SCHEDULE 14A
(RULE 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement

[ ] Definitive Additional Materials

[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12

CollaGenex Pharmaceuticals, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.

(1) Title of each class of securities to which transaction applies:

- --------------------------------------------------------------------------------

(2) Aggregate number of securities to which transaction applies:

- --------------------------------------------------------------------------------

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):

- --------------------------------------------------------------------------------

(4) Proposed maximum aggregate value of transaction:

- --------------------------------------------------------------------------------

(5) Total fee paid:

- --------------------------------------------------------------------------------

[ ] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.

(1) Amount previously paid:

- --------------------------------------------------------------------------------

(2) Form, schedule or registration statement no.:

- --------------------------------------------------------------------------------

(3) Filing party:

- --------------------------------------------------------------------------------

(4) Date filed:

- --------------------------------------------------------------------------------

COLLAGENEX PHARMACEUTICALS, INC.
301 SOUTH STATE STREET
NEWTOWN, PA 18940
------------------------

PROXY STATEMENT
------------------------

This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of CollaGenex Pharmaceuticals, Inc. (the "Company") of
proxies to be voted at the Annual Meeting of Stockholders of the Company to be
held on Thursday, May 8, 1997 (the "Meeting"), at the Four Seasons Hotel, One
Logan Square, Philadelphia, Pennsylvania at 9:30 A.M., local time, and at any
adjournment or adjournments thereof. Holders of record of Common Stock, $.01 par
value ("Common Stock"), as of the close of business on March 28, 1997, will be
entitled to notice of and to vote at the Meeting and any adjournment or
adjournments thereof. As of that date, there were 7,543,579 shares of Common
Stock issued and outstanding and entitled to vote. Each share of Common Stock is
entitled to one vote on any matter presented at the Meeting. The number of votes
entitled to be cast at the Meeting is 7,543,579.

If proxies in the accompanying form are properly executed and returned, the
Common Stock represented thereby will be voted in the manner specified therein.
If not otherwise specified, the Common Stock represented by the proxies will be
voted (i) FOR the election of the eight nominees named below as Directors, (ii)
FOR a proposal to amend the Company's 1996 Non-Employee Director Stock Option
Plan (the "Non-Employee Plan") to increase the number of shares of Common Stock
reserved for issuance upon the exercise of options granted under the
Non-Employee Plan from 109,000 to 300,000 shares, to increase the number of
shares of Common Stock underlying automatic option grants to new non-employee
Directors from 10,000 to 25,000 shares, to grant options to purchase an
additional 15,000 shares of Common Stock to those non-employee Directors who
previously received, upon the effectiveness of the Company's initial public
offering in June 1996 (the "IPO"), an automatic grant of options to purchase
10,000 shares of Common Stock under the Non-Employee Plan and to revise certain
other provisions of the Non-Employee Plan as set forth herein, (iii) FOR the
ratification of the appointment of KPMG Peat Marwick LLP as independent auditors
for the year ending December 31, 1997, and (iv) in the discretion of the persons
named in the enclosed form of proxy, on any other proposals which may properly
come before the Meeting or any adjournment or adjournments thereof. Any
Stockholder who has submitted a proxy may revoke it at any time before it is
voted, by written notice addressed to and received by the Secretary of the
Company, by submitting a duly executed proxy bearing a later date or by electing
to vote in person at the Meeting. The mere presence at the Meeting of the person
appointing a proxy does not, however, revoke the appointment.

The presence, in person or by proxy, of holders of Common Stock having a
majority of the votes entitled to be cast at the Meeting shall constitute a
quorum. The affirmative vote by the holders of a plurality of the shares of
Common Stock represented at the Meeting is required for the election of
directors, provided a quorum is present in person or by proxy. All actions
proposed herein other than the election of directors may be taken upon the
affirmative vote of Stockholders possessing a majority of the voting power
represented at the Meeting, provided a quorum is present in person or by proxy.

This Proxy Statement, together with the related proxy card, is being mailed
to the Stockholders of the Company on or about April 8, 1997. The Annual Report
to Stockholders of the Company for the year ended December 31, 1996, including
financial statements (the "Annual Report"), is being mailed together with this
Proxy Statement to all Stockholders of record as of March 28, 1997. In addition,
the Company has provided brokers, dealers, banks, voting trustees and their
nominees, at the Company's expense, with additional copies of the Annual Report
so that such record holders could supply such materials to beneficial owners as
of March 28, 1997.

Abstentions are included in the shares present at the Meeting for purposes
of determining whether a quorum is present, and are counted as a vote against
for purposes of determining whether a proposal is approved. Broker non-votes
(when shares are represented at the Meeting by a proxy specifically conferring
3

only limited authority to vote on certain matters and no authority to vote on
other matters) are included in the determination of the number of shares
represented at the Meeting for purposes of determining whether a quorum is
present but are not counted for purposes of determining whether a proposal has
been approved and thus have no effect on the outcome.

ELECTION OF DIRECTORS

At the Meeting, eight Directors are to be elected (which number shall
constitute the entire Board of Directors of the Company) to hold office until
the next Annual Meeting of Stockholders and until their successors shall have
been elected and qualified.

It is the intention of the persons named in the enclosed form of proxy to
vote the stock represented thereby, unless otherwise specified in the proxy, for
the election as Directors of the persons whose names and biographies appear
below. All of the persons whose names and biographies appear below are at
present Directors of the Company. In the event any of the nominees should become
unavailable or unable to serve as a director, it is intended that votes will be
cast for a substitute nominee designated by the Board of Directors. The Board of
Directors has no reason to believe that the nominees named will be unable to
serve if elected. Each of the nominees has consented to being named in this
Proxy Statement and to serve if elected.

The current Board of Directors and nominees for election to the Board are
as follows:

SERVED AS A POSITIONS WITH
NAME AGE DIRECTOR SINCE THE COMPANY
- ----------------------------------------------- --- -------------- ------------------------------

Helmer P.K. Agersborg, Ph.D. .................. 68 1992 Chairman of the Board
Brian M. Gallagher, Ph.D. ..................... 49 1994 President and Chief Executive
Officer and Director
Peter R. Barnett, D.M.D. ...................... 45 1997 Director
Robert J. Easton............................... 52 1993 Director
James E. Daverman.............................. 47 1995 Director
Stephen W. Ritterbush, Ph.D. .................. 50 1992 Director
Pieter J. Schiller............................. 59 1995 Director
Terence E. Winters, Ph.D. ..................... 54 1992 Director

The principal occupations and business experience, for at least the past
five years, of each nominee are as follows:

Dr. Agersborg has been Chairman of the Company's Board of Directors since
March 1992 and served as its Chief Executive Officer and President until March
1994. Dr. Agersborg also serves as President and Chief Executive Officer of
Afferon Corporation and Maret Corporation, having joined such companies in
September 1992 and September 1994, respectively. Dr. Agersborg has also served
as director of Lidak Pharmaceutical since October 1992. Each of such companies
engages in pharmaceutical development. From May 1987 until his retirement in
June 1990, Dr. Agersborg was the President of Wyeth-Ayerst Research Division of
American Home Products Corporation. Prior to that, and beginning in 1975, he was
a Vice President, and then an Executive Vice President, of Wyeth-Ayerst
Laboratories Research Division.

Dr. Gallagher joined the Company in April 1994 as President and Chief
Executive Officer and was elected to the Board of Directors in November 1994.
From 1988 until joining the Company, Dr. Gallagher was employed by Bristol-Myers
Squibb Company ("BMS") and its predecessor, Squibb Corporation, in various
executive positions including strategic planning, worldwide product and business
development and marketing. From 1991 until joining the Company, Dr. Gallagher
was Vice President and General Manager of Squibb Diagnostics, the in vivo
imaging pharmaceutical division, where he was responsible for drug development,
including filing NDAs with the FDA and other regulatory authorities worldwide.
Prior to that, Dr. Gallagher served for ten years with E.I. DuPont de Nemours &
Co. in a variety of pharmaceutical research, development, marketing and business
management positions.

2
4

Dr. Barnett has been a Director of the Company since February 1997. He is
Senior Vice President and Chief Operating Officer of United Dental Care, Inc., a
managed dental benefits firm, where he has served in such capacity since January
1995. From August 1994 to January 1995, Dr. Barnett was Executive Director of
Prudential DMO, and from March 1993 to August 1994, he served as an independent
consultant in the managed care field. From January 1985 to March 1993, Dr.
Barnett was a Senior Vice President with Pearle Vision, Inc.

Mr. Easton has been a director of the Company since November 1993. He is
Managing Director of The Wilkerson Group, Inc., an IBM Company and a major
health care consulting firm, where he has served in such capacity since 1986.
Mr. Easton is a former President of the Biomedical Marketing Association.

Mr. Daverman has been a director of the Company since November 1995. He is
a managing general partner of Marquette Venture Partners ("MVP"), a venture
capital investment company which he co-founded in 1987. Mr. Daverman is a
general partner of Marquette Management Partners, the general partner of
Marquette Venture Partners, L.P. and a general partner of MG II, L.P., the
general partner of Marquette Venture Partners II, L.P. and MVP II Affiliates
Fund, L.P. He is a member of the Board of Directors of the Technology Advisory
Group of the Technology Management Office of the University of Michigan. Mr.
Daverman is a member of the Board of Directors of Endocardial Solutions, Inc.
and numerous privately held companies.

Dr. Ritterbush has been a director of the Company since its founding in
January 1992. He is managing general partner of Fairfax Partners/The Venture
Fund of Washington, L.P., a venture capital fund, which he co-founded in 1989.
Dr. Ritterbush serves as a director and is on the compensation committee of the
Board of Directors of Apache Medical Systems, Inc.

Mr. Schiller has been a director of the Company since September 1995. He
joined Advanced Technology Ventures ("ATV"), a venture capital fund, in
September 1986 and is currently a general partner of various ATV funds. He is a
director of Anthra Pharmaceuticals, Inc., Endius, Inc., Afferon Corporation,
HealthShare Technology, Inc. and Novoste Corporation.

Dr. Winters has been a director of the Company since its founding in
January 1992. He is a general partner of Columbine Venture Funds, a venture
capital fund, of which he was a founder in 1983. He also serves as a director of
Afferon Corporation, Maret Corporation and Melanotan Corporation.

All directors hold office until the next annual meeting of stockholders and
until their successors shall have been duly elected and qualified. None of the
Company's Directors are related to any other Director or to any executive
officer of the Company.

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR EACH OF THE
NOMINEES FOR THE BOARD OF DIRECTORS.

COMMITTEES AND MEETINGS OF THE BOARD

The Board of Directors has a Compensation Committee, which approves
salaries and incentive compensation for executive officers of the Company and
which administers the Company's stock option plans, and an Audit Committee,
which reviews the results and scope of the audit and other services provided by
the Company's independent accountants. The Compensation Committee currently
consists of Robert J. Easton, Stephen W. Ritterbush, Ph.D. and Terence E.
Winters, Ph.D. The Compensation Committee was established in March 1996 and held
two meetings in 1996. The Audit Committee currently consists of James E.
Daverman, Stephen W. Ritterbush, Ph.D. and Pieter J. Schiller. The Audit
Committee was established in March 1996 and held one meeting in 1996. There were
six meetings of the Board of Directors during 1996. Each incumbent Director
attended at least 75% of the aggregate of all meetings of the Board of Directors
held during the period in which he served as a Director and the total number of
meetings held by the committee on which he served during the period, if
applicable.

3
5

COMPENSATION OF DIRECTORS

Helmer P.K. Agersborg is paid $36,000 per year for his services as Chairman
of the Board. Peter R. Barnett receives $1,500 per meeting for each meeting of
the Board of Directors attended. The Wilkerson Group, Inc., an IBM Company,
receives $1,500 per meeting for each meeting of the Board of Directors attended
by Mr. Easton. No other directors receive cash compensation for services on the
Board of Directors. The Company provides reimbursement to directors for
reasonable and necessary expenses incurred in connection with attendance at
meetings of the Board of Directors and other Company business.

In addition, the Company granted to Dr. Agersborg options to purchase
60,625, 28,084 and 22,500 shares of Common Stock on March 1, 1992, September 1,
1993 and March 1, 1995, respectively, at exercise prices of $0.20, $0.20 and
$0.335, respectively. Of such options, an aggregate of 88,709 have been
exercised. The remaining options vested to the extent of 7,500 shares on March
1, 1996 and will vest to the extent of 7,500 shares on each of March 1, 1997 and
1998. The Company granted to Mr. Easton options to purchase 7,500 shares of
Common Stock on each of January 1, 1994 and October 1, 1995 at exercise prices
of $0.20 and $1.20, respectively. Of such options, 7,500 have been exercised and
the remaining 7,500 vest to the extent of 2,500 shares per year commencing
October 1, 1996. On the effective date of the Company's IPO, pursuant to the
Non-Employee Plan, each non-employee director of the Company was granted an
option to purchase 10,000 shares of Common Stock, at an exercise price per share
equal to $10.00. On November 22, 1996, the Board of Directors of the Company
granted, subject to Stockholder approval of the proposed amendment to the Plan
contained herein, options to purchase an additional 15,000 shares of Common
Stock to each non-employee director of the Company, at an exercise price per
share equal to $9.75. All such options become exercisable in five equal annual
installments commencing one year after the date of grant provided that the
optionee then remains a director at the time of vesting of the installments. The
right to exercise annual installments of options will be reduced proportionately
based on the optionee's actual attendance at directors' meetings if the optionee
fails to attend at least 80% of the directors' meetings held in any calendar
year. For a description of the material terms of the Non-Employee Plan, see
"PROPOSED AMENDMENT TO THE 1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN."

4
6

EXECUTIVE OFFICERS

The following table identifies the current executive officers of the
Company:

CAPACITIES IN IN CURRENT
NAME AGE WHICH SERVED POSITION SINCE
- ------------------------------ --- -------------------------------------- ---------------------

Brian M. Gallagher, Ph.D...... 49 President and Chief Executive Officer April 1994 (Director
and Director since November
1994)
Robert A. Ashley(1)........... 39 Vice President, Commercial Development September 1994
Nancy C. Broadbent(2)......... 41 Chief Financial Officer, Treasurer and March 1996
Secretary

- ---------------
(1) Mr. Ashley joined the Company in September 1994 as Vice President,
Commercial Development. From 1989 until joining the Company, he was employed
by BMS and its predecessor, Squibb Corporation, in various positions
including product development, commercial and business development and, most
recently, as Director, Business Development where he was responsible for the
worldwide product and market development of several new drugs. From 1979 to
1989, Mr. Ashley held various positions at Amersham International (UK) Ltd.,
including research, development, manufacturing, sales and marketing
positions, as well as worldwide product development and product launch
positions.

(2) Ms. Broadbent joined the Company in March 1996 as Chief Financial Officer,
Treasurer and Secretary. From October 1994 until joining the Company, Ms.
Broadbent served as Senior Vice President, Chief Financial Officer and
director of Human Genome Sciences, Inc., a biotechnology company. From
January 1993 to October 1994, she served as Vice President and Chief
Financial Officer of Cangene, Inc., a biopharmaceutical company. From
January 1992 through December 1992, Ms. Broadbent served as an independent
financial consultant. From March 1990 to December 1991, she was employed by
Baring Brothers & Co., Inc., initially as Senior Vice President and then as
Executive Director, Corporate Finance. Prior to that, Ms. Broadbent served
for nine years in corporate finance positions with Salomon Brothers, Inc.
and PaineWebber Incorporated.

None of the Company's executive officers is related to any other executive
officer or to any Director of the Company. Executive officers of the Company are
elected annually by the Board of Directors and serve until their successors are
duly elected and qualified.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's Directors, officers and shareholders who
beneficially own more than 10% of any class of equity securities of the Company
registered pursuant to Section 12 of the Exchange Act to file initial reports of
ownership and reports of changes in ownership with respect to the Company's
equity securities with the Securities and Exchange Commission (the "SEC"). All
reporting persons are required by SEC regulation to furnish the Company with
copies of all reports that such reporting persons file with the SEC pursuant to
Section 16(a).

Based solely on the Company's review of the copies of such forms received
by the Company and upon written representations of the Company's reporting
persons received by the Company, Robert A. Ashley, Vice President, Commercial
Development, and Peter R. Barnett, D.M.D., a member of the Board of Directors,
did not report on a timely basis certain transactions. In particular, Mr. Ashley
failed to timely report on a Form 4 the acquisition of 100 shares of Common
Stock on June 20, 1996 at a purchase price of $10.00 per share. Such transaction
was reported on a Form 4 filed on April 7, 1997 with the SEC. In addition, Mr.
Ashley failed to timely report on a Form 4 the exercise on November 12, 1996 of
options to purchase 18,750 shares of Common Stock at an exercise price of $0.335
per share. Such transaction was reported on a Form 5 filed on February 7, 1997
with the SEC. Dr. Barnett failed to timely report on a Form 3 his election on
February 7, 1997 to the Board of Directors and his receipt on such date of
options to purchase 25,000 shares of Common Stock at an exercise price of $9.00
per share. Dr. Barnett filed such Form 3 on March 20, 1997 with the SEC.

5
7

EXECUTIVE COMPENSATION

SUMMARY OF COMPENSATION IN 1996 AND 1995

The following Summary Compensation Table sets forth information concerning
compensation for services in all capacities awarded to, earned by or paid to
each person who served as the Company's Chief Executive Officer at any time
during 1996 and each other executive officer of the Company whose aggregate cash
compensation exceeded $100,000 (collectively, the "Named Executives") during the
years ended December 31, 1995 and 1996.

SUMMARY COMPENSATION TABLE(1)

Long-Term
Compensation Awards
Annual Compensation ----------------------
---------------------- Securities Underlying
NAME AND PRINCIPAL POSITION Year Salary($) Bonus($) Options(#)
(a) (b) (c) (d) (g)
- -------------------------------------------- ----- --------- -------- ----------------------

Brian M. Gallagher, Ph.D(2)................. 1996 225,000 50,000 0
President and Chief Executive Officer 1995 225,000 50,000 100,000
Robert A. Ashley............................ 1996 139,961 30,000 0
Vice President, Commercial Development 1995 120,000 10,000 37,500
Nancy C. Broadbent(3)....................... 1996 137,500 30,000 60,000
Chief Financial Officer, Treasurer and
Secretary 1995 -- -- --

- ---------------
(1) The costs of certain benefits are not included because they did not exceed,
in the case of each Named Executive, the lesser of $50,000 or 10% of the
total annual salary and bonus reported in the above table.

(2) In November 1994, Dr. Gallagher purchased 125,000 shares of the Company's
restricted Common Stock at $0.335 per share. Such shares are subject to
vesting and the Company's repurchase right and right of first refusal. Of
such shares, 25,000 vested immediately, an aggregate of 83,333 have vested
to date and the remaining 41,667 will vest in equal monthly portions over
the next 20 months. Pursuant to the Company's repurchase right, the Company
may repurchase any of Dr. Gallagher's unvested shares, at a purchase price
of $0.335 per share, at the time of termination of his service. Pursuant to
the Company's right of first refusal, the Company may buy back Dr.
Gallagher's vested shares at $0.335 per share, if Dr. Gallagher is
terminated for cause, and at the current market value per share, if he is
terminated for any other reason. At December 31, 1996, Dr. Gallagher held
77,083 shares of restricted Common Stock with a year-end value of $626,302
based on the value of the Common Stock as of such date ($8.125 per share),
less the purchase price per share paid for such shares ($0.335 per share).

(3) Ms. Broadbent joined the Company in March 1996 as Chief Financial Officer,
Treasurer and Secretary.

6
8

OPTION GRANTS IN 1996

The following table sets forth information concerning individual grants of
stock options made pursuant to the Company's 1992 Stock Option Plan (the "1992
Plan") during 1996 to each of the Named Executives. The Company has never
granted any stock appreciation rights.

OPTION GRANTS IN LAST FISCAL YEAR

POTENTIAL
INDIVIDUAL GRANTS REALIZABLE
--------------------------------------------------------- VALUE AT
PERCENT OF ASSUMED ANNUAL
TOTAL RATES OF STOCK
NUMBER OF OPTIONS PRICE APPRECIATION
SECURITIES GRANTED TO FOR
UNDERLYING EMPLOYEES EXERCISE OR OPTION TERM(3)
OPTIONS IN FISCAL BASE PRICE EXPIRATION ------------------
NAME GRANTED (#)(1) YEAR(2) ($/SH) DATE 5%($) 10%($)
(a) (b) (c) (d) (e) (f) (g)
- ---------------------------- -------------- ---------- ----------- ---------- ------ -------

Brian M. Gallagher, Ph.D.... -- 0% -- -- -- --
Robert A. Ashley............ -- 0% -- -- -- --
Nancy C. Broadbent.......... 60,000 79% $2.00 3/1/2006 75,467 191,249

- ---------------
(1) Such options were granted pursuant to and in accordance with the Company's
1992 Plan. The 1992 Plan was adopted by the Board of Directors and approved
by the stockholders of the Company on February 20, 1992 and March 1, 1992,
respectively. A total of 268,750 shares of Common Stock currently are
reserved for issuance upon exercise of options granted under the 1992 Plan.
Those eligible to receive stock option grants under the 1992 Plan include
employees, non-employee directors and consultants. The 1992 Plan is
administered by the Compensation Committee of the Board of Directors of the
Company, which is comprised solely of outside directors. Subject to the
provisions of the 1992 Plan, the administrator of the 1992 Plan has the
discretion to determine the optionees and/or grantees, the type of options
to be granted (incentive stock options ("ISOs") or non-qualified stock
options ("NQSOs")), the vesting provisions, the terms of the grants and such
other related provisions as are consistent with the 1992 Plan. The exercise
price of an ISO may not be less than the fair market value per share of the
Common Stock on the date of grant or, in the case of an optionee who
beneficially owns 10% or more of the outstanding capital stock of the
Company, not less than 110% of the fair market value per share on the date
of grant. The exercise price of a NQSO may be less than the fair market
value per share of the Common Stock on the date of grant. The options
terminate not more than ten years from the date of grant, subject to earlier
termination on the optionee's death, disability or termination of employment
with the Company, but provide that the term of any ISOs granted to a holder
of more than 10% of the outstanding shares of capital stock may be no longer
than five years. Options are not assignable or otherwise transferable except
by will or the laws of descent and distribution. In the event that the
shares of Common Stock underlying options issued pursuant to the 1992 Plan
shall be changed into or exchanged for a different number or kind of shares
of stock of the Company or of another corporation (whether by reason of
corporate merger, consolidation, acquisition of property or stock
separation, reorganization or liquidation) or if the number of such shares
is increased through the payment of a stock dividend, then there shall be
substituted for or added to each share issued under the 1992 Plan, the
number and kind of such shares of stock into which each such outstanding
share shall be so changed, or for which each such share shall be exchanged,
or to which each such share shall be entitled, as the case may be.
Outstanding options shall also be appropriately amended as to price and
other terms as may be necessary to reflect the foregoing events. Upon
dissolution or liquidation of the Company, or upon a reorganization, merger
or consolidation in which the Company is not the surviving corporation, or
upon the sale of substantially all of the property of the Company to another
corporation, the 1992 Plan and the options issued thereunder shall
terminate, unless provisions are made in connection with such transaction
for the assumption of options theretofore granted, or for the substitution
for such options of new options of the successor corporation or a parent or
subsidiary thereof, with appropriate adjustments as to the number and kinds
of shares and the per share exercise prices. The 1992 Plan terminates on
February 19, 2002.

7
9

(2) Based on an aggregate of 75,500 options granted to employees in 1996,
including options granted to Named Executives.

(3) Based on a grant date fair market value of $2.00 per share.

AGGREGATED OPTION EXERCISES IN 1996 AND YEAR END OPTION VALUES

The following table sets forth information concerning each exercise of
options during 1996 by each of the Named Executives and the year end value of
unexercised in-the-money options.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES

NUMBER OF VALUE OF
SECURITIES UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL FISCAL
SHARES YEAR-END(#) YEAR-END($)(1)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
(a) (b) (c) (d) (e)
- ----------------------------------- ----------- ------------ --------------------- ----------------

Brian M. Gallagher, Ph.D........... 0 0 49,167/50,833 $372,199/363,552
Robert A. Ashley................... 18,750 $181,219 9,375/46,875 $ 64,922/340,829
Nancy C. Broadbent................. 0 0 12,000/48,000 $ 73,500/294,000

- ---------------
(1) Based on a year end fair market value of the underlying securities equal to
$8.125, less the exercise price payable for such shares.

EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

The Company has executed indemnification agreements with each of its
executive officers and directors pursuant to which the Company has agreed to
indemnify such parties to the full extent permitted by law, subject to certain
exceptions, if such party becomes subject to an action because such party is a
director, officer, employee, agent or fiduciary of the Company.

Each of the Company's employees has agreed to maintain the confidentiality
of Company information, to assign inventions to the Company and, for a period of
two years after termination of employment, not to solicit any person who is
employed by the Company or was employed by the Company at any time during the
year prior to the termination of such employee.

In addition, each of Dr. Gallagher, Ms. Broadbent and Mr. Ashley have
agreed that during the term of his or her employment and for a period of two
years thereafter, such person will not directly or indirectly provide services
to or for any business engaged in research regarding the development,
manufacture, testing, marketing or sale of collagenase inhibiting drugs for
application in periodontal disease or any other application which, during the
period of such person's employment with the Company, is either marketed or in
advanced clinical development by the Company.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee consists of Robert J. Easton, Stephen W.
Ritterbush, Ph.D. and Terence E. Winters, Ph.D. There are no Compensation
Committee Interlocks.

In January and November 1992, the Company sold an aggregate of 3,133,000
shares of Series A Redeemable Preferred Stock at a price of $1.00 per share. In
September and November 1993, the Company sold an aggregate of 1,946,268 shares
of Series B Redeemable Preferred Stock at a price of $1.675 per share. In
September and November 1995, the Company sold an aggregate of 5,318,980 shares
of Series C Redeemable Preferred Stock at a price of $2.00 per share. All shares
of Series A, Series B and Series C Redeemable Preferred Stock outstanding as of
the consummation of the IPO automatically converted into shares of Common Stock
on a one-for-two basis as of such date. The purchasers of the Series A, Series B
and

8
10

Series C Redeemable Preferred Stock included the following members of the
Compensation Committee and entities affiliated with such persons:

NUMBER OF COMMON STOCK
EQUIVALENTS(1)
-----------------------------------
SERIES SERIES SERIES
A B C
------- ------- -------

Columbine Venture Fund, II, L.P. (Dr. Winters).... 416,667 238,806 313,855
Longbow Partners (Mr. Easton)..................... -- -- 14,366
Fairfax Partners/The Venture Fund of Washington,
L.P. (Dr. Ritterbush)........................... 416,667 29,850 --

- ---------------
(1) Relates only to shares attributable to the issuance and sale by the Company
of shares of Series A, Series B and Series C Redeemable Preferred Stock and
excludes other issuances and sales to such stockholders, if any, since the
Company's inception. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT."

The shares of Common Stock issued upon conversion of the Series A, Series B
and Series C Redeemable Preferred Stock are entitled to certain registration
rights and certain rights to participate in certain future offerings undertaken
by the Company. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."

9
11

PERFORMANCE GRAPH

The following graph compares the cumulative total shareholder return on the
Company's Common Stock with the cumulative total return on the Nasdaq Composite
Index and the Nasdaq Pharmaceutical Index (capitalization weighted) for the
period beginning on the date on which the SEC declared effective the Company's
Form 8-A Registration Statement pursuant to Section 12 of the Exchange Act and
ending on the last day of the Company's last completed fiscal year.

COMPARISON OF CUMULATIVE TOTAL RETURN(1)(2)(3)

Among the Company, the Nasdaq Composite Index and the
Nasdaq Pharmaceutical Index
(Capitalization Weighted)

NASDAQ
Measurement Period PHARMACEUTICAL
(Fiscal Year Covered) CGPI NASDAQ STOCKS

Jun-96 100.00 100.00 100.00
Jun-96 95.89 101.66 99.40
Jul-96 94.52 92.61 88.58
Aug-96 106.85 97.80 94.99
Sep-96 112.33 105.28 101.64
Oct-96 112.33 104.13 97.07
Nov-96 112.33 110.58 95.63
Dec-96 89.04 110.46 98.41

- ---------------
(1) Graph assumes $100 invested on June 20, 1996 in the Company's Common Stock,
the Nasdaq Composite Index and the Nasdaq Pharmaceutical Index
(capitalization weighted).

(2) Total return assumes reinvestment of dividends.

(3) Year ending December 31.

10
12

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The Compensation Committee has furnished the following report:

The Compensation Committee of the Board of Directors (the "Committee") is
composed of three non-employee directors. The Committee recommends, and the
Board approves, all matters relating to executive compensation, including
setting and administering policies governing executive salaries, bonuses (if
any) and stock option awards (if any). The Committee meets twice annually to set
performance objectives for the Chief Executive Officer ("CEO") and to determine
the annual compensation of the CEO and other senior executives of the Company.
The CEO is not present during the discussion of his compensation.

Executive Compensation Policy

The goal of the Company's executive compensation policy is to ensure that
an appropriate relationship exists between executive compensation and the
creation of shareholder value, while at the same time attracting and retaining
qualified senior management. Since its inception in 1992, the Company has
operated as a "virtual" pharmaceutical company with a small number of highly
experienced senior executives determining and executing the Company's strategy
while contracting out pharmaceutical development activities to clinical research
and other third party organizations. In order to attract highly experienced
executives, the Company's compensation packages for senior executives are highly
competitive with those paid to executives of other emerging pharmaceutical
companies.

Compensation Mix

The Company's executive compensation packages generally include three
components: base salary; a discretionary annual cash bonus; and stock options.

Base Salary

The Committee seeks to establish base salaries for each position and level
of responsibility which are competitive with those of executive officers at
other emerging pharmaceutical companies.

Discretionary Cash Bonus

The Committee believes that discretionary cash bonuses are important to
motivate and reward executive officers. However, cash bonuses are not
guaranteed. Annual cash bonuses are awarded to executives based on their
achievements against a stated list of objectives developed at the beginning of
each year by senior management and the Committee. Such objectives are reviewed
and approved by the Board of Directors.

Stock Options

Stock option grants under the Company's stock option plans are designed to
align the long term interests of the Company's executives with those of its
shareholders by rewarding executives for increasing shareholder value. All
executive officers are awarded option grants upon joining the Company which are
competitive with those at comparable emerging pharmaceutical companies. In
addition, the Committee may award additional stock option grants annually. When
granting stock options, the Committee considers the recommendation of the CEO
and the relative performance and contributions of each officer compared to that
of other officers within the Company with similar levels of responsibility.

Compensation of the Chief Executive Officer

In establishing Dr. Gallagher's compensation package, the Committee seeks
to maintain a level of total current compensation that is competitive with that
paid to CEOs of other comparable emerging pharmaceutical companies. In addition,
in order to align Dr. Gallagher's interests with the interests of the Company's
shareholders, the Committee attempts to make a substantial portion of the value
of his total compensation dependent on the appreciation of the Company's stock
price.

11
13

Dr. Gallagher's performance is evaluated annually by the Committee against
a stated list of short, medium and long term objectives developed by the
Committee at the beginning of each year and approved by the Board. In evaluating
and establishing Dr. Gallagher's current compensation, the Committee considered
his accomplishments in completing the Company's initial public offering, filing
a new drug application with the FDA for Periostat(R), securing one European
distribution agreement for Periostat(R) and three research agreements with large
pharmaceutical companies for other applications of the Company's technology, and
initiating preclinical development work on the Company's leading cancer compound
with the National Cancer Institute. Based on these achievements, the Committee
recommended, and the board approved, a bonus to Dr. Gallagher of $41,000 and an
increase in base salary from $225,000 to $250,000.

Section 162(m) of the Internal Revenue Code disallows the deductibility by
the Company of any compensation over $1 million paid to the CEO or any of the
other four most highly compensated executives, unless certain criteria are
satisfied. The Company's CEO and the other named executives have not received
annual compensation over $1 million, and the Company has not determined what
measures, if any, it should take to comply with Section 162.

Compensation Committee Members:

Robert J. Easton
Stephen W. Ritterbush, Ph.D.
Terence E. Winters, Ph.D.

12
14

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

There are, as of February 28, 1997, approximately 56 holders of record and
1,200 beneficial holders of the Company's Common Stock. The following table sets
forth certain information, as of February 28, 1997, with respect to holdings of
the Company's Common Stock by (i) each person known by the Company to be the
beneficial owner of more than 5% of the total number of shares of Common Stock
outstanding as of such date, (ii) each of the Company's Directors (which
includes all nominees) and Named Executives, and (iii) all Directors and
officers as a group.

AMOUNT AND NATURE OF PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP(1) OF CLASS(2)
- ------------------------------------------------------------- ----------------------- -----------

(i) Certain Beneficial Owners:
Columbine Venture Fund II, L.P.
6155 N. Scottsdale Road, Suite 100
Scottsdale, Arizona 85250.................................... 969,328 12.8%
Marquette Venture Partners II, L.P.
and MVP II Affiliates Fund, L.P.
520 Lake Cook Road, Suite 450
Deerfield, Illinois 60015.................................... 916,313(3) 12.1
Zesiger Capital Group LLC
320 Park Avenue, 30th Floor
New York, New York 10022..................................... 629,700 8.3
Delphi Ventures III, L.P. and
Delphi Investments III, L.P.
3000 Sand Hill Road
Building 1, Suite 135
Menlo Park, California 94025................................. 625,000(4) 8.3
Fairfax Partners/The Venture Fund
of Washington, L.P.
1568 Spring Hill Road, Suite 200
McLean, Virginia 22102....................................... 446,517 5.9
Advanced Technology Ventures III, L.P.
10 Post Office Square
Boston, Massachusetts 02109.................................. 390,299 5.2
(ii) Directors (which includes all nominees) and Named
Executives:
Brian M. Gallagher, Ph.D..................................... 227,500(5) 3.0
Robert A. Ashley............................................. 53,225(6) *
Nancy C. Broadbent........................................... 50,000(7) *
Helmer P.K. Agersborg, Ph.D.................................. 103,709(8) 1.4
Peter R. Barnett, D.M.D...................................... 500 *
James E. Daverman............................................ 916,313(9) 12.1
Robert J. Easton............................................. 31,866(10) *
Stephen W. Ritterbush, Ph.D.................................. 446,517(11) 5.9
Pieter J. Schiller........................................... 390,299(12) 5.2
Terence E. Winters, Ph.D..................................... 969,328(13) 12.8
(iii) All Directors and officers as a group (10 persons).... 3,189,257(14) 41.2%

- ---------------
* Less than 1%

(1) Except as set forth in the footnotes to this table and subject to
applicable community property law, the persons named in the table have sole
voting and investment power with respect to all shares.

(2) Applicable percentage of ownership for each holder is based on 7,543,579
shares of Common Stock outstanding on February 28, 1997, plus any Common
Stock equivalents and presently exercisable stock options or warrants held
by each such holder, and options or warrants held by each such holder which
will become exercisable within 60 days after February 28, 1997.

13
15

(3) Includes 890,860 shares and 25,453 shares owned by Marquette Venture
Partners II, L.P. and MVP II Affiliates Fund, L.P., respectively.

(4) Includes 613,946 shares and 11,054 shares owned by Delphi Ventures III,
L.P. and Delphi Investments III, L.P., respectively.

(5) Of such shares, 125,000 are subject to certain rights of first refusal held
by the Company, of which 43,750 also are subject to repurchase by the
Company as of February 28, 1997. See "EXECUTIVE COMPENSATION -- Summary of
Compensation in 1996 and 1995." Includes 102,500 shares of Common Stock
underlying options which are or may be exercisable as of February 28, 1997
or 60 days after such date.

(6) Includes 34,375 shares of Common Stock underlying options which are or may
be exercisable as of February 28, 1997 or 60 days after such date.

(7) Includes 49,000 shares of Common Stock underlying options which are or may
be exercisable as of February 28, 1997 or 60 days after such date. Includes
1,000 shares held as custodian to minor child.

(8) Includes 15,000 shares of Common Stock underlying options which are
exercisable as of February 28, 1997 or 60 days after such date.

(9) James E. Daverman is co-founding general partner of Marquette Venture
Partners II, L.P. and MVP II Affiliates Fund, L.P. and, as such, has the
power to vote or direct the vote of and to dispose of or direct the
disposition of the shares owned by Marquette Venture Partners II, L.P. and
MVP II Affiliates Fund, L.P. Mr. Daverman expressly disclaims beneficial
ownership of such shares, except as to his proportionate interest in
Marquette Venture Partners II, L.P. and MVP II Affiliates Fund, L.P.

(10) Includes 20,278 shares of Common Stock held by Longbow Partners of which
Robert J. Easton is a general partner. Mr. Easton expressly disclaims
beneficial ownership of such shares, except as to his proportionate
interest in Longbow Partners. Includes 2,500 shares of Common Stock
underlying options which are exercisable as of February 28, 1997 or 60 days
after such date.

(11) Stephen W. Ritterbush, Ph.D. is a general partner of Fairfax Partners/The
Venture Fund of Washington, L.P. and, as such, has the power to vote or
direct the vote of and to dispose of or direct the disposition of the
shares owned by Fairfax Partners/The Venture Fund of Washington, L.P. Dr.
Ritterbush expressly disclaims beneficial ownership of such shares, except
as to his proportionate interest in Fairfax Partners/The Venture Fund of
Washington, L.P.

(12) Pieter J. Schiller is a general partner of Advanced Technology Ventures
III, L.P. and, as such, has the power to vote or direct the vote of and to
dispose of or direct the disposition of the shares owned by Advanced
Technology Ventures III, L.P. Mr. Schiller expressly disclaims beneficial
ownership of such shares, except as to his proportionate interest in
Advanced Technology Ventures III, L.P.

(13) Terence E. Winters, Ph.D. is a general partner of Columbine Venture Fund
II, L.P. and, as such, has the power to vote or direct the vote of and to
dispose of or direct the disposition of the shares owned by Columbine
Venture Fund II, L.P. Dr. Winters expressly disclaims beneficial ownership
of such shares, except as to his proportionate interest in Columbine
Venture Fund II, L.P.

(14) See Notes 5 through 13.

14
16

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In January and November 1992, the Company sold an aggregate of 3,133,000
shares of Series A Redeemable Preferred Stock at a price of $1.00 per share. In
September and November 1993, the Company sold an aggregate of 1,946,268 shares
of Series B Redeemable Preferred Stock at a price of $1.675 per share. In
September and November 1995, the Company sold an aggregate of 5,318,980 shares
of Series C Redeemable Preferred Stock at a price of $2.00 per share. All shares
of Series A, Series B and Series C Redeemable Preferred Stock outstanding as of
the consummation of the Company's IPO automatically converted into shares of
Common Stock on a one-for-two basis on such date. The purchasers of the Series
A, Series B and Series C Redeemable Preferred Stock included the following 5%
stockholders, directors and entities affiliated with directors:

NUMBER OF COMMON STOCK
EQUIVALENTS(1)
-------------------------------
SERIES A SERIES B SERIES C
--------- --------- ---------

DIRECTORS AND ENTITIES AFFILIATED WITH DIRECTORS
Advanced Technology Ventures III, L.P. (Mr. Schiller)....... -- 223,880 166,419
Marquette Venture Partners II, L.P. and MVP II Affiliates
Fund, L.P. (Mr. Daverman)................................ 166,667 447,760 301,886
OTHER 5% STOCKHOLDERS
Johnson & Johnson Development Corporation................... 486,500 -- 317,829
Innocal, L.P................................................ -- -- 375,000
Delphi Ventures III, L.P. and Delphi Investments III,
L.P...................................................... -- -- 625,000

For information with respect to Mr. Easton and Drs. Ritterbush and Winters,
each a member of the Compensation Committee, see "EXECUTIVE
COMPENSATION -- Compensation Committee Interlocks and Insider Participation."

In September 1995, the Company and the holders of the Company's Series A,
Series B and Series C Redeemable Preferred Stock entered into a Registration
Rights Agreement (the "Rights Agreement") pursuant to which the Company has
granted certain registration rights to such stockholders. Pursuant to the Rights
Agreement, at any time beginning six months after the effective date of the
Company's IPO, the holders of at least a majority of the Common Stock issued
upon the conversion of the Series A, Series B and Series C Redeemable Preferred
Stock (the "Registrable Securities") have the right, subject to certain
restrictions set forth in the Rights Agreement, to require that the Company
register the Registrable Securities requested by such holders at the Company's
expense (on no more than two occasions) on either a Form S-1, Form S-2 or Form
S-3 Registration Statement under the Securities Act of 1933, as amended (the
"Securities Act"). The Company is not, however, required to register any
Registrable Securities unless such shares represent at least 10% of the
Company's outstanding shares of Common Stock, or, if less than 10%, if the
anticipated aggregate offering price exceeds $1,000,000.

After the Company has qualified for the use of Form S-3 under the
Securities Act, the holders of Registrable Securities have the right to an
unlimited number of registrations on such form. The Company is not, however,
required to effect such a registration unless the requesting holders reasonably
anticipate having an aggregate disposition price of at least $500,000.

15
17

Also pursuant to the Rights Agreement, if, at any time during the
seven-year period commencing on the effective date of the Company's IPO, the
Company proposes to register any of its Common Stock under the Securities Act
for sale to the public, the holders of the Registrable Securities have unlimited
piggyback registration rights at the Company's expense, subject to certain
restrictions set forth in the Rights Agreement.

Also in September 1995, the Company granted to the holders of Series A,
Series B and Series C Redeemable Preferred Stock certain rights to participate
in certain future offerings undertaken by the Company. Such rights to
participate require that, with certain exceptions including but not limited to
an underwritten public offering, any time the Company proposes to issue, sell or
exchange, or reserve therefor, any securities, the Company must first offer to
sell to each of the pre-conversion holders of Series A, Series B and Series C
Redeemable Preferred Stock their respective pro rata share of such securities at
a price and on terms identical to the price and terms of the securities proposed
to be issued, sold or exchanged in the applicable offering.

PROPOSED AMENDMENT TO THE 1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN

GENERAL

On March 22, 1996, the Board of Directors approved and, on March 29, 1996,
the stockholders adopted, the Non-Employee Plan. The Non-Employee Plan currently
provides for the grant of options to purchase a maximum of 109,000 shares of
Common Stock of the Company to non-employee directors of the Company, of whom
there are six.

Each person who was a director of the Company on the effective date of the
Company's IPO or who became or will become a director of the Company thereafter,
and who is not also an employee or officer of the Company, has been or shall be
granted, on the effective date of the IPO or the date on which he or she became
or will become a director, whichever is later, an option to purchase 10,000
shares of Common Stock, at an exercise price per share equal to the then fair
market value of the shares. No subsequent grants are permitted to such
individuals under the Non-Employee Plan. All options become exercisable in five
equal annual installments commencing one year after the date of grant provided
that the optionee then remains a director at the time of vesting of the
installments. The right to exercise annual installments of options will be
reduced proportionately based on the optionee's actual attendance at directors'
meetings if the optionee fails to attend at least 80% (the "Percent") of the
directors' meetings held in any calendar year. The term of each option will be
for a period of ten years from the date of grant, unless sooner terminated in
accordance with the Non-Employee Plan. Options may not be transferred except by
will or by the laws of descent and distribution or pursuant to a domestic
relations order and are exercisable to the extent vested at any time prior to
the scheduled expiration date of the option. The Non-Employee Plan terminates on
the earlier of March 28, 2006 or at such time as all shares of Common Stock
currently or hereafter reserved for issuance shall have been issued.

In the event that the Company's Common Stock shall be subdivided or
combined into a greater or smaller number of shares or if the Company shall
issue any shares of Common Stock as a stock dividend on its outstanding Common
Stock, the number of shares of Common Stock deliverable upon the exercise of
options granted under the Non-Employee Plan shall be appropriately increased or
decreased proportionately, and appropriate adjustments shall be made in the
purchase price per share to reflect such subdivision, combination or stock
dividend.

In the event that the Company is to be consolidated with or acquired by
another entity in a merger, sale of all or substantially all of the Company's
assets or otherwise, each option granted under the Non-Employee Plan which is
outstanding but unvested as of the effective date of such event shall become
exercisable in full twenty (20) days prior to the effective date of such event.
In the event of a reorganization, recapitalization, merger, consolidation, or
any other change in the corporate structure or shares of the Company, to the
extent permitted by Rule 16b-3 under the Exchange Act, adjustments shall be made
in the number and kind of shares authorized by the Non-Employee Plan and in the
number and kind of shares covered by, and the option

16
18

price of, outstanding options under the Non-Employee Plan, in each case, as
necessary to maintain the proportionate interest of the optionee and preserve,
without exceeding, the value of such option.

The Non-Employee Plan may be amended or discontinued at any time by the
Board of Directors without stockholder approval, but no amendment may be made
without stockholder approval which would: (i) increase the maximum number of
shares for which options may be granted under the Non-Employee Plan, (ii)
materially modify the requirements as to eligibility to participate in the
Non-Employee Plan, (iii) materially increase benefits accruing to option holders
under the Non-Employee Plan, or (iv) amend the Non-Employee Plan in any manner
which would cause Rule 16b-3 under the Exchange Act to become inapplicable to
the Non-Employee Plan; and provided further that the provisions of the
Non-Employee Plan specified in Rule 16b-3(c)(2)(ii)(A) (or any successor or
amended provision thereto) under the Exchange Act (including without limitation,
provisions as to eligibility, amount, price and timing of awards) may not be
amended more than once every six months, other than to comport with changes in
the Code, the Employee Retirement Income Security Act, or the rules thereunder.
No amendment will affect any option previously granted without the consent of
the Grantee.

FEDERAL INCOME TAX ASPECTS

The options to be issued under the Non-Employee Plan will be designated as
NQSOs which receive no special tax treatment, but are taxed pursuant to Section
83 of the Code. Under the provisions of that Section, if an option is granted in
connection with the performance of services and has a "readily ascertainable
fair market value" at the time of the grant, the optionee will be deemed to have
received compensation income in the year of grant in an amount equal to the
excess of the fair market value of the option at the time of grant over the
amount, if any, paid by the optionee for the option. However, a NQSO generally
has "readily ascertainable fair market value" only when the option is actively
traded on an established market and when certain stringent Code requirements are
met.

If the option does not have a readily ascertainable fair market value at
the time of the grant, the option is not included as compensation income at that
time. Rather, the optionee realizes compensation income only when the option is
exercised and the optionee has become substantially vested in the shares
transferred. The shares are considered to be substantially vested when they are
either transferable or not subject to a substantial risk of forfeiture. The
amount of income realized is equal to the excess of the fair market value of the
shares at the time the shares become substantially vested over the sum of the
exercise price plus the amount, if any, paid by the optionee for the option.

If a NQSO is exercised through payment of the exercise price by the
delivery of Common Stock, to the extent that the number of shares received by
the optionee exceeds the number of shares surrendered, ordinary income will be
realized by the optionee at that time only in the amount of the fair market
value of such excess shares, and the tax basis of such excess shares will be
such fair market value.

Once a NQSO is subject to tax as compensation income, it is treated as an
investment option or investment shares and becomes subject to the investment
property rules. No gain or loss arises from the exercise of an option that was
taxed at the time of grant. When the optionee disposes of the shares acquired
pursuant to a NQSO, whether taxed at the time of grant or exercise, or some
other terms, the optionee will recognize capital gain or loss equal to the
difference between the amount received for the shares and the optionee's basis
in the shares.

Generally, the optionee's basis in the shares will be the exercise price
plus the optionee's basis in the option. The optionee's basis in the option is
equal to the sum of the compensation income realized at the time of grant or
exercise, whichever is applicable, and the amount, if any, paid by the optionee
for the option. In the compensatory option context, optionees normally pay
nothing for the grant of the option so the basis in the option will usually be
the amount of compensation income realized at the time of grant or exercise.
Thus, the optionee's basis in the shares will generally be equal to the exercise
price of the option plus the amount of compensation income realized by the
optionee plus the amount, if any, paid by the optionee for the option. The
capital gain or loss will be short-term if the shares are disposed of within one
year after the option is exercised, and long-term if the shares are disposed of
more than one year after the option is exercised.

17
19

If a NQSO is taxed at the time of grant and expires or lapses without being
exercised, it is treated in the same manner as the lapse of an investment
option. The lapse is deemed to be a sale or exchange of the option on the day
the option expires and the amount of income realized is zero. The optionee
recognizes a capital loss in the amount of the optionee's basis (compensation
income realized at the time of the grant plus the amount, if any, paid by the
optionee for the option) in the option at the time of the lapse. The loss is
short-term or long-term, depending on the optionee's holding period in the
option.

If a NQSO is not taxed at the time of grant and expires without being
exercised, the optionee will have no tax consequences unless the optionee paid
for the option. In such case, the optionee would recognize a loss in the amount
of the price paid by the optionee for the option.

The preceding discussion is based upon federal tax laws and regulations in
effect on the date of this Proxy Statement, which are subject to change, and
upon an interpretation of the relevant sections of the Code, their legislative
histories and the income tax regulations which interpret similar provisions of
the Code. Furthermore, the foregoing is only a general discussion of the federal
income tax aspects of the Non-Employee Plan and does not purport to be a
complete description of all federal income tax aspects of the Non-Employee Plan.
Optionees may also be subject to state and local taxes in connection with the
grant or exercise of options granted under the Non-Employee Plan and the sale or
other disposition of shares acquired upon exercise of the options. Each optionee
receiving a grant of options should consult with his or her personal tax advisor
regarding federal, state and local tax consequences of participating in the
Non-Employee Plan.

PREVIOUSLY GRANTED OPTIONS

As of February 28, 1997, the Company had granted options to purchase an
aggregate of 150,000 shares of Common Stock (net of cancellations) under the
Non-Employee Plan at a weighted average exercise price of $9.71 per share. As of
February 28, 1997, no options to purchase shares were vested and no options to
purchase shares had been exercised under the Non-Employee Plan. The following
table sets forth information as of February 28, 1997 concerning options granted
under the Non-Employee Plan to (i) the Named Executives; (ii) all current
executive officers as a group; (iii) each nominee for election as a Director;
(iv) all current Directors who are not executive officers as a group; (v) each
associate of any of such Directors, executive officers or nominees; (vi) each
person who has received or is to receive 5% of such options or rights; and (vii)
all employees, including all current officers who are not executive officers, as
a group:

OPTIONS WEIGHTED
GRANTED AVERAGE
THROUGH EXERCISE
NAME FEB. 28, 1997 PRICE
-------------------------------------------------------------- ------------- --------

Brian M. Gallagher, Ph.D. .................................... -- --
Robert A. Ashley.............................................. -- --
Nancy C. Broadbent............................................ -- --
Helmer P.K. Agersborg, Ph.D................................... -- --
Peter R. Barnett, D.M.D. ..................................... 25,000 $ 9.00
Robert J. Easton.............................................. 25,000 $ 9.85
James E. Daverman............................................. 25,000 $ 9.85
Stephen W. Ritterbush, Ph.D. ................................. 25,000 $ 9.85
Pieter J. Schiller............................................ 25,000 $ 9.85
Terence E. Winters, Ph.D. .................................... 25,000 $ 9.85
All current executive officers as a group (three persons)..... -- --
All current Directors who are not executive officers as a
group (seven persons)....................................... 150,000 $ 9.71
All Employees, including all current officers who are not
executive officers as a group (six persons)................. -- --

As of February 28, 1997, the market value of the Common Stock underlying
the Non-Employee Plan was $10.50 per share.

18
20

PROPOSED AMENDMENT

Stockholders are being asked to consider and vote upon a proposed amendment
(the "Amendment") to the Non-Employee Plan to: (i) increase the number of shares
of Common Stock reserved for issuance upon the exercise of options granted under
the Non-Employee Plan from 109,000 to 300,000 shares; (ii) increase the number
of shares of Common Stock underlying the automatic option grants to new
non-employee Directors from 10,000 to 25,000 shares; (iii) provide for the grant
of options to purchase an additional 15,000 shares of Common Stock to each of
Drs. Ritterbush and Winters and Messrs. Easton, Daverman and Schiller, each of
whom is a non-employee Director who previously received, upon the effectiveness
of the IPO, an automatic grant of options to purchase 10,000 shares of Common
Stock under the Non-Employee Plan; (iv) decrease the Percent, as defined above,
to 75%; and (v) add a lock-up provision to the Non-Employee Plan pursuant to
which each non-employee Director agrees that during the period that such
non-employee Director serves as a member of the Board, and for one year
thereafter, such non-employee Director will not, in connection with any
underwritten public offering of the Company's securities, sell, make short sale
of, loan, grant any options for the purchase of, or otherwise dispose of any
shares of Common Stock of the Company held by such non-employee Director (other
than those shares included as part of such underwritten public offering, if
any), without the prior written consent of the Company or the underwriters
managing such underwritten public offering, for 180 days from the effective date
of such registration or for such other period as may be required by the
underwriters managing such underwritten public offering, and will execute any
agreement reflecting the above as may be requested by the underwriters at the
time of the applicable underwritten public offering.

The Company has been actively recruiting qualified, experienced senior
executives to serve as non-employee Directors on the Company's Board of
Directors. The Board of Directors believes that the Amendment provides an
important inducement to recruit and retain the best available personnel. The
Board of Directors believes that providing non-employee Directors with an
opportunity to invest in the Company rewards them appropriately for their
efforts on behalf of the Company. The proposed Amendment to the Non-Employee
Plan will enable additional outside directors of the Company to participate in
the Non-Employee Plan as well as provide further incentives to current
participants.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE AMENDMENT.

RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

The Board of Directors of the Company intends, subject to stockholder
approval, to retain KPMG Peat Marwick LLP as independent auditors of the Company
for the year ending December 31, 1997. KPMG Peat Marwick LLP also served as
independent auditors of the Company for 1996. Neither the firm nor any of its
members has any direct or indirect financial interest in or any connection with
the Company in any capacity other than as auditors.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE
APPOINTMENT OF KPMG PEAT MARWICK LLP AS THE INDEPENDENT AUDITORS OF THE COMPANY
FOR THE YEAR ENDING DECEMBER 31, 1997.

One or more representatives of KPMG Peat Marwick LLP is expected to attend
the Meeting and have an opportunity to make a statement and/or respond to
appropriate questions from stockholders.

On January 19, 1996, the Company selected KPMG Peat Marwick LLP to act as
independent accountants for the Company and informed the prior auditors, the
Company's independent accountants since January 1994, of its decision. The prior
auditors conducted the Company's audit for the period from January 10, 1992
(inception) to December 31, 1993. In connection with such audit, there were no
disagreements with the prior auditors on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures. The
prior auditors' report on the Company's financial statements for the period from
January 10, 1992 (inception) to December 31, 1993 contained no adverse opinion
or disclaimer of opinion and was not modified or qualified as to uncertainty,
audit scope, or accounting principles. The decision to change accountants was
approved by the Board of Directors of the Company.

19
21

STOCKHOLDERS' PROPOSALS

Stockholders who wish to submit proposals for inclusion in the Company's
proxy statement and form of proxy relating to the 1998 Annual Meeting of
Stockholders must advise the Secretary of the Company of such proposals in
writing by December 5, 1997.

OTHER MATTERS

The Board of Directors is not aware of any matter to be presented for
action at the Meeting other than the matters referred to above and does not
intend to bring any other matters before the Meeting. However, if other matters
should come before the Meeting, it is intended that holders of the proxies will
vote thereon in their discretion.

GENERAL

The accompanying proxy is solicited by and on behalf of the Board of
Directors of the Company, whose notice of meeting is attached to this Proxy
Statement, and the entire cost of such solicitation will be borne by the
Company.

In addition to the use of the mails, proxies may be solicited by personal
interview, telephone and telegram by directors, officers and other employees of
the Company who will not be specially compensated for these services. The
Company will also request that brokers, nominees, custodians and other
fiduciaries forward soliciting materials to the beneficial owners of shares held
of record by such brokers, nominees, custodians and other fiduciaries. The
Company will reimburse such persons for their reasonable expenses in connection
therewith.

Certain information contained in this Proxy Statement relating to the
occupations and security holdings of directors and officers of the Company is
based upon information received from the individual directors and officers.

COLLAGENEX PHARMACEUTICALS, INC. WILL FURNISH, WITHOUT CHARGE, A COPY OF
ITS REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996, INCLUDING
FINANCIAL STATEMENTS AND SCHEDULES THERETO BUT NOT INCLUDING EXHIBITS, TO EACH
OF ITS STOCKHOLDERS OF RECORD ON MARCH 28, 1997, AND TO EACH BENEFICIAL
STOCKHOLDER ON THAT DATE UPON WRITTEN REQUEST MADE TO THE SECRETARY OF THE
COMPANY. A REASONABLE FEE WILL BE CHARGED FOR COPIES OF REQUESTED EXHIBITS.

PLEASE DATE, SIGN AND RETURN THE PROXY CARD AT YOUR EARLIEST CONVENIENCE IN
THE ENCLOSED RETURN ENVELOPE. A PROMPT RETURN OF YOUR PROXY CARD WILL BE
APPRECIATED AS IT WILL SAVE THE EXPENSE OF FURTHER MAILINGS.

By Order of the Board of Directors

Nancy C. Broadbent,
Secretary

Newtown, Pennsylvania
April 8, 1997

20
22

COLLAGENEX PHARMACEUTICALS, INC.
301 SOUTH STATE STREET
NEWTOWN, PA 18940

April 8, 1997

To Our Stockholders:

You are cordially invited to attend the 1997 Annual Meeting of Stockholders
of CollaGenex Pharmaceuticals, Inc. at 9:30 A.M., local time, on Thursday, May
8, 1997 at the Four Seasons Hotel, One Logan Square, Philadelphia, Pennsylvania.
Please join us for coffee and assorted pastries beginning at 8:30 A.M.

The Notice of Meeting and Proxy Statement on the following pages describe
the matters to be presented at the meeting.

It is important that your shares be represented at this meeting to assure
the presence of a quorum. Whether or not you plan to attend the meeting, we hope
that you will have your stock represented by signing, dating and returning your
proxy in the enclosed envelope, as soon as possible. Your stock will be voted in
accordance with the instructions you have given in your proxy.

Thank you for your continued support.

Sincerely,

Brian M. Gallagher, Ph.D.
President and
Chief Executive Officer
23

COLLAGENEX PHARMACEUTICALS, INC.
301 SOUTH STATE STREET
NEWTOWN, PA 18940

------------------------

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 8, 1997

------------------------

The Annual Meeting of Stockholders (the "Meeting") of COLLAGENEX
PHARMACEUTICALS, INC., a Delaware corporation (the "Company"), will be held at
the Four Seasons Hotel, One Logan Square, Philadelphia, Pennsylvania, on
Thursday, May 8, 1997, at 9:30 A.M., local time, for the following purposes:

(1) To elect eight directors to serve until the next Annual Meeting of
Stockholders and until their respective successors shall have been duly
elected and qualified;

(2) To amend the Company's 1996 Non-Employee Director Stock Option
Plan (the "Plan") to: (i) increase the number of shares of Common Stock
reserved for issuance upon the exercise of options granted under the Plan
from 109,000 to 300,000 shares; (ii) to increase the number of shares of
Common Stock underlying automatic option grants to new non-employee
Directors from 10,000 to 25,000 shares; (iii) to grant options to purchase
an additional 15,000 shares of Common Stock to those non-employee Directors
who previously received, upon the effectiveness of the Company s initial
public offering in June 1996, an automatic grant of options to purchase
10,000 shares of Common Stock under the Plan; and (iv) to revise certain
other provisions of the Plan as set forth in the Proxy Statement;

(3) To ratify of the appointment of KPMG Peat Marwick LLP as
independent auditors for the year ending December 31, 1997; and

(4) To transact such other business as may properly come before the
Meeting or any adjournment or adjournments thereof.

Holders of Common Stock of record at the close of business on March 28,
1997 are entitled to notice of and to vote at the Meeting, or any adjournment or
adjournments thereof. A complete list of such stockholders will be open to the
examination of any stockholder at the Company's principal executive offices at
301 South State Street, Newtown, PA 18940 and at the Four Seasons Hotel, One
Logan Square, Philadelphia, Pennsylvania at 9:30 A.M., local time, for a period
of 10 days prior to the Meeting. The Meeting may be adjourned from time to time
without notice other than by announcement at the Meeting.

IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED REGARDLESS OF THE NUMBER OF
SHARES YOU MAY HOLD. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON,
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN
THE ENCLOSED RETURN ENVELOPE. THE PROMPT RETURN OF PROXIES WILL ENSURE A QUORUM
AND SAVE THE COMPANY THE EXPENSE OF FURTHER SOLICITATION. EACH PROXY GRANTED MAY
BE REVOKED BY THE STOCKHOLDER APPOINTING SUCH PROXY AT ANY TIME BEFORE IT IS
VOTED. IF YOU RECEIVE MORE THAN ONE PROXY CARD BECAUSE YOUR SHARES ARE
REGISTERED IN DIFFERENT NAMES OR ADDRESSES, EACH SUCH PROXY CARD SHOULD BE
SIGNED AND RETURNED TO ASSURE THAT ALL OF YOUR SHARES WILL BE VOTED.

By Order of the Board of Directors

Nancy C. Broadbent
Secretary

Newtown, Pennsylvania
April 8, 1997
THE COMPANY'S 1996 ANNUAL REPORT ACCOMPANIES THE PROXY STATEMENT.
24
COLLAGENEX PHARMACEUTICALS, INC.

PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE
CORPORATION FOR THE ANNUAL MEETING OF STOCKHOLDERS

The undersigned hereby constitutes and appoints Brian M. Gallagher, Ph.D. and
Nancy C. Broadbent, and each of them, his or her true and lawful agent and
proxy with full power of substitution in each, to represent and to vote on
behalf of the undersigned all of the shares of CollaGenex Pharmaceuticals, Inc.
(the "Company") which the undersigned is entitled to vote at the Annual Meeting
of Stockholders of the Company to be held at the Four Seasons Hotel, One Logan
Square, Philadelphia, Pennsylvania at 9:30 A.M., local time, on Thursday, May
8, 1997, and at any adjournment or adjournments thereof, upon the following
proposals more fully described in the Notice of Annual Meeting of Stockholders
and Proxy Statement for the Meeting (receipt of which is hereby acknowledged).

THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSALS 1, 2 AND 3.

PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY,
USING THE ENCLOSED ENVELOPE.

(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)

/ SEE REVERSE /
/ SIDE /
25
/ X / PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE

FOR WITHHELD
1. Election of / / / / Nominees: Helmer P.K. Agersborg, Ph.D.;
Directors Peter R. Barnett, D.M.D.; Brian M.
Gallagher, Ph.D.; Robert J. Easton;
James E. Daverman; Stephen W.
Ritterbush, Ph.D.; Pieter J. Schiller;
For, except vote withheld from and Terence E. Winters, Ph.D.
the following nominee(s):

-----------------------------------
FOR AGAINST ABSTAIN
2. APPROVAL OF PROPOSAL TO AMEND THE COMPANY'S 1996 / / / / / /
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN TO:
(I) INCREASE THE NUMBER OF SHARES OF COMMON STOCK
RESERVED FOR ISSUANCE UPON THE EXERCISE OF OPTIONS
GRANTED UNDER THE PLAN FROM 109,000 TO 300,000
SHARES; (II) INCREASE THE NUMBER OF SHARES OF COMMON STOCK UNDERLYING THE
AUTOMATIC OPTION GRANTS TO NEW NON-EMPLOYEE DIRECTORS FROM 10,000 TO 25,000
SHARES; (III) PROVIDE FOR THE GRANT OF OPTIONS TO PURCHASE AN ADDITIONAL
15,000 SHARES OF COMMON STOCK TO CERTAIN NON-EMPLOYEE DIRECTORS WHO
PREVIOUSLY RECEIVED, UPON THE EFFECTIVENESS OF THE COMPANY'S INITIAL PUBLIC
OFFERING IN JUNE 1996, AN AUTOMATIC GRANT OF OPTIONS TO PURCHASE 10,000
SHARES OF COMMON STOCK UNDER THE PLAN; (IV) DECREASE THE PERCENT (AS DEFINED
IN THE PROXY STATEMENT) TO 75%; AND (V) ADD A LOCK-UP PROVISION TO THE PLAN
AS DESCRIBED IN THE PROXY STATEMENT.

FOR AGAINST ABSTAIN
3. APPROVAL OF PROPOSAL TO RATIFY THE APPOINTMENT / / / / / /
OF KPMG PEAT MARWICK LLP AS THE INDEPENDENT
AUDITORS OF THE COMPANY FOR THE YEAR ENDING
DECEMBER 31, 1997.

4. In his or her discretion, the proxy is authorized to vote upon other matters
as may properly come before the Meeting.

I WILL / / WILL NOT / / attend the Meeting

Signature(s) ________________________________________________ Dated ____________

This proxy must be signed exactly as the name appears hereon. When shares are
held by joint tenants, both should sign. If the signer is a corporation, please
sign full corporate name by duly authorized officer, giving full title as such.
If a partnership, please sign in partnership name by authorized person.