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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
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------- -------
Commission File Number: 0-20063
THERATECH, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 87-0420511
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
417 WAKARA WAY, SALT LAKE CITY, UTAH 84108
(Address of principal executive offices)(Zip Code)
(801) 588-6200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
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. X Yes 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 the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of February 28, 1997, the aggregate market value of the voting stock
held by non-affiliates of the registrant is approximately $145,500,000 based on
the closing sale price as reported on the Nasdaq National Market on such date.
Shares of Common Stock held by officers, directors and holders of more than 5%
of the outstanding Common Stock have been excluded from this calculation because
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
The number of shares of Common Stock outstanding on February 28, 1997 was
20,608,372
DOCUMENTS INCORPORATED BY REFERENCE
Part II and Part IV of this Report on Form 10-K incorporate information by
reference from the Registrant's 1996 Annual Report to Stockholders. Part III of
this Report on Form 10-K incorporates information by reference from the
Registrant's Proxy Statement for its 1997 Annual Meeting of Stockholders.
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PART I
ITEM 1. BUSINESS
TheraTech, Inc. ("TheraTech" or the "Company") develops advanced,
controlled release drug delivery products which administer drugs through the
skin, by oral delivery to the gastrointestinal tract, through tissues in the
oral cavity and by other means. The Company believes its products provide
advantages over existing controlled release drug delivery products and
conventional oral, injectable and continuous infusion methods by increasing
efficacy, safety, bioavailability and patient compliance and comfort. The
Company focuses its research and development efforts on the design and
development of improved delivery systems for off-patent and proprietary drugs.
Historically, TheraTech's product development activities have been
conducted independently or pursuant to collaborative research and development
agreements with pharmaceutical companies. For products developed independently
by TheraTech, marketing rights may later be transferred to pharmaceutical
companies under licensing and marketing agreements. These agreements with
pharmaceutical companies normally provide for TheraTech to receive payments in
various forms, including licensing fees and other payments upon the execution of
an agreement, milestone payments upon achievement of technical and regulatory
goals, and periodic payments in the form of cost reimbursements for product
development and clinical evaluation of a specified product, including a portion
of general and administrative expenses. The client generally receives marketing
rights to the product and TheraTech generally retains manufacturing rights, for
which it recognizes product sales revenue at the time TheraTech ships product to
the client and/or at the time the client ships product to its customers.
To date, the U.S. Food & Drug Administration ("FDA") has cleared for
marketing two of TheraTech's developed products, its Androderm(R) Testosterone
Transdermal System for men in September 1995, and its Alora(R) Estradiol
Transdermal System for woman in December 1996. Both marketing clearances were
received within one year of their respective initial submissions. Also during
1996, the testosterone transdermal system received marketing clearances in
Brazil, Denmark, Finland, Ireland, South Korea, Sweden, Switzerland and the U.K.
This product is or will be marketed under the trade names Atmos(R) in Denmark
and Finland, Androflex(R) in Switzerland and Andropatch(TM) in the U.K.
Androderm, Atmos and Andropatch are currently available in their respective
countries through TheraTech's marketing partners. Another of TheraTech's
marketing partners together with such partners sublicensees have obtained
regulatory approval to market in certain European countries TheraTech's
nitroglycerin transdermal system. An Abbreviated New Drug Application ("ANDA")
for TheraTech's nitroglycerin product is under review by the FDA. Additionally,
TheraTech has more than 20 other drug delivery products under development and
testing in the U.S., Europe, Japan and South Korea, of which eight are in
various stages of clinical development.
DRUG DELIVERY
Conventional dosage forms currently dominate the pharmaceutical market.
These dosage forms can be grouped by routes of administration into oral,
injectable, topical, nasal, inhalation, ocular and rectal delivery categories.
Oral dosage forms comprise a substantial majority of all present dosage forms.
Conventional dosage forms offer ease of administration and low cost-per-use, but
often require inconvenient dosage intervals and may result in higher
side-effects, reduced efficacy and poor bioavailability. Controlled drug
delivery systems, also referred to as alternate drug delivery systems, have been
introduced to eliminate or reduce the limitations of conventional therapies and
currently comprise less than 10 percent of the pharmaceutical market. Controlled
drug delivery systems currently marketed by pharmaceutical companies include
transdermal patches, oral controlled release products, biodegradable and
non-biodegradable implants and long-acting injectables.
Controlled drug delivery seeks to maintain a more consistent and
appropriate drug level in the bloodstream than conventional dosage forms.
Conventional dosage forms often produce higher initial drug levels than required
for optimal therapy, increasing risks of side effects, and subsequently, lower
than therapeutically optimal levels as the drug is metabolized and cleared from
the body. Controlled delivery technologies allow for the development of
"patient-friendly" dosage forms which eliminate the need for frequent
administration, such as frequent injections or taking tablets several times a
day, and thus can improve safety, efficacy and patient compliance. This can be
especially beneficial for certain patient populations, such as elderly patients,
who often require several medications with differing dosage regimens.
Controlled drug delivery can provide patent protection for a product that
includes a drug that has not been patented or for which the patent is expiring
or has expired. Patented methods of controlled drug delivery may extend product
life and provide a pharmaceutical company with a competitive advantage over
generic products delivered by conventional means. The controlled delivery of
certain drugs can also result in the approval of new therapeutic indications,
thereby expanding the utility of and the market for those drugs.
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COMPANY STRATEGY
TheraTech's strategy is to develop and manufacture advanced drug delivery
products for a wide variety of therapeutic applications utilizing a broad array
of proprietary delivery technologies. The Company's strategy consists of four
basic elements:
Collaborative Product Development with Established Pharmaceutical Companies
TheraTech is developing several drug delivery products in collaboration
with major pharmaceutical companies. In general, TheraTech's collaborative
partners provide research funds, and clinical and other support during the
product development process. Either TheraTech or a pharmaceutical company may
bring an idea for a drug delivery product to the other, seeking to collaborate
on the development and testing of a new product. Once a product is approved,
TheraTech's partners generally provide an established and trained marketing and
sales force to sell TheraTech's product.
Independent Product Development
In addition to its collaborative efforts, the Company is engaged in
independent product development. If successful, independently developed products
will provide the Company with the flexibility either to market the product
itself or enter into agreements with pharmaceutical partners on terms generally
more favorable to the Company than if the agreement was entered into at an
earlier stage of development. Although independent product development entails
more financial risk than initially working with a collaborative partner, the
Company is better able to control the development process and retain a greater
portion of the product revenue stream. TheraTech currently has several products
which are being or were initially developed independently, including
testosterone patches for men, estradiol and estradiol/progestin transdermal
patches, testosterone patches for women and transmucosal, oral and topical
dosage form products.
Use of Multiple Drug Delivery Technologies
TheraTech begins product development by defining the target blood level
profile for a given drug and choosing from its broad technology base the most
appropriate dosage form and route of administration to achieve that profile.
TheraTech's extensive technology base enables the Company to deliver a much
wider variety of drugs more effectively than could be delivered from the use of
a single delivery technology. TheraTech devotes significant resources to
continued development of new drug delivery technologies as well as additional
products based on its existing technologies. TheraTech's strategy is to maintain
ownership of its drug delivery technology and to license only specific product
applications.
Control of the Product Manufacturing Process
TheraTech products are manufactured using several proprietary materials
and production technologies. By manufacturing its own products and those of its
pharmaceutical partners, TheraTech can protect the proprietary aspects of the
manufacturing process, retain control over the quality of its products and
increase its share of the product revenue stream. TheraTech produces product for
development requirements and clinical supplies in its pilot plant facilities,
and commercial transdermal products in its 63,000 square foot manufacturing
facility. This facility is equipped to produce commercial quantities of both
liquid reservoir and matrix transdermal patches, and may be adapted to
manufacture other dosage forms.
THERATECH TECHNOLOGIES
TheraTech approaches drug delivery from a multi-disciplinary perspective,
applying innovations in medical and pharmaceutical sciences, fundamental
knowledge of drug permeation mechanisms and advanced technologies in polymer
science. This process begins by first defining the desired blood level profile,
then the most appropriate methods of administration, such as transdermal, oral,
oral transmucosal or others, are identified for product development. For new
chemical entities under development, the optimal profile is frequently not
known. Further, the ideal dosing for many drugs may not be fully understood due
to absorption or delivery difficulties. In such cases, TheraTech's initial
objective is to develop a delivery technology to administer these drugs which
may not otherwise be deliverable without invasive methods such as injections,
and to subsequently develop an optimized dosage form.
Transdermal Drug Delivery
Transdermal drug delivery entails the administration of drugs through the
skin from an adhesive patch. This method of drug delivery is ideally suited for
certain drugs that must be injected and for many orally delivered drugs that are
degraded either in the gastrointestinal tract or by the liver, such that only a
small fraction of the total administered dose is actually absorbed and
therapeutically effective. Attempts to overcome such inefficient oral delivery
through increased dosage may lead to direct adverse effects on the liver and
result in high levels of the metabolized drug ("metabolites") which can
potentiate certain side-effects. Transdermal delivery systems overcome such
"first-pass" metabolism problems by delivering the drug directly into the
bloodstream at prescribed rates. Further, transdermal delivery systems provide a
convenient means
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to administer many drugs over prolonged periods, which would otherwise require
frequent dosing. Thus, transdermal delivery can significantly enhance the
therapeutic benefits of certain drugs through improved efficacy, safety and
bioavailability while improving patient compliance and comfort.
Due to the significant barrier properties of skin, transdermal drug
delivery has historically been limited to those drugs which are highly potent
and can naturally permeate skin. TheraTech has developed and obtained patents on
several enhancer compositions for use in transdermal drug delivery. The Company
has demonstrated that these proprietary enhancers can be used to create
transdermal products that will deliver a variety of drugs at higher rates than
would otherwise be possible. These patented enhancer compositions consist of
agents that have already been approved for human use in pharmaceutical, cosmetic
and/or food applications. As a result, the Company believes products employing
these enhancers can achieve regulatory approval more quickly than products using
new chemical entity enhancers. The Company also believes that its enhancer
technologies represent a significant competitive advantage over other
transdermal drug delivery products.
TheraTech has developed two principal types of transdermal patch systems,
the TheraDerm-LRS(R) ("Liquid Reservoir System" or "LRS") and the
TheraDerm-MTX(R) ("Matrix System" or "MTX"). The Company can incorporate the use
of its enhancer technologies into either system type. TheraDerm-LRS was designed
and developed to overcome the limitations of other liquid reservoir systems.
Numerous drug formulations can be incorporated into a TheraDerm-LRS patch since
the system is not rate limiting to the administration of the drug and the drug
reservoir is physically isolated from the adhesive within the system. This
system design also eliminates adverse drug formulation interactions with the
patch adhesive. The TheraDerm-LRS patch is particularly useful for drugs that
require higher doses or have intrinsically low transdermal permeability. Two
U.S. patents have been issued for the TheraDerm-LRS transdermal patch, as well
as international patents.
The TheraDerm-MTX is an adhesive matrix patch design. The drug is
incorporated in the adhesive, resulting in a light and flexible patch which
conforms to the skin for maximum adhesion and comfort. The TheraDerm-MTX employs
a convenient application tab, allowing the user to easily apply the patch.
Several U.S. patents have been issued to provide a proprietary position for
products developed by TheraTech utilizing the TheraDerm-MTX patch design.
THERADERM-LRS
THERADERM-MTX
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Oral Transmucosal Drug Delivery
The Company has placed considerable emphasis on the development of new
technologies for the administration of large molecule drugs including peptides
and polysaccharides. These technologies enable the delivery of many such drugs
across the mucosal tissue of the oral cavity ("oral transmucosal delivery"). The
advantages of this approach over other delivery routes include: high drug
permeability relative to transdermal administration; reduced metabolism and
increased bioavailability relative to oral dosing where enzymatic degradation in
the intestine and by the liver is significant; easy access to the oral cavity
for convenient application or removal of the dose by the patient; localization
of the dosage form at the delivery site over prolonged periods to extend the
duration of drug delivery and maximize the extent of absorption; and greater
resistance to chemical and mechanical irritation relative to other mucosal
delivery routes.
TheraTech's oral transmucosal ("OTM") delivery systems are solid dosage
forms which adhere to various surfaces in the oral cavity and deliver
macromolecular drugs over a period of time. TheraTech views its OTM technology
as a patient friendly alternative to systemic injection that has wide
applicability to many peptide and other macromolecular drugs, as well as smaller
conventional drugs which must currently be injected. The Company has been issued
patents for certain OTM designs and compositions, and has filed additional
patent applications for other system designs and therapeutic applications. The
Company has conducted human feasibility studies demonstrating the ability of
these systems to deliver therapeutic levels of glucagonlike insulinotropic
peptide ("GLP-1"). The results of this study were published in the August 1996
issue of Diabetes Care. The Company also initiated similar studies on GLP-1 in
Type II diabetic patients during 1996. GLP-1 is an investigational drug for the
treatment of non-insulin dependent diabetes mellitus, commonly referred to as
Type II or adult-onset diabetes.
Considering that there are an estimated 12 to 14 million Type-II diabetics
in the U.S. alone, TheraTech believes its successful GLP-1 human feasibility
study presents not only a potential therapeutic breakthrough, but also a
potentially significant commercial opportunity. The Company believes that the
successful delivery of GLP-1 in human trials by its oral transmucosal tablets
represents the first major step in the development of peptide drug products with
its OTM technology.
TheraTech has recently entered into a multi-product collaboration with
Eli Lilly and Company ("Lilly") to evaluate certain Lilly peptide drugs and
develop OTM dosage forms using TheraTech's proprietary technologies.
Oral Drug Delivery
The Company continues to invest resources in the area of orally
administered controlled release dosage forms by developing and/or acquiring
patented technologies for controlled release dosage forms formulated using FDA
approved materials and using established solid dosage form manufacturing
processes. The Company is currently developing several oral controlled release
products.
Other Delivery Technologies
The Company is also developing long lasting lozenges which provide
controlled release drug delivery in the oral cavity. This lozenge technology
complements the Company's transmucosal delivery technology and is applicable to
a wide variety of drugs for either local delivery or systemic delivery through
the mucosal tissues of the mouth.
To complement its transdermal efforts, TheraTech is developing topical
formulations for dermatological applications based upon its proprietary skin
enhancer technologies. These topical formulations are designed to maximize the
delivery of the drug to the skin itself, and more particularly to the regions of
skin underlying the outer barrier layer. TheraTech's proprietary enhancer
technologies allow topical dosing to the skin at significantly greater levels
than those provided by conventional topical formulations and technologies. This
allows the Company to increase dosing to the target site, which may result in
increased therapeutic efficacy for many topically administered drugs.
During 1996, TheraTech acquired exclusive rights to two inhalation drug
delivery technologies. A dry powder inhalation ("DPI") respiratory drug delivery
device and an assist device for use with existing metered dose inhalers ("MDI").
Design features of both devices include breath activation by the patient and an
expected lower production cost compared to other devices currently under
development. Both devices, acquired from Innovative Devices, LLC, have patents
pending and are in early development. The MDI device is targeted to be
compatible with approximately 80 percent of the asthma medications currently on
the market and to be reusable for up to a year. The DPI device is being
developed primarily for certain peptides and larger protein drugs and has a
mechanism that should provide maximum deaggregation of drug particles. These
additional technologies expand TheraTech's protein drug delivery capabilities
and provide an entry into the important pulmonary drug delivery area, a market
that is both large and growing. In fact, the worldwide respiratory drug market
totaled approximately $6.85 billion in 1995 and is expected to surpass $11
billion by the year 2001.
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THERATECH PRINCIPAL PRODUCTS AND KEY PARTNERSHIPS
The following table lists the potential indications, current status as of
March 1997, and collaborative marketing partners for each of the Company's
principal products that have been approved or are in preclinical or later stages
of development. The table does not include those products which the Company has
in earlier stages of development.
<TABLE>
<CAPTION>
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PRODUCT TARGETED PARTNERS
DESCRIPTION INDICATION STATUS TERRITORY/AVAILABILITY
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Testosterone Male Launched in: SMITHKLINE BEECHAM (U.S.,
(Transdermal Hypogonadism US, So. Canada, New Zealand, Australia
TheraDerm-LRS, 2.5 mg Korea, and the majority of Western
System) (Androderm); Europe); CEPA (Spain);
UK LABORTERAPIA (Portugal);
(Andropatch); FOURNIER (France, North
Sweden, Africa); ASTRA (Sweden,
Denmark Norway, Denmark, Finland and
(Atmos). Iceland); GRELAN (Japan);
Approved in: WYETH-AYERST (Mexico, Latin
Switzerland America, the rest of Africa
(Androflex), and the Middle East); SAMYANG
Brazil, CORP. (So. Korea)
Ireland,
Finland
- ---------------------------------------------------------------------------------------
Estradiol Female HRT, NDA cleared PROCTER & GAMBLE
(Transdermal Osteoporosis in U.S. (Worldwide, except in
TheraDerm-MTX) 12/96 (Alora) Asia); SAMYANG CORP. (So.
Korea)
- ---------------------------------------------------------------------------------------
Nitroglycerin Angina Pectoris Launched in LAVIPHARM S.A. (Worldwide,
(Transdermal Italy, except So. Korea); SUB
TheraDerm-MTX) Greece and DISTRIBUTORS: LAVIPHARM
France S.A./SYNTHELABO (Greece);
ANDA filed in ALTER S.A. (Spain);
U.S CYANAMID BENELUX SA/NV
SNDS filed in (Belgium); KNOLL
Canada FARMACEUTICI S.P.A.
(Italy); RHONE-POULENC
RORER CANADA (Canada);
SANOFI WINTHROP AB
(Scandinavia); SYNTHELABO
S.A. (France); SAMYANG
CORP. (So. Korea)
- ---------------------------------------------------------------------------------------
Testosterone Male SNDA SMITHKLINE BEECHAM (U.S.,
(Transdermal Hypogonadism submitted in Canada, New Zealand,
TheraDerm-LRS, Single U.S. 10/96 Australia and the majority
patch 5 mg System) of Western Europe);
WYETH-AYERST (Mexico, Latin
America,
non-French-speaking Africa
and the Middle East), ASTRA
(Denmark, Finland, Iceland,
Norway and Sweden). Under
negotiation with the
remaining partners.
- ---------------------------------------------------------------------------------------
Estradiol/Progestin Female HRT, Phase III PROCTER & GAMBLE (Worldwide,
(Transdermal Osteoporosis except in Asia);
TheraDerm-MTX) NICHIIKO AND YOSHITOMI (Japan);
SAMYANG CORP. (So. Korea)
- ---------------------------------------------------------------------------------------
Progestin Female HRT Phase II Unassigned/Worldwide
(Transdermal
TheraDerm-MTX)
- ---------------------------------------------------------------------------------------
Testosterone Female HRT, Phase II Unassigned/Worldwide
(Transdermal AIDS Wasting
TheraDerm-MTX)
- ---------------------------------------------------------------------------------------
Undisclosed Urinary Phase I/II MEIJI MILK PRODUCTS CO.
(Transdermal Incontinence (Asia)
TheraDerm-MTX) Unassigned/Remainder of the
World
- ---------------------------------------------------------------------------------------
GLP-1 Diabetes Phase I Unassigned/Worldwide
(OTM)
- ---------------------------------------------------------------------------------------
Nicotine Smoking Phase I Unassigned/Worldwide
(Oral Lozenge) Cessation
- ---------------------------------------------------------------------------------------
Testosterone/Estradiol Female HRT Phase I Unassigned/Worldwide
(Transdermal
TheraDerm-MTX)
- ---------------------------------------------------------------------------------------
New Chemical Entity Undisclosed Phase I PFIZER INC. (Worldwide)
(Transdermal
TheraDerm-LRS)
- ---------------------------------------------------------------------------------------
Peptide X Undisclosed Preclinical ELI LILLY (Worldwide)
(OTM)
- ---------------------------------------------------------------------------------------
Acyclovir Herpes Labialis Preclinical Unassigned/Worldwide
(Topical)
- ---------------------------------------------------------------------------------------
Lidocaine Local Analgesic Preclinical Unassigned/Worldwide
(Transdermal
TheraDerm-LRS)
- ---------------------------------------------------------------------------------------
</TABLE>
(1) For an explanation of the various stages of development, see "Business
Government Regulation and Product Approvals." For international markets, a
pharmaceutical company is subject to regulatory requirements, interactions and
product approvals substantially the same as those in the U.S. Although the
clinical trials can be different than those conducted in the U.S., the trials
themselves are substantially the same as those in the U.S. and are commonly
referred to in the industry as Phases I, II, and III.
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Testosterone Transdermal System for Male Hormone Replacement Therapy
The Company independently developed a two and one half milligram ("2.5
mg") LRS testosterone transdermal system for the treatment of male hypogonadism.
For the vast majority of patients, two patches are applied to non-scrotal skin,
providing testosterone and its active metabolites at levels closely matching
those which result from natural testosterone production and metabolism in normal
men. Current competitive products include injectable synthetic hormones, oral
androgens and a transdermal patch which is applied to the shaved scrotum. In
addition, a sublingual testosterone product and a non-scrotal testosterone
product have recently been submitted to the FDA by other companies. TheraTech
believes that its system offers significant advantages over competitive products
in that the natural hormone is administered in a more physiological fashion from
a more patient friendly system.
TheraTech assigned U.S. and Canadian marketing rights to its 2.5 mg
testosterone transdermal system to SmithKline Beecham. Under the agreement with
SmithKline Beecham, TheraTech retained an option to co-promote the product in
the U.S. under certain conditions. The Company also has distribution agreements
to market this product with Compania Espanola De La Penicilina Y Antibioticos,
S.L. ("CEPA") in Spain and Laborterapia - Produtos Farmaceuticos, S.A.
("Laborterapia") in Portugal, (Produtos Farmaceuticos Bioty, LDA ("Bioty") has
assigned its marketing rights to Laborterapia with TheraTech's consent), with
Samyang Corporation ("Samyang") to market the product in South Korea, with
Laboratoires Fournier ("Fournier") for France, with SmithKline Beecham for the
remainder of Western Europe (excluding Scandinavia), Australia and New Zealand.
TheraTech assigned the Scandinavian marketing rights for the product to Astra AB
("Astra"). The Company signed a joint development and co-promotion agreement for
the testosterone patch with Grelan Pharmaceutical Co., LTD ("Grelan") a member
of Takada Chemical Industries Group, the largest pharmaceutical company in
Japan. The Company has granted Wyeth-Ayerst International, Inc.
("Wyeth-Ayerst"), a division of American Home Products Corporation, exclusive
testosterone patch marketing and distribution rights in Mexico, Central and
South America, non-French-speaking Africa and the Middle East.
The testosterone transdermal system for men was cleared for marketing
under the trade name Androderm by the FDA and is currently marketed by
SmithKline Beecham in the U.S. European regulatory filings have been submitted
by SmithKline Beecham, Fournier, CEPA, Laborterapia and Astra to the respective
European authorities. During 1996, European approvals were received in Denmark,
Finland, Ireland, Sweden, Switzerland and the United Kingdom, with the product
being launched in several of these countries. Similar filings have been and are
being prepared by Wyeth-Ayerst for its licensed territories. Wyeth-Ayerst also
received approval in Brazil during 1996. Additional clinical work will be
conducted by Grelan for registration in Japan. The product is or will be
marketed under the trade name Atmos in Denmark, Finland and Sweden, Androflex in
Switzerland and Andropatch in the U.K. and Ireland. In addition, Samyang
received government approval to market the product under the name Androderm in
South Korea in late 1996.
TheraTech completed the development of a second generation Androderm
Transdermal System that delivers a nominal daily dose of five milligrams ("5.0
mg") of testosterone from a single patch in a manner equivalent to the
application of two currently marketed 2.5 mg Androderm patches. A single 5.0 mg
patch provides additional convenience over the current two patch per day dosage.
The Supplemental New Drug Application ("SNDA") for this product was submitted to
the FDA in October 1996. TheraTech has granted marketing rights for the 5.0 mg
patch to Astra, SmithKline Beecham and Wyeth-Ayerst in their respective
territories. TheraTech is also negotiating agreements for the 5.0 mg patch with
its other testosterone transdermal system marketing partners.
Male hypogonadism results when the body cannot produce normal levels of
testosterone. The consequences of testosterone deficiency include decreased
libido, impotence, fatigue, depression, and muscle and bone loss. It is
estimated that approximately one percent to five percent of men in the U.S.
between the ages of 20 and 65 suffer from hypogonadism, including approximately
200,000 men afflicted by Klinefelter's syndrome (a genetic condition in which
men have an extra female chromosome). In such cases, testosterone replacement
therapy may have a beneficial impact. Furthermore, it is now recognized that
natural testosterone production can be dramatically reduced with age in men, of
which it is estimated that 20 percent or more of men over age 65 are
hypogonadal. The effects of testosterone replacement in hypogonadal, elderly men
have not been systematically evaluated.
Female Hormone Replacement Therapy
The Company is developing a number of transdermal products for female
Hormone Replacement Therapy ("HRT"). These include an estradiol patch, an
estradiol/progestin combination patch, a progestin patch, a testosterone patch
and an estradiol/testosterone combination patch. TheraTech has a development and
marketing agreement with Procter & Gamble Pharmaceutical, Inc. ("Procter &
Gamble") for worldwide rights (excluding Asia) for its estradiol patch and
estradiol/progestin combination patch. The Company has an agreement with
Nichiiko Pharmaceutical Co., Ltd. ("Nichiiko") to develop and market the
estradiol/progestin combination patch in Japan and with Samyang to market the
estradiol patch and estradiol/progestin combination patch in South Korea.
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TheraTech submitted an NDA on its MTX estradiol patch in December 1995,
and received FDA clearance in December 1996 under the trade name Alora. This was
TheraTech's second product approval in two years, both occurring within one year
of their initial submission. TheraTech is preparing for the U.S. commercial
launch of Alora in the spring of 1997 by Procter and Gamble. The Alora patch
will be available in three dosage strengths: 0.05; 0.075; and 0.1 milligrams per
day.
In collaboration with Procter & Gamble, the Company also initiated U.S.
Phase III clinical trials for its MTX estradiol/progestin combination patch in
1996. These studies will evaluate multiple dosing levels and regimes with the
combination patch. The estradiol and estradiol/progestin combination products
are being developed for the treatment of menopausal symptoms and other
conditions associated with estrogen deficiency, including osteoporosis.
Menopause is a condition associated with aging in which women no longer produce
steroid hormones at the physiological levels which were present in their younger
years. Menopause can also result from surgical intervention, such as
oophorectomy. It is now accepted that bone loss is associated with menopause
which can lead to osteoporosis, a debilitating condition contributing to more
than one million bone fractures each year in the U.S. Estrogen replacement
therapy can effectively treat menopausal symptoms, as well as reduce bone loss
with beneficial effects on the prevention of osteoporosis. It is estimated that
there are more than 90 million menopausal or postmenopausal women in the U.S.
and Europe, and this number is anticipated to increase during the next decade.
In 1995, worldwide sales for female hormone therapy replacement products
exceeded $2.1 billion.
The current market for estrogen in the U.S. is dominated by oral products
which require significantly larger doses of estrogen to produce the desired
effects relative to transdermal estradiol administration. Further, unopposed
estrogen administration can lead to pre-cancerous uterine conditions in many
women unless counterbalanced by the co-administration of a progestin. As with
estrogen replacement, progestin therapy is currently dominated by oral products
which require higher levels of progestin hormones. Transdermal female hormone
replacement patch development is an active field with several companies
developing estradiol patches and estradiol/progestin combination patches. In the
U.S., three other estradiol matrix patches offered by competitors of the Company
have also received FDA approval. The Company believes that its products may
provide improved performance and better skin toleration than competitive
transdermal estradiol products.
An exciting new product in the female HRT area is a MTX transdermal patch
that delivers testosterone to women. Although women produce only about one
twentieth the amount of testosterone produced by men, it is believed to have an
important role in the normal hormonal balance of healthy women. The potential
consequences of testosterone deficiency in women, including loss of libido and
muscle and bone deterioration, are becoming more recognized by the medical
community, offering TheraTech new opportunities in the female HRT market. The
issuance in October 1995 of a U.S. patent on this technology solidified
TheraTech's position in this rapidly evolving area. During the third quarter of
1996, TheraTech reacquired all rights to its testosterone patch for women and
its estradiol/testosterone combination patch from Solvay Pharmaceuticals, Inc.
("Solvay") and is now independently developing both products. TheraTech is
negotiating with several multi-national pharmaceutical companies to market its
transdermal testosterone patch for women.
TheraTech initiated Phase II clinical trials in 1996 for two separate
indications on its female testosterone patch. The first study is being conducted
at the Massachusetts General Hospital, to evaluate the effects of the patch on
muscle wasting in HIV infected women who are testosterone deficient. The second
study evaluates the effects on sexual function, mood and quality of life in
oophorectomized woman with low testosterone levels. The effects of testosterone
replacement on bone turnover markers will also be evaluated. The latter study is
being conducted at several medical centers in the U.S.
Nitroglycerin Transdermal System for the Treatment of Angina
TheraTech has developed an enhanced transdermal nitroglycerin patch for
the treatment of angina, a painful attack due to insufficient oxygen in the
muscles of the heart. TheraTech's system utilizes proprietary enhancer
technology allowing equivalent dose administration from smaller patches than the
currently marketed originator products. Utilizing a TheraDerm-MTX patch design,
this product was developed as a generic bioequivalent product against Ciba
Geigy's (now Novartis AG) Transderm-Nitro(R) product and in 1993 an ANDA was
submitted to the FDA. The FDA has listed both Schering Plough's Nitro-Dur(R) and
Ciba Geigy's Transderm-Nitro(R) as suitable reference standard products for
bioequivalence comparisons; allowing generic substitution of TheraTech's product
against Transderm-Nitro pending final ANDA approval. In Europe, marketing
applications based on TheraTech's bioequivalency study against the
Transderm-Nitro product were submitted and approved in several countries and
TheraTech's product is being marketed by Lavipharm' distributors in France,
Greece and Italy.
8
<PAGE> 9
TheraTech entered into development and license agreements with Lavipharm,
a privately-held European company with sales of approximately $175 million in
1996, pursuant to which TheraTech has received development payments and is
receiving royalties in exchange for granting Lavipharm exclusive worldwide
(excluding South Korea) marketing rights for this product. Lavipharm has
licensed the product to various distributors for sales in Europe and Canada.
TheraTech retains exclusive manufacturing rights for the U.S., but has granted
exclusive manufacturing rights to Lavipharm with respect to the rest of the
world, except South Korea. TheraTech has entered into a technical license
agreement with Samyang pursuant to which TheraTech will receive certain license
fees and royalties in exchange for granting Samyang the exclusive right to
manufacture and market the product in South Korea.
Approximately three million people in the U.S. suffer from angina. Nitrate
therapy is a leading method of treatment of angina. Total U.S. annual sales of
nitroglycerin patches at the manufacturer's level are approximately $250
million, and worldwide annual sales of nitroglycerin patches are approximately
$500 million.
Oral and OTM Drug Delivery
In 1996, the Company continued to make significant progress in the oral
controlled release and OTM drug delivery areas. TheraTech has a small scale,
solid dosage form pilot plant for the development and manufacturing of oral
controlled release tablets, self adherent OTM systems and long acting lozenges,
in accordance with current Good Manufacturing Practice ("cGMP"). This facility
will be used to support clinical supplies manufacturing and is capable of
biobatch production runs.
The Company made particular progress in the transmucosal delivery of
macromolecules. Such drugs include peptide and carbohydrate based compounds
which are the focus of many biotechnology based drug discovery programs within
the industry. Such compounds are inherently difficult to administer using
conventional drug delivery technologies and typically must be administered by
injection.
A major technological milestone was reached with a successful clinical
feasibility study using TheraTech's proprietary OTM system for peptide delivery.
In this study, TheraTech's proprietary OTM system administered pharmacologically
active amounts of GLP-1, an investigational drug for the treatment of
non-insulin dependent diabetes mellitus, commonly referred to as Type-II, or
adult-onset, diabetes. GLP-1 works primarily by stimulating the release of
insulin while inhibiting gastric emptying, thus lowering blood glucose. The
ability of GLP-1 to stimulate insulin secretion is accomplished in a blood
glucose-dependent fashion with minimal effects when blood glucose levels are
normal or low. GLP-1 may, thereby, offer an inherent safety advantage over
conventional drugs for the treatment of Type-II diabetes. The results of this
study were published in the August 1996 issue of Diabetes Care. The Company also
initiated similar studies on GLP-1 in Type II diabetic patients during 1996.
TheraTech's successful GLP-1 clinical trial demonstrates the viability of
the Company's proprietary OTM technology for the non-invasive administration of
peptide drugs. Most peptide drugs cannot be administered orally because of their
susceptibility to enzymatic digestion in the gastrointestinal tract and their
large molecular size. GLP-1, for example, is a 30 amino acid peptide with a
molecular weight of approximately 3,300. Further, considering there are an
estimated 12 to 14 million Type II diabetics in the U.S. alone, the GLP-1 OTM
product may offer a significant commercial opportunity for TheraTech.
TheraTech is in discussions with several pharmaceutical companies
regarding the development of peptides using OTM technology. The first
development agreement in this area was signed in January 1997 with Lilly. This
agreement encompasses a multiple-product development and marketing collaboration
program. The products under this agreement will utilize the OTM technology for
the delivery of several Lilly peptide drugs, primarily in the endocrine area.
These peptide drugs are at various stages of preclinical and clinical
development.
Pfizer New Chemical Entity Transdermal Products
TheraTech has had a broad, long-standing agreement with Pfizer to evaluate
and develop transdermal patches for selected new chemical entities under
development at Pfizer. Under this agreement, TheraTech is screening a selected
number of compounds and developing prototype patches for clinical studies on
those compounds satisfying transdermal drug delivery requirements. Based on
Phase I results, further development activities would be subsequently
negotiated.
Nicotine Products for Smoking Cessation
Although TheraTech is developing a nicotine transdermal patch for smoking
cessation therapy for Lavipharm, the Company and Lavipharm are not currently
allocating substantial resources to this product. TheraTech has licensed the
nicotine transdermal patch to Samyang, who is actively developing the product
for South Korea. The Company is allocating resources to develop a nicotine
lozenge for smoking cessation and initiated Phase I clinical trials on this
product during 1996.
9
<PAGE> 10
RISK FACTORS AFFECTING EARNINGS AND STOCK PRICE
The statements contained in this Report on Form 10-K that are not purely
historical are "forward looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All forward looking statements involve various
risks and uncertainties. Forward looking statements contained in this Report
include statements regarding the Company's future product development and
commercialization, market opportunities and acceptance, U.S. and foreign
regulatory approval, expectations, goals, product sales and other revenues,
financial performance, strategies, mission and intentions for the future. Such
forward looking statements are included under Item 1. "Business," Item 2.
"Properties" and Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations." All forward looking statements included in
this Report are made as of the date hereof, based on information available to
TheraTech as of such date, and the Company assumes no obligation to update any
forward looking statement. It is important to note that such statements may not
prove to be accurate and that the Company's actual results and future events
could differ materially from those anticipated in such statements. Among the
factors that could cause actual results to differ materially from the Company's
expectations are those described below and elsewhere in this Report. All
subsequent written and oral forward looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by this section and other factors included elsewhere in this Report.
Early Stage of the Company and its Products; Technological Uncertainty
TheraTech was founded in January 1985 and its revenues to date have
consisted principally of research fees, licensing fees, milestone payments and
other payments from other entities under collaborative research and other
agreements. Revenues from sales of TheraTech's products have been limited to the
initial commercialization of the testosterone product in the U.S. and Europe,
and to royalties from Lavipharm for sales of the nitroglycerin product in
Europe. During the year ended December 31, 1996, revenue earned from Procter &
Gamble and SmithKline Beecham accounted for approximately 42 percent and 33
percent, respectively, of the Company's total revenues. The loss of either of
these customers would have an adverse result on the Company's business,
financial condition and results of operations. To achieve significant revenues
and profitable operations on a continuing basis, the Company and its partners
must successfully develop, manufacture, and license or market additional
products. The Company's two introduced products are at an early stage of
commercialization and many of the Company's drug delivery products and
technologies are at various stages of research and development. The time
necessary to achieve market success for any individual product is long and
uncertain. No assurance can be given that the Company's product development
efforts will be successfully completed, that required regulatory approvals can
be obtained, that products under development can be manufactured at acceptable
cost and with appropriate quality or that any approved products can be
successfully licensed or marketed. In addition, there can be no assurance that
the drug development and marketing efforts of TheraTech or its partners will be
successful.
Competition
Competition for the development of drug delivery products is intense and
expected to increase. TheraTech's competitors include Alza Corporation ("Alza"),
Cygnus Therapeutic Systems ("Cygnus"), Elan Corporation ("Elan"), Ethical
Pharmaceuticals, Ltd., Novartis AG (formerly Ciba-Geigy), Noven Pharmaceuticals
Inc, Schering Plough, 3-M Pharmaceuticals and others. Some of these companies
have substantially greater financial resources and larger research and
development staffs than TheraTech, as well as substantially greater experience
in developing products, in obtaining regulatory approvals and in manufacturing
and marketing pharmaceutical products. Competition with these companies involves
not only product development, but also acquisition of products and technologies
from universities and other research institutions. TheraTech also competes with
pharmaceutical companies, universities and other institutions in the development
of products, technologies and processes that are, or in the future may be, the
basis for competitive products. There can be no assurance that the Company will
successfully develop technologies and products that are more effective or
affordable than those being developed by its competitors. In addition, one or
more of the Company's competitors may achieve product commercialization or
obtain patent protection earlier than TheraTech. Competitive products have
either been approved or are being developed for most of TheraTech's products.
The first pharmaceutical product to reach the market in a therapeutic area often
has a significant competitive advantage relative to later entrants to the
market.
TheraTech expects that its products will compete primarily on the basis of
product efficacy, safety, patient convenience, reliability, price and scope of
patent rights. The Company's competitive position will also depend on its
ability to attract and retain qualified scientific and other personnel, develop
effective proprietary products, implement production and marketing plans, obtain
patent protection and secure adequate capital resources. There can be no
assurance that future competitive forces will not have a material adverse effect
on the Company's business, financial condition or results of operations.
10
<PAGE> 11
Manufacturing and Supply
TheraTech transdermal patches are manufactured using several proprietary
materials and production technologies developed by TheraTech in conjunction with
equipment and material suppliers. The two types of patches, TheraDerm-LRS and
TheraDerm-MTX transdermal drug delivery systems, initially were produced on
separate production lines in TheraTech's pilot production facilities in
accordance with cGMP practices prescribed by the FDA. These facilities continue
to supply TheraTech's transdermal patch developmental requirements and are
capable of producing biobatch lots. TheraTech also manufactures its OTM, lozenge
and controlled release oral dosage forms for development purposes in its
separate solid dosage form pilot manufacturing facility under cGMP practices.
TheraTech performs quality control testing in-house for each aspect of the
manufacturing process, from raw material studies to final product
characterization.
Several materials used in the manufacture of the Company's products are
available only from sole source suppliers. These items have generally been
available to TheraTech and the pharmaceutical industry on commercially
reasonable terms. TheraTech has not experienced undue difficulty acquiring
materials necessary to manufacture clinical quantities of its products.
TheraTech intends to negotiate supply contracts, as appropriate, for its
products and has already entered into contracts on certain materials for its
Androderm production. Any interruption of supply could have a material adverse
effect on the Company's business, financial condition and results of operations.
TheraTech has a 63,000 square foot multi-product cGMP commercial
manufacturing facility. When fully equipped, this facility will be capable of
producing up to approximately 140 million LRS patches and 100 million MTX
patches annually. The LRS portion of the facility was validated and underwent a
Pre-Approval Inspection ("PAI") by the FDA in April 1995. Commercial production
of the testosterone transdermal systems began in July 1995. The MTX portion of
the facility was validated and completed a PAI in August 1996 for the commercial
production of Alora, which began in December 1996. TheraTech believes it has
sufficient capacity to support the initial U.S. and worldwide marketing of its
approved transdermal products. Further product growth may require TheraTech to
expand this facility or obtain a second manufacturing facility. The Company has
installed the equipment necessary for current LRS and MTX production capability
and plans to install additional production equipment to attain full capacity.
Currently, the facility is producing the required commercial quantities of
testosterone transdermal systems and is producing Alora in preparation for
commercial launch. There can be no assurance, however, that the Company will not
encounter manufacturing difficulties with respect to its existing and future
products that could have a material adverse effect on the Company's business,
financial condition or results of operations.
Marketing and Sales
TheraTech is developing several drug delivery products under research and
development, and marketing and distribution agreements pursuant to which the
other contracting parties are responsible for marketing activities. Although
TheraTech believes that its collaborative partners intend to commercialize the
products which they license from the Company, the level of resources and
attention devoted by the collaborative partner to a product is not within the
Company's control.
Collaborative partners are generally responsible for marketing and
distribution activities. Product sales forecasts provided by collaborative
partners are used by TheraTech for production scheduling. Significant changes in
sales forecasts may cause substantial changes in the Company's production and
future product sales. TheraTech's product sales are subject to many variables,
including: the collaborative partners' ability to identify the market; market
acceptance of the product; inventory levels held in the distribution network and
marketing efforts by collaborative partners. As a result, TheraTech's
production, and the resulting product sales, are dependent upon the
collaborative partners marketing and sales efforts. There can be no assurance,
with respect to the market acceptance of the Company's products or the
anticipated sales growth of such products.
Certain of TheraTech's products may be directed toward markets and
indications whose potential has not been fully developed. New products and
technologies could expand the size of a market due to the limitations of
existing therapies. This may require extensive education of physicians and
potential new patients. Physicians may require assistance in understanding the
benefits of these new products and overcoming objections to long-standing ideas
on treatments. Patients may not be aware of their symptoms, or that the symptoms
they are experiencing are signs of a medical condition that now have treatments
available. As a result, the growth of product sales may be significantly
dependent upon this educational process.
11
<PAGE> 12
TheraTech generally has retained manufacturing rights and intends to
manufacture most of its products under development, but may also choose to
license certain manufacturing rights, as appropriate. TheraTech is also
developing several products independently. Initially, the Company intends to
license most of these independently developed products for sale through
pharmaceutical companies. TheraTech's long-term objective is to market some of
its independently developed products. The Company may initially focus on
selected market segments to provide optimum return on the sale of its products.
In the event significant sales of products are not achieved or sustained,
whether through marketing partners or the Company's own sales efforts, the
Company's business, financial condition and results of operations would be
materially adversely affected.
Patents and Proprietary Technology
TheraTech's policy is to file patent applications in appropriate
situations to protect and preserve, for its own use, technology, inventions and
improvements that it considers important to the development of its business. The
Company seeks patent protection for its proprietary technologies and products as
it believes is appropriate in the U.S., Canada, Australia, key European and
Asian countries and other countries. The Company also relies on trade secrets,
know-how, continuing technological innovations and licensing opportunities to
develop and maintain its competitive position.
TheraTech's success will depend, in part, on its ability to obtain or
license patents, protect trade secrets and operate without infringing the
proprietary rights of others. The Company has a number of patents and patent
applications. There can be no assurance, however, that existing patent
applications will mature into issued patents, that the Company will be able to
obtain additional licenses to patents of others or that the Company will be able
to develop its own additional patentable technologies. In addition, there can be
no assurance that any patents issued to the Company will provide it with
competitive advantages or will not be challenged by others or, if challenged,
will be held valid, or that the patents of others will not have a material
adverse effect on the Company's business, financial condition and results of
operations. Furthermore, there can be no assurance that others will not
independently develop similar products, or if patents are issued to the Company,
will not design around such patents.
TheraTech currently holds 23 issued and allowed U.S. patents and an
additional 15 pending U.S. patent applications. Corresponding patents or
applications have been issued or filed in Canada, Australia and key European and
Asian countries including Japan. These international filings are in various
stages of prosecution, some having been issued as patents, with others being
allowed or pending. TheraTech currently is not aware of any claims of
infringement against its products or technologies, except: (i) its Nicotine
TheraDerm-MTX system may infringe patents issued to Elan and other companies;
and (ii) the Company's estradiol/testosterone patent, if successfully marketed
in the U.S., may infringe a U.S. patent (if held valid) issued to the University
of Southern California. Accordingly, there can be no assurance that claims will
not be made against TheraTech or that TheraTech will not be precluded from
marketing certain of its products in the U.S. or elsewhere.
In addition, while TheraTech has no current need to obtain licenses to
patents or other proprietary rights of others, such licenses may be required in
the future. No assurance can be given that any licenses required under any such
patents or proprietary rights would be made available on terms acceptable to the
Company, if at all. If TheraTech does not obtain such licenses, it could
encounter delays in product market introductions while it attempts to design
around such patents, or could find that the development, manufacture or sale of
products requiring such licenses could be foreclosed. In addition, the Company
could experience a loss of revenue, as well as incur substantial costs, in
defending itself and potentially indemnifying its partners in suits involving
such patents or proprietary rights. Further, there can be no assurance that any
patent obtained or licensed by TheraTech will be held valid and enforceable if
asserted by TheraTech against another party.
TheraTech requires each of its employees, consultants and advisors to
execute a confidentiality and assignment of proprietary rights agreement upon
the commencement of employment or consulting relationship with the Company. The
agreements generally provide that all inventions, ideas, discoveries,
improvements, and copyrightable material made or conceived by the individual
arising out of the employment or consulting relationship and all confidential
information developed or made known to the individual during the term of the
relationship shall be the exclusive property of the Company. This information
shall be kept confidential and not disclosed to third parties except in
specified circumstances. The employment agreements generally also contain a
covenant not to compete for twelve months and a prohibition against disclosure
of confidential information for a period of five years after termination of the
relationship. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's proprietary information in the
event of unauthorized use or disclosure of such information.
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<PAGE> 13
Government Regulation and Product Approvals
The production and marketing of the Company's products and its research
and development activities are subject to regulation by numerous governmental
authorities in the U.S. and other countries. In the U.S., pharmaceutical
products are subject to the Federal Food, Drug & Cosmetic Act, the Public Health
Services Act, and other federal statutes and regulations. These regulations and
statutes influence the testing, manufacture, labeling, storage, record keeping,
advertising, promotion and approval of such pharmaceutical products. Failure to
comply with applicable requirements can result in fines, recall or seizure of
products, total or partial suspension of production, refusal by the government
to approve marketing of the product and criminal prosecution.
In order to obtain FDA approval of a new product, the Company must submit
proof of safety, efficacy and stability, and validate its manufacturing
processes. These efforts can entail extensive preclinical, clinical and
laboratory testing in order to prepare the necessary application for FDA
approval. The testing and application process is expensive and time consuming,
often taking several years to complete. There is no assurance that the FDA will
act favorably or quickly in reviewing such applications. With respect to
patented products or technologies, delays imposed by the governmental approval
process may materially reduce the period during which the Company will have the
exclusive right to exploit them.
The FDA approval process for a new pharmaceutical product includes: (i)
preclinical laboratory and animal studies to enable FDA approval of an
Investigational New Drug ("IND") application; (ii) initial IND clinical studies
to define safety and dose parameters; (iii) well-controlled IND clinical trials
to demonstrate product efficacy and safety in the target population (pivotal
trials); and, (iv) submission and FDA approval of an NDA. Preclinical studies
involve laboratory evaluation of product characteristics and animal studies to
assess the efficacy and safety of the product. Human clinical trials are
typically conducted in three sequential phases with some amount of overlap
allowed. Phase I trials normally consist of testing the product in a small
number of volunteers for safety and pharmacokinetic parameters using single and
multiple dosing regimens. In Phase II, continued safety and initial efficacy of
the product is evaluated in a somewhat larger patient population for dose
ranging. Phase III trials typically involve additional testing for safety and
clinical efficacy using multiple dosage regimens in an expanded patient
population at multiple clinical testing centers. A clinical plan (or
"protocol"), accompanied by the approval of the institution participating in the
trials, must be submitted to the FDA prior to commencement of each clinical
trial. The FDA may order the temporary or permanent discontinuation of clinical
trials at any time.
All the results of the preclinical and clinical studies on a
pharmaceutical product are submitted to the FDA in the form of an NDA for
approval to commence commercial distribution. In responding to an NDA, the FDA
may grant marketing approval, require additional testing and/or information, or
deny the application. Continued compliance with all FDA requirements and the
conditions in an approved application, including product specification,
manufacturing process, labeling, promotional material, record keeping and
reporting requirements, is necessary throughout the life of the product. Failure
to comply, or the occurrence of unanticipated adverse effects during commercial
marketing, could lead to the need for product recall or other FDA-initiated
actions that could delay further marketing until the products or processes are
brought into compliance.
The facilities of each pharmaceutical manufacturer must be registered with
and approved by the FDA. Continued registration requires compliance with cGMP
regulations. Manufacturers must also be registered with the Drug Enforcement
Administration ("DEA") and similar state and local regulatory authorities if
they handle controlled substances, and with the Environmental Protection Agency
("EPA") and similar state and local regulatory authorities to insure efficient
emissions and control is maintained. Certain of the drugs used in products being
developed by the Company are controlled substances and are subject to regulation
by the DEA and state and local authorities. Each of these organizations conduct
periodic establishment inspections to confirm continued compliance with its
regulations. Failure to comply with any of these regulations could result in
fines, interruption of production and criminal prosecution.
For international markets, a pharmaceutical company is subject to
regulatory requirements, interactions and product approvals substantially the
same as those in the U.S. Although the technical details are different, the
trials are substantially the same as the Phase I, II and III trial definitions
in the U.S. regulations. For most of the Company's development agreements, the
collaborative partner is responsible for regulatory interactions. However, the
Company is responsible for part, or all, of the regulatory interactions on its
independently developed products and some of its collaborative products. The
time and cost required to obtain these international market approvals may be
more or less than that required for FDA approval.
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<PAGE> 14
There can be no assurance that required approvals from the FDA or foreign
regulatory authorities will be obtained on a timely basis, if at all, with
respect to TheraTech's products currently under development. Furthermore, future
regulatory action, and government compliance measures could significantly impact
the Company's launched products and those under development and subject the
Company to unexpected delays, costs and expenses. Any failure or material delay
in obtaining required regulatory approvals or in satisfying applicable
government regulations could affect significantly the Company's future revenues
and have a material adverse effect on the Company's business, financial
condition and results of operations.
Product Liability Exposure; Limited Insurance
The Company's business exposes it to potential product liability risks
which are inherent in the testing, manufacturing, marketing and sale of
therapeutic products. Product liability insurance for the pharmaceutical
industry generally is expensive, to the extent it is available at all. TheraTech
has limited product liability insurance, and there can be no assurance that it
will be able to maintain such insurance on acceptable terms, that the Company
will be able to secure increased coverage as the commercialization of its
products increase or that the insurance will provide adequate protection against
potential liabilities. A successful claim brought against the Company in excess
of the Company's insurance coverage could have a material adverse effect on the
Company's business, financial condition and results of operations.
Possible Limitations on Health Care Reimbursement
TheraTech's ability to successfully commercialize its products may depend
in part on the extent to which reimbursement for the costs of such products and
related treatments will be available from government health administration
authorities, private health coverage insurers and other organizations.
Significant uncertainty exists as to the reimbursement status of newly approved
health care products, and there can be no assurance that adequate third-party
coverage will be available for the Company to maintain price levels or volume
sufficient to realize an appropriate return on its investment in developing new
drug delivery systems. Government and other third-party payors are increasingly
attempting to contain health care costs by limiting both coverage and the level
of reimbursement for new therapeutic products approved for marketing and
refusing, in some cases, to provide any coverage for indications for which the
FDA and other national health regulatory authorities have not granted marketing
approval. If adequate coverage and reimbursement levels are not provided by
government and third-party payors for uses of the Company's products, market
acceptance of these products could be materially adversely affected.
EMPLOYEES
As of February 28, 1997, TheraTech had 231 full time and 10 part-time
employees, of whom 26 hold Ph.D., Pharm.D. and/or M.D. degrees and 42 hold
master's degrees. Of the total number, 152 employees were engaged in research
and development activities, including: 43 in research; 43 in clinical studies,
regulatory affairs and quality control; and 66 in process development and pilot
production, 54 employees were in manufacturing, and 35 employees were in finance
and administration.
TheraTech's management team is composed of pharmaceutical industry
specialists, including individuals with experience ranging from project
conception and design to regulatory approval process and commercial production.
ITEM 2. PROPERTIES
TheraTech's executive and principal facilities are located in Salt Lake City,
Utah. These facilities include approximately 64,000 square feet of research and
development, pilot manufacturing and packaging, and administrative space under
several leases. Certain of these leases expire in May 1997 and September 1997,
and the Company currently leases some of its space on a month-to-month basis as
a result of a recently expired lease. Certain of the current leases have
renewal options of six months and one year. During 1996, a property management
company acquired two of the Salt Lake City buildings in which the Company
leases space. TheraTech and the property management company are negotiating to
consolidate TheraTech's space from two adjacent buildings it currently occupies
into one building. Upon completion of this arrangement, TheraTech will no
longer be on a month-to-month lease in the building it will be vacating.
Additionally, TheraTech intends to consolidate several of the leases executed
in the course of its growth, into one overall lease for the one occupied
building. The new lease is expected to have a one-year term with a two-year
renewal option. TheraTech has also entered into a 40-year lease, with an option
to renew for an additional ten years, on approximately seven acres of land
located in the University of Utah Research Park for its commercial
manufacturing facility and has right of first refusal on an additional 16
adjacent acres. TheraTech also maintains approximately 3,000 square feet of
leased space for business development and related purposes in Tokyo, Japan.
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<PAGE> 15
Included in the Utah facilities, TheraTech currently has two pilot cGMP
transdermal manufacturing facilities and one pilot cGMP manufacturing facility
for oral products. These facilities utilize small scale production machines for
product development and clinical production activities. In addition, the Company
has installed similar machines, with modifications for higher throughput and
increased manufacturing, in its substantially larger, multi-product transdermal
manufacturing facility also located in Salt Lake City, Utah. This 63,000 square
foot building is owned by TheraTech and has been approved by the FDA for the
commercial production of Androderm and Alora. The manufacturing facility has
also been approved by the U.K. Medicines Control Administration for the
production of Andropatch.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation, other than legal and
arbitration proceedings incurred in the ordinary course of business. There can
be no assurance that the Company's pending or future legal proceedings will not
have a material adverse effect on the Company's business, financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
TheraTech's common stock is traded on the Nasdaq National Market under the
Symbol: THRT. On May 30, 1996, the Company announced that its Board of Directors
had approved a 3-for-2 stock split, that was effected in the form of a stock
dividend on June 28, 1996 to stockholders of record as of the close of business
June 14, 1996. The quarterly high and low sales prices for the calendar years
1995 and 1996 as reported are shown below (prices for the periods prior to the
3-for-2 stock split effected June 28, 1996, have been restated):
<TABLE>
<CAPTION>
1995: HIGH LOW
---- ---
<S> <C> <C>
First Quarter $ 7.83 $ 5.83
Second Quarter 9.50 7.17
Third Quarter 11.50 9.00
Fourth Quarter 13.67 10.00
</TABLE>
<TABLE>
<CAPTION>
1996: HIGH LOW
---- ---
<S> <C> <C>
First Quarter $16.83 $10.42
Second Quarter 16.33 12.00
Third Quarter 14.00 8.38
Fourth Quarter 13.63 9.38
</TABLE>
As of December 31, 1996, there were 243 stockholders of record and
approximately 3,300 beneficial owners of TheraTech stock. TheraTech has never
declared or paid cash dividends on its common stock and does not anticipate
paying cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included under "Selected
Consolidated Financial Data" in the Company's 1996 Annual Report to Stockholders
and is incorporated herein by reference.
15
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is included under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Company's 1996 Annual Report to Stockholders and is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included in the "Financial
Section" in the Company's 1996 Annual Report to Stockholders and is incorporated
herein by reference. Such information is listed under Item 14(a)1 of Part IV of
this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is included under "Election of
Directors," "The Board of Directors and Committees," "Executive Officers" and
"Other Matters" in the Company's Proxy Statement to be filed in connection with
its 1997 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under "Executive
Compensation" in the Company's Proxy Statement to be filed in connection with
its 1997 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under "Security
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy
Statement to be filed in connection with its 1997 Annual Meeting of Stockholders
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under "Certain
Relationships and Related Transactions" in the Company's Proxy Statement to be
filed in connection with its 1997 Annual Meeting of Stockholders and is
incorporated herein by reference.
16
<PAGE> 17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements and Report of Independent Auditors.
The following financial statements of the Company and Report of
Independent Auditors are contained in the Company's 1996 Annual
Report to Stockholders and are incorporated by reference in Item 8
of Part II of this Report on Form 10-K:
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Auditors
2. Financial Statement Schedules.
The following financial statement schedules are filed as part of
this Report on Form 10-K and are incorporated herein by reference:
All schedules have been omitted because the information required to
be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
3. Exhibits.
The exhibits listed in the accompanying index to exhibits are filed
or incorporated by reference as part of this Report on Form 10-K.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1996.
(c) See Item 14(a)3 above.
(d) See Item 14(a)2 above.
17
<PAGE> 18
INDEX TO EXHIBITS
(ITEM 14(c))
<TABLE>
<CAPTION>
NUMBER EXHIBITS
- ------ --------
<S> <C>
3.1 Restated Certificate of Incorporation of the Company. (2)
3.2 Amended Bylaws of the Company. (2)
3.3 Certificate of Amendment to Restated Certificate of Incorporation of
the Company.
4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3.
4.2 Specimen Common Stock Certificate of the Company. (1)
10.18* TheraTech, Inc. 1992 Employees' Stock Option Plan. (4)
10.19* TheraTech, Inc. 1992 Directors' Stock Option Plan. (3)
11 Statement regarding computation of per share earnings.
13.1 Certain portions of the TheraTech, Inc. 1996 Annual Report to
Stockholders, which portions are incorporated by reference into Part II
of this Report on Form 10-K.
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Auditors, Ernst & Young LLP.
27.1 Financial Data Schedule for the year ended December 31, 1996.
</TABLE>
1 Incorporated by reference to identically numbered Exhibit to the Company's
Registration Statement of Form S-1 (Commission File No. 33-46155), which
became effective on March 13, 1992.
2 Incorporated by reference to identically numbered Exhibit to the Company's
Registration Statement on Form S-1 (Commission File No. 33-55122), which
became effective on December 17, 1992.
3 Incorporated by reference to the exhibit filed with the Company's Proxy
Statement filed in connection with its 1994 Annual Meeting of
Stockholders.
4 Incorporated by reference to the exhibit filed with the Company's Proxy
Statement filed in connection with its 1996 Annual Meeting of
Stockholders.
* Management contracts or compensatory plans or arrangements.
18
<PAGE> 19
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 in Salt Lake City,
State of Utah, on the 24th day of March 1997.
TheraTech, Inc.
By: DINESH C. PATEL
Dinesh C. Patel, Ph.D.
President and Chief Executive Officer and Director
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 as of the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
DINESH C. PATEL President, Chief Executive Officer March 24, 1997
- ------------------------- and Director (Principal Executive Officer)
Dinesh C. Patel, Ph.D.
ALEXANDER L. SEARL Senior Vice President and Chief Financial Officer March 24, 1997
- ------------------------- (Principal Financial and Accounting Officer)
Alexander L. Searl
WILLIAM I. HIGUCHI Chairman of the Board of Directors March 24, 1997
- -------------------------
William I. Higuchi, Ph.D.
GARY L. CROCKER Director March 24, 1997
- -------------------------
Gary L. Crocker
JAY J. PISIK Director March 24, 1997
- -------------------------
Jay J. Pisik
JAMES T. O'BRIEN Director March 24, 1997
- -------------------------
James T. O'Brien
BOYD J. POULSEN Director March 24, 1997
- -------------------------
Boyd J. Poulsen, Ph.D.
</TABLE>
19
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER EXHIBITS
- ------ --------
<S> <C>
3.1 Restated Certificate of Incorporation of the Company. (2)
3.2 Amended Bylaws of the Company. (2)
3.3 Certificate of Amendment to Restated Certificate of Incorporation of
the Company.
4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3.
4.2 Specimen Common Stock Certificate of the Company. (1)
10.18* TheraTech, Inc. 1992 Employees' Stock Option Plan. (4)
10.19* TheraTech, Inc. 1992 Directors' Stock Option Plan. (3)
11 Statement regarding computation of per share earnings.
13.1 Certain portions of the TheraTech, Inc. 1996 Annual Report to
Stockholders, which portions are incorporated by reference into Part II
of this Report on Form 10-K.
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Auditors, Ernst & Young LLP.
27.1 Financial Data Schedule for the year ended December 31, 1996.
</TABLE>
1 Incorporated by reference to identically numbered Exhibit to the Company's
Registration Statement of Form S-1 (Commission File No. 33-46155), which
became effective on March 13, 1992.
2 Incorporated by reference to identically numbered Exhibit to the Company's
Registration Statement on Form S-1 (Commission File No. 33-55122), which
became effective on December 17, 1992.
3 Incorporated by reference to the exhibit filed with the Company's Proxy
Statement filed in connection with its 1994 Annual Meeting of
Stockholders.
4 Incorporated by reference to the exhibit filed with the Company's Proxy
Statement filed in connection with its 1996 Annual Meeting of
Stockholders.
* Management contracts or compensatory plans or arrangements.
20
<PAGE> 21
THERATECH, INC.
-----------------
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Research and development $ 20,413 $ 15,998 $ 3,228 $ 2,063 $ 2,481
Product sales 11,296 4,318 -- -- --
Licensing 2,999 2,715 4,277 3,300 --
Interest and other 1,653 1,490 1,282 902 285
-------- -------- -------- -------- --------
Total revenues 36,361 24,521 8,787 6,265 2,766
Costs and expenses:
Research and development 18,086 19,959 15,581 8,957 5,766
Cost of products sold 8,009 4,711 -- -- --
General and administrative 4,935 6,694 4,545 3,617 2,728
Interest and other 1,106 998 298 120 111
Purchase of in-process technology -- -- -- 1,446 --
-------- -------- -------- -------- --------
Total costs and expenses 32,136 32,362 20,424 14,140 8,605
-------- -------- -------- -------- --------
Net income (loss) $ 4,225 $ (7,841) $(11,637) $ (7,875) $ (5,839)
======== ======== ======== ======== ========
Net income (loss) per share $ 0.20 $ (0.40) $ (0.61) $ (0.50) $ (0.47)
======== ======== ======== ======== ========
Shares used in calculation of net income (loss)
per share 21,587 19,790 18,972 15,695 12,542
======== ======== ======== ======== ========
BALANCE SHEET DATA
Cash, cash equivalents and investments $ 25,215 $ 25,098 $ 29,050 $ 18,749 $ 25,746
Working capital 22,302 14,530 20,012 14,831 25,268
Total assets 53,847 50,836 49,818 28,060 28,420
Notes payable and capital lease obligations,
less current portion 8,661 10,320 8,662 652 404
Accumulated deficit (33,061) (37,286) (29,445) (17,808) (9,934)
Stockholders' equity 36,022 30,391 37,307 22,595 26,681
</TABLE>
<PAGE> 22
THERATECH, INC.
----------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Since its inception in January 1985, TheraTech has devoted substantially all of
its resources to drug delivery research and development programs. TheraTech
develops advanced, controlled release drug delivery products which administer
drugs through the skin, by oral delivery to the gastrointestinal tract, through
tissues in the oral cavity and by other means. TheraTech product development
activities have been conducted independently or pursuant to collaborative
research and development agreements generally with pharmaceutical companies
("Collaborative Partners"). For independently developed products, TheraTech has
entered into licensing, marketing and distribution agreements generally with
pharmaceutical companies to market TheraTech manufactured products, or has
transferred the technology to other companies. TheraTech continues to devote
substantial resources to the development of drug delivery technologies and
product development programs.
The Company has entered into various product development, licensing, marketing,
manufacturing and supply agreements with Collaborative Partners. Product
development and licensing agreements generally provide for TheraTech to receive
payments in various forms, including licensing fees and other payments upon the
execution of an agreement, milestone payments upon achievement of certain
technical and regulatory goals and periodic payments in the form of cost
reimbursements for product development and clinical evaluation of a specified
product, including a portion of general and administrative expenses.
Manufacturing and supply agreements provide for TheraTech to manufacture and
transfer products to Collaborative Partners, which allows TheraTech to earn
product sales revenues in a variety of ways. In general, product sales represent
contract payments or sales to TheraTech's marketing partners for resale
purposes. Product sales may be recognized based on one or a combination of the
following: (i) TheraTech's fully burdened manufacturing cost; (ii) a fixed or
variable manufacturing profit; (iii) a royalty on the partners product sales;
and/or (iv) a transfer of product where the price is based on a percentage of
the marketing partners' sales to their clients. Certain agreements also require
the marketing partner to meet certain production volumes or pay TheraTech's
fixed production costs. Accordingly, TheraTech's product sales do not
necessarily reflect the existing or future market demand for such products.
The Company's results of operations may vary significantly from quarter to
quarter and depend, among other factors, on the signing of new product
development agreements, the timing of fees and milestone payments made by
Collaborative Partners, the progress of clinical trials, product sales levels
and costs associated with the manufacturing processes. The timing of the
Company's research and development revenues may not match the timing of the
associated expenses. The amount of revenues in any given period is not
necessarily indicative of future revenues.
To date, three research and development programs have resulted in approved
products. In late December 1996, TheraTech received marketing clearance from the
U.S. Food and Drug Administration ("FDA") for the Alora(R) Estradiol Transdermal
System for women, the Company's second commercial product in the U.S.
TheraTech's first commercial product in the U.S. was the Androderm(R)
Testosterone Transdermal System for men, approved by the FDA in September 1995.
Both marketing clearances were received within one year of their respective
initial submissions. The Testosterone Transdermal System for men has also been
approved in certain European countries under different trade names. TheraTech
also has a nitroglycerin transdermal product which has been approved in certain
European countries and was launched by TheraTech's marketing partners in Greece
during 1996 and in Italy and France during 1995.
TheraTech has negotiated marketing agreements for its Testosterone Transdermal
System with several partners covering various countries. These partners and
countries include SmithKline Beecham in the U.S., Canada, Australia, New Zealand
and Western Europe excluding France, Spain, Portugal and Scandinavia;
Laboratories Fournier S.C.A. ("Fournier") in France and French-speaking Africa;
Compania Espanola de la Penicilina y Antibioticos, S.L. ("CEPA") in Spain;
Produtos Farmaceuticos Bioty, Lda. ("Bioty") assigned its marketing rights to
Laborterapia - Produtos Farmaceuticos, S.A. ("Laborterapia") in Portugal; Astra
AB ("Astra") in Scandinavia; Wyeth-Ayerst International, Inc. ("Wyeth-Ayerst")
in Mexico, Central and South America, non-French-speaking Africa and the Middle
East; Grelan Pharmaceutical Co., Ltd. ("Grelan") in Japan and Samyang
Corporation ("Samyang") in South Korea. This product will be marketed under the
trade name Androderm in the U.S. and Canada.
1
<PAGE> 23
THERATECH, INC.
----------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TheraTech was responsible for filing with the FDA the Androderm New Drug
Application ("NDA") in the United States. In all other countries, TheraTech's
partners are responsible for filing and obtaining regulatory approvals to market
the testosterone product. The ability to market and the timing of the
testosterone product launch in the various countries is dependent upon obtaining
the necessary regulatory approvals. In April 1996, TheraTech and Astra announced
that their testosterone transdermal patch had been granted marketing
authorization in Sweden by the Swedish Medical Products Agency under the trade
name Atmos(R). In July 1996, TheraTech and SmithKline Beecham announced that
their testosterone transdermal patch had been granted a marketing license in the
United Kingdom by the Medicines Control Administration under the trade name
Andropatch(TM). In September 1996, TheraTech and Astra announced that Atmos had
been granted marketing approval in Denmark by the Danish National Board of
Health. Also in September 1996, the Swiss regulatory agency approved the
testosterone transdermal patch for marketing in Switzerland by SmithKline
Beecham.
In April 1996, TheraTech established a wholly owned subsidiary, Natrapac, Inc.
("Natrapac"), to conduct third party non-pharmaceutical packaging operations.
Also in April 1996, Natrapac entered into a nine month contract to package a
client company's product using certain technology developed by TheraTech.
On June 28, 1996, TheraTech effected a 3-for-2 split of the Company's common
stock in the form of a stock dividend. The accompanying financial statements
have been adjusted retroactively for all periods presented to reflect the split.
RESULTS OF OPERATIONS
For the year ended December 31, 1996, the Company had net income of $4,225,000,
equal to $0.20 per share. This compares to a net loss of $7,841,000 or $0.40 per
share, and a net loss of $11,637,000 or $0.61 per share for the years ended
December 31, 1995 and 1994, respectively. The Company had total revenues of
$36,361,000, $24,521,000 and $8,787,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
RESEARCH AND DEVELOPMENT REVENUES were $20,413,000, $15,998,000 and $3,228,000
for the years ended December 31, 1996, 1995 and 1994, respectively. During 1996,
TheraTech earned revenues for: (i) estradiol commercialization activities
performed for Procter & Gamble Pharmaceuticals, Inc. ("Procter & Gamble"), which
included a milestone payment for the FDA clearance in December 1996 to market
the estradiol transdermal system for women in the U.S. under the trade name
Alora; (ii) estradiol/progestin combination product development activities also
with Procter & Gamble, which completed Phase II studies and initiated Phase III
clinical trials; (iii) development activities on the testosterone single patch
per day product for SmithKline Beecham and Wyeth-Ayerst, which included filing a
Supplemental New Drug application ("SNDA") with the FDA in October 1996; (iv)
product development activities performed for Meiji Milk Products Co. ("Meiji")
in the form of milestone payments; and (v) providing supplies for additional
Androderm clinical trials, supporting Collaborative Partners with foreign
regulatory filings and other research and development activities. The milestone
payment received for the FDA approval of Alora is primarily the reason for the
increase in revenues from 1995 to 1996.
The increase in research and development revenues from 1994 to 1995 was
primarily the result of an agreement signed in 1995 with Procter & Gamble to
develop and market new hormone replacement products for women. Under this
agreement, TheraTech received significant milestone payments for the estradiol
NDA submission and for the completion of Phase I studies on the
estradiol/progestin combination product. TheraTech also earned from Procter &
Gamble cost reimbursements of research and development expenses for these
products. During 1995, milestone and cost reimbursement payments were also
received from SmithKline Beecham, Grelan and Nichiiko Pharmaceutical Co., Ltd.
PRODUCT SALES for the years ended December 31, 1996 and 1995 were $11,296,000
and $4,318,000, respectively. Product sales during 1996 relate primarily to
TheraTech's testosterone transdermal products including Androderm, Andropatch
and Atmos. Product sales during 1996 also include the Natrapac client contract,
repackaging of patient and physician inserts into cartons of Androderm, payments
for fixed production costs and royalties on sales by Lavipharm S.A.
("Lavipharm") of Nitroglycerin in Italy, France and Greece.
Product sales during 1995 were primarily from the launch of Androderm in the
U.S. The Company also recognized revenue on Lavipharm's sales of Nitroglycerin
which was launched in Italy and France during 1995.
2
<PAGE> 24
THERATECH, INC.
----------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LICENSING REVENUES were $2,999,000, $2,715,000 and $4,277,000 for the years
ended December 31, 1996, 1995 and 1994, respectively. During the 1996 period,
TheraTech earned licensing revenues from SmithKline Beecham, Wyeth-Ayerst and
Astra for achieving milestones under their testosterone product licensing
agreements and from Samyang for milestones under an estradiol/progestin
combination product licensing agreement and testosterone product licensing
agreement.
During 1995, TheraTech earned licensing fees by achieving milestones for the
approval of Androderm in the United States and upon regulatory submission of the
testosterone transdermal product in France. Also during the period, the Company
earned fees upon signing agreements with Wyeth-Ayerst and Astra for distribution
of the testosterone transdermal product. Licensing fees also included the
payment by Procter & Gamble for worldwide (excluding Asian countries) marketing
rights covering new female hormone replacement products.
During 1994, TheraTech earned a milestone payment from SmithKline Beecham, under
a North American marketing and distribution agreement for the testosterone
transdermal product, upon filing an NDA with the FDA. TheraTech also earned
licensing fees from signing European marketing and distribution agreements with
SmithKline Beecham and Fournier for the testosterone transdermal product.
INTEREST AND OTHER REVENUES were $1,653,000, $1,490,000 and $1,282,000 for the
years ended December 31, 1996, 1995 and 1994, respectively. Interest and other
revenues consist primarily of interest income. The Company earned interest
income of $1,296,000, $1,438,000 and $1,252,000 for the years ended December 31,
1996, 1995 and 1994, respectively. Interest income during the 1996 period
decreased from the 1995 period due to lower yields on lower average balances in
cash, cash equivalents and investments. Interest income during 1995 increased
over 1994 due to higher investment returns on lower average balances in cash,
cash equivalents and investments.
Other revenues in the 1996 period consisted primarily of a settlement with a
supplier of manufacturing materials, intermediate materials sold to a
Collaborative Partner and a foreign currency transaction gain on a Collaborative
Partner payment.
RESEARCH AND DEVELOPMENT EXPENSES for the years ended December 31, 1996, 1995
and 1994 were $18,086,000, $19,959,000 and $15,581,000, respectively. This
reduction in 1996 compared to 1995 was the result of Phase III clinical trials
and NDA preparation activities for the estradiol transdermal product and
Androderm commercialization activities conducted during 1995 and not repeated in
1996. This decrease was partially offset by additional spending on the
following: (i) commercialization, Pre-Approval Inspection preparation and
follow-up activities for the estradiol transdermal product; (ii)
estradiol/progestin combination product development activities including
completion of Phase II studies and initiation of Phase III clinical trials;
(iii) testosterone single patch per day product development activities; (iv)
female testosterone product Phase I and Phase II clinical activities; and (v)
other projects funded by Collaborative Partners and by TheraTech.
During 1995, research and development expenses included the completion of Phase
III clinical studies and the NDA submission for TheraTech's estradiol
transdermal product, validation of the manufacturing process for Androderm,
preproduction start-up expenses and costs associated with new and existing
programs. Preproduction start-up expenses which included costs associated with
staffing, training and operating the Company's commercial manufacturing facility
were required to obtain regulatory approvals and prepare for product
commercialization.
The 1994 expenses included the initiation of Phase III clinical studies for the
Company's estradiol transdermal product, preproduction start-up expenses, costs
of preparing the NDA for the testosterone transdermal product filed in September
1994, and the hiring of additional personnel.
COST OF PRODUCTS SOLD for the years ended December 31, 1996 and 1995 were
$8,009,000 and $4,711,000, respectively, which included direct and indirect
manufacturing costs attributable to the production of Androderm, Atmos and
Andropatch, and the packaging cost associated with the Natrapac client contract.
Cost of products sold as a percentage of product sales decreased from 109
percent in 1995 to 71 percent in 1996. This decrease resulted from improved
production efficiencies in 1996 as compared to 1995 when TheraTech incurred
higher startup costs associated with initial production of its Androderm
product.
3
<PAGE> 25
THERATECH, INC.
----------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL AND ADMINISTRATIVE EXPENSES for the years ended December 31, 1996, 1995
and 1994 were $4,935,000, $6,694,000 and $4,545,000, respectively. The reduction
of expenses in the 1996 period was primarily the result of 1995 outside services
associated with the negotiation of several contracts being greater than such
services in 1996. Expenses in 1995 included outside legal and consulting fees
incurred in connection with marketing and supply agreements, costs to re-acquire
the testosterone transdermal product marketing rights in Scandinavia, as well as
the costs associated with growth in Japanese operations. Expenses during 1994
included increased operations in Japan, consulting and legal fees, the write-off
of certain patent and patent application costs, loan origination fees, costs
associated with the Company's public offering in February 1994, along with
increases in staffing and other related business expenses. These costs were
partially offset by a decrease in business development expenses and amortization
of deferred compensation expense related to the grant of stock options.
INTEREST AND OTHER EXPENSES for the years ended December 31, 1996, 1995 and 1994
were $1,106,000, $998,000 and $298,000, respectively. Interest and other
expenses consist primarily of interest expense. The Company incurred interest
expense of $1,060,000, $972,000 and $296,000 for the years ended December 31,
1996, 1995 and 1994, respectively. The increase in interest expense from 1995 to
1996 reflects an increase in capital lease obligations in late 1995 partially
offset by the payment of notes payable and capital lease obligations during
1996.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, TheraTech has funded its operations primarily through
equity and debt financing, collaborative research and development agreements,
product sales, licensing fees, and other revenues. As of December 31, 1996 and
1995, TheraTech had cash, cash equivalents and investments totaling $25,215,000
and $25,098,000, respectively. This increase was primarily the result of cash
provided by operating and investing activities, partially offset by cash used in
financing activities reflected in the Company's Consolidated Statements of Cash
Flows.
Net cash provided by operating activities for the year ended December 31, 1996
was $4,039,000 compared to net cash used in operating activities of $4,300,000
for 1995. Cash provided in 1996 was primarily a result of net income as compared
to net losses in earlier years, partially offset by increases in contracts and
accounts receivable and a decrease in accounts payable and accrued liabilities.
Cash used in operating activities during 1995 was primarily due to the net loss,
together with increases in contracts and accounts receivable and inventory,
partially offset by an increase in unearned revenue and accounts payable.
The net cash provided by operating activities in 1996 is not necessarily
indicative of future levels. As a result of changing levels of product sales and
production costs, the timing of milestone payments and licensing fees, and the
timing of expenditures for new and existing product development programs, net
income and accordingly the levels of net cash from operations will vary from
year to year.
The Company's investing activities during the year ended December 31, 1996
provided $1,390,000 compared to cash used of $1,970,000 for 1995. Cash provided
by investing activities during 1996 was primarily the result of sales of
securities and the release of cash previously restricted as part of a financing
agreement covenant. These increases in cash were partially offset by purchases
of securities and expenditures for plant expansion costs and the purchase of
equipment for manufacturing and research and development.
The Company's future capital expenditure requirements will depend upon numerous
factors, including the progress of research and development activities, the
resources that the Company devotes to the independent development of products,
and the need for additional manufacturing plant and equipment due to the demand
for its other products, if and when approved.
Net cash used in financing activities for the year ended December 31, 1996 was
$739,000 compared to net cash provided by financing activities of $3,271,000 for
the year ended December 31, 1995. Cash used in 1996 consisted primarily of
payments on notes payable and capital lease obligations, largely offset by
proceeds from the issuance of stock in both the employee stock purchase plan and
the employee stock option plan and from a short-term note with a client company.
In comparison, cash provided in 1995 was primarily proceeds from notes payable
and capital lease obligations and proceeds from the issuance of stock in both
the employee stock purchase plan and the employee stock option plan, partially
offset by payments on notes payable and capital lease obligations. Based upon
current expectation of operations and capital expenditures for 1997, the Company
anticipates that its available cash, cash equivalents and investments plus
anticipated revenues from
4
<PAGE> 26
THERATECH, INC.
----------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
collaborative agreements, product licensing and sales, interest income and bank
financing should be sufficient to fund its current capital requirements and
operating activities.
5
<PAGE> 27
THERATECH, INC.
-----------------
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
----------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Research and development revenue under
collaborative agreements $20,413,161 $ 15,997,563 $ 3,227,859
Product sales 11,296,298 4,318,193 --
Licensing 2,999,000 2,715,000 4,277,584
Interest and other 1,653,083 1,490,777 1,282,100
----------- ------------ ------------
Total revenues 36,361,542 24,521,533 8,787,543
Costs and expenses:
Research and development 18,086,153 19,959,358 15,581,433
Cost of products sold 8,008,967 4,711,102 --
General and administrative 4,935,429 6,694,112 4,545,309
Interest and other 1,106,084 997,550 297,792
----------- ------------ ------------
Total costs and expenses 32,136,633 32,362,122 20,424,534
----------- ------------ ------------
Net income (loss) $ 4,224,909 $ (7,840,589) $(11,636,991)
=========== ============ ============
Net income (loss) per share $ 0.20 $ (0.40) $ (0.61)
=========== ============ ============
Shares used in calculation of net income (loss)
per share 21,586,928 19,789,460 18,972,185
=========== ============ ============
</TABLE>
See accompanying notes.
<PAGE> 28
THERATECH, INC.
-----------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 19,116,991 $ 14,554,352
Short-term investments 4,097,419 4,164,633
Contracts and accounts receivable 4,726,112 2,157,559
Inventories 2,277,021 2,418,516
Prepaid expenses 36,127 147,860
------------ ------------
Total current assets 30,253,670 23,442,920
Investments in long-term securities 2,000,468 6,379,122
Plant and equipment:
Plant 9,301,171 9,291,313
Equipment 11,950,618 9,253,425
Leasehold improvements 986,703 918,484
Construction in progress 2,929,228 2,366,678
------------ ------------
25,167,720 21,829,900
Less accumulated depreciation and amortization (5,737,034) (3,666,441)
------------ ------------
Net plant and equipment 19,430,686 18,163,459
Other assets 2,161,978 2,850,553
------------ ------------
Total assets $ 53,846,802 $ 50,836,054
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,360,512 $ 2,039,959
Accrued liabilities 2,383,698 2,392,706
Current portion of notes payable and capital lease obligations 1,609,587 2,047,124
Unearned revenue 2,597,942 2,432,822
------------ ------------
Total current liabilities 7,951,739 8,912,611
Notes payable, less current portion 5,684,880 6,569,286
Capital lease obligations, less current portion 2,975,864 3,750,707
Unearned revenue 1,212,000 1,212,000
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value:
Authorized - 50,000,000 shares; issued and outstanding 20,563,395
as of December 31, 1996 and 20,007,708 as of December 31, 1995 205,634 200,078
Additional paid-in capital 69,116,551 67,509,148
Unrealized gain (loss) on investments held as available-for-sale -- 79,941
Accumulated deficit (33,061,163) (37,286,072)
Cumulative translation adjustment (238,703) (111,645)
------------ ------------
Total stockholders' equity 36,022,319 30,391,450
------------ ------------
Total liabilities and stockholders' equity $ 53,846,802 $ 50,836,054
============ ============
</TABLE>
See accompanying notes.
<PAGE> 29
THERATECH, INC.
-----------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL UNREALIZED
--------------------------- PAID-IN GAIN (LOSS) ON
SHARES PAR VALUE CAPITAL INVESTMENTS
------ --------- ------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 16,200,844 $162,009 $ 40,241,041 $ --
Common stock issued in public offering,
net of issuance costs of $1,680,737 3,000,000 30,000 25,539,263 --
Common stock issued for in-process
technology 45,000 450 330,863 --
Common stock issued upon exercise
of stock options 340,838 3,408 215,697 --
Common stock issued in the employee
stock purchase plan 12,615 126 87,687 --
Compensation expense related to the
grant of stock options -- -- 169,524 --
Unrealized loss on investments held
as available-for-sale -- -- -- (52,958)
Cumulative translation adjustment
Net loss -- -- -- --
---------- -------- ------------ ---------
Balance at December 31, 1994 19,599,297 195,993 66,584,075 (52,958)
Common stock issued upon exercise
of stock options 377,025 3,770 742,909 --
Common stock issued in the employee
stock purchase plan 31,386 315 160,772 --
Compensation expense related to the
grant of stock options -- -- 21,392 --
Unrealized gain on investments held
as available-for-sale -- -- -- 132,899
Cumulative translation adjustment -- -- -- --
Net loss -- -- -- --
---------- -------- ------------ ---------
Balance at December 31, 1995 20,007,708 200,078 67,509,148 79,941
Common stock issued upon exercise
of stock options 519,321 5,193 1,313,287 --
Common stock issued in the employee
stock purchase plan 36,385 363 293,448 --
Repurchase of fractional shares resulting
from the 3-for-2 stock split (19) -- (288) --
Compensation expense related to the
grant of stock options -- -- 956 --
Change in unrealized gain on investments held
as available-for-sale -- -- -- (79,941)
Cumulative translation adjustment -- -- -- --
Net income -- -- -- --
---------- -------- ------------ ---------
Balance at December 31, 1996 20,563,395 $205,634 $ 69,116,551 $ --
========== ======== ============ =========
<CAPTION>
CUMULATIVE TOTAL
ACCUMULATED TRANSLATION STOCKHOLDERS'
DEFICIT ADJUSTMENT EQUITY
------- ---------- ------
<S> <C> <C> <C>
Balance at December 31, 1993 $(17,808,492) $ -- $ 22,594,558
Common stock issued in public offering,
net of issuance costs of $1,680,737 -- -- 25,569,263
Common stock issued for in-process
technology -- -- 331,313
Common stock issued upon exercise
of stock options -- -- 219,105
Common stock issued in the employee
stock purchase plan -- -- 87,813
Compensation expense related to the
grant of stock options -- -- 169,524
Unrealized loss on investments held
as available-for-sale -- -- (52,958)
Cumulative translation adjustment 25,361 25,361
Net loss (11,636,991) -- (11,636,991)
------------ --------- ------------
Balance at December 31, 1994 (29,445,483) 25,361 37,306,988
Common stock issued upon exercise
of stock options -- -- 746,679
Common stock issued in the employee
stock purchase plan -- -- 161,087
Compensation expense related to the
grant of stock options -- -- 21,392
Unrealized gain on investments held
as available-for-sale -- -- 132,899
Cumulative translation adjustment -- (137,006) (137,006)
Net loss (7,840,589) -- (7,840,589)
------------ --------- ------------
Balance at December 31, 1995 (37,286,072) (111,645) 30,391,450
Common stock issued upon exercise
of stock options -- -- 1,318,480
Common stock issued in the employee
stock purchase plan -- -- 293,811
Repurchase of fractional shares resulting
from the 3-for-2 stock split -- -- (288)
Compensation expense related to the
grant of stock options -- -- 956
Change in unrealized gain on investments held
as available-for-sale -- -- (79,941)
Cumulative translation adjustment -- (127,058) (127,058)
Net income 4,224,909 -- 4,224,909
------------ --------- ------------
Balance at December 31, 1996 $(33,061,163) $(238,703) $ 36,022,319
============ ========= ============
</TABLE>
See accompanying notes.
<PAGE> 30
THERATECH, INC.
-----------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 4,224,909 $ (7,840,589) $(11,636,991)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,354,279 1,552,362 735,594
Compensation expense related to the grant of
stock options 956 21,392 169,524
Changes in operating assets and
liabilities:
Contracts and accounts receivable (2,568,553) (1,139,339) (390,966)
Inventories 141,495 (2,418,516) --
Prepaid expenses 409,214 (46,386) (44,960)
Accounts payable and accrued liabilities (688,455) 2,146,684 (1,540,425)
Unearned revenue 165,120 3,424,322 (31,500)
------------ ------------ ------------
Net cash provided by (used in) operating activities 4,038,965 (4,300,070) (12,739,724)
INVESTING ACTIVITIES:
Purchases of securities (5,519,041) (10,252,075) (17,604,460)
Sales and maturities of securities 9,884,968 11,200,326 18,167,738
Purchases of plant and equipment (3,628,421) (3,962,822) (9,808,751)
Other assets 652,701 1,044,861 (1,947,799)
------------ ------------ ------------
Net cash provided by (used in) investing activities 1,390,207 (1,969,710) (11,193,272)
FINANCING ACTIVITIES:
Proceeds from issuance of notes payable and
capital lease obligations 300,000 4,069,477 9,813,012
Proceeds from issuance of common stock 1,612,003 907,766 25,876,181
Payments of notes payable and capital lease obligations (2,651,478) (1,706,564) (864,760)
------------ ------------ ------------
Net cash provided by (used in) financing activities (739,475) 3,270,679 34,824,433
Effect of exchange-rate changes on cash and cash equivalents (127,058) (137,006) 25,361
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 4,562,639 (3,136,107) 10,916,798
Cash and cash equivalents at beginning of period 14,554,352 17,690,459 6,773,661
============ ============ ============
Cash and cash equivalents at end of period $ 19,116,991 $ 14,554,352 $ 17,690,459
============ ============ ============
</TABLE>
See accompanying notes.
<PAGE> 31
THERATECH, INC.
-----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Organization and Business Activities
TheraTech, Inc. ("TheraTech" or the "Company") was incorporated in January 1985
and develops advanced, controlled release drug delivery products which
administer drugs through the skin, through tissues in the oral cavity, by oral
delivery to the gastrointestinal tract and by other means. The Company designs,
develops and manufactures products which it believes utilize the most effective
delivery method for administering a given drug.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries Nippon TTI K.K. ("TheraTech Japan") and Natrapac,
Inc. ("Natrapac"). All significant intercompany accounts and transactions have
been eliminated.
Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform with the 1996
presentation.
Revenues
The Company has entered into various collaborative research and development,
product licensing and marketing agreements with certain pharmaceutical
companies ("Collaborative Partners"). These agreements provide for TheraTech to
receive payments in various forms, including licensing fees and other payments
upon execution of an agreement, milestone payments upon achievement of certain
technical and regulatory goals and periodic payments in the form of cost
reimbursements for product development and clinical evaluation of a specified
product, including a portion of general and administrative expenses.
Research and development revenues and licensing fees are recognized as earned
based on terms in the specific contracts. Milestone payments are included in
revenues in the period in which the applicable milestone is achieved.
TheraTech has also entered into various product supply agreements to manufacture
products for certain Collaborative Partners. These agreements include provisions
for TheraTech to recognize product sales and unearned revenue at the time
TheraTech ships product to the Collaborative Partner and/or at the time the
Collaborative Partner ships product to it customers. Unearned revenue relates to
advances on future product sales.
Three Collaborative Partners accounted for 86 percent of research and
development and licensing revenues for the year ended December 31, 1996, four
Collaborative Partners accounted for 84 percent in 1995 and six Collaborative
Partners accounted for 82 percent in 1994. Additionally, one Collaborative
Partner accounted for 79 and 94 percent of product sales for the years ended
December 31, 1996 and 1995, respectively.
Interest and other revenues consist primarily of interest income. The Company
earned interest income of $1,296,163, $1,438,123 and $1,252,374 for the years
ended December 31, 1996, 1995 and 1994, respectively.
Research and Development
Research and development expenses consist of self-funded research and
development costs and the costs associated with work performed under
collaborative research and development agreements. Research and development
expenses include direct and allocated expenses and exclude reimbursable general
and administrative costs. Research and development expenses incurred under
collaborative agreements were approximately $14,813,000, $13,939,000 and
$3,160,000 for the years ended
- 1 -
<PAGE> 32
THERATECH, INC.
-----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994, respectively. The Company performs research
and development under agreements with certain of its pharmaceutical company
investors, none of which has greater than a 10 percent interest in the Company.
Income Taxes
The Company records its income taxes under the asset and liability method, in
which deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. The effect on deferred taxes
of a change in tax rates is recognized in income in the period of the enactment
date.
Stock Split
On June 28, 1996, TheraTech effected a 3-for-2 split of its common stock in the
form of a stock dividend. The accompanying financial statements have been
adjusted retroactively for all years presented to reflect the split.
Net Income (Loss ) per Share
Net income (loss) per share is computed using the weighted average number of
shares of common stock and common equivalent shares outstanding, however, common
equivalent shares from stock options are excluded from the computation of net
loss per share as their effect is antidilutive. Fully diluted net income (loss)
per share is not presented because it approximates primary net income (loss) per
share.
Cash and Cash Equivalents
Cash includes currency on hand and demand deposits with financial institutions.
Cash equivalents consist of highly liquid investments with original maturities
of three months or less. The carrying amount reported on the balance sheets for
cash and cash equivalents approximates their fair value.
Credit & Investment Risk
The Company considers its credit risk to be minimal as its transactions are
primarily with major pharmaceutical company partners. Allowances for doubtful
accounts were $91,000 and $40,000 at December 31, 1996 and 1995, respectively.
Additionally, short-term investments and investments in long-term securities at
December 31, 1996 and 1995 consist of investment grade U.S. Government
obligations and corporate debt securities of companies with strong credit
ratings from a variety of industries.
Plant and Equipment
Plant and equipment is recorded at cost. Depreciation of plant and equipment is
computed on a straight-line basis over estimated useful lives of three to seven
years for equipment and 20 years for the plant. Equipment under capital leases
is stated at the present value of minimum lease payments and is amortized using
the straight-line method over the estimated useful life of the asset. Leasehold
improvements are amortized straight line over the lesser of the useful life of
the improvement or lease term. Amortization of equipment under capital leases
and leasehold improvements is included with depreciation expense.
Other Assets
Other assets consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
---------- ----------
<S> <C> <C>
Patent application costs, net $1,163,253 $1,091,059
Restricted cash 750,000 1,500,000
Deposits and other 248,725 259,494
---------- ----------
$2,161,978 $2,850,553
========== ==========
</TABLE>
- 2 -
<PAGE> 33
THERATECH, INC.
-----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Patent application costs represent capitalized legal and other costs incurred in
connection with obtaining patents which, once granted, are amortized over the
shorter of 17 years, the remaining patent life or the estimated useful life of
the patent using the straight-line method. The estimated useful lives and
recorded values of granted patents and patent applications are periodically
reviewed by management and adjusted to reflect any change in anticipated lives
or diminution in value. Accumulated amortization was $118,605 and $82,732 as of
December 31, 1996 and 1995, respectively. Amortization expense was $35,873,
$31,285 and $24,411 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Accrued Liabilities
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
---------- ----------
<S> <C> <C>
Accrued payroll and payroll taxes $ 912,292 $ 805,138
Accrued clinical costs 837,533 849,456
Other 633,873 738,112
---------- ----------
$2,383,698 $2,392,706
========== ==========
</TABLE>
2. SHORT-TERM INVESTMENTS AND INVESTMENTS IN LONG-TERM SECURITIES
The Company classifies its investments in one of two categories:
held-to-maturity or available-for-sale. Held-to-maturity securities are those
securities in which the Company has the ability and intent to hold the security
until maturity. All other securities are classified as available-for-sale.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization of premiums or discounts. Premiums and discounts are amortized over
the life of the related security. Available-for-sale securities are recorded at
fair value based on general market valuations. Unrealized holding gains and
losses on available-for-sale securities are excluded from earnings and are
reported as a separate component of stockholders' equity until realized.
Short-term investments have a maturity of twelve months or less. Investments in
long-term securities generally mature in one to five years. Short-term
investments and investments in long-term securities at December 31, 1996 and
1995 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Short-term investments:
Held-to-maturity, at amortized cost $4,097,419 $4,164,633
========== ==========
Investments in long-term securities:
Available-for-sale, at fair value $ -- $3,345,560
Held-to-maturity, at amortized cost 2,000,468 3,033,562
---------- ----------
$2,000,468 $6,379,122
========== ==========
</TABLE>
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and fair value for available-for-sale and held-to-maturity securities by
major security type at December 31, 1996 and 1995, were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Cost Unrealized Unrealized Fair
DECEMBER 31, 1996 Gains Losses Value
------------- -------- ------------ ----------
<S> <C> <C> <C> <C>
Held-to-maturity:
U.S. government obligations $2,001,663 $ -- $ (1,063) $2,000,600
Corporate obligations 4,096,224 2,239 (780) 4,097,683
---------- ------- ----------- ----------
$6,097,887 $ 2,239 $ (1,843) $6,098,283
========== ======= =========== ==========
</TABLE>
- 3 -
<PAGE> 34
THERATECH, INC.
-----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
DECEMBER 31, 1995 Cost Gains Losses Value
---------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Held-to-maturity:
U.S. government obligations $3,120,385 $ 68 $ -- $3,120,453
Corporate obligations 4,077,810 42,811 -- 4,120,621
---------- ------- ---------- ----------
$7,198,195 $42,879 $ -- $7,241,074
========== ======= ========== ==========
Available-for-sale:
Other obligations $3,265,619 $79,941 $ -- $3,345,560
========== ======= ========== ==========
</TABLE>
During 1996, the Company purchased $5,310,532 in held-to-maturity securities and
$208,509 in available-for-sale securities. Also during 1996, proceeds from the
maturity of held-to-maturity securities were $6,410,840 and sales of
available-for-sale securities were $3,474,128. During 1995, the Company
purchased $10,036,860 in held-to-maturity securities and $215,215 in
available-for-sale securities. Proceeds from the maturity of held-to-maturity
securities were $11,200,326 in 1995.
3. INVENTORIES
Inventories are stated at the lower of cost or market applying the first-in,
first-out cost method. Inventories at December 31, 1996 and 1995, consist of the
following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Raw materials $2,181,079 $1,875,818
Work in process 9,552 111,467
Finished goods 86,390 431,231
---------- ----------
$2,277,021 $2,418,516
========== ==========
</TABLE>
4. NOTES PAYABLE AND LEASES
TheraTech has a 15 year term note which will mature in September 2009 with a
bank to finance its commercial manufacturing facility. TheraTech is required to
make monthly payments of principal and interest. Interest for the first 60
months is fixed at 8.99 percent and will be adjusted every 60 months based on
the five-year U.S. Treasury constant maturity rate.
TheraTech has generally financed equipment by using promissory notes and leases.
Certain of these leases have been classified as capital lease obligations. At
December 31, 1996 and 1995, the gross amount of equipment recorded under capital
leases for both years was approximately $5,000,000. Accumulated amortization on
these assets at December 31, 1996 and 1995 was approximately $985,000 and
$375,000, respectively. At the expiration of the 60 month lease term, TheraTech
will have the option to purchase all the equipment or renew the lease for twelve
months and then: a) return the equipment, b) purchase the equipment at fair
market value or c) re-negotiate the lease. Additionally, TheraTech has notes
payable with a financial institution for certain equipment which have
outstanding balances totaling approximately $867,000, and which require monthly
payments of principal and interest sufficient to fully amortize the notes in
periods ranging from one to two years. The notes bear interest at rates between
7.38 and 9.12 percent.
Notes payable and capital lease obligations are secured by a building, equipment
and an interest bearing deposit (classified as restricted cash) with a total
cost of approximately $15,100,000 at December 31, 1996. The various financing
agreements contain covenants among which require TheraTech to maintain certain
financial ratios and minimum cash balances and restrict dividend payments. As of
December 31, 1996, the Company was in compliance with these covenants. The
weighted average interest rate on notes payable was 8.93 percent as of December
31, 1996.
TheraTech also has noncancellable operating leases for land, office and
laboratory space and equipment. The Company has a 40-year lease, with an option
to renew for an additional ten years, on approximately seven acres of land on
which the Company has constructed its manufacturing facility. The office and
laboratory leases expire in May 1997 and September 1997. These leases have
renewal options of six months and one year. Certain leases are subject to
adjustment based on a consumer price index. TheraTech is currently leasing space
on a month-to-month basis and is negotiating to renew and
- 4 -
<PAGE> 35
THERATECH, INC.
-----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
extend the lease terms on its Tokyo, Japan facility and on certain leases for
its Salt Lake City facilities. Future minimum payments of these renewals are not
reflected in the table below. Equipment leases are generally for periods of
three to five years and contain purchase options at fair market value. Lease
expense, net of sub-lease income in 1994 only, amounted to $977,508, $937,396
and $688,395 for the years ended December 31, 1996, 1995 and 1994, respectively.
Interest paid and interest expense was $1,060,076, $971,708 and $296,018 for the
years ended December 31, 1996, 1995 and 1994, respectively.
Future minimum capital lease payments, maturities of notes payable and minimum
lease payments under noncancellable operating leases at December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Capital
Lease Notes Operating
Year ended December 31: Obligations Payable Leases
------------- ------------ ------------
<S> <C> <C> <C>
1997 $ 1,099,111 $ 836,945 $ 142,204
1998 1,099,111 549,311 111,062
1999 1,373,906 297,009 104,034
2000 943,410 323,743 101,258
2001 -- 355,545 99,406
Thereafter -- 4,159,272 3,094,668
------------ ------------ ------------
4,515,538 $ 6,521,825 $ 3,652,632
Less amount representing imputed interest 767,032 ============ ============
------------
Present value of net minimum capital lease payments 3,748,506
Less current portion of capital lease obligations 772,642
------------
Capital lease obligations, less current portion $ 2,975,864
============
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
TheraTech has entered into a purchase commitment with a commercial supplier for
material used in its manufacturing process. Under this agreement, TheraTech has
agreed to purchase, at predetermined prices, fixed quantities over four years as
follows:
<TABLE>
<S> <C>
1995 $ 136,250
1996 2,725,000
1997 2,885,000
1998 3,060,000
-------------
$ 8,806,250
=============
</TABLE>
The 1995 and 1996 purchase commitments have been satisfied.
In the ordinary course of business, various suits and claims are filed by and
against TheraTech. In the past, TheraTech's liability claims have not been
significant. The Company is not a party to any litigation, other than legal and
arbitration proceedings incurred in the ordinary course of business.
6. STOCKHOLDERS' EQUITY
TheraTech is authorized to issue 5,000,000 shares of preferred stock, $0.01 par
value, none of which was outstanding at December 31, 1996 and 1995. The Board of
Directors may determine rights, preferences and privileges of any preferred
stock issued in the future.
- 5 -
<PAGE> 36
THERATECH, INC.
-----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Option Plans
The Company has granted non-qualified stock options to officers, employees,
consultants and outside members of the Board of Directors. TheraTech also has an
incentive stock option plan for its employees (the "Employee Plan") and a stock
option plan for its directors (the "Director Plan") (together, the "Option
Plans"). In general, options granted under the Option Plans vest over 0 to 5
years and have maximum terms of 10 years. At December 31, 1996, a total of
2,812,500 shares of Common Stock were reserved for issuance under the Option
Plans of which 277,500 shares were reserved for issuance under the Director
Plan.
The Company has elected to continue to apply Accounting Principles Board Opinion
No. 25 "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its plans. The alternative fair value method
of accounting prescribed by Financial Accounting Standards Board No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123") requires the use of option
valuation models that were not developed for use in valuing employee stock
options, as discussed below. Accordingly, under APB 25, no compensation expense
has been recognized for the stock option plans except compensation expense for
the difference between the grant price and the market value at the date of
grant. Amortization of deferred compensation was $956, $21,392 and $169,524 for
the years ended December 31, 1996, 1995 and 1994, respectively.
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. Because
the Company's 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, in management's opinion the existing
models do not necessarily provide a reliable single measure of the fair value of
the stock options. The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
assumptions: expected dividend yield, 0%; expected stock price volatility, 27.2%
- - 32.8%; risk-free interest rate, 5.5% - 6.5%; and average expected life of
options, 3.8 years. If compensation expense for the Company's stock-based
compensation plans had been determined consistent with FAS 123, the Company's
net income (loss) and net income (loss) per share would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1995
-------------- ------------
<S> <C> <C> <C>
Net income (loss) As reported $ 4,224,909 $ (7,840,589)
Pro forma 2,970,535 (8,884,776)
Net income (loss) per share As reported $ 0.20 $ (0.40)
Pro forma 0.14 (0.45)
</TABLE>
The effect of FAS 123 on pro forma net income (loss) and net income (loss) per
share disclosed for 1996 and 1995 may not be representative of the effects on
pro forma results in future years. The pro forma results for 1996 and 1995
include the impact of only two and one years, respectively, of options vesting,
while subsequent years will include additional years of vesting.
- 6 -
<PAGE> 37
THERATECH, INC.
-----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Year Ended Average Year Ended Average Year Ended Average
December 31, Exercise December 31, Exercise December 31, Exercise
1996 Price 1995 Price 1994 Price
---------- ------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of
period 3,090,420 $ 5.70 3,053,595 $ 4.65 2,836,733 $ 3.67
Granted 303,515 11.47 488,925 9.64 563,475 7.25
Exercised (519,321) 2.54 (377,025) 1.97 (340,838) 0.65
Canceled (44,100) 8.69 (75,075) 7.51 (5,775) 10.23
---------- ------------- ---------- ------------- ---------- -----------
Balance at end of period 2,830,514 $ 6.84 3,090,420 $ 5.70 3,053,595 $ 4.65
========== ============= ========== ============= ========== ===========
Exercisable 2,300,635 2,315,595 2,144,321
Weighted-average fair
value of options granted
during the year $ 4.24 $ 3.44 N/A
</TABLE>
The following summarizes information about stock options outstanding at December
31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- ------------------------------
Weighted-
Number Average Number
Outstanding Remaining Weighted- Exercisable Weighted-
Range of at Contractual Average at Average
Exercise December 31, Life in Exercise December 31, Exercise
Prices 1996 Years Price 1996 Price
------------------- --------------- -------------- ---------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.83 to 6.00 1,273,977 3.53 $ 3.02 1,163,352 $ 2.93
6.60 to 10.00 732,429 6.54 8.68 392,775 8.90
10.17 to 15.50 824,108 7.71 11.11 744,508 11.01
------------------- --------- ----- ------ --------- ------
$ 0.83 to 15.50 2,830,514 5.53 $ 6.84 2,300,635 $ 6.56
========= ==== ====== ========= ======
</TABLE>
Employee Stock Purchase Plan
As part of an employee retention program, the Company established the 1992
Employee Stock Purchase Plan (the "Stock Purchase Plan") to provide employees
with an opportunity to purchase common stock of the Company through payroll
deductions. Accordingly, 300,000 shares of common stock were reserved for
issuance to eligible employees. This Stock Purchase Plan will terminate in the
year 2012 unless sooner terminated by the Board of Directors. Under this
Stock Purchase Plan, the Company's employees, subject to certain restrictions,
may purchase shares of common stock at the lesser of 85 percent of fair market
value at either the enrollment date or the exercise date. As of December 31,
1996, under this plan 80,386 shares have been issued.
7. RELATED PARTY TRANSACTIONS
Several of the Company's principal stockholders and directors are affiliated
with the University of Utah ("the University"). In the normal course of
business, the Company has entered into various agreements with the University
for research and other services. Additionally, certain agreements provide for,
but are not limited to, the following terms: granting of exclusive licensing and
marketing rights to TheraTech, ownership of patents by the University and
royalties payable to the University ranging from 2 to 15 percent on royalties
received by the Company. The Company paid to University departments affiliated
with principal stockholders and directors $57,500, $18,393 and $113,440 for the
years ended December 31, 1996, 1995 and 1994, respectively.
- 7 -
<PAGE> 38
THERATECH, INC.
-----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TheraTech has one secured loan to an officer of the Company, a 9.5 percent note
for $38,000 due January 20, 1998.
8. 401(k) PLAN
The Company sponsors a 401(k) plan under which employees may defer a certain
percentage of their salary. The Company will match 50 percent of the employee's
contribution up to 8.5 percent of their salary. Employees who have completed six
months of service and who are at least 18 years of age are eligible to
participate. For the years ended December 31, 1996, 1995 and 1994, the 401(k)
plan expenses were $288,161, $206,371 and $155,841, respectively.
9. INCOME TAXES
As of December 31, 1996, TheraTech had federal and state net operating loss
carryforwards of approximately $41,800,000. The Company also has federal
research and development tax credit carryforwards of approximately $1,846,000.
The net operating loss and credit carryforwards will expire at various dates
beginning in years 2001 through 2011, if not utilized.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets for federal and state income taxes as of
December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 15,473,000 $ 15,147,000
Research credits 1,846,000 1,664,000
Other, net 1,060,000 1,173,000
------------ ------------
Total deferred tax assets 18,379,000 17,984,000
Valuation allowance for deferred tax assets (18,379,000) (17,984,000)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
</TABLE>
The net valuation allowance increased by $395,000, during the year ended
December 31, 1996.
As of December 31, 1996, and 1995, approximately $4,708,000 and $2,894,000,
respectively, of the valuation allowance for deferred tax assets relate to
benefits of stock option deductions which, when recognized, will be credited
directly to additional paid-in capital.
The following table reconciles income tax at the U.S. federal statutory tax rate
to the tax provision at the effective tax rate:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Tax at U.S. statutory rates $ 1,436,000 $(2,666,000)
State tax, net of federal tax benefit 139,000 (259,000)
Credits (182,000) (223,000)
Adjustment of valuation allowance for deferred tax assets (1,401,000) 3,016,000
Other, net 8,000 132,000
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
<PAGE> 39
Report of Independent Auditors
The Board of Directors and Stockholders
TheraTech, Inc.
We have audited the accompanying consolidated balance sheets of TheraTech, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
TheraTech, Inc. and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Salt Lake City, Utah
February 7, 1997
<PAGE> 1
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF THERATECH, INC.
TheraTech, Inc., a corporation organized and existing under and by virtue
of the General Corporation Law of the State of Delaware (the "Corporation"),
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation, by duly adopted
resolutions setting forth a proposed amendment of the Restated Certificate of
Incorporation of the Corporation, declaring the proposed amendment to be
advisable and authorizing the officers of the Corporation to submit such
amendment to the stockholders of the Corporation for consideration thereof. The
resolution setting forth the proposed amended is as follows:
RESOLVED, that the Restated Certificate of Incorporation of this
Corporation be amended by changing the first paragraph of the Article thereof
numbered "4" so that, as amended, such Article shall read as follows:
"4. The total number of shares of all classes of stock that the
Corporation is authorized to issue is fifty-five million (55,000,000) shares,
consisting of (i) fifty million (50,000,000) shares of Common Stock with par
value of one cent ($0.01) per share and (ii) five million (5,000,000) shares of
Preferred Stock with a par value of one cent ($0.01) per share."
RESOLVED, that the Restated Certificate of Incorporation of this
Corporation be further amended by changing the Article thereof numbered
"4.B.(1)" so that, as amended, such Article shall read as follows:
"(1) Classification. The Common Stock shall consist of one class of fifty
million (50,000,000) shares."
SECOND: That thereafter, pursuant to resolution of its Board of Directors,
the proposed amendment was submitted to the stockholders of the Corporation and
the necessary number of shares required by statute were voted in favor of such
amendment.
THIRD: That such amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
<PAGE> 2
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed be Dinesh C. Patel, its President and Alexander L. Searl, its Secretary,
this 28th day of June, 1996.
BY: DINESH C. PATEL
-----------------------------
Dinesh C. Patel, President
ATTEST: ALEXANDER L. SEARL
-----------------------------
Alexander L. Searl, Secretary
<PAGE> 1
EXHIBIT 11
THERATECH, INC.
-----------------
STATEMENT OF COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
Primary: 1996 1995 1994
----------- ------------ ------------
<S> <C> <C> <C>
Weighted average shares of common stock 20,291,513 19,789,460 18,972,185
Common equivalent shares attributable to stock options 1,295,415 -- --
----------- ------------ ------------
Weighted average common and dilutive
common equivalent shares 21,586,928 19,789,460 18,972,185
=========== ============ ============
Net income (loss) $ 4,224,909 $ (7,840,589) $(11,636,991)
=========== ============ ============
Net income (loss) per share $ 0.20 $ (0.40) $ (0.61)
=========== ============ ============
Fully Diluted:
Weighted average shares of common stock 20,291,513 19,789,460 18,972,185
Common equivalent shares attributable to stock options 1,369,886 -- --
----------- ------------ ------------
Weighted average common and dilutive
common equivalent shares 21,661,399 19,789,460 18,972,185
=========== ============ ============
Net income (loss) $ 4,224,909 $ (7,840,589) $(11,636,991)
=========== ============ ============
Net income (loss) per share $ 0.20 $ (0.40) $ (0.61)
=========== ============ ============
</TABLE>
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THERATECH, INC.
Subsidiary and Business Name Jurisdiction of Incorporation
Natrapac, Inc. Utah
Nippon TTI K.K. Japan
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of TheraTech, Inc. of our report dated February 7, 1997, included in the 1996
Annual Report to Shareholders of TheraTech, Inc.
We also consent to the incorporation by reference in the Registration Statements
(Form S-8) pertaining to the 1992 Employees' Stock Option Plan, 1992 Directors'
Stock Option Plan and Informal Stock Option Program, and the 1993 Employee Stock
Purchase Plan of TheraTech, Inc. of our report dated February 7, 1997, with
respect to the consolidated financial statements of TheraTech, Inc. incorporated
by reference in the Annual Report (Form 10-K) for the year ended December 31,
1996.
ERNST & YOUNG LLP
Salt Lake City, Utah
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
THERATECH,INC. CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH (B) FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 19,116,991
<SECURITIES> 4,097,419
<RECEIVABLES> 4,726,112
<ALLOWANCES> 91,034
<INVENTORY> 2,277,021
<CURRENT-ASSETS> 30,253,670
<PP&E> 25,167,720
<DEPRECIATION> 5,737,034
<TOTAL-ASSETS> 53,846,802
<CURRENT-LIABILITIES> 7,951,739
<BONDS> 8,660,744
0
0
<COMMON> 205,634
<OTHER-SE> 35,816,685
<TOTAL-LIABILITY-AND-EQUITY> 53,846,802
<SALES> 11,296,298
<TOTAL-REVENUES> 36,361,542
<CGS> 8,008,967
<TOTAL-COSTS> 31,030,549
<OTHER-EXPENSES> 46,009
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,060,075
<INCOME-PRETAX> 4,224,909
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,224,909
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,224,909
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
</TABLE>
