immune functions that protect severe burns patients from infections. Various
findings from ongoing studies are expected to be reported in 1998 and will serve
as the basis for initiating full-scale Phase III clinical studies in 1999.
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<PAGE> 21
Additionally, Celtrix plans to evaluate SomatoKine as a potential
therapeutic in managing glucose homeostasis in diabetic patients because
extensive research by a number of investigators has demonstrated the importance
of IGF-I in hormonal regulation of insulin and growth hormone. The Company
initiated a Phase II feasibility study in Type I diabetes patients in mid-1998
to evaluate the potential of SomotaKine on glycemic control.
Other potential indications include protein wasting conditions associated
with cancer cachexia, AIDS, advanced kidney failure, and other life-threatening
conditions. Celtrix plans to pursue the use of SomatoKine in these areas through
corporate collaborations. SomatoKine's anabolic effects offer the potential to
preserve and restore muscle strength and mobility which are important for these
patients' survival and quality of life. Celtrix manufactures SomatoKine for
clinical trials at its Santa Clara, California facility.
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. In December 1997, under amended terms, 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 in 1994 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. Green Cross was merged with Yoshitomi Pharmaceuticals
Industries, Ltd. ("Yoshitomi") in April 1998, and in May 1998, the Company
received notification of intent from Yoshitomi to terminate the Green Cross
license agreement with Celtrix. The result of the termination would be loss of
potential revenues from milestone and license payments and royalties on future
product sales; however, upon termination, Celtrix will regain the rights to the
treatment of osteoporosis in Japan.
Celtrix has not earned substantial revenues from product sales since
inception and at March 31, 1998 has an accumulated deficit of $117.0 million.
The Company's revenues to date consist principally of licensing and milestone
payments from pharmaceuticals, research and development funding, related party
revenue, and to a lesser extent, sales of products for use in research and assay
applications. The Company expects to incur additional operating losses, which
may fluctuate 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
The Company incurred net losses of $12.9 million, $12.7 million, and $7.2
million in fiscal 1998, 1997, and 1996, respectively. Basic and diluted net loss
per share for these years were $0.61, $0.83, and $0.51, respectively.
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<PAGE> 22
Revenues, consisting of licensing revenue from Yoshitomi and
miscellaneous product sales, were $661,000 and $658,000, respectively, for 1998
and 1997. Revenues decreased 62% in 1997 from $1.8 million in 1996. In addition
to $704,000 in licensing and miscellaneous product sales, 1996 revenues included
proceeds received from Collagen Corporation ("Collagen") for the sale of the
Vitrogen business, receipts from an Orphan Drug Grant, and reimbursement from
Genzyme for development work on TGF-beta-2.
Operating expenses increased 9% to $15.0 million in 1998 from $13.8
million in 1997 due primarily to increased costs associated with the Phase II
feasibility clinical trials, and additional staffing to support increased
SomatoKine manufacturing and clinical activities. Operating expenses increased
5% 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.
Interest income, net of interest expense, increased 47% to $681,000 in
1998 from $464,000 in 1997 due primarily to an increase in average cash, cash
equivalents and short-term investments resulting from net proceeds received from
the Company's April 1997 private equity financing of approximately $13.3
million. Net interest income decreased 26% in 1997 from $625,000 in 1996 due
primarily to the lower average cash, cash equivalents and short-term investments
balances, partly offset by lower interest expense. Interest expense was $24,000,
$89,000, and $176,000 in 1998, 1997, and 1996, respectively.
In 1998, the Company reported a gain on investment of $737,000 as a
result of the sale of preferred stock in Prograft Medical, Inc. ("Prograft"),
held by the Company since 1993. In 1996, the Company sold an equity investment
in Metra Biosystems, Inc. which resulted in a reported gain of $3.5 million.
At March 31, 1998, the Company had net operating loss and tax credit
carryforwards for federal income tax purposes of approximately $113.4 million
and $4.1 million, respectively, expiring in the years 2006 through 2013. 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 $45.8 million and $41.0 million at March
31, 1998 and 1997, 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 Corporation, research and development revenues
and licensing fees 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 March 31, 1998, Celtrix's cash, cash equivalents and short-term
investments were $7.9 million compared to $5.8 million (including restricted
cash of $520,000) at March 31, 1997. This net increase of $2.1 million was due
primarily to net proceeds of $13.4 million received from the issuance of common
stock, $737,000 in realized gain from the sale of an investment in Prograft,
partially offset by cash outlays consisting of $11.1 million in net cash used in
operating activities and $901,000 used for investing and financing activities.
The Company's financial statements are prepared and presented on a basis
assuming it continues as a going concern. At March 31, 1998, the Company had net
working capital of $5.9 million and an accumulated deficit of $117.0 million,
and incurred a net loss of $12.9 million for the
22
<PAGE> 23
year ended March 31, 1998. Management's planned expenditure for the next twelve
months exceed current cash, cash equivalents and short-term investments. The
Company is currently in the process of raising additional capital through an
equity offering. Current cash, cash equivalents and short-term investments,
excluding the equity offering proceeds, will not be sufficient to fund
operations for the next twelve months. The Company also continues to pursue 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, the magnitude of these programs, progress
with preclinical and clinical trials, the cost of scaling up manufacturing and
establishing facilities for commercialization, 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 ability to enter into a collaborative relationship
for the continuation of the hip fracture surgery clinical trials and the
initiation of trials for osteoporosis, the continuation of the same observations
in future severe burns clinical trials, the initiation of Type I diabetes trials
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, or if so, 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.
IMPACT OF YEAR 2000
Many computer systems experience problems handling dates beyond the year
1999. Therefore, some computer hardware and software will need to be upgraded or
modified prior to the Year 2000 in order to remain functional. The Company is
currently assessing the impact of Year 2000 on its existing softwares and
systems. The Company expects to implement successfully the systems and software
changes necessary to address the Year 2000 issues, and does not believe that the
costs of such actions will have a material effect on the Company's results of
operations or financial condition. However, it is unknown the extent, if any, of
the impact of the Year 2000 on other systems and equipment of third parties with
which the Company does business. There can be no assurance that third parties
will address the Year 2000 issue in a timely fashion, or at all. Any Year 2000
compliance problem or delay of either the Company, its suppliers, its clinical
research organizations, or its collaborative partners could have a material
adverse effect on the Company's business, operating results and financial
conditions.
23
<PAGE> 24
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, manufacture 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, 1998, the Company had an accumulated
deficit of approximately $117.0 million. 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.
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, the results of 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 Additional Funding
The Company is currently in the process of raising additional capital by
means of an equity offering. Current cash, cash equivalents and short term
investments, excluding any proceeds from the equity offering, will be sufficient
to fund the Company's operations through September 1998. The development of the
Company's products requires 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. Such additional
funding will need to be raised through collaborative arrangements or through
public or private financings, including equity financing. Any additional equity
financing may be dilutive to stockholders, and any debt
24
<PAGE> 25
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 financing will be available to
the Company or on terms attractive to the Company, or that the Company can enter
into a collaborative relationship with a corporate partner for the continuation
of the clinical trials for recovery from hip fracture surgery and the initiation
of trials for osteoporosis. The inability to obtain funds, or to enter into
additional corporate collaborations, will 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. These actions will have material
adverse effects on the Company's business, results of operations and prospects.
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 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.
25
<PAGE> 26
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's business, financial condition and results of operations.
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 payors. Competitors may also develop new
technologies or products which are 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
26
<PAGE> 27
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 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. However, this large biotechnology and
pharmaceutical company has recently appealed the decision and there can be no
assurance that the appeal will not be successful, and it is not possible to
determine what, if any, claims will be reinstated or the breadth of such claims.
In addition, this large biotechnology company has been issued a patent directed
toward the subcutaneous bolus administration of IGF-BP3 for certain limited
areas of use. 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. A large number of other companies have pending
patent applications and/or issued patents which claim certain methods of use of
27
<PAGE> 28
IGF. 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, all of which could delay or otherwise
adversely impact the Company's potential products for commercial use. 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 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.
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<PAGE> 29
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 and
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.
Product Liability; Availability of Insurance
The Company currently has in force general liability insurance, with
coverage limits of $2.0 million per incident and $4.0 million in the aggregate
annually, and product liability insurance with coverage limits of $1.0 million
per incident and $3.0 million in the aggregate annually. The Company's insurance
policies provide coverage for product liability on a claims made basis and
general liability on occurrence 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.
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<PAGE> 30
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.
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 10, 1998 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,"
"Compensation of Executive Officers--Stock Option Grants in Last Fiscal Year,"
and "Compensation of Executive Officers--Aggregated
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<PAGE> 31
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.
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 of this report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors .............. 39
Consolidated Balance Sheets - March 31, 1998 and 1997 .......... 40
Consolidated Statements of Operations
Years Ended March 31, 1998, 1997 and 1996 .................. 41
Consolidated Statements of Stockholders' Equity
Years Ended March 31, 1998, 1997 and 1996 .................. 42
Consolidated Statements of Cash Flows
Years Ended March 31, 1998, 1997 and 1996 .................. 43
Notes to the Consolidated Financial Statements ................. 44
</TABLE>
(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
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<S> <C>
2.1 - Stock Exchange Agreement dated September 14, 1992, among Registrant,
Baltimore Biotech, Inc. ("BBI") and holders of outstanding stock of
BBI. (6) (10)
</TABLE>
31
<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<S> <C>
3.1 - Certificate of Incorporation of the Registrant, as amended and restated.
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)
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)
</TABLE>
32
<PAGE> 33
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<S> <C>
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)
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)
10.30 - Master Lease Agreement Number 9131 between the Registrant and LeasTec Corporation. (6)
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)
</TABLE>
33
<PAGE> 34
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<S> <C>
10.41 - Registration Rights Agreement dated June 22, 1994, between the Registrant and Genzyme Corporation (15)
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. (26)
10.53 - License Agreement dated December 18, 1997, between the Registrant and Genzyme Corporation. (27) (28)
10.54 - Amendment dated December 31, 1997 to License and Development Agreement dated June 24, 1994, between the
Registrant and Genzyme Corporation. (27) (28)
21 - Subsidiaries of the Registrant. (4)
23.1 - Consent of Ernst & Young LLP, Independent Auditors.
24 - Power of Attorney. (See page 38 of this report.)
27 - Financial Data Schedule
</TABLE>
- --------------------
(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.
34
<PAGE> 35
(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.
(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.
(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.
(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.
(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.
35
<PAGE> 36
(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.
(26) Incorporated by reference to identically numbered exhibits filed with
Registrant's Form 10-K for the year ended March 31, 1997, filed with the
Securities and Exchange Commission on June 24, 1997.
(27) Incorporated by reference to identically numbered exhibits filed with
Registrant's Form 10-Q for the quarterly period ended December 31, 1997,
filed with the Securities and Exchange Commission on February 12, 1998.
(28) Confidential treatment has been granted with respect to portions of this
exhibit by order dated March 18, 1998.
(B) REPORTS ON FORM 8-K
The Company filed the following report on Form 8-K during the quarter
ended March 31, 1998:
1. Report Date: January 22, 1998
Item 5. Other Events
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits.
The Registrant announced financial results for the quarter ended
December 31, 1997.
2. Report Date: February 5, 1998
Item 5. Other Events
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits.
The Registrant announced expanded relationship with Genzyme's
Tissue Repair Division.
3. Report Date: March 26, 1998
Item 5. Other Events
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits.
The Registrant reported interim results of Phase II clinical
feasibility study using SomatoKine(R) for recovery from hip
fracture surgery.
36
<PAGE> 37
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: July 10, 1998
37
<PAGE> 38
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 Donald D.
Huffman, and each one of them, his attorneys-in-fact, each with the power of
substitution, for him 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 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, July 10, 1998
President and Director -------------
/s/DONALD D. HUFFMAN
- --------------------
(Donald D. Huffman) Vice President, Finance July 10, 1998
and Administration, -------------
Chief Financial Officer
and Assistant Secretary (Principal
Financial and Accounting Officer)
/s/HENRY E. BLAIR
- --------------------
(Henry E. Blair) Director July 10, 1998
-------------
/s/BARRY M. SHERMAN
- --------------------
(Barry M. Sherman) Director July 10, 1998
-------------
/s/JAMES E. THOMAS
- --------------------
(James E. Thomas) Chairman of the Board July 10, 1998
-------------
</TABLE>
38
<PAGE> 39
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, 1998 and 1997 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 1998. 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, 1998 and 1997, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended March 31, 1998, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that
Celtrix Pharmaceuticals, Inc. will continue as a going concern. As more fully
described in Note 1, the Company has net working capital of $5.9 million and an
accumulated deficit of $117.0 million as of March 31, 1998, and has incurred
recurring losses from operations. In addition, the Company's available cash,
cash equivalents and short-term investments are insufficient to fund operations
for the next twelve months. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans as to these
matters are also described in Note 1. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability or
classification of assets or the amounts and classification of liabilities that
might result from the outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
Palo Alto, California
April 24, 1998
39
<PAGE> 40
CELTRIX PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,608 $ 2,684
Short-term investments 6,305 2,584
Restricted cash -- 520
Receivables and other current assets 219 197
--------- ---------
Total current assets 8,132 5,985
Property and equipment, at cost:
Leasehold improvements 11,133 11,118
Machinery and equipment 8,974 8,802
--------- ---------
20,107 19,920
Less accumulated depreciation and amortization (13,045) (11,497)
--------- ---------
7,062 8,423
Intangible and other assets, net of accumulated amortization of
$938 and $678 at March 31, 1998 and 1997, respectively 2,682 2,548
--------- ---------
$ 17,876 $ 16,956
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 751 $ 486
Accrued clinical expenses 482 145
Accrued compensation 421 221
Other accrued liabilities 580 528
Short-term debt and lease obligations 8 328
--------- ---------
Total current liabilities 2,242 1,708
Deferred rent 890 1,038
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; 21,061,053 shares and 15,263,429 shares issued
and outstanding at March 31, 1998 and 1997, respectively 211 153
Additional paid-in capital 131,542 118,152
Accumulated deficit (117,009) (104,095)
--------- ---------
Total stockholders' equity 14,744 14,210
--------- ---------
$ 17,876 $ 16,956
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE> 41
CELTRIX PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Product sales $ 51 $ 31 $ 99
Related party -- -- 420
Licensing revenues and other 610 627 1,231
-------- -------- --------
661 658 1,750
Costs and expenses:
Cost of sales 1 5 31
Research and development 13,006 11,999 10,990
General and administrative 1,985 1,814 2,063
-------- -------- --------
14,992 13,818 13,084
-------- -------- --------
Operating loss (14,331) (13,160) (11,334)
Interest income, net 681 464 625
Gain on sale of investments 737 -- 3,463
-------- -------- --------
Net loss $(12,913) $(12,696) $ (7,246)
======== ======== ========
Basic and diluted net loss per share $ (0.61) $ (0.83) $ (0.51)
======== ======== ========
Shares used in basic and diluted per share
computation 21,004 15,238 14,161
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE> 42
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, 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
Issuance of 5,721,876 shares of common
stock and warrants to purchase
2,860,934 shares of common stock
in a private placement, net 57 13,274 -- 13,331
Issuance of 75,748 shares of common stock
under the Employee Stock Purchase Plan 1 116 -- 117
Unrealized loss on available-for-sale
securities -- -- (1) (1)
Net loss -- -- (12,913) (12,913)
--------- --------- --------- ---------
Balance at March 31, 1998 $ 211 $ 131,542 $(117,009) $ 14,744
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE> 43
CELTRIX PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(12,913) $(12,696) $ (7,246)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,660 1,840 2,234
Gain on sale of investments (737) -- (3,463)
Changes in operating accounts:
Receivables and other current assets (22) (2) 112
Accounts payable, accrued compensation
and other accrued liabilities 854 79 (1,485)
-------- -------- --------
Net cash used in operating activities (11,158) (10,779) (9,848)
Cash flows from investing activities:
Sales and maturities of available-for-sale
securities 40,497 35,210 34,544
Purchase of available-for-sale securities (43,482) (30,315) (24,940)
Decrease (increase) in restricted cash 520 (470) 948
Capital expenditures (187) (198) (8)
Increase in intangible and other assets (394) (455) (192)
-------- -------- --------
Net cash (used in) provided by investing
activities (3,046) 3,772 10,352
Cash flows from financing activities:
Proceeds from issuance of common stock, net 13,448 101 4,445
Principal payments under long-term obligations (320) (543) (596)
-------- -------- --------
Net cash provided by (used in) financing
activities 13,128 (442) 3,849
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (1,076) (7,449) 4,353
Cash and cash equivalents at beginning of year 2,684 10,133 5,780
-------- -------- --------
Cash and cash equivalents at end of year $ 1,608 $ 2,684 $ 10,133
======== ======== ========
Supplemental disclosure:
Interest paid $ 24 $ 89 $ 176
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE> 44
CELTRIX PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Celtrix Pharmaceuticals, Inc. (the "Company") 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.
The accompanying financial statements have been prepared assuming that the
Company continues as a going concern. At March 31, 1998, the Company had net
working capital of $5.9 million and an accumulated deficit of $117.0 million,
and incurred a net loss of $12.9 million for the year ended March 31, 1998.
Management's planned expenditure for the next twelve months exceed current cash,
cash equivalents and short-term investments. The Company is currently in the
process of raising additional capital through an equity offering. Current cash,
cash equivalents and short-term investments, excluding the equity offering
proceeds, will not be sufficient to fund operations for the next twelve months.
The Company also continues to pursue 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.
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.
44
<PAGE> 45
Property and Equipment
Depreciation and amortization of property and equipment is provided on
the straight-line method over the estimated useful lives (three to seven years)
of the assets. Leasehold improvements are amortized over the shorter of the life
of the lease or their estimated useful lives using the straight-line method.
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.
Stock-Based Compensation
The Financial Accounting Standards Board issued SFAS 123, "Accounting for
Stock-Based Compensation" in October 1995, which encourages, but does not
require, companies to record compensation expense for stock-based employee
compensation plans at fair value. The Company has elected to follow the
disclosure requirements of SFAS 123 for the fiscal years ended 1998, 1997 and
1996 (see Note 5) and will continue to measure stock-based compensation to
employees in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees".
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, 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. In February 1997, the Financial Accounting Standards
Board issued Statement No. 128, "Earnings Per Share" ("SFAS 128"), which the
Company adopted in the period ended December 31, 1997. Under the new
requirements for calculating basic earnings per share, the dilutive effect of
stock options and warrants is excluded. The impact of SFAS 128 results in no
change to the Company's net loss per share, as stock options and other common
stock equivalents have been excluded from the current computation as they are
antidilutive.
Recently Issued Accounting Standard
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income" ("SFAS 130"), which is effective for fiscal
years beginning after December 15, 1997. SFAS 130 requires that all components
of comprehensive income, including net income, be reported in the financial
statements in the period in which they are recognized. Comprehensive income is
defined as the change in equity during a period from transactions and other
events from non-owner sources, which include foreign currency translation
adjustments, and unrealized gains and losses on investments. The Company does
not believe the adoption of SFAS 130 will have a significant impact on the
Company's consolidated financial statement disclosures.
45
<PAGE> 46
2. INVESTMENT SECURITIES
The following is a summary of available-for-sale securities at March 31
(in thousands). Gross unrealized losses were immaterial for the two years.
<TABLE>
<CAPTION>
1998 1997
---------------------------------- ----------------------------------
Net Estimated Net Estimated
Unrealized Fair Unrealized Fair
Cost Losses Value Cost Losses Value
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. treasury securities and
obligations of U.S. government
agencies $5,808 $ 1 $5,807 $3,381 $ 1 $3,380
U.S. corporate debt securities 499 1 498 -- - --
-------------------------------- --------------------------------
$6,307 $ 2 $6,305 $3,381 $ 1 $3,380
================================ ================================
Classified as:
Cash equivalents $ -- $-- $ -- $ 796 $-- $ 796
Short-term investments 6,307 2 6,305 2,585 1 2,584
-------------------------------- --------------------------------
$6,307 $ 2 $6,305 $3,381 $ 1 $3,380
================================ ================================
</TABLE>
During fiscal year 1998, none of the securities were sold prior to maturity.
During fiscal year 1997, available-for-sale debt securities sold amounted to
$1,985,000, resulting in $8,000 of gross realized gains. At March 31, 1998, by
contractual maturity, all of the available-for sale securities are due in one
year or less.
3. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist primarily of patents and employee
receivables. Amounts due from employees as of March 31, 1998 and 1997 of
$159,000 and $167,000, respectively, consist primarily of secured promissory
notes that bear interest of approximately five percent and have terms of up to
nine years. Principal and interest are due and payable upon maturity.
4. DEBT AND COMMITMENTS
As of March 31, 1998, the Company has fully amortized its obligation
under capital leases and debt arrangements; accordingly, the carrying value was
$0, net of $2,855,000 accumulated amortization at March 31, 1998, and $124,000,
net of $2,731,000 accumulated amortization at March 31, 1997. Amortization
expense for leased assets is included in depreciation and amortization expense.
The Company has an extension on one remaining capital lease and future minimum
payments under that arrangement total $8,000 in fiscal 1999.
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 $1.1 million, $1.2 million, and $1.2 million for the years ended
March 31, 1998, 1997, and 1996 respectively.
46
<PAGE> 47
Future minimum lease payments under operating leases at March 31, 1998
(exclusive of potential CPI adjustments) are as follows (in thousands):
<TABLE>
<CAPTION>
Operating
Leases
--------
<S> <C>
1999 $ 1,281
2000 1,281
2001 1,089
2002 1,089
2003 1,089
Thereafter 1,089
--------
Total minimum lease payments $ 6,918
========
</TABLE>
5. INCENTIVE AND BENEFIT PLANS
In September 1997, the stockholders approved an increase in the number of
shares reserved for issuance under the Company's 1991 Stock Option Plan from
1,500,000 to 3,000,000 shares of common stock. Under the 1991 Directors' Stock
Option Plan, 200,000 shares of Celtrix's common stock have been reserved for
issuance. The exercise prices under these plans are determined by the Board of
Directors 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 1998,
1997 and 1996, respectively: risk-free interest rates of 6.03%, 6.55% and 5.87%;
dividend yields of zero; volatility factors of the expected market price of the
Company's common stock of .792 for 1998 and .733 for 1997 and 1996; and an
expected option life 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-
47
<PAGE> 48
month offering period, whichever is lower. The first offering period commenced
January 1, 1994. As of March 31, 1998, 176,880 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 1998, 1997 and 1996, respectively: risk-free
interest rates of 5.59%, 5.66% and 5.09%; dividend yields of zero; volatility
factors of the expected market price of the Company's common stock of .792 for
1998 and .733 for 1997 and 1996; and an expected life 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>
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
Pro forma net loss $(13,275) $(12,929) $(7,342)
Pro forma net loss per share $ (0.63) $ (0.85) $(0.52)
</TABLE>
The weighted-average fair value of options granted during 1998, 1997 and
1996 was $1.59, $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, 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 $2.61
Shares authorized 1,500,000 -- -- --
Options granted (1,073,783) 1,073,783 $2.00-$2.94 $2.34
Options canceled 272,450 (272,450) $2.44-$3.94 $2.60
---------- ---------- ------------- -----
Balance at March 31, 1998 1,406,135 1,761,691 $1.25-$11.50 $2.39
========== ========== ============= =====
</TABLE>
The following table summarizes information concerning outstanding options
at March 31, 1998:
<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 1,004,008 8.2 $2.17 378,970 $2.25
$2.63 - $3.94 752,433 8.3 $2.64 315,968 $2.70
$5.50 - $11.50 5,250 4.4 $7.71 5,180 $7.73
-------------- ------------
1,761,691 700,118
============== ============
</TABLE>
48
<PAGE> 49
Under Celtrix's 1991 retirement savings plan ("401(k) Plan"), employees
may elect to defer up to 20% 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, 1998.
6. STOCKHOLDERS' EQUITY
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 warrant to purchase an
additional share of Celtrix common stock at $2.682 per share. The warrants are
exercisable only after the shares of stock are held for at least one year and as
of March 31, 1998, there were 2,758,391 warrants outstanding related to this
financing (102,543 were cancelled due to the sale of stock). The warrant expires
in April 2000. The net proceeds to the Company, after fees and expenses of
approximately $619,000, were $13.3 million.
7. RELATED PARTY TRANSACTIONS
Pursuant to the distribution of Celtrix common stock by Collagen in
February 1991, Celtrix entered into various agreements with Collagen, including
a Vitrogen(R) 100 Collagen manufacturing agreement. 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. This revenue is reported
as related party revenue in 1996.
8. LICENSE AND COLLABORATIVE ARRANGEMENTS
In July 1994, Celtrix entered into a license agreement with The Green
Cross Corporation ("Green Cross"), covering the development and
commercialization of SomatoKine for the treatment of osteoporosis in Japan.
Under the terms of the agreement, Green Cross was to be responsible for all
related research, development and marketing, as well as manufacturing the
product to support its preclinical, clinical and commercial needs in Japan. The
agreement provided for Celtrix to receive licensing fees, milestone payments
upon Green Cross accomplishing specific product development activities and
royalties on future product sales. Celtrix retained full rights outside of Japan
to SomatoKine and also to related know-how and technology developed by Green
Cross. In April 1998, Green Cross was merged with Yoshitomi Pharmaceuticals
Industries, Ltd. ("Yoshitomi"). In May 1998, Celtrix received notice from
Yoshitomi of its intent to terminate this license agreement. The impact on the
Company of dissolving the collaboration would be loss of potential revenues from
milestone and license payments and royalties on future product sales. However,
upon termination, Celtrix will regain the rights to the treatment of
osteoporosis in Japan.
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. As part of the agreement, Celtrix sold to Genzyme 1,550,388 shares of
Celtrix common stock in June 1994, and subsequently, in December 1995 Celtrix
exercised the option to receive an additional investment by Genzyme for
1,472,829 shares of Celtrix common stock resulting in $4.4 million of net
proceeds to the Company. Under recently amended terms, Genzyme has been granted
expanded worldwide commercialization rights for all systemic applications and
select local applications of TGF-beta-2 to include Japan, China, Korea and
Taiwan; in exchange, Genzyme released Celtrix from certain service and royalty
obligations under the original agreement. Celtrix has retained rights to select
applications of TGF-beta-2 and the
49
<PAGE> 50
Company has the option to reacquire rights to other product applications not
pursued by Genzyme. In December 1997, the Company also entered into a new
license agreement with Genzyme granting Genzyme a worldwide exclusive
royalty-bearing license to TGF-beta antibodies, and license and sublicense
rights to TGF-beta receptor. Under the terms of the agreement, Genzyme will
assume the licensing and royalty obligations of Celtrix related to TGF-beta
receptor.
Since inception, Celtrix has entered into various other research and
development and licensing arrangements. Some of these agreements contain royalty
and other obligations.
9. GAIN ON SALE OF INVESTMENTS
In June 1997, the Company sold 43,750 shares of Prograft Medical, Inc.
preferred stock, resulting in the recording of $737,000 in gain on investment.
These shares were held by Celtrix since 1993.
In 1996, Celtrix liquidated an equity investment of 231,480 shares of
Metra Biosystems, Inc. common stock, resulting in the recording of $3.5 million
in gain on investment.
10. INCOME TAXES
At March 31, 1998, the Company had net operating loss and tax credit
carryforwards for federal income tax purposes of approximately $113.4 million
and $4.1 million, respectively, expiring in the years 2006 through 2013. 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 $8.8 million of the total federal net 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: 1998 1997
-------- --------
<S> <C> <C>
Net operating loss carryforwards $ 39,100 $ 35,100
Research credits 5,500 4,800
Acquired intangibles -- --
Research expenses capitalized for tax purposes 2,200 3,700
Other-net (1,000) (2,600)
-------- --------
Net deferred tax assets 45,800 41,000
Valuation allowance for deferred tax assets (45,800) (41,000)
-------- --------
Total deferred tax assets $ -- $ --
======== ========
</TABLE>
The valuation allowance increased by $4.8 million, $5.2 million, and $2.9
million during the years ended March 31, 1998, 1997, and 1996, respectively.
50
<PAGE> 51
11. SUBSEQUENT EVENT (UNAUDITED)
In May 1998, the Board of Directors approved the Company to increase
its authorized shares of common and preferred stocks to 60,000,000 and
10,000,000 shares, respectively. This action received majority stockholder
approval and the Company amended and restated its Certificate of Incorporation
to effect the increase in July 1998.
51
<PAGE> 52
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<S> <C>
3.1 - Certificate of Incorporation of the Registrant, as amended and restated.
23.1 - Consent of Ernst & Young LLP, Independent Auditors.
24 - Power of Attorney. (see page 38 of this report.)
27 - Financial Data Schedule
</TABLE>
52
<PAGE> 1
EXHIBIT 3.1
RESTATED CERTIFICATE
OF INCORPORATION OF
CELTRIX PHARMACEUTICALS, INC.
Celtrix Pharmaceuticals, Inc., a corporation organized and existing under
the laws of the State of Delaware, hereby certifies as follows:
FIRST: The name of the corporation is Celtrix Pharmaceuticals, Inc. The
corporation was originally incorporated under the name "Celtrix Laboratories,
Inc.," and the original Certificate of Incorporation of the corporation was
filed with the Secretary of State of the State of Delaware on December 3, 1990.
SECOND: Pursuant to Section 245 of the General Corporation Law of the State
of Delaware, this Restated Certificate of Incorporation restates and integrates,
without further amendment, the provisions of the Certificate of Incorporation of
this corporation, and there is no discrepancy between the provisions of the
Certificate of Amendment, as heretofore amended or supplemented, and the
provisions of this Restated Certificate of Incorporation.
THIRD: The text of the Certificate of Incorporation as heretofore amended
or supplemented is hereby restated to read in its entirety as follows:
"1. The name of the corporation is Celtrix Pharmaceuticals, Inc. (the
"Corporation").
2. The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, Delaware 19801. The name of its registered
agent at such address is The Corporation Trust Company.
3. The nature of the business or purpose to be conducted or promoted by
the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of Delaware.
4. (a) The Corporation is authorized to issue two classes of shares to be
designated, respectively, "Preferred Shares" and "Common Shares." The number of
shares of Preferred Shares authorized to be issued is Ten Million (10,000,000)
and the number of shares of Common Shares authorized to be issued is Sixty
Million (60,000,000). The Preferred Shares and Common Shares shall each have a
par value of $.01 per share.
(b) The shares of Preferred Shares may be issued from time to time in
one or more series. The Board of Directors of the Corporation is authorized, by
filing a certificate pursuant to the applicable law of the State of Delaware,
to: (i) establish from time to time the number of shares to be included in each
such series; (ii) fix the voting powers, designations, powers, preferences and
relative, participating, optional or other rights of the shares of each such
series and the qualifications, limitations or restrictions thereof, including
but not limited to the fixing or alteration of the dividend rights, dividend
rate, conversion rights, conversion rate, voting rights, rights and terms of
redemption (including sinking fund provisions), the redemption price or prices,
and the liquidation preferences of any wholly unissued series of shares of
Preferred Shares; and (iii) increase or decrease the number of shares of any
series subsequent to the issue of shares of that series, but not below the
number of shares of such series then outstanding. In case the number of shares
of any series shall be so decreased, the number of shares constituting such
decrease shall resume the status which they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
<PAGE> 2
5. The Corporation is to have perpetual existence.
6. In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter, amend or
repeal the Bylaws of the Corporation, but the stockholders may make additional
Bylaws and may alter or repeal any Bylaw whether adopted by them or otherwise.
7. The number of directors which will constitute the whole Board of
Directors of the Corporation shall be as specified in the Bylaws of the
Corporation.
8. At all elections of directors of the Corporation, and subject to the
provisions of the Bylaws of the Corporation, each holder of stock or of any
class or classes or of a series or series thereof shall be entitled to as many
votes as shall equal the number of votes which (except for such provision as to
cumulative voting) he would be entitled to cast for the election of directors
with respect to his shares of stock multiplied by the number of directors to be
elected by him, and he may cast all of such votes for a single director or may
distribute them among the number to be voted for, or for any two or more of them
as he may see fit.
9. Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
10. (a) To the fullest extent permitted by the Delaware General Corporation
Law as the same exists or as may hereafter be amended, a director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
(b) The corporation shall indemnify to the full extent permitted by
law any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
that he, his testator or intestate is or was a director, officer or employee of
the corporation or any predecessor of the corporation or serves or served any
other enterprise as a director, officer or employee at the request of the
corporation or any predecessor of the corporation.
(c) Neither any amendment nor repeal of this Article 10, nor the
adoption of any provision of this Certificate of Incorporation inconsistent with
this Article 10, shall eliminate or reduce the effect of this Article 10 in
respect of any matter occurring, or any cause of action, suit or claim that, but
for this Article 10, would accrue or arise, prior to such amendment, repeal or
adoption of an inconsistent provision.
11. Advance notice of new business and stockholder nominations for the
election of directors shall be given in the manner and to the extent provided in
the Bylaws of the Corporation.
12. The Corporation reserves the right to amend, alter, change or repeal
any provisions contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation."
IN WITNESS WHEREOF, said Celtrix Pharmaceuticals, Inc. has caused this
Restated Certificate of Incorporation to be signed by Andreas Sommer, its
President and Chief Executive Officer, and attested by Craig W. Johnson, its
Secretary, this 24th day of June 1998.
CELTRIX PHARMACEUTICALS, INC.
By: /s/ Andreas Sommer
----------------------------
Andreas Sommer
President and Chief Executive Officer
ATTEST:
By: /s/ Craig W. Johnson
---------------------------
Craig W. Johnson, Secretary
<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 24, 1998,
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, 1998.
/s/ ERNST & YOUNG LLP
Palo Alto, California
July 9, 1998
<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-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,608
<SECURITIES> 1,608
<RECEIVABLES> 6
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,132
<PP&E> 20,107
<DEPRECIATION> 13,045
<TOTAL-ASSETS> 17,876
<CURRENT-LIABILITIES> 2,242
<BONDS> 0
0
0
<COMMON> 211
<OTHER-SE> 14,533
<TOTAL-LIABILITY-AND-EQUITY> 17,876
<SALES> 51
<TOTAL-REVENUES> 661
<CGS> 1
<TOTAL-COSTS> 1
<OTHER-EXPENSES> 13,006
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,913)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,913)
<EPS-PRIMARY> (0.61)
<EPS-DILUTED> (0.61)
</TABLE>
