C O L L A G E N E X
p h a r m a c e u t i c a l s
August 14, 2001
Via EDGAR
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Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: CollaGenex Pharmaceuticals, Inc. (Commission File No. 0-28308) Form
10-Q for the Quarter Ended June 30, 2001
Dear Sirs:
Pursuant to Rule 13a-13(a) under the Securities Exchange Act of 1934, as
amended, on behalf of CollaGenex Pharmaceuticals, Inc., a Delaware corporation
(the "Corporation"), submitted herewith for filing is the Corporation's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
If you have any questions or comments concerning this filing, kindly
contact the undersigned at (215) 579-7388 ext. 3110.
/s/ Frank Ruffo
Frank Ruffo
Controller
CollaGenex Pharmaceuticals, Inc., 41 University Drive, Newtown, PA 18940 USA
215-579-7388 voice 215-579-8577 fax
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
Commission File Number
0-28308
CollaGenex Pharmaceuticals, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-1758016
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
41 University Drive, Newtown, PA 18940
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(Address of Principal Executive Offices) (Zip Code)
(215) 579-7388
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(Registrant's Telephone Number,
Including Area Code)
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:
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Indicate the number of shares outstanding of each of the Registrant's
classes of common stock as of July 15, 2001:
Class Number of Shares
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Common Stock $.01 par value 10,550,638
COLLAGENEX PHARMACEUTICALS, INC.
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION.......................................... 1
Item 1. Financial Statements......................................... 1
Condensed Consolidated Balance Sheets as of December 31,
2000 and June 30, 2001 (unaudited)........................ 2
Condensed Consolidated Statements of Operations for the Three
Months Ended June 30, 2000 and 2001 (unaudited)........... 3
Condensed Consolidated Statements of Operations for the Six
Months Ended June 30, 2000 and 2001 (unaudited)........... 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and 2001 (unaudited)........... 5
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 9
Results of Operations........................................ 10
Liquidity and Capital Resources.............................. 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 16
PART II. OTHER INFORMATION.............................................. 17
Item 4. Submission of Matters to a Vote of Security Holders ......... 17
Item 5. Other Information............................................ 18
Item 6. Exhibits and Reports on Form 8-K............................. 18
SIGNATURES.............................................................. 20
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
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COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
December 31, 2000 and June 30, 2001
(dollars in thousands, except per share data)
DECEMBER 31, JUNE 30,
ASSETS 2000 2001
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(unaudited)
Current assets:
Cash and cash equivalents........................................... $ 3,709 $ 6,897
Short term investments.............................................. 1,739 296
Accounts receivable, net of allowance of $381 and $352 at December
31, 2000 and June 30, 2001, respectively.......................... 3,038 3,863
Inventories......................................................... 277 1,216
Prepaid expenses and other current assets........................... 989 1,187
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Total current assets.......................................... 9,752 13,459
Equipment and leasehold improvements, net.............................. 652 574
Other assets........................................................... 27 26
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Total assets.................................................. $ 10,431 $ 14,059
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of note payable..................................... $ 65 $ 65
Accounts payable.................................................... 1,865 3,878
Accrued expenses.................................................... 2,514 2,578
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Total current liabilities..................................... 4,444 6,521
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Note payable, less current portion..................................... 47 10
Deferred revenue....................................................... 676 645
Commitments
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized;
200,000 shares of Series D cumulative convertible preferred stock
issued and outstanding at December 31, 2000 and June 30, 2001
(liquidation value of $20,000 at June 30, 2001)................... 2 2
Common stock, $0.01 par value; 25,000,000 shares authorized,
8,775,176 and 10,550,638 shares issued and outstanding at
December 31, 2000 and June 30, 2001, respectively................. 88 106
Common stock to be issued (275,462 shares at December 31, 2000 and
118,379 at June 30, 2001) ........................................ 872 840
Additional paid in capital.......................................... 68,461 76,293
Deferred compensation............................................... (29) (15)
Accumulated deficit................................................. (64,130) (70,343)
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Stockholders' equity.......................................... 5,264 6,883
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Total liabilities and stockholders' equity.................... $ 10,431 $ 14,059
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See accompanying notes to unaudited condensed consolidated financial statements.
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COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three Months Ended June 30, 2000 and 2001
(dollars in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED JUNE 30,
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2000 2001
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RESTATED
(SEE NOTE 3)
Revenues:
Product sales....................................................... $ 5,723 $ 7,267
Contract revenues................................................... 878 1,024
License revenues.................................................... 11 420
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Total revenues................................................. 6,612 8,711
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Operating expenses:
Cost of product sales............................................... 1,127 1,516
Research and development............................................ 965 874
Selling, general and administrative................................. 6,669 9,070
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Total operating expenses...................................... 8,761 11,460
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Operating loss................................................ (2,149) (2,749)
Other income (expense):
Interest income..................................................... 165 74
Interest expense.................................................... (4) (2)
Other expense....................................................... (2) (4)
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Loss before cumulative effect of change in accounting
principle.................................................... (1,990) (2,681)
Cumulative effect of change in accounting principle.................... -- --
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Net loss...................................................... (1,990) (2,681)
Preferred stock dividend............................................ 426 420
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Net loss allocable to common stockholders.............................. $ (2,416) $ (3,101)
Basic and diluted net loss per share allocable to common stockholders.. ============ ============
$ (0.28) $ (0.29)
Shares used in computing basic and diluted net loss per share allocable ============ ============
to common stockholders.............................................. 8,678,073 10,550,638
============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
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COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Six Months Ended June 30, 2000 and 2001
(dollars in thousands, except per share data)
(unaudited)
SIX MONTHS ENDED JUNE 30,
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2000 2001
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RESTATED
(SEE NOTE 3)
Revenues:
Product sales....................................................... $ 11,233 $ 13,381
Contract revenues................................................... 1,528 1,899
License revenues.................................................... 381 456
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Total revenues................................................. 13,142 15,736
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Operating expenses:
Cost of product sales............................................... 2,297 2,882
Research and development............................................ 1,812 1,818
Selling, general and administrative................................. 13,436 16,547
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Total operating expenses...................................... 17,545 21,247
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Operating loss................................................ (4,403) (5,511)
Other income (expense):
Interest income..................................................... 351 136
Interest expense.................................................... (8) (5)
Other Income (expense).............................................. (3) 8
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Loss before cumulative effect of change in accounting principle (4,063) (5,372)
Cumulative effect of change in accounting principle.................... 764 --
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Net loss...................................................... (4,827) (5,372)
Preferred stock dividend............................................ 849 840
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Net loss allocable to common stockholders.............................. $ (5,676) $ (6,212)
Basic and diluted net loss per share allocable to common stockholders ============ ===========
before cumulative effect of change in accounting principle..........
$ (0.57) $ (0.62)
Cumulative effect of change in accounting principle.................... (0.09) --
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Basic and diluted net loss per share allocable to common stockholders..
$ (0.66) $ (0.62)
Shares used in computing basic and diluted net loss per share allocable ============ ===========
to common stockholders............................................... 8,664,835 9,946,992
============ ===========
See accompanying notes to unaudited condensed consolidated financial statements.
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COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2000 and 2001
(dollars in thousands)
(unaudited)
SIX MONTHS ENDED JUNE 30,
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2000 2001
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RESTATED
(See Note 3)
Cash flows from operating activities:
Net loss.............................................................. $ (4,827) $ (5,372)
Adjustments to reconcile net loss to net cash used in operating
activities:
Noncash compensation expense...................................... 358 178
Depreciation and amortization expense............................. 113 127
Cumulative effect of change in accounting principle............... 764 --
Change in assets and liabilities:
Accounts receivable............................................. (549) (825)
Inventories..................................................... 310 (939)
Prepaid expenses and other assets............................... (166) (198)
Accounts payable................................................ 991 2,013
Accrued expenses................................................ (148) 64
Deferred revenue................................................ (280) (31)
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Net cash used in operating activities.................. (3,434) (4,983)
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Cash flows from investing activities:
Capital expenditures.................................................. (144) (49)
Proceeds from the sale of short term investments...................... 5,638 1,739
Purchase of short term investments.................................... (1,333) (296)
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Net cash provided by investing activities............. 4,161 1,394
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Cash flows from financing activities:
Net proceeds from issuance of common stock............................ 71 6,814
Repayment of long-term debt........................................... (34) (37)
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Net cash provided by financing activities.............. 37 6,777
Net increase in cash and cash equivalents................................ 764 3,188
Cash and cash equivalents at beginning of period......................... 7,981 3,709
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Cash and cash equivalents at end of period............................... $ 8,745 $ 6,897
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Supplemental schedule of noncash financing activities:
Common stock dividends issued or issuable
on preferred stock.................................................. $ 849 $ 840
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Issuance of common stock to be issued............................... 858 872
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Supplemental disclosure of cash flow information:
Cash paid during the period for interest............................ $ 8 $ 8
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See accompanying noted to unaudited condensed consolidated financial statements.
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COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 2001
(dollars in thousands)
(Unaudited)
NOTE 1 -- BASIS OF PRESENTATION:
The unaudited condensed consolidated financial statements included herein
have been prepared by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission and in accordance with generally accepted
accounting principles. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These unaudited condensed consolidated financial statements should
be read in conjunction with the Company's 2000 audited consolidated financial
statements and footnotes.
The accompanying unaudited condensed consolidated financial statements
include the results of the Company and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.
In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements have been prepared on a basis
substantially consistent with the audited consolidated financial statements and
contain adjustments, all of which are of a normal recurring nature, necessary to
present fairly the Company's consolidated financial position as of June 30,
2001, their results of operations for the three and six months ended June 30,
2000 and 2001, and their cash flows for the six months ended June 30, 2000 and
2001. Interim results are not necessarily indicative of results anticipated for
the full fiscal year.
NOTE 2 -- INVENTORIES:
Inventories at December 31, 2000 and June 30, 2001 consist of the
following:
2000 2001
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Raw materials $ 60 $ 219
Work-in-process -- 295
Finished goods 217 702
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$ 277 $ 1,216
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NOTE 3 -- CHANGE IN ACCOUNTING PRINCIPLE:
In the fourth quarter of 2000, the Company adopted SAB 101, "Revenue
Recognition in Financial Statements", implementing a change in revenue
recognition policy for certain upfront payments received in international
licensing arrangements for Periostat. Effective January 1,
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2000, upfront payments received from licensees, where the Company has continuing
involvement, are now being deferred and recognized as license revenue over the
estimated performance period of the individual license agreements. In previous
years, prior to the Company's adoption of SAB 101, the Company recognized
revenue when the upfront payments were received, generally upon the execution of
each agreement. During the three and six months ended June 30, 2001, the Company
recognized $15 and $30, respectively, in license revenues which were deferred
upon the implementation of SAB 101. During the three and six months ended June
30, 2000, the Company recognized $9 and $369, respectively, in license revenues
which were deferred upon the implementation of SAB 101.
The consolidated statements of operations and cash flows for the three and
six months ended June 30, 2000 have been restated in the accompanying financial
statements based on this newly adopted revenue recognition policy. The change
increased revenue and decreased net loss by $281 during the six months ended
June 30, 2000, and decreased revenue and increased net loss by $89 during the
three months ended June 30, 2000, excluding the cumulative effect of the change.
During the six months ended June 30, 2000, the Company recorded a charge of
$764, as a result of the cumulative effect of the change in accounting principle
for revenue recognized prior to January 1, 2000.
NOTE 4 -- COMMON STOCK AND DEBT FINANCING:
On March 12, 2001, the Company consummated a private equity offering of
1,500,000 shares of Common Stock for an aggregate purchase price of $7,500,
which generated net proceeds to the Company of approximately $6,900. In
addition, the investors in this financing were also issued an aggregate of
400,000 warrants which are exercisable for up to three (3) years into 400,000
shares of the Company's Common Stock at an exercise price per share of $6.00.
The consideration received for such warrants is included in the aggregate
proceeds received in the financing. The Company also issued to its financial
advisor in this financing, warrants to purchase an aggregate of 150,000 shares
of the Company's Common Stock, exercisable for up to three (3) years, at an
exercise price of $5.70 per share. All such warrants may be deemed automatically
exercised in certain circumstances based on the Company's stock price. The
Company is obligated to maintain the effectiveness of a shelf registration
statement with respect to all such shares of Common Stock issued and shares
underlying all such warrants for a continuous twenty-four (24) month period.
Should the Company fail to maintain the effectiveness of such registration
statement, the investors and the financial advisor shall receive an additional
27,500 shares of the Company's Common Stock, in the aggregate, for no additional
consideration. As a result of this financing, the conversion price of the
Preferred Stock has been reduced from $11.00 to $9.94 per share.
On March 19, 2001, the Company consummated a revolving credit facility (the
"Facility") with Silicon Valley Bank (the "Bank"). The Company may borrow up to
the lesser of $3,000 or 80% of eligible accounts receivable, as defined. The
amount available is also reduced by outstanding letters of credit which may be
issued under this agreement in amounts totaling up to $1,500. The Company is not
obligated to draw amounts under the Facility and any such borrowings on the
Facility bear interest, payable monthly, at the prime rate plus 1.5% per annum
and may be used only for working capital purposes. Without the consent of the
Bank, the
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Company, among other things, shall not (i) merge or consolidate with another
entity; (ii) acquire assets outside the ordinary course of business; or (iii)
pay or declare any cash dividends on the Company's Common Stock. The Company
must also maintain a certain tangible net worth and a minimum of $2,000 in cash,
net of borrowings under the Facility, at all times during the term of the
Facility. In addition, the Company has secured its obligations under the
Facility through the granting of a security interest in favor of the Bank with
respect to all of the Company's assets, including its intellectual property. As
of June 30, 2001, the Company has an outstanding letter of credit issued
relating to open purchase commitments in the amount of $1,106 and there are no
borrowings outstanding against the Facility.
NOTE 5 -- STOCK OPTION PLAN:
At the Company's 2001 Annual Meeting of Stockholders held on May 10, 2001,
the stockholders of the Company approved a proposal to amend the Company's 1996
Stock Option Plan (the "1996 Stock Option Plan") to increase the maximum number
of shares of Common Stock available for issuance under the 1996 Stock Option
Plan from 1,500,000 to 2,000,000 shares and to reserve an additional 500,000
shares of Common Stock of the Company for issuance in connection with awards
granted under the 1996 Stock Option Plan.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview
CollaGenex Pharmaceuticals, Inc. and subsidiaries (the "Company") is a
specialty pharmaceutical company focused on providing innovative medical
therapies to the dental market. The Company's first product, Periostat(R), is an
orally administered, prescription pharmaceutical product that was approved by
the United States Food and Drug Administration (the "FDA") in September 1998 and
is the first and only pharmaceutical to treat adult periodontitis by inhibiting
the enzymes that destroy periodontal support tissues. In December 2000 and
February 2001, the United Kingdom Medicines Control Agency and the FDA,
respectively, granted marketing approval for a new tablet formulation of
Periostat. This new tablet formulation is smaller, easier to swallow and offers
manufacturing cost advantages over the Company's currently marketed capsule
formulation and will replace the capsule formulation during 2001. Periostat is
indicated as an adjunct to scaling and root planing, the most prevalent therapy
for adult periodontitis, to promote attachment level gain and to reduce pocket
depth in patients with adult periodontitis. The Company is marketing Periostat
to the dental community through its own professional dental pharmaceutical sales
force of approximately 120 sales representatives and managers. This sales force
also co-promotes Vioxx(R), a prescription non-steroidal anti-inflammatory drug
developed by Merck & Co., Inc. and, as of June 2001, markets Dentaplex(TM), the
Company's professionally-recommended nutritional supplement formulated to help
maintain optimal oral health. The Company is actively pursuing other
prescription and non-prescription products to market to the professional dental
community and directly to the consumer.
The Company began operations in January 1992 and functioned primarily as a
research and development company until 1998. During this period, the Company
operated with a minimal number of employees, and substantially all
pharmaceutical development activities were contracted to independent contract
research and other organizations. Following FDA approval of Periostat in
September 1998, the Company significantly increased its number of employees,
primarily in the areas of sales and marketing. The Company continues to contract
its research and development activities as well as manufacturing and
distribution functions.
The Company has incurred losses each year since inception and had an
accumulated deficit of $70.3 million at June 30, 2001. The Company expects to
continue to incur losses in the foreseeable future from expenditures on drug
development, marketing, manufacturing and administrative activities.
Statements contained or incorporated by reference in this Quarterly Report
on Form 10-Q that are not based on historical fact are "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Forward-looking statements may be identified by the use of
forward-looking terminology such as "may," "will," "expect," "estimate,"
"anticipate," "continue," or similar terms, variations of such terms or the
negative of those terms. This Form 10-Q contains forward-looking statements that
involve risks and
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uncertainties. The Company's business of selling, marketing and developing
pharmaceutical products is subject to a number of significant risks, including
risks relating to the implementation of the Company's sales and marketing plans
for Periostat, risks inherent in research and development activities, risks
associated with conducting business in a highly regulated environment and
uncertainty relating to clinical trials of products under development. The
success of the Company depends to a large degree upon the market acceptance of
Periostat by periodontists, dental practitioners, other health care providers,
patients and insurance companies. Other than Periostat, which has been approved
by the FDA for marketing in the United States and approved by the Medicines
Control Agency for marketing in the United Kingdom, there can be no assurance
that any of the Company's other product candidates will be approved by any
regulatory authority for marketing in any jurisdiction or, if approved, that any
such products or that Vioxx will be successfully commercialized by the Company.
As a result of these risks, and others expressed from time to time in
Collagenex's filings with the Securities and Exchange Commission, the Company's
actual results may differ materially from the results discussed in the
forward-looking statements contained herein.
RESULTS OF OPERATIONS
From its founding through the quarter ended September 30, 1998, the Company
had no revenues from sales of its own products. During the fourth quarter of
1998, the Company achieved net product sales of $3.1 million following the
commercial launch of Periostat in November 1998. Most of the 1998 sales
represented initial wholesale and retail stocking. During the year ended
December 31, 1999, the Company achieved net product sales of $15.2 million from
sales of Periostat. In addition, in 1999 the Company generated $770,000 in
contract revenues from two (2) co-promotion agreements (one (1) of which, the
Company's agreement with respect to Denavir(R), a prescription cold sore
medication owned by Novartis Pharmaceuticals Corporation, was terminated
effective April 13, 2001) and $100,000 in license fees relating to the signing
of a distribution agreement for Periostat in Canada. During the year ended
December 31, 2000, the Company achieved net product sales of $20.5 million from
sales of Periostat. In addition, in 2000 the Company generated $3.2 million in
contract revenues from two (2) co-promotion agreements (one (1) of which was for
Denavir) and $530,000 in license and milestone fees from various foreign
distribution and marketing agreements for Periostat. This amount included
$397,000 of license revenues that were deferred upon the implementation of Staff
Accounting Bulletin ("SAB 101"), effective January 1, 2000. These amounts were
previously recognized as license revenues in prior years under the historical
revenue recognition policy prior to the adoption of SAB 101.
During the three months ended June 30, 2001, the Company achieved net
product sales of $7.3 million from the sale of Periostat. In addition, during
the three months ended June 30, 2001, the Company generated $1.0 million in
contract revenues from its two (2) co-promotion agreements (one (1) of which was
for Denavir) and $420,000 in license and milestone fees from certain of the
Company's European partners. The milestone fees were earned when CollaGenex
International Limited, the Company's wholly-owned United Kingdom subsidiary,
completed the official filings for the registration of Periostat tablets with
the European Union.
To broaden awareness of and increase Periostat usage, the Company initiated
a direct-to-
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consumer ("DTC") advertising test program in the fall of 2000. DTC is a
relatively new but highly effective marketing tool used by pharmaceutical
companies to build patient awareness of prescription drugs and to drive
prescription and revenue growth. In October 2000, the Company launched a test
DTC campaign in Tampa and St. Louis to evaluate the potential effectiveness of
this tool for increasing Periostat prescription growth. During the fourth
quarter of 2000, new Periostat prescriptions in the test cities were 48% higher
than the third quarter of 2000 compared to a 1.4% increase in new Periostat
prescriptions in the rest of the United States. Based on these results, in
January 2001 the Company expanded its DTC campaign to include Philadelphia,
Washington, Houston and Chicago and in April 2001 launched such a campaign in
New York City, Denver, Detroit and Boston.
The Company realized a net loss during the first six months of 2001,
resulting primarily from increased sales and marketing expenses associated with
the Company's investment in DTC advertising for Periostat. Total operating
expenses consist of the cost of product sales, research and development expenses
and selling, general and administrative expenses. Cost of product sales consists
primarily of direct manufacturing expenses and royalties. Research and
development expenses consist primarily of funds paid to contract research
organizations for the provision of services and materials for drug development,
ongoing manufacturing and formulation enhancements and clinical trials. Selling,
general and administrative expenses consist primarily of personnel salaries and
benefits, direct marketing costs, professional and consulting fees, insurance
and general office expenses.
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000
Revenues. The Company realized $8.7 million in net revenues during the
three months ended June 30, 2001 compared to $6.6 million during the three
months ended June 30, 2000. Revenues for the second quarter of 2001 included
$7.3 million in net sales of Periostat, $1.0 million in contract revenues which
were derived from the Company's co-promotion of Vioxx and Denavir, and $420,000
in foreign license and milestone revenues related to Periostat. Revenues from
Denavir accounted for approximately $122,000 of such contract revenues. Revenues
for the three months ended June 30, 2000 included $5.7 million in net sales of
Periostat, $878,000 in contract revenues, which were derived from the Company's
co-promotion of Vioxx and Denavir, and $11,000 in foreign license and milestone
revenues for Periostat. Revenues from Denavir accounted for approximately
$175,000 of such contract revenues. Novartis, the owner of Denavir, terminated
its co-promotion agreement with the Company with respect to Denavir effective
April 13, 2001. In accordance with SAB 101, which was adopted on January 1,
2000, the license revenues recorded during the three months ended June 30, 2001
and 2000 were attributable, in part, to the recognition of up-front license fees
received for various agreements which are being recognized over the expected
term of these agreements. License revenues during the quarters ended June 30,
2001 and 2000 include $15,000 and $11,000 that were recorded in periods prior to
the adoption of SAB 101 which were deferred as a result of the cumulative effect
of a change in accounting principle as of January 1, 2000.
Cost of Product Sales. Cost of product sales for Periostat were $1.5
million, or 20.9% of net product sales, for the three months ended June 30,
2001, compared to $1.1 million, or 19.7% of net product sales, for the three
months ended June 30, 2000. This increase in cost of product
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sales for Periostat, as a percentage of net product sales, resulted primarily
from increases in contracted product production cost.
Research and Development Expenses. Research and development expenses
decreased 9.4% to $874,000 for the three months ended June 30, 2001 from
$965,000 for the three months ended June 30, 2000. This decrease resulted
primarily from lower deferred compensation expenses recorded in 2001. During the
three months ended June 30, 2000, the Company recorded a $302,000 non-cash
compensation charge relating to accelerating the vesting schedule on stock
options granted to certain non-employees in 1999. During the three months ended
June 30, 2001, contracted clinical trial expenses for Metastat increased
$150,000 from the prior year offsetting, in part, the decrease from 2000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 36.0% to $9.1 million for the three months
ended June 30, 2001 from $6.7 million for the three months ended June 30, 2000.
This increase was due primarily to increased sales and marketing expenses
associated with the Company's investment in DTC advertising for Periostat.
Other Income/Expenses. Interest income decreased to $74,000 during the
three months ended June 30, 2001 from $165,000 during the three months ended
June 30, 2000. This decrease was due to lower average balances in cash and
short-term investments. Interest expense for the three months ended June 30,
2001 was $2,000 compared to $4,000 for the three months ended June 30, 2000.
These expenses were primarily due to interest on the $219,000 note payable
executed by the Company in April 1999. Other expense of $4,000 was recognized
during the three months ended June 30, 2001 as a result of foreign currency
transactions.
Preferred Stock Dividends. Preferred stock dividends of $420,000 were
recorded during the three months ended June 30, 2001 as a result of the
Company's obligations in connection with the issuance of its Series D Stock (as
defined below) in May 1999. Similarly, preferred stock dividends of $426,000
were recorded during the three months ended June 30, 2000.
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
Revenues. The Company realized $15.7 million in net revenues during the six
months ended June 30, 2001 compared to $13.1 million during the six months ended
June 30, 2000. Revenues for the six months ended June 30, 2001 included $13.4
million in net sales of Periostat, $1.9 million in contract revenues which were
derived from the Company's co-promotion of Vioxx and Denavir, and $456,000 in
foreign license and milestone revenues for Periostat. Revenues from Denavir
accounted for approximately $297,000 of such contract revenues. Revenues for the
six months ended June 30, 2000 included $11.2 million in net sales of Periostat,
$1.5 million in contract revenues which were derived from the Company's
co-promotion of Vioxx and Denavir, and $381,000 in foreign license and milestone
revenues for Periostat. Revenues from Denavir accounted for approximately
$350,000 of such contract revenues. Novartis, the owner of Denavir, terminated
its co-promotion agreement with the Company with respect to Denavir effective
April 13, 2001. In accordance with SAB 101, which was adopted on January 1,
2000, the license revenues recorded during the six months ended June 30, 2001
and
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2000 were attributable, in part, to the recognition of up-front license fees
received for various agreements which are being recognized over the expected
term of these agreements. License revenues during the six months ended June 30,
2001 and 2000 include $30,000 and $281,000 that were recorded in periods prior
to the adoption of SAB 101 which were deferred as a result of the cumulative
effect of a change in accounting principle as of January 1, 2000.
Cost of product sales. Cost of product sales for Periostat were $2.9
million, or 21.5% of net product sales, for the six months ended June 30, 2001,
compared to $2.3 million, or 20.4% of net product sales, for the six months
ended June 30, 2000. This increase in cost of product sales for Periostat, as a
percentage of net product sales, resulted primarily from increases in contracted
product production cost.
Research and Development Expenses. Research and development expenses were
$1.8 million for both the six months ended June 30, 2001 and the six months
ended June 30, 2000. Expenses incurred during the six months ended June 30, 2001
included approximately $300,000 in Metastat contract clinical trial expenses and
$65,000 in development costs for Dentaplex while expenses incurred in the first
half of 2000 included a $324,000 non-cash compensation charge primarily relating
to accelerating the vesting schedule on certain non-employee stock options
granted in 1999, and $180,000 in additional formulation development charges for
Periostat tablets initiated in 2000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 23.2% to $16.5 million for the six months
ended June 30, 2001 from $13.4 million for the six months ended June 30, 2000.
This increase was due primarily to increased sales and marketing expenses
associated with the Company's investment in DTC advertising for Periostat.
Other Income/Expenses. Interest income decreased to $136,000 in the six
months ended June 30, 2001 from $351,000 in the six months ended June 30, 2000.
This decrease was due to lower average balances in cash and short-term
investments during 2001. Interest expense for the six months ended June 30, 2000
was $5,000 compared to $8,000 for the three months ended June 30, 2000. These
expenses were primarily due to interest on the $219,000 note payable executed by
the Company in April 1999. Other income of $8,000 was recognized during the six
months ended June 30, 2001 as a result of foreign currency transactions.
Preferred Stock Dividends. Preferred stock dividends of $840,000 were
recorded during the six months ended June 30, 2001 as a result of the Company's
obligations in connection with the issuance of its Series D Stock (as defined
below) in May 1999. Preferred stock dividends of $849,000 were recorded during
the six months ended June 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Since its origin in January 1992, the Company has financed its operations
through private placements of preferred stock and common stock, an initial
public offering of 2,000,000 shares of common stock, which generated net
proceeds to the Company of approximately $18.0 million after underwriting fees
and related expenses, and a subsequent public offering of 1,000,000
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shares of common stock, which generated net proceeds to the Company of
approximately $11.6 million after underwriting fees and related expenses. On May
12, 1999, the Company consummated a $20.0 million financing (the "1999
Financing") through the issuance of its Series D Cumulative Convertible
Preferred Stock (the "Series D Stock"), which generated net proceeds to the
Company of $18.5 million. The issuance of the Series D Stock was approved by a
majority of the Company's stockholders at the Company's Annual Meeting of
Stockholders on May 11, 1999. A portion of the proceeds of the 1999 Financing
were used to repay a $10.0 million Senior Secured Convertible Note provided by
one of the investors on March 19, 1999 in connection with the 1999 Financing.
The remaining proceeds have been and will be used for general working capital
purposes.
The Series D Stock is convertible at any time into shares of common stock
of the Company at a current conversion price of $9.94 per share, which
conversion price reflects a decrease from the initial conversion price of $11.00
per share as a result of the 2001 Financing (as defined below). The conversion
price is not subject to reset except in the event that the Company should fail
to declare and pay dividends when due or the Company should issue new equity
securities or convertible securities at a price per share or having a conversion
price per share lower than the then applicable conversion price of the Series D
Stock. During the first three years following issuance, holders of the Series D
Stock will be entitled to receive dividends payable in shares of fully
registered common stock at a rate of 8.4% per annum. Thereafter, dividends will
be payable in cash at a rate of 8.0% per annum.
All or a portion of the shares of Series D Stock shall, at the option of
the Company (as determined by the Board of Directors), automatically be
converted into fully paid, registered and non-assessable shares of common stock,
if the following two conditions are met: (i) the last sale price, or, in case no
such sale takes place on such day, the average of the closing bid and asked
prices on the Nasdaq is at least 200% of the conversion price then in effect (as
of June 30, 2001, $9.94 per share) for forty consecutive trading days; and (ii)
a shelf registration is in effect for the shares of common stock to be issued
upon conversion of the Series D Stock. Without written approval of a majority of
the holders of record of the Series D Stock, the Company, among other things,
shall not: (i) declare or pay any dividend or distribution on any shares of
capital stock of the Company other than dividends on the Series D Stock; (ii)
make any loans, incur any indebtedness or guarantee any indebtedness, advance
capital contributions to, or investments in any person, issue or sell any
securities or warrants or other rights to acquire debt securities of the
Company, except that the Company may incur such indebtedness in any amount not
to exceed $10.0 million in the aggregate outstanding at any time for working
capital requirements in the ordinary course of business; or (iii) make research
and development expenditures in excess of $7.0 million in any continuous twelve
month period, unless the Company has reported positive net income for four
consecutive quarters immediately prior to such twelve month period.
In April 1999, the Company received $219,000 in proceeds from the issuance
of a note payable. The proceeds of such note were used to fund the purchase of
equipment, fixtures and furniture for the Company's corporate offices in
Newtown, Pennsylvania. The term of the note is three years at 9.54% per annum,
with monthly minimum payments of principal and interest.
On March 12, 2001, the Company consummated a private equity offering of
1,500,000
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shares of Common Stock for an aggregate purchase price of $7.5 million, which
generated net proceeds to the Company of approximately $6.8 million (the "2001
Financing"). Such proceeds will be used primarily for the Company's DTC
advertising campaign and for general working capital purposes. In addition, the
investors in such financing were also issued an aggregate of 400,000 warrants
which are exercisable for up to three (3) years into 400,000 shares of the
Company's Common Stock at an exercise price per share of $6.00. The
consideration received for such warrants is included in the aggregate proceeds
received in the 2001 Financing. The Company also issued to its financial advisor
in such financing warrants to purchase an aggregate of 150,000 shares of the
Company's Common Stock exercisable for up to three (3) years at an exercise
price of $5.70 per share, as partial consideration for services rendered in
connection with the 2001 Financing. These warrants may be deemed automatically
exercised in certain circumstances based upon the Company's stock price. In
connection with the 2001 Financing, the Company is obligated to maintain the
effectiveness of a shelf registration statement with respect to all such shares
of Common Stock issued and shares underlying all such warrants for a continuous
twenty-four (24) month period, or the Company will be required to issue to the
investors and the financial advisor an additional 27,500 shares of the Company's
Common Stock, in the aggregate, for no additional consideration.
On March 19, 2001, the Company consummated a revolving credit facility (the
"Facility") with Silicon Valley Bank (the "Bank"). The Company may borrow up to
the lesser of $3.0 million or 80% of eligible accounts receivable, as defined
under the Facility. The amount available is also reduced by outstanding letters
of credit which may be issued under the Facility in amounts totaling up to $1.5
million. The Company is not obligated to draw amounts under the Facility and any
such borrowings on the Facility bear interest, payable monthly, at the prime
rate plus 1.5% per annum and may be used only for working capital purposes. The
Company intends to secure its purchase order commitments for Periostat from
Pharmaceutical Manufacturing Research Services, Inc., a contract manufacturing
company, with a letter of credit under the Facility. Without the consent of the
Bank, the Company, among other things, shall not (i) merge or consolidate with
another entity; (ii) acquire assets outside the ordinary course of business; or
(iii) pay or declare any cash dividends on the Company's Common Stock. The
Company must also maintain a certain tangible net worth and a minimum of $2.0
million in cash, net of borrowings under the Facility, at all times during the
term of the Facility. In addition, the Company has secured its obligations under
the Facility through the granting of a security interest in favor of the Bank
with respect to all of the Company's assets, including its intellectual
property.
At June 30, 2001, the Company had cash, cash equivalents and short-term
investments of approximately $7.2 million, an increase of $1.8 million from the
$5.4 million balance at December 31, 2000. This increase was primarily
attributable to the net proceeds of $6.8 million from the 2001 Financing less
cash used to fund operating activities for the six months ended June 30, 2001.
In accordance with investment guidelines approved by the Company's Board of
Directors, cash balances in excess of those required to fund operations have
been invested in short-term United States Treasury securities and commercial
paper with a credit rating no lower than A1/P1. The Company's working capital at
June 30, 2001 was $6.9 million, an increase of $1.6 million from $5.3 million at
December 31, 2000. This increase was primarily attributable to the net proceeds
of $6.8 million from the 2001 Financing less cash used to fund operations
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during the six months ended June 30, 2001.
The Company anticipates that its existing working capital will be
sufficient to fund the Company's operations through at least the middle of 2002.
The Company's future capital requirements and the adequacy of its available
funds will depend on many factors, including the size and scope of the Company's
marketing effort and sales of Periostat, the terms of agreements entered into
with corporate partners, if any, and the results of research and development and
pre-clinical and clinical studies for other applications of the Company's core
technology. Over the long-term, the Company's liquidity is dependent on market
acceptance of its products and technology.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company believes that it is not subject to a material impact to its
financial position or results of operations relating to market risk.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders was held on May 10, 2001.
There were present at the Annual Meeting in person or by proxy stockholders
holding an aggregate of 7,522,654 shares of Common Stock and 200,000 shares of
Series D Stock, which shares of Series D Stock account for an additional
2,012,599 shares of Common Stock on an as converted to Common Stock basis. The
results of the vote taken at such Annual Meeting with respect to the election of
the nominees to be the Common Stock directors were as follows:
Common Stock Nominees For Withheld
--------------------- --- --------
Brian M. Gallagher, Ph.D. 7,199,754 Shares 322,900 Shares
Peter R. Barnett, D.M.D. 7,199,754 Shares 322,900 Shares
Robert C. Black 7,199,754 Shares 322,900 Shares
James E. Daverman 7,199,754 Shares 322,900 Shares
Robert J. Easton 7,199,754 Shares 322,900 Shares
W. James O'Shea 7,199,754 Shares 322,900 Shares
The results of the vote taken at such Annual Meeting with respect to the
election of the nominee to be the Series D Director, Stephen A. Kaplan, were as
follows: 2,012,599 shares of Series D Stock (on an as converted to Common Stock
basis) were voted FOR the Series D Stock nominee, with no shares voting against.
A vote of the stockholders was taken at such Annual Meeting with respect to
the proposal to amend the Company's 1996 Stock Option Plan to increase the
maximum aggregate number of shares of Common Stock available for issuance
thereunder from 1,500,000 to 2,000,000 shares and to reserve an additional
500,000 shares of Common Stock of the Company for issuance in connection with
awards granted under the 1996 Stock Option Plan. For the purposes of such vote,
the holders of shares of Common Stock and the holders of Series D Stock (on an
as converted to Common Stock basis) voted together as a single class. Of such
shares 8,841,791 shares voted in favor of such proposal, 596,388 shares were
voted against such proposal and 97,074 shares abstained from voting.
In addition, a vote of the stockholders was taken at the Annual Meeting on
the proposal to ratify the appointment of KPMG LLP as the independent auditors
of the Company for the fiscal year ending December 31, 2001. For the purpose of
such vote, the holders of shares of Common Stock and the holders of Series D
Stock (on an as converted to Common Stock basis) voted together as a single
class. Of such shares 9,499,725 shares voted in favor of such proposal, 29,900
shares were voted against such proposal and 5,628 shares abstained from voting.
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ITEM 5. OTHER INFORMATION.
On June 18, 2001, the Company announced that its wholly-owned, United
Kingdom subsidiary, CollaGenex International Limited, completed the official
filings for the registration of Periostat tablets with the European Union Member
States and Norway. Periostat tablets were approved for marketing by the United
Kingdom Medicines Control Agency (the "UKMCA") in February 2001 and the UKMCA
has acted as Reference Member State in the preparation of the registration
filings in fifteen additional European countries. The Company earned milestone
payments from certain of its European partners as a result of such filings.
On June 19, 2001, the Company announced the availability of Dentaplex(TM),
the Company's professionally-recommended nutritional supplement to help maintain
optimal oral health. Dentaplex is marketed as a dietary supplement and, as such,
subjects the Company to an additional regulatory scheme under the Food, Drug and
Cosmetic Act and implementing regulations. The Company and its products
otherwise continue to be regulated as set forth in the Company's periodic
filings with the Securities and Exchange Commission.
On June 25, 2001, the Company announced that Periostat had been awarded the
ADA Seal of Acceptance by the American Dental Association. The ADA Seal of
Acceptance is awarded to products that have been shown to meet the ADA's
criteria for safety and effectiveness.
On July 2, 2001, the Company announced the launch of a tablet formulation
of Periostat. In December 2000 and February 2001, the UKMCA and the FDA,
respectively, granted marketing approval for the tablet formulation of
Periostat.
On August 9, 2001, the Company announced that its wholly-owned, United
Kingdom subsidiary, CollaGenex International Limited, had been advised by the
Department of Health in England that Periostat tablets have been placed on the
Dental Practitioners Formulary for prescribing under the National Health Service
as of September 1, 2001. Prior to inclusion in the Dental Practitioners
Formulary, Periostat was only available to periodontitis patients in England by
private prescription. Patients in the United Kingdom contribute a co-pay as a
prescription charge for drugs that are prescribed by a dental practitioner or
doctor, with the cost of the drugs being met by the National Health Service,
although many patients are exempt from the co-pay.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 - Letter Agreement dated as of June 26, 2001 by and between the
Company and Pharmaceutical Manufacturing Research Services, Inc.
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(b) Reports on Form 8-K.
On March 16, 2001, the Company filed a current report on Form 8-K with
the Securities and Exchange Commission relating to the issuance by the
Company of 1,500,000 shares of Common Stock and warrants to purchase
shares of the Company's Common Stock for an aggregate purchase price
of $7.5 million. The Company amended such Form 8-K by filing a Form
8-K/A on April 3, 2001.
On July 20, 2001, the Company filed a current report on Form 8-K with
the Securities and Exchange Commission relating to its Dentaplex
product and the related governmental regulation with respect to
dietary supplements.
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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.
CollaGenex Pharmaceuticals, Inc.
Date: August 14, 2001 By: /s/ Nancy C. Broadbent
-------------------------------------------
Nancy C. Broadbent
As Chief Financial Officer, Treasurer and
Secretary on behalf of the Registrant and as
the Registrant's Principal Financial and
Accounting Officer
EXHIBIT 10.1
LETTER AGREEMENT DATED AS OF JUNE 26, 2001 BY AND BETWEEN THE
COMPANY AND PHARMACEUTICAL MANUFACTURING RESEARCH SERVICES, INC.