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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended September 30, 1998
OR
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from__________to___________.
Commission File Number: 0-18976
CELTRIX PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3121462
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3055 Patrick Henry Drive, Santa Clara, CA 95054-1815
(Address of principal executive offices and zip code)
Registrant's Telephone Number: (408) 988-2500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of October 31, 1998, the Registrant had outstanding 21,061,053 shares of
Common Stock.
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CELTRIX PHARMACEUTICALS, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1998
and March 31, 1998.............................................. 3
Condensed Consolidated Statements of Operations for the
three-and six-month periods ended September 30, 1998 and 1997... 4
Condensed Consolidated Statements of Cash Flows for the
three-and six-month periods ended September 30, 1998 and 1997... 5
Notes to Condensed Consolidated Financial Statements............... 6
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 8
PART II. OTHER INFORMATION
Item 2: Changes in Securities and Use of Proceeds........................... 21
Item 4: Submission of Matters to a Vote of Security Holders................. 22
Item 6: Exhibits and Reports on Form 8-K.................................... 22
SIGNATURES..................................................................... 24
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PART I. FINANCIAL INFORMATION
CELTRIX PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, March 31,
1998 1998
--------- ---------
(Unaudited) (1)
Assets
Current assets:
Cash and cash equivalents $ 1,002 $ 1,608
Short-term investments -- 6,305
Receivables and other current assets 165 219
--------- ---------
Total current assets 1,167 8,132
Property and equipment, net 1,103 7,062
Intangible and other assets, net 2,620 2,682
--------- ---------
$ 4,890 $ 17,876
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 583 $ 751
Other accrued liabilities 1,146 1,483
Accrued restructuring reserve 474 --
Current portion of capital lease obligations -- 8
--------- ---------
Total current liabilities 2,203 2,242
Deferred rent -- 890
Stockholders' equity:
Preferred stock -- --
Common stock 211 211
Additional paid-in capital 131,542 131,542
Accumulated deficit (129,066) (117,009)
--------- ---------
Total stockholders' equity 2,687 14,744
--------- ---------
$ 4,890 $ 17,876
========= =========
(1) Derived from audited financial statements at that date but does not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
See accompanying notes.
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CELTRIX PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
Revenues:
Product sales $ -- $ 33 $ 10 $ 33
Other revenues 23 22 49 46
-------- -------- -------- --------
23 55 59 79
Costs and expenses:
Cost of sales -- 1 -- 1
Research and development 2,817 3,060 5,818 6,065
General and administrative 667 399 1,230 947
Restructuring costs 5,178 -- 5,178 --
-------- -------- -------- --------
8,662 3,460 12,226 7,013
-------- -------- -------- --------
Operating loss (8,639) (3,405) (12,167) (6,934)
Interest income, net 33 192 108 416
Gain on sale of investment in
Prograft Medical, Inc. -- -- -- 737
-------- -------- -------- --------
Net loss $ (8,606) $ (3,213) $(12,059) $ (5,781)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.41) $ (0.15) $ (0.57) $ (0.28)
======== ======== ======== ========
Shares used in basic and diluted per
share computation 21,061 20,985 21,061 20,985
======== ======== ======== ========
See accompanying notes.
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CELTRIX PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(In thousands)
(Unaudited)
Six Months Ended
September 30,
-------------------------
1998 1997
-------- --------
Cash flows from operating activities:
Net loss $(12,059) $ (5,781)
Adjustments to reconcile net loss to net cash
used in operating activities:
Write off of leasehold improvements 5,311 --
Reduction in deferred rent liability (890) --
Depreciation and amortization 864 868
Gain on sale of investment in Prograft Medical, Inc. -- (737)
Other adjustments related to changes in operating
accounts 23 (305)
-------- --------
Net cash used in operating activities (6,751) (5,955)
Cash flows from investing activities:
Decrease (increase) in available-for-sale securities 6,307 (6,840)
Capital expenditures (72) (80)
Increase in intangible and other assets (82) (224)
-------- --------
Net cash provided by (used in) investing activities 6,153 (7,144)
Cash flows from financing activities:
Proceeds from issuance of common stock, net -- 13,339
Principal payments under lease obligations (8) (231)
-------- --------
Net cash (used in) provided by financing activities (8) 13,108
-------- --------
Net increase in cash and cash equivalents (606) 9
Cash and cash equivalents at beginning of period 1,608 2,734
-------- --------
Cash and cash equivalents at end of period $ 1,002 $ 2,743
======== ========
See accompanying notes.
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CELTRIX PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Condensed Consolidated Interim Financial Statements
The condensed consolidated balance sheet as of September 30, 1998 and
the condensed consolidated statements of operations and cash flows for the
three- and six-month periods ended September 30, 1998 and 1997, have been
prepared by the Company, without audit. In the opinion of management, the
accompanying unaudited interim condensed consolidated financial statements
include all adjustments, which include normal recurring adjustments, necessary
to present fairly the Company's financial position, results of its operations
and its cash flows. Interim results are not necessarily indicative of results to
be expected for a full fiscal year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the audited financial
statements and notes thereto for the fiscal year ended March 31, 1998 in the
Company's 1998 Annual Report to Stockholders.
The accompanying financial statements have been prepared assuming that
the Company continues as a going concern. At September 30, 1998, the Company had
negative working capital of $1.0 million, an accumulated deficit of $129.1
million, and incurred a net loss of $8.6 million for the quarter ended September
30, 1998 which included a $5.2 million restructuring charge (see Note 3). In
November 1998, the Company completed a private placement, resulting in net
proceeds to the Company of approximately $1.9 million, reversing the negative
working capital position on a pro forma basis (see Note 4). Current cash, cash
equivalents and short-term investments, including proceeds from this financing,
and the sale of fixed assets as a result of discontinuing the Company's
manufacturing operations in connection with the September 1998 restructuring
(see Note 3), will be sufficient to fund ongoing operations into the third
calendar quarter of 1999. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
2. Recent Pronouncement
As of April 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130, "Reporting Comprehensive Income". Statement 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's net loss or shareholders' equity. Statement 130 requires unrealized
gains or losses on the Company's available-for-sale
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securities and foreign currency translation adjustments, which prior to adoption
were reported separately in shareholders' equity, to be included in other
comprehensive income. Total comprehensive income was not significant during the
periods ended September 30, 1998 and 1997.
3. Restructuring Charges
In September 1998, Celtrix announced that it would restructure the
Company to focus on the clinical development of SomatoKine, cease manufacturing
operation and reduce the cash burn rate. As a result of this action, the Company
recognized a $5.2 million restructuring charge in the quarter ended September
30, 1998; the components are as follows:
Non- Future
(In thousands) Cash Cash Cash Outlays
------ ------- ------------
Write-off of leasehold improvements (1) $ 5,311
Severance benefit expenses $ 358 $ 213
Non-cancelable operating lease obligations 250 186
Other restructuring-related charges 75 75
Reduction of deferred rent liability (2) (816)
------ ------- -------
$ 683 $ 4,495 $ 474
====== ======= =======
(1) In connection with the plan to cease manufacturing operation.
(2) Represents a portion of leasehold improvements that were funded by the
landlord.
4. Subsequent Event
In November 1998, the Company completed a private placement of
4,000,000 shares of newly issued common stock at $0.50 per share pursuant to a
Common Stock and Warrant Purchase Agreement dated October 12, 1998, resulting in
net proceeds to the Company of approximately $1.9 million. For every share of
stock issued, the Company also issued one and one-half warrants to purchase
additional shares at $0.55 per share. The warrants are exercisable beginning in
January 1999 and will expire in January 2002.
The following pro-forma financial data gives effect, as of September
30, 1998, to the private placement described above:
Actual Pro-Forma
(In thousands) Balance Balance
------- -------
Cash, cash equivalents and short-term investments $ 1,002 $2,902
Working capital $(1,036) $ 864
Stockholders' equity $ 2,687 $4,587
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
condensed consolidated financial statements and notes thereto included in Part I
- -- Item 1 of this Quarterly Report and the financial statements and notes
thereto in the Company's 1998 Annual Report to Stockholders.
OVERVIEW
Celtrix Pharmaceuticals, Inc. is a biopharmaceutical company developing
novel therapeutics for the treatment of seriously debilitating, degenerative
conditions primarily associated with severe trauma, chronic diseases or aging.
The Company's focus is on regenerating lost tissue and metabolic processes
essential for the patient's health and quality of life. Ongoing product
development programs target severe osteoporosis, including hip fracture surgery
in the elderly, traumatic burns and diabetes. Other potential indications
include protein wasting diseases associated with cancer, AIDS, advanced kidney
failure and other life-threatening conditions.
The Company's development focus is on SomatoKine, a naturally occurring
complex comprised of the anabolic hormone insulin-like growth factor-I (IGF-I)
and its primary binding protein, BP3. IGF-I is known to play a major role in
diverse biological processes, including muscle and bone formation, tissue repair
and endocrine regulation. However, limitations associated with administering
free IGF-I therapeutically have proven significant because IGF-I does not
naturally exist in quantity free of its binding proteins. SomatoKine delivers
IGF-I complexed with BP3, which contains biological information important for
the body's natural regulation of IGF-I bioavailability and biodistribution, and
the resulting complex does not display the acute limitations seen in free IGF
administration.
Results from the Company's three earlier Phase I studies demonstrated
that the repeated or continuous administration of SomatoKine safely delivers
IGF-I at substantially higher dosage levels than have ever been achievable with
free IGF-I, increasing the peak blood concentration of IGF-I up to 35-fold its
normal level. Furthermore, the elevated levels substantially stimulated bone and
connective tissue metabolism.
Based on these positive results, the Company initiated a Phase II
clinical feasibility study in early 1997, using SomatoKine to treat severe
osteoporosis patients recovering from
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hip fracture surgery. Following the trauma of hip fracture, patients typically
suffer an accelerated loss of hip bone mineral density (BMD) which predisposes
them to a high risk of refracture. Interim results from patients treated with
SomatoKine for eight weeks showed a substantial retention in their hip bone
mineral density. Final patient follow-up and data analysis are anticipated in
fourth calendar quarter 1998. The Company intends to establish corporate
partnership(s) to continue the global development of SomatoKine for severe
osteoporosis.
In mid-1997, the Company began a Phase II clinical feasibility study in
severely burned patients. Severe burns patients typically have low IGF-I levels
which may be connected to the disruption of the biological processes that are
essential for efficient and successful healing and protection from
complications. Interim results provided evidence that SomatoKine improved the
metabolic processes involved in maintaining muscle protein. In addition,
SomatoKine appeared to have a positive effect on the heart function and immune
system of these severely burned patients. Clinical findings from this study will
be used to establish corporate partnership(s) for future development of
SomatoKine in severe burns.
In July 1998, Celtrix initiated a Phase II feasibility study in Type I
diabetes. This 12-patient study will investigate SomatoKine's potential to
reduce the need for exogenous (injected) insulin and improve blood glucose
control. A number of parameters are being measured including the amount of
insulin required for optimal glycemic control. Clinical findings from this study
will be used to establish corporate partnership(s) for future development of
SomatoKine in diabetes.
The Company has a product development, license and marketing agreement
with Genzyme Corporation ("Genzyme") for TGF-beta-2, a potential pharmaceutical
based on a naturally occurring compound which appears to play an important role
in regulating healthy cell functions. Under amended terms in December 1997, the
Company granted Genzyme expanded territory rights to TGF-beta-2 to include
Japan, China, Korea and Taiwan. Additionally, under a separate license
agreement, Genzyme was granted a worldwide royalty-bearing license to TGF-beta
antibodies and receptor technology. The Company is not currently pursuing an
in-house TGF-beta-2 program.
Celtrix has not earned substantial revenues from product sales and at
September 30, 1998 has an accumulated deficit of $129.1 million. The Company
expects to incur additional operating losses, which may fluctuate from quarter
to quarter, for at least the next several years as the Company continues its
clinical development of SomatoKine.
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Development of the Company's products beyond the current Phase II
feasibility studies will require the commitment of substantial funding to
conduct further clinical studies. Such additional funding will need to be raised
through collaborative arrangements or through public or private financings,
including equity financing. There can be no assurance that any such financing
will be available to the Company or on terms attractive to the Company, or that
the Company can enter into a collaborative relationship with a corporate partner
for the continuation of the clinical trials in any of its current indications.
Consequently, there can be no assurance that Celtrix will ever achieve either
significant revenues from product sales or profitable operations. To achieve
profitable operations, the Company, alone or with others, must successfully
develop, obtain regulatory approval for and market its potential products. No
assurance can be given that the Company's product development efforts will be
successfully completed, that required regulatory approvals will be obtained, or
that any products, if developed and introduced, will be successfully marketed or
achieve market acceptance.
RESULTS OF OPERATIONS
Celtrix incurred a net loss of $8.6 million and $12.1 million for the
three- and six-month periods ended September 30, 1998, compared to $3.2 million
and $5.8 million for the same periods in 1997. Net loss per share increased to
$0.41 and $0.57 per share for the three- and six-months ended September 30,
1998, compared to $0.15 and $0.28 per share for the same periods in 1997. The
increase in net loss and basic and diluted net loss per share for the three- and
six-month periods ended September 30, 1998 is due primarily to the one-time
restructuring charges made by the Company this quarter in its effort to reduce
its cash burn rate.
Revenues decreased to $23,000 and $59,000 for the three- and six-month
periods ended September 30, 1998 from $55,000 and $79,000 for the same periods
in 1997 due primarily to a reduction in sale of material for research purposes.
Operating expenses increased to $8.7 million and $12.2 million for the
three- and six-month periods ended September 30, 1998 from $3.5 million and $7.0
million for the same periods in 1997. The increase is due primarily to a
one-time $5.2 million restructuring charge recorded in September 1998.
Net interest income of $33,000 and $108,000 for the three- and
six-month periods ended September 30, 1998 decreased from $192,000 and $416,000
for the same periods in 1997 due primarily to the decrease in average cash, cash
equivalent and short-term investment balances.
In September 1998, Celtrix announced that it would restructure the
Company to focus on the clinical development of SomatoKine, and to significantly
reduce its cash burn rate. Since sufficient clinical grade SomatoKine has been
manufactured for the conduct of clinical trials
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over the next two years, the Company discontinued its manufacturing operations.
As part of the restructuring, the Company reduced its work force by 59
employees, or approximately 80%, in September 1998. The Company intends to
further reduce its work force by the end of the calendar year, for a total
reduction of approximately 90%. The reduction in work force affects all levels
of staff in manufacturing and other functions. Also, as a result of
discontinuing its manufacturing operations, the Company is currently in the
process of selling its equipment and other assets. The Company terminated its
facility lease effective November 30, 1998.
As a result, the Company recognized a $5.2 million restructuring charge
in the quarter ended September 30, 1998, which included a net $4.5 million
non-cash charge for the write-off of leasehold improvements, $358,000 for
severance and benefit expenses, $250,000 related to certain non-cancelable
operating lease obligations and $75,000 in other restructuring-related charges.
Of the $5.2 million in restructuring charges, the Company had reserved $474,000
for future payments related to the restructuring at September 30, 1998, which
include $213,000 for severance and benefit payments, $186,000 under
non-cancelable operating leases and $75,000 in other anticipated payments. (See
also Note 3.)
The $737,000 gain on investment reported in the quarter ended June 30,
1997 was the result of the sale of 43,750 shares of Prograft Medical, Inc.
("Prograft") preferred stock, held by the Company since 1993.
LIQUIDITY AND CAPITAL RESOURCES
Celtrix has funded its activities with proceeds from public and private
offerings, advances from Collagen, research and development revenues from
collaborative arrangements, lease and debt financing arrangements, proceeds from
liquidating its equity investments and, to a lesser extent, other revenues and
product sales.
At September 30, 1998, Celtrix's cash, cash equivalents and short-term
investments were $1.0 million compared to $7.9 million at March 31, 1998. The
net decrease of $6.9 million was due primarily to cash outlays consisting of
$6.8 million in net cash and investments used in operating activities and
$162,000 used in investing and financing activities.
In November 1998, the Company completed a private placement of
4,000,000 shares of newly issued common stock at $0.50 per share pursuant to a
Common Stock and Warrant Purchase Agreement dated October 12, 1998, resulting in
net proceeds to the Company of approximately $1.9 million. In addition, for
every share of stock issued, the Company also issued one and one-half warrants
to purchase additional shares at $0.55 per share. (See also
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Note 4.)
The Company's financial statements are prepared and presented on a
basis assuming it continues as a going concern. At September 30, 1998, the
Company had negative working capital of $1.0 million and an accumulated deficit
of $129.1 million, and incurred a net loss of $8.6 million for the quarter ended
September 30, 1998. The Company expects current cash, cash equivalents and
short-term investments, including proceeds from the November 1998 financing and
the sale of fixed assets as a result of discontinuing the manufacturing
operations in connection with the September 1998 restructuring, will be
sufficient to fund operations into the third calendar quarter of 1999. The
Company will be required to seek additional funds to finance operations beyond
that period. To minimize future dilution from additional equity financing, the
Company plans to concentrate on establishing corporate partner arrangements and
other opportunities that will enable the continued development of SomatoKine.
Merger opportunities that are consistent with the Company's clinical development
of SomatoKine will also be considered. There can be no assurance that the
Company will be able to raise any additional funds or enter into any
collaborative arrangement on terms favorable to the Company, or at all. If the
Company is unable to obtain the necessary capital, it may be required to
liquidate its assets or to cease operations.
The Company anticipates that it will be necessary to expend significant
capital resources to support further clinical development. Capital resources may
also be required for the acquisition of complementary businesses, products or
technologies. The Company's future capital requirements will depend on many
factors, including progress with its clinical trials, the time and costs
involved in obtaining regulatory approvals, the time and costs involved in
filing, prosecuting, enforcing and defending patent claims, competition in
technological and market developments, the establishment of and changes in
collaborative relationships and the cost of commercialization activities and
arrangements. The Company anticipates that it will be required to raise
substantial additional capital over a period of several years in order to
continue its clinical development programs and to prepare for commercialization.
Raising additional funds may result in further dilution to then-existing
shareholders. No assurance can be given that such additional funds will be
available on reasonable terms, or at all. The unavailability of such financing
could delay or prevent the development and marketing of the Company's potential
products.
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RISK FACTORS
Early Stage of Development; No Developed or Approved Products
The Company's potential products are in research and development and no
material revenues have been generated to date from product sales. To achieve
profitable operations, the Company, alone or with others, must successfully
develop, obtain regulatory approval for, manufacture and market its potential
products. Much of the clinical development work for the Company's potential
products remains to be completed. No assurance can be given that the Company's
product development effort will be successfully completed, that required
regulatory approval will be obtained or that any products, if developed and
introduced will be successfully marketed or achieve market acceptance.
History of Operating Losses; Accumulated Deficit
The Company has incurred net operating losses in every year of operation
since its inception. As of September 30, 1998, the Company had an accumulated
deficit of approximately $129.1 million. Losses have resulted principally from
costs incurred in connection with the Company's research and development
activities and from general and administrative costs associated with the
Company's operations. The Company expects to incur substantial and increasing
operating losses for at least the next several years. The Company's ability to
achieve profitability will depend in part on completing the research and
development of, and obtaining regulatory approvals for, its products and
successfully commencing product commercialization.
Possible Volatility of Stock Price; Dividend Policy
The market prices for securities of biopharmaceutical and biotechnology
companies have historically been highly volatile, and the market has from time
to time experienced significant price and volume fluctuations that are unrelated
to the operating performance of particular companies. Since the Company's Common
Stock became listed for public trading, its market price has fluctuated over a
wide range and the Company expects that it will continue to fluctuate. In
addition, announcements concerning the Company or its competitors, the results
of clinical trials, technological innovations or new commercial products,
government regulations, developments concerning proprietary rights, litigation
or public concern as to safety of the Company's potential products as well as
changes in general market conditions may have a significant effect on the market
price of Celtrix's common stock.
The Company has never paid dividends on its capital stock and the Company
does not anticipate paying any cash dividends in the foreseeable future.
Future Capital Requirements and Uncertainty of Additional Funding
After the completion of the November 1998 financing and the sale of fixed
assets as a result of discontinuing its manufacturing operations, the Company
anticipates that sufficient funds will be available to fund the Company's
operations into the third calendar quarter of 1999, not including further
clinical trials beyond the fourth quarter of 1998. Accordingly, further
development of the Company's products will require the commitment of substantial
resources to conduct the time-consuming research and development, clinical
studies and regulatory activities necessary to bring any potential therapeutic
products to market and to establish production, marketing and sales
capabilities. Such additional funding will need to be raised through
collaborative arrangements or through public or private financings, including
equity financing. Any additional equity financing may be dilutive to
stockholders, and any debt financing, if available, may involve restrictions on
the Company's ability to pay future dividends on its capital stock or the manner
in which the Company conducts its business.
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There can be no assurance that any such financing will be available to
the Company or on terms attractive to the Company, or that the Company can enter
into a collaborative relationship with a corporate partner for the continuation
of the clinical trials in any of its current indications. The inability to
obtain funds, or to enter into additional corporate collaborations, may require
the Company, ultimately, to liquidate its assets or to cease operations.
Stringent Government Regulation; Need for Product Approvals
The preclinical testing and clinical trials of any compounds developed by
the Company or its collaborative partners and the manufacturing and marketing of
any drugs resulting therefrom are subject to regulation by numerous federal,
state and local governmental authorities in the United States, the principal one
of which is the United States Food and Drug Administration (the "FDA"), and by
similar agencies in other countries in which drugs developed by the Company or
its collaborative partners may be tested and marketed (each of such federal,
state, local and other authorities and agencies, a "Regulatory Agency"). Any
compound developed by the Company or its collaborative partners must receive
Regulatory Agency approval before it may be marketed as a drug in a particular
country. The regulatory process, which includes preclinical testing and clinical
trials of each compound in order to establish its safety and efficacy, can take
many years and requires the expenditure of substantial resources. Data obtained
from preclinical and clinical activities are susceptible to varying
interpretations which could delay, limit or prevent Regulatory Agency approval.
In addition, delays or rejections may be encountered based upon changes in
Regulatory Agency policy during the period of drug development and/or the period
of review of any application for Regulatory Agency approval for a compound.
Delays in obtaining Regulatory Agency approvals could adversely affect the
marketing of any drugs developed by the Company or its collaborative partners,
impose costly procedures upon the Company's and its collaborative partners'
activities, diminish any competitive advantages that the Company or its
collaborative partners may attain and adversely affect the Company's ability to
receive royalties, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
There can be no assurance that, even after such time and expenditures,
Regulatory Agency approvals will be obtained for any compounds developed by or
in collaboration with the Company. Moreover, if Regulatory Agency approval for a
drug is granted, such approval may entail limitations on the indicated uses for
which it may be marketed that could limit the potential market for any such
drug. Furthermore, if and when such approval is obtained, the marketing and
manufacture of the Company's products would remain subject to extensive
regulatory requirements, and discovery of previously unknown problems with a
drug or its manufacturer may result in restrictions on such drug or
manufacturer, including withdrawal of the drug from the market. Failure to
comply with regulatory requirements could, among other things, result in fines,
suspension of regulatory approvals, operating restrictions and criminal
prosecution. In addition, Regulatory Agency approval of prices is required in
many countries and may be required for the marketing of any drug developed by
the Company or its collaborative partners in such countries.
Uncertainties Related to Clinical Trials
Before obtaining regulatory approvals for the commercial sale of any of
its products under development, the Company must demonstrate through preclinical
studies and clinical trials that the product is safe and efficacious for use in
each target indication. The results from preclinical studies and early clinical
trials may not be predictive of results that will be obtained in large-scale
testing, and there can be no assurance that the Company's clinical trials will
demonstrate the safety and efficacy of any products or will result in marketable
products.
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A number of companies in the biotechnology industry have suffered significant
setbacks in advanced clinical trials, even after promising results in earlier
trials. For example, in fiscal year 1995, Celtrix discontinued its in-house
TGF-beta-2 program for the treatment of ophthalmic conditions as a result of
disappointing clinical study results.
The rate of completion of the Company's clinical trials is dependent
upon, among other factors, the rate of patient enrollment. Patient enrollment is
a function of many factors, including the size of the patient population, the
nature of the protocol, the proximity of patients to clinical sites and the
eligibility criteria for the study. Delays in planned patient enrollment may
result in increased costs and delays, which could have a material adverse effect
on the Company's business, financial condition and results of operations.
No Assurance of Market Acceptance
There can be no assurance that any products successfully developed by the
Company, if approved for marketing, will achieve market acceptance. The products
and therapies which the Company is attempting to develop will compete with a
number of well-established traditional drugs and therapies manufactured and
marketed by major pharmaceutical companies. The degree of market acceptance of
any products developed by the Company will depend on a number of factors,
including the establishment and demonstration in the medical community of the
clinical efficacy and safety of the Company's product candidates, their
potential advantage over existing treatment methods, and reimbursement policies
of government and third-party payors. Competitors may also develop new
technologies or products which are more effective or less costly than SomatoKine
or perceived to be more cost-effective. There is no assurance that physicians,
patients or the medical community in general will accept and utilize any
products that may be developed by the Company. The Company's business, financial
condition and results of operations may be materially adversely affected if
SomatoKine does not receive market acceptance for any reason.
Substantial Competition
In each of the Company's potential product areas, competition from large
pharmaceutical companies, biotechnology companies and other companies,
universities and research institutions is substantial. At least three large
biotechnology and pharmaceutical companies with substantial financial and legal
resources have patent applications on file in the United States and abroad
directed at the production of recombinant IGF-I by various methods. Relative to
the Company, most of these entities have substantially greater capital
resources, research and development staffs, facilities and experience in
conducting clinical trials and obtaining regulatory approvals, as well as in
manufacturing and marketing pharmaceutical products. Furthermore, the Company
believes that competitors have used, and may continue to use, litigation to gain
competitive advantage. In addition, these and other entities may have or develop
new technologies or use existing technologies that are, or may in the future be,
the basis for competitive products.
Any potential products that the Company succeeds in developing and for
which it gains regulatory approval will have to compete for market acceptance
and market share. For certain of the Company's potential products, an important
factor in such competition may be the timing of market introduction of
competitive products. Accordingly, the relative speed with which the Company can
develop products, complete the clinical testing and regulatory approval
processes and supply commercial quantities of the product to the market are
expected to be important competitive factors. The Company expects that
competition will be based, among other things, on product efficacy, safety,
reliability, availability, timing and scope of regulatory approval and price.
There can be no assurance that the Company's competitors will not succeed in
developing technologies and products that are more effective than any that are
being developed by the Company or that would render the Company's technology and
products obsolete or
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noncompetitive. In addition, many of the Company's competitors may achieve
product commercialization or patent protection earlier than the Company. The
failure of the Company to compete effectively would have a material adverse
effect on the Company's business, financial condition and results of operations.
Dependence on Proprietary Technology; Uncertainty of Patent Protection
The Company's success will depend in part on its ability to obtain
patents, maintain trade secrets and operate without infringing on the
proprietary rights of others, both in the United States and in other countries.
The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including the Company, are highly uncertain and involve complex legal
and factual questions. Patent law relating to the scope of claims in the
technology fields in which the Company operates is still evolving. The degree of
future protection for the Company's proprietary rights is therefore uncertain.
No consistent policy has emerged regarding the permissible breadth of coverage
of claims in biotechnology patents. Therefore, no assurance can be given that
any of the Company's or its licensors' patent applications will issue as patents
or that any such issued patents will provide competitive advantages for the
Company's products or will not be successfully challenged or circumvented by its
competitors. In addition, there can be no assurance that others will not
independently develop substantially equivalent proprietary technology that is
not covered by the Company's patents or that others will not be issued patents
that may prevent the sale of the Company's proposed products or require
licensing and the payment of significant fees or royalties by the Company.
At least three large biotechnology and pharmaceutical companies with
substantial financial and legal resources have issued patents and/or patent
applications on file in the United States and abroad directed at the production
and/or use of recombinant IGF-I by various methods. The earliest date of filing
of these patent applications is April 25, 1983. Unless and until all of these
applications issue, it is not possible to determine the breadth of these claims
regarding a process for IGF-I production or for the use of IGF-I for any
particular indication. Furthermore, a large biotechnology and pharmaceutical
company with substantial financial and legal resources has a patent issued in
the United States directed towards certain DNA molecules encoding BP3 and the
corresponding BP3 protein. This same patent was previously granted in Europe and
was successfully opposed by Celtrix. However, this large biotechnology and
pharmaceutical company has recently appealed the decision and there can be no
assurance that the appeal will not be successful, and it is not possible to
determine what, if any, claims will be reinstated or the breadth of such claims.
In addition, this large biotechnology company has been issued a patent directed
toward the subcutaneous bolus administration of IGF-BP3 for certain limited
areas of use. Each of the referenced companies can be expected to defend its
patent position vigorously.
Celtrix has developed a new process for the production of IGF and BP3
which it does not believe will infringe on other patents relating to recombinant
protein production in general or on other patents relating to the production of
IGF and BP3 in particular, although there can be no assurance that a contrary
position will not be asserted. A large number of other companies have pending
patent applications and/or issued patents which claim certain methods of use of
IGF. There can be no assurance that third parties will not claim the Company's
technology, current or future products or manufacturing processes infringe the
proprietary rights of others. If other companies were to successfully bring
legal actions against the Company claiming patent or other intellectual property
infringements, in addition to any potential liability for damages, then the
Company could be required to obtain a license in order to continue to use the
affected process or to manufacture or use the affected products or cease using
such products or process if enjoined by a court. Any such claim, with or without
merit, could result in costly litigation or might require the Company to enter
into royalty or licensing agreements, all of which could delay or otherwise
adversely impact the Company's potential products for commercial use. If any
licenses are required, there can be no assurance that the
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Company will be able to obtain any such license on commercially favorable terms,
if at all, and if these licenses are not obtained, the Company might be
prevented from pursuing the development of certain of its potential products.
The Company's breach of an existing license or failure to obtain or delay in
obtaining a license to any technology that it may require to commercialize its
products may have a material adverse impact on the Company.
Litigation, which could result in substantial costs to the Company, may
also be necessary to enforce any patents issued or licensed to the Company or to
determine the scope and validity of another party's proprietary rights. There
can be no assurance that the Company's issued or licensed patents would be held
valid by a court of competent jurisdiction. An adverse outcome in litigation or
an interference or other proceeding in a court or patent office could subject
the Company to significant liabilities to other parties, require disputed rights
to be licensed from other parties or require the Company to cease using such
technology, any of which could have a material adverse effect on the Company.
Celtrix also relies on trade secrets to protect technology, especially
where patent protection is not believed to be appropriate or obtainable. Celtrix
attempts to protect its proprietary technology and processes in part by
confidentiality agreements with its employees, consultants and certain
contractors. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
discovered by competitors in such a manner that the Company has no practical
recourse. To the extent that the Company or its consultants or research
collaborators use intellectual property owned by others in their work for the
Company, disputes may also arise as to the rights in related or resulting
know-how and inventions.
Limited Manufacturing Experience and Capacity
The Company's products must be manufactured in compliance with regulatory
requirements and at acceptable costs. In September 1998, the Company implemented
a restructuring plan to focus its operation on the clinical development of its
lead drug compound, SomatoKine(R), and to reduce its cash burn rate. With
sufficient clinical grade SomatoKine to support the conduct of clinical trials
over the next two years, the Company discontinued its in-house manufacturing
operations. In the future, the Company will need to contract its manufacturing
operations or enter into corporate partnering arrangements that will support
manufacturing of drug material to support additional clinical drug needs and
eventual commercial scale manufacturing. There can be no assurance that the
Company will be able to successfully identify and contract a third party
manufacturer, to manufacture any of its current or future products on a
commercial scale, nor that such products can be manufactured at a cost or in
quantities to make commercially viable products. Failure to obtain sufficient
commercial quantities of SomatoKine at acceptable terms will have an adverse
impact on the Company's attempts to seek approval for this product, or to
commercialize this product.
Limited Sales and Marketing Experience
If the Company is permitted to commence commercial sales of products, it
will face commercial competition with respect to sales, marketing and
distribution, areas in which it has no experience. To market any of its products
directly, the Company must develop a marketing and sales force with technical
expertise and with supporting distribution capability. Alternatively, the
Company may obtain the assistance of a pharmaceutical company with a large
distribution system and a large direct sales force. There can be no assurance
that the Company will be able to establish sales and distribution capabilities
or be successful in gaining market acceptance for its proprietary products. To
the extent the Company enters into co-promotion or other licensing arrangements,
any revenues received by the Company will be
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dependent on the efforts of third parties and there can be no assurance that
such efforts will be successful.
Reliance on Qualified and Key Personnel
The Company is highly dependent on the principal members of its
scientific and management staff, the loss of whose services might significantly
delay or prevent the achievement of research, development, or business
objectives. Although the Company believes it has retained sufficient employees
to achieve its near-term business objectives after its reduction in force in
September 1998, there can be no assurance that the loss of service of such
employees would not impede the Company's objectives. Furthermore, there can be
no assurance that the reduction in force will not adversely affect the Company's
ability to retain its remaining employees. The loss of key management or
scientific personnel could adversely affect the Company's continued business.
The Company's potential expansion into areas and activities requiring
additional expertise, such as clinical trials, governmental approvals, contract
manufacturing and marketing, are expected to place a significant strain on the
Company's management, operational and financial resources. These demands are
expected to require a substantial increase in management and scientific
personnel and the development of additional expertise by existing management
personnel. The failure to attract and retain such personnel or to develop such
expertise could materially adversely affect prospects for the Company's success.
Product Liability; Availability of Insurance
The Company currently has in force general liability insurance, with
coverage limits of $2.0 million per incident and $4.0 million in the aggregate
annually, and product liability insurance with coverage limits of $1.0 million
per incident and $3.0 million in the aggregate annually. The Company's insurance
policies provide coverage for product liability on a claims made basis and
general liability on occurrence basis. These policies are subject to annual
renewal. Such insurance may not be available in the future on acceptable terms
or at all. There can be no assurance that the Company's insurance coverage will
be adequate or that a product liability claim or recall would not materially
adversely affect the business or financial condition of the Company.
The use of the Company's potential products or technology in clinical
trials and the sale of such products may expose the Company to liability claims.
Such risks exist even with respect to those potential products, if any, that
receive regulatory approval for commercial sale. Although Celtrix has taken and
will continue to take what it believes are appropriate precautions, there can be
no assurance that it will avoid significant product liability exposure. There
also can be no assurance that the Company's insurance coverage will be adequate
or that a product liability claim or recall would not materially adversely
affect the business or financial condition of the Company.
Concentration of Stock Ownership
As of September 30, 1998 the Company's directors and officers and their
affiliates beneficially owned approximately 30% of the outstanding Common Stock.
As a result, these stockholders have been able to exercise significant influence
over all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. Such concentration
of ownership may have the effect of delaying or preventing a change in control
of the Company. In November 1998, the Company completed a private placement of
4,000,000 shares of newly issued common stock pursuant to a Common Stock and
Warrant Purchase Agreement dated October 12, 1998 which had a dilutive impact on
the foregoing stock ownership percentage. However, it is anticipated that the
Company's
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directors and officers and their affiliates collectively will continue to be
able to exercise influence in matters requiring stockholder approval in the
future.
Impact of Year 2000
Many computer systems experience problems handling dates beyond the year
1999. Therefore, some computer hardware and software will need to be upgraded or
modified prior to the Year 2000 in order to remain functional. The Company is
currently assessing the impact of Year 2000 on its existing software and
systems. The Company expects to implement successfully the systems and software
changes necessary to address the Year 2000 issues, and does not believe that the
costs of such actions will have a material effect on the Company's results of
operations or financial condition. However, it is unknown the extent, if any, of
the impact of the Year 2000 on other systems and equipment of third parties with
which the Company does business. There can be no assurance that third parties
will address the Year 2000 issue in a timely fashion, or at all. Any Year 2000
compliance problem or delay of either the Company, its suppliers, its clinical
research organizations, or its collaborative partners could have a material
adverse effect on the Company's business, operating results and financial
conditions.
Nasdaq Issues
Since October 1998, the Company has failed to comply with certain Nasdaq
continued listing requirements, including the minimum net tangible assets
requirement and the minimum bid price requirement. The proceeds from the
November 1998 financing allowed the Company to meet the minimum net tangible
assets requirement, on a pro forma basis, for the quarter ended September 30,
1998. In November 1998, the Company received notice from Nasdaq advising that if
it is unable to comply with the minimum bid price requirement for a ten (10) day
period prior to February 1999, it will be subject to delisting from Nasdaq. Such
delisting may have a material adverse effect on the price of the Company's
Common Stock and the levels of liquidity currently available to its
stockholders. Although the Company is working to comply with all continued
listing requirements of Nasdaq, there can be no assurance that it will be able
to satisfy such requirements prior to February 1999.
Restructuring
In efforts to reduce the Company's cash burn rate and preserve value in
the Company's core assets and technologies, in the second quarter of 1998, the
Company restructured its operations to eliminate manufacturing and announced a
reduction in work force of up to 90%. Such actions were designed to permit the
Company to continue its clinical development of SomatoKine. There can be no
assurance that the restructuring efforts the Company has engaged in to date will
be successful or that the Company will be able to sustain its clinical
development activities going forward. In addition, there can be no assurance
that the Company's management will not deem it appropriate to undertake other
restructuring efforts in the future or to what degree any such efforts will
result in improved performance or a reduction in the Company's cash burn rate.
Dilutive and Potential Dilutive Effect to Stockholders
In November 1998, pursuant to the terms of a Common Stock and Warrant
Purchase Agreement dated October 12, 1998, the Company completed a private
placement of 4,000,000 shares of the Company's common stock (the "Private
Placement"), resulting in net proceeds to the Company, after deducting estimated
transaction costs, of approximately $1.9 million. Also in connection with the
Private Placement for every share of stock issued, the Company issued one and
one-half warrants to purchase additional shares at $0.55 per share.
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The Company also agreed to register the shares and warrants issued in the
Private Placement under the Securities Act of 1933, as amended.
The foregoing Private Placement issuance of shares of the Company's
common stock and warrants exercisable for common stock will dilute the
beneficial ownership of existing Company stockholders.
FORWARD-LOOKING STATEMENTS
The Company notes that certain of the foregoing statements are forward
looking within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Actual results may differ materially from the statements made
due to a variety of factors including, but not limited to, the ability to obtain
financing for the Company's working capital, clinical study results, the ability
to secure corporate partnership arrangements, and other risk factors which are
described in the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1998.
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PART II. OTHER INFORMATION
CELTRIX PHARMACEUTICALS, INC.
Item 2. Changes in Securities and Use of Proceeds.
(a) Securities Sold
(I) On April 1, 1997, the Company issued and sold to purchasers in
a private placement 5,721,876 shares of the Company's Common
Stock (the "Shares") and warrants exercisable for 2,860,934
shares of the Company's Common Stock (the "Warrants"). The
Shares and Warrants were sold in the form of "Units" which
consisted of two Shares of Common Stock to purchase one share
of Warrant.
(II) On December 15, 1995, the Company issued and sold to Genzyme
Corporation pursuant to a 1994 Product Development, License and
Marketing Agreement, 1,472,829 shares (the "Genzyme Shares") of
the Company's Common Stock.
(b) Underwriters and Other Purchasers
There were no underwriters for the foregoing transactions mentioned in
(a)(I) and (a)(II). A finders fee of $520,000 was paid to BioAsia LLC
in connection with the private placement described in (a)(I) above.
The Shares and Warrants were offered only to a group of accredited
investors. The Genzyme Shares were offered only to Genzyme
Corporation, an accredited investor.
(c) Consideration
(I) The Shares and Warrants from the April 1997 private placement
were sold for an aggregate offering price of $13,949,955.60.
(II) The shares issued to Genzyme Corporation were sold for an
aggregate price of $4,418,487.00.
(d) Exemption from Registration Claimed
(I) The foregoing transaction under (a)(I) was exempt from
registration under the Securities Act of 1933, as amended (the
"Act") pursuant to Rule 506 of Regulation D, which provides an
exemption for sales without regard to the dollar amount of the
offering, provided that there are no more than 35 purchasers,
and the sale satisfies all terms and conditions of Rules 501
and 502 under the Act.
(II) The foregoing transaction under (a)(II) was exempt from
registration under the Act pursuant to Rule 505 of Regulation
D, which provides an exemption for sales of securities not
exceeding $5 million, provided that there are no more than 35
purchasers, and the sale satisfies all terms and conditions of
Rules 501 and 502 under the Act.
(e) Terms of Conversion or Exercise
In connection with the April 1997 private placement, the Warrants are
exercisable at a price of $2.6818 per share and expire on April 1,
2000. If the holder of a Unit sold any Shares between April 1, 1997
and April 1, 1998, the number of shares issuable upon exercise of that
holder's Warrant would have been reduced by an amount equal to 0.5
multiplied by the number of Shares sold or otherwise disposed of
during such
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period. Also, in the event that the average of the daily high and low
bid price per share of the Company's Common Stock as reported on the
Nasdaq National Market (or such other equivalent market or exchange)
exceeds $4.876 for a period of thirty (30) consecutive trading days (a
"Callable Event"), then the Company may, on or before the tenth (10th)
trading day after such Callable Event has occurred, send a written
notice to the Warrantholder that a Callable Event has occurred and
that the Warrant shall terminate on the thirtieth (30th) day after the
date the notice became effective.
Item 4. Submission of Matters to a Vote of Security Holders
(a) On September 10, 1998, the Registrant held its Annual Meeting of
Stockholders.
(b) All of the Management's nominees for directors were elected at the
meeting pursuant to proxies solicited pursuant to Regulation 14 under
the Securities Exchange Act of 1934. The directors were elected as
follows:
For Against
--- -------
Henry E. Blair 15,446,872 205,864
Barry M. Sherman, M.D. 15,446,072 206,664
Andreas Sommer, Ph.D. 15,447,772 204,964
James E. Thomas 15,445,234 207,502
There were no broker non-votes as the election was uncontested.
(c) The stockholders approved amendments to the Company's 1991
Directors' Stock Option Plan, to increase the number of shares which
are automatically granted to non-employee directors and to amend the
timing and vesting of such options, with 14,813,002 shares voting in
favor, 773,017 voting against, and 66,717 shares abstaining. There were
no broker non-votes.
(d) The stockholders approved an amendment to the Company's 1991
Employee Stock Purchase Plan to the increase the number of shares of
Common Stock reserved for issuance by 250,000 shares, with 15,116,757
shares voting in favor, 460,522 shares voting against, and 75,457
shares abstaining. There were no broker non-votes.
(e) The stockholders also approved the selection of Ernst & Young LLP
as independent auditors of the Company for the next fiscal year, with
15,497,999 shares voting in favor, 99,825 shares voting against, and
54,912 shares abstaining. There were no broker non-votes.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10.55 Separation Agreement and Mutual Release between the Registrant
and the employees who participated in the Registrant's 1998
reduction-in-force.
27.1 Financial Data Schedule
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(b) The Company filed the following reports on Form 8-K during the
quarter ended September 30, 1998:
Report Date: July 15, 1998
Item 5. Other Events
The Registrant announced the initiation of a Phase II clinical
feasibility study in diabetes.
Report Date: July 23, 1998
Item 5. Other Events
The Registrant announced its first quarter financial results.
Report Date: September 18, 1998
Item 5. Other Events
The Registrant announced the restructure of the Company to concentrate
on the clinical development of SomatoKine(R).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CELTRIX PHARMACEUTICALS, INC. (Registrant)
Date: November 20, 1998 By: /s/ DONALD D. HUFFMAN
---------------------------------------
Donald D. Huffman
Vice President, Finance and
Administration and Chief Financial
Officer (Duly authorized principal
financial and accounting officer)
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CELTRIX PHARMACEUTICALS, INC.
INDEX TO EXHIBITS
10.55 Separation Agreement and Mutual Release between the Registrant
and the employees who participated in the Registrant's 1998
reduction-in-force.
27.1 Financial Data Schedule