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
November 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 September 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 September 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 September 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
Incorporation or Organization) Identification No.)
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 October 15, 2001:
Class Number of Shares
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Common Stock, $.01 par value 10,999,573
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 September 30, 2001 (unaudited)................... 2
Condensed Consolidated Statements of Operations for the Three
Months Ended September 30, 2000 and 2001 (unaudited)...... 3
Condensed Consolidated Statements of Operations for the Nine
Months Ended September 30, 2000 and 2001 (unaudited)...... 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 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.............................. 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 17
PART II. OTHER INFORMATION.............................................. 18
Item 2. Changes in Securities and Use of Proceeds.................... 18
Item 4. Submission of Matters to a Vote of Security Holders.......... 18
Item 5. Other Information............................................. 18
Item 6. Exhibits and Reports on Form 8-K.............................. 19
SIGNATURES............................................................... 21
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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 September 30, 2001
(dollars in thousands, except per share data)
December 31, September 30,
Assets 2000 2001
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(unaudited)
Current assets:
Cash and cash equivalents........................................... $ 3,709 $ 7,637
Short term investments.............................................. 1,739 99
Accounts receivable, net of allowance of $381 and $602 at
December 31, 2000 and September 30, 2001, respectively............ 3,038 4,320
Inventories......................................................... 277 1,170
Prepaid expenses and other current assets........................... 989 1,082
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Total current assets.......................................... 9,752 14,308
Equipment and leasehold improvements, net.............................. 652 534
Other assets........................................................... 27 926
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Total assets.................................................. $ 10,431 $ 15,768
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Liabilities and Stockholders' Equity
Current liabilities:
Current portion of note payable..................................... $ 65 $ 55
Accounts payable.................................................... 1,865 3,679
Accrued expenses.................................................... 2,514 3,062
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Total current liabilities..................................... 4,444 6,796
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Note payable, less current portion..................................... 47 --
Deferred revenue....................................................... 676 629
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 September 30,
2001 (liquidation value of $20,000 at September 30, 2001)........ 2 2
Common stock, $0.01 par value; 25,000,000 shares authorized,
8,775,176 and 10,999,573 shares issued and outstanding at
December 31, 2000 and September 30, 2001, respectively........... 88 110
Common stock to be issued (275,462 shares at December 31, 2000
and 0 shares at September 30, 2001) .............................. 872 --
Additional paid in capital.......................................... 68,461 80,129
Deferred compensation............................................... (29) (8)
Accumulated deficit................................................. (64,130) (71,890)
Stockholders' equity.......................................... 5,264 8,343
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Total liabilities and stockholders' equity.................... $ 10,431 $ 15,768
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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 September 30, 2000 and 2001
(dollars in thousands, except per share data)
(unaudited)
Three Months Ended
September 30,
---------------------------------------
2000 2001
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Restated
(See Note 3)
Revenues:
Product sales....................................................... $ 4,252 $ 8,320
Contract revenues................................................... 992 913
License revenues.................................................... 15 16
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Total revenues................................................. 5,259 9,249
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Operating expenses:
Cost of product sales............................................... 816 1,274
Research and development............................................ 562 1,024
Selling, general and administrative................................. 6,080 8,548
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Total operating expenses...................................... 7,458 10,846
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Operating loss................................................ (2,199) (1,597)
Other income (expense):
Interest income..................................................... 152 53
Interest expense.................................................... (4) (2)
Other expense....................................................... (1) --
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Net loss...................................................... (2,052) (1,546)
Preferred stock dividends.............................................. 429 420
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Net loss allocable to common stockholders.............................. $ (2,481) $ (1,966)
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Basic and diluted net loss per share allocable to common
stockholders......................................................... $ (0.28) $ (0.18)
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Shares used in computing basic and diluted net loss per share
allocable to common stockholders..................................... 8,740,955 10,745,876
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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 Nine Months Ended September 30, 2000 and 2001
(dollars in thousands, except per share data)
(unaudited)
Nine Months Ended
September 30,
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2000 2001
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Restated
(See Note 3)
Revenues:
Product sales....................................................... $ 15,485 $ 21,701
Contract revenues................................................... 2,520 2,812
License revenues.................................................... 396 472
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Total revenues................................................. 18,401 24,985
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Operating expenses:
Cost of product sales............................................... 3,113 4,156
Research and development............................................ 2,374 2,842
Selling, general and administrative................................. 19,516 25,095
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Total operating expenses...................................... 25,003 32,093
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Operating loss................................................ (6,602) (7,108)
Other income (expense):
Interest income..................................................... 502 189
Interest expense.................................................... (12) (7)
Other income (expense).............................................. (3) 8
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Loss before cumulative effect of change in accounting
principle.................................................... (6,115) (6,918)
Cumulative effect of change in accounting principle.................... 764 --
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Net loss...................................................... (6,879) (6,918)
Preferred stock dividends.............................................. 1,278 1,260
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Net loss allocable to common stockholders.............................. $ (8,157) (8,178)
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Basic and diluted net loss per share allocable to common
stockholders before cumulative effect of change in accounting
principle........................................................... $ (0.85) $ (0.80)
Cumulative effect of change in accounting principle.................... (0.09) --
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Basic and diluted net loss per share allocable to common
stockholders........................................................ $ (0.94) $ (0.80)
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Shares used in computing basic and diluted net loss per share
allocable to common stockholders.................................... 8,690,208 10,216,213
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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 Cash Flows
For the Nine Months Ended September 30, 2000 and 2001
(dollars in thousands)
(unaudited)
Nine Months Ended
September 30,
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2000 2001
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Restated
(See Note 3)
Cash flows from operating activities:
Net loss............................................................ $ (6,879) $ (6,918)
Adjustments to reconcile net loss to net cash used in
operating activities:
Noncash compensation expense.................................... 366 183
Depreciation and amortization expense........................... 170 192
Cumulative effect of change in accounting principle............. 764 --
Change in assets and liabilities:
Accounts receivable........................................... (431) (1,282)
Inventories................................................... (53) (893)
Prepaid expenses and other assets............................. (486) (992)
Accounts payable.............................................. 708 1,814
Accrued expenses.............................................. (120) 548
Deferred revenue.............................................. (75) (47)
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Net cash used in operating activities................ (6,036) (7,395)
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Cash flows from investing activities:
Capital expenditures................................................ (167) (74)
Proceeds from the sale of short term investments.................... 5,638 1,936
Purchase of short term investments.................................. (2,224) (296)
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Net cash provided by investing activities........... 3,247 1,566
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Cash flows from financing activities:
Net proceeds from issuance of common stock.......................... 79 9,814
Repayment of long-term debt......................................... (51) (57)
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Net cash provided by financing activities............ 28 9,757
Net (decrease) increase in cash and cash equivalents................... (2,761) 3,928
Cash and cash equivalents at beginning of period....................... 7,981 3,709
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Cash and cash equivalents at end of period............................. $ 5,220 $ 7,637
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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.......................... $ 12 $ 7
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See accompanying notes to unaudited condensed consolidated financial statements.
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COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 accounting principles
generally accepted in the United States of America. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America 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 September 30,
2001, their results of operations for the three and nine months ended September
30, 2000 and 2001, and their cash flows for the nine months ended September 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 September 30, 2001 consist of the
following:
2000 2001
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Raw materials $ 60 $ 225
Work-in-process -- 100
Finished goods 217 845
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$ 277 $ 1,170
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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
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payments received in international licensing arrangements for Periostat.
Effective January 1, 2000, upfront payments received from licensees, where the
Company has continuing involvement, were 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 nine months ended
September 30, 2001, the Company recognized $16 and $47, respectively, in license
revenues which were deferred under SAB 101. During the three and nine months
ended September 30, 2000, the Company recognized $15 and $388, respectively, in
license revenues which were deferred upon the implementation of SAB 101.
The condensed consolidated statements of operations for the three and nine
months ended September 30, 2000 and the condensed consolidated statement of cash
flows for the nine months ended September 30, 2000 have been restated in the
accompanying financial statements based on the adoption of SAB 101. The change
decreased revenue and increased net loss before cumulative effect of change in
accounting principle by $205 during the three months ended September 30, 2000,
and increased revenue and decreased net loss before cumulative effect of change
in accounting principle by $76 during the nine months ended September 30, 2000.
During the nine months ended September 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 $6,800. 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 such 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. 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 such financing, the conversion price of the
Company's Series D Preferred Stock was reduced from $11.00 to $9.94 per share.
Such conversion price was further reduced to $9.91 per share in connection with
the sale of shares of the Company's Common Stock to Atrix Laboratories, Inc.
(see Note 5 below).
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 under
the Facility. The amount
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available under the Facility is also reduced by outstanding letters of credit
which may be issued under the Facility in amounts totaling up to $1,500. The
Company is not obligated to draw amounts under the Facility and any such
borrowings under 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 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 September 30, 2001, the Company has an outstanding letter of
credit issued relating to open purchase commitments in the amount of $716 and
there are no borrowings outstanding against the Facility.
NOTE 5 -- LICENSING AND MARKETING AGREEMENT:
On August 24, 2001, the Company signed an exclusive License Agreement (the
"Atrix License Agreement") with Atrix Laboratories, Inc. ("Atrix") to market
Atrix's proprietary dental products, Atridox(R), Atrisorb(R)-Free Flow and
Atrisorb(R)-D, to the United States dental market. Pursuant to the terms of the
Atrix License Agreement, among other things: (i) Atrix will manufacture the
dental products for the Company at an agreed upon transfer price and will
receive royalties on future net sales of the products each calendar year; (ii)
the Company paid to Atrix a $1.0 million licensing fee to market such products;
(iii) the Company has committed to no less than $2.0 million in advertising and
selling expenses related to the products during the fiscal year beginning
January 1, 2002 and certain additional advertising and selling expenses
commencing with fiscal year 2003; (iv) the Company has agreed to maintain, for a
period of 24 months, a force of no less than ninety (90) full time dental
consultants and divisional and regional managers to make sales and product
recommendation calls on dental professionals; and (v) the Company has agreed
that the products will be the subject of a specific number of detail calls in
the United States during 2002. The $1.0 million license fee payment has been
deferred and is being amortized over the ten year estimated term of the license
on a straight-line basis.
In addition, pursuant to the terms of a Stock Purchase Agreement dated
August 24, 2001 by and between the Company and Atrix, Atrix purchased 330,556
unregistered shares of the Company's Common Stock for an aggregate purchase
price of $3.0 million. As a result of the sale of such shares to Atrix, the
conversion price of the Company's Series D Preferred Stock was reduced from
$9.94 to $9.91 per share.
NOTE 6 -- 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.
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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. In July 2001, the Company launched this new tablet formulation of
Periostat, which offers manufacturing cost advantages over, and will replace,
the Company's capsule formulation of Periostat. 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 Dentaplex(TM), the Company's
professionally-recommended nutritional supplement formulated to help maintain
optimal oral health. Pursuant to an exclusive License Agreement (the "Atrix
License Agreement") with Atrix Laboratories, Inc. ("Atrix"), the Company began
in October 2001 to actively market Atrix's proprietary dental products,
Atridox(R), Atrisorb(R)-Free Flow and Atrisorb(R)-D, to the United States dental
market. The Company is actively pursuing other prescription and non-prescription
products to market to the professional dental and medical 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 $71.9 million at September 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. Periostat 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 will
be successfully commercialized by the Company. In addition, there can be no
assurance that the Company will successfully commercialize Dentaplex(TM),
Vioxx(R), Atridox(R), Atrisorb(R)-Free Flow and Atrisorb(R)-D. 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.
Periostat(R), Metastat(R), IMPACS(TM), Dermostat(R) and Dentaplex(TM) are
trademarks of CollaGenex Pharmaceuticals, Inc.
CollaGenex(TM) and Periostat(R) are trademarks of CollaGenex International
Limited.
VIOXX(R)is a trademark of Merck & Co., Inc.
Atridox(R), Atrisorb - Free Flow(R) and Atrisorb-D(R) are trademarks of Atrix
Laboratories, Inc.
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.
$397,000 of such $530,000 in license revenues 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.
-10-
During the three months ended September 30, 2001, the Company achieved net
product sales of $8.3 million from the sale of Periostat. In addition, during
the three months ended September 30, 2001, the Company generated $913,000 in
contract revenues from its co-promotion agreement with Merck with respect to
Vioxx and $16,000 in licensing revenue, which consisted of previously deferred
license fees from certain of the Company's European partners.
To broaden awareness of and increase Periostat usage, the Company initiated
a direct-to-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. New Periostat
prescriptions in those test cities were 48% higher during the fourth quarter of
2000 than the third quarter of 2000 compared to a 1.4% increase between such
quarters in new Periostat prescriptions in the rest of the United States. Based
on these results, during 2001 the Company expanded its DTC campaign to a number
of major cities across the country.
The Company realized a net loss during the first nine 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 September 30, 2001 Compared to Three Months Ended
September 30, 2000
Revenues. The Company realized $9.2 million in net revenues during the
three months ended September 30, 2001 compared to $5.3 million in net revenues
during the three months ended September 30, 2000. Revenues for the third quarter
of 2001 included $8.3 million in net sales of Periostat, $913,000 in contract
revenues which were derived from the Company's co-promotion of Vioxx, and
$16,000 in foreign license revenues related to Periostat. Revenues from Denavir
did not account for any of such contract revenues. Revenues for the third
quarter of 2000 included $4.3 million in net sales of Periostat, $992,000 in
contract revenues, which were derived from the Company's co-promotion of Vioxx
and Denavir, and $15,000 in Periostat license revenues. 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 September 30, 2001 and 2000 were attributable to the recognition of
up-front license fees received for various agreements which are being recognized
over the expected term of such agreements. License revenues during the quarters
ended September 30, 2001 and 2000 include $16,000 and $15,000 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,
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2000.
Cost of Product Sales. Cost of product sales for Periostat were $1.3
million, or 15.3% of net product sales, for the three months ended September 30,
2001, compared to $816,000, or 19.2% of net product sales, for the three months
ended September 30, 2000. This decrease in cost of product sales for Periostat,
as a percentage of net product sales, resulted from the manufacturing cost
savings for Periostat tablets which were launched on July 2, 2001.
Research and Development Expenses. Research and development expenses
increased 82.2% to $1.0 million for the three months ended September 30, 2001
from $562,000 for the three months ended September 30, 2000. The increase in
2001 resulted primarily from the initiation of contracted formulation
development projects for Periostat and ongoing clinical trial expenditures for
Metastat. Other incremental expenses incurred during the three months ended
September 30, 2001 included regulatory costs and registration fees associated
with obtaining marketing approval for Periostat tablets in Europe.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 40.6% to $8.5 million for the three months
ended September 30, 2001 from $6.1 million for the three months ended September
30, 2000. This increase was due primarily to increased sales and marketing
expenses associated with the Company's investment in DTC advertising for
Periostat and advertising, promotional and other launch expenses associated with
the Dentaplex introduction during the three months ended September 30, 2001.
Other Income/Expenses. Interest income decreased to $53,000 during the
three months ended September 30, 2001 from $152,000 during the three months
ended September 30, 2000. This decrease was due to lower average balances in
cash and short-term investments. Interest expense for the three months ended
September 30, 2001 was $2,000 compared to $4,000 for the three months ended
September 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
$1,000 was recognized during the three months ended September 30, 2000 as a
result of foreign currency transactions. There were no such expenses recognized
during the three months ended September 30, 2001.
Preferred Stock Dividends. Preferred stock dividends of $420,000 were
recorded during the three months ended September 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 $429,000
were recorded during the three months ended September 30, 2000.
Nine Months Ended September 30, 2001 Compared to Nine Months Ended
September 30, 2000
Revenues. The Company realized $25.0 million in net revenues during the
nine months ended September 30, 2001 compared to $18.4 million in net revenues
during the nine months ended September 30, 2000. Revenues for the nine months
ended September 30, 2001 included $21.7 million in net sales of Periostat, $2.8
million in contract revenues which were derived from the Company's co-promotion
of Vioxx and Denavir, and $472,000 in foreign license and milestone revenues for
Periostat. Revenues from Denavir accounted for approximately $297,000
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of such contract revenues. Revenues for the nine months ended September 30, 2000
included $15.5 million in net sales of Periostat, $2.5 million in contract
revenues which were derived fromthe Company's co-promotion of Vioxx and Denavir,
and $396,000 in Periostat license revenues. Revenues from Denavir accounted for
approximately $525,000 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 nine months ended
September 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 such agreements. License revenues during the nine
months ended September 30, 2001 and 2000 include $47,000 and $388,000 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 $4.2
million, or 19.2% of net product sales, for the nine months ended September 30,
2001, compared to $3.1 million, or 20.1% of net product sales, for the nine
months ended September 30, 2000. This decrease in cost of product sales for
Periostat, as a percentage of net product sales, resulted from the manufacturing
cost savings for Periostat tablets which were launched on July 2, 2001.
Research and Development Expenses. Research and development expenses
increased 19.7% to $2.8 million for the nine months ended September 30, 2001
from $2.4 million for the nine months ended September 30, 2000. Expenses
incurred during the nine months ended September 30, 2001 included approximately
$425,000 more in Metastat contract clinical trial expenses and $240,000 in
formulation development costs for Periostat, while expenses incurred in the nine
months ended September 30, 2000 included $160,000 more in compensation expenses
relating to certain non-employee stock options.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 28.6% to $25.1 million for the nine months
ended September 30, 2001 from $19.5 million for the nine months ended September
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 $189,000 in the nine
months ended September 30, 2001 from $502,000 in the nine months ended September
30, 2000. This decrease was due to lower average balances in cash and short-term
investments during 2001. Interest expense for the nine months ended September
30, 2001 was $7,000 compared to $12,000 for the nine months ended September 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 nine months ended September 30, 2001, mainly the result of foreign
currency transactions.
Preferred Stock Dividends. Preferred stock dividends of $1.3 million were
recorded during each of the nine months ended September 30, 2001 and September
30, 2000 as a result of the Company's obligations in connection with the
issuance of its Series D Stock (as defined below) in May 1999.
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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 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 $9.91 per share, which
conversion price reflects a decrease from the initial conversion price of $11.00
per share as a result of both a Common Stock financing by the Company in March
2001, as discussed below, and the sale of shares of the Company's Common Stock
to Atrix in August 2001, as discussed below. Such 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
are 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 September 30, 2001, such conversion price was $9.91 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
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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 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 are being 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 from the date
of such financing 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. Such 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 under the Facility 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 under 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 has secured 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. As of September 30, 2001, the Company has an outstanding
letter of credit issued relating to open purchase commitments in the amount of
$716,000 and there are no borrowings outstanding against the Facility.
-15-
On August 24, 2001, the Company signed the Atrix License Agreement with
Atrix to market Atrix's proprietary dental products, Atridox(R), Atrisorb(R) -
Free Flow and Atrisorb(R)-D, the United States dental market. Pursuant to the
terms of the Atrix License Agreement, among other things: (i) Atrix will
manufacture the dental products for the Company at an agreed upon transfer price
and will receive royalties on future net sales of the products each calendar
year; (ii) the Company paid to Atrix a $1.0 million licensing fee to market such
products; (iii) the Company has committed to no less than $2.0 million in
advertising and selling expenses related to the products during the fiscal year
beginning January 1, 2002 and certain additional advertising and selling
expenses commencing with fiscal year 2003; (iv) the Company has agreed to
maintain, for a period of 24 months, a force of no less than ninety (90) full
time dental consultants and divisional and regional managers to make sales and
product recommendation calls on dental professionals; and (v) the Company has
agreed that the products will be the subject of a specific number of detail
calls in the United States during 2002.
In addition, pursuant to the terms of a Stock Purchase Agreement dated
August 24, 2001 by and between the Company and Atrix, Atrix purchased 330,556
unregistered shares of the Company's Common Stock for an aggregate purchase
price of approximately $3.0 million. As a result of the sale of such shares to
Atrix, the conversion price of the Company's Series D Stock was reduced from
$9.94 to $9.91 per share.
In October 2001, the Company filed a shelf Registration Statement on Form
S-3 to register 964,880 shares of its Common Stock. Such Registration Statement
has not yet been declared effective by the Securities and Exchange Commission.
Upon the declaration of the effectiveness of such Registration Statement, the
Company will be permitted to issue such registered shares of Common Stock from
time to time and may use the proceeds thereof for research and development of
additional products, expansion of the Company's sales and marketing
capabilities, potential product acquisitions and other general corporate
purposes, including, but not limited to, working capital and capital
expenditures.
At September 30, 2001, the Company had cash, cash equivalents and
short-term investments of approximately $7.7 million, an increase of $2.3
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, and $3.0 million from the sale of shares of the Company's Common
Stock to Atrix, less cash used to fund operating activities for the nine months
ended September 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 September 30, 2001 was $7.5 million, an increase of
$2.2 million from $5.3 million at December 31, 2000. This increase was primarily
attributable to the net proceeds of $9.8 million from the 2001 Financing and the
sale of shares of the Company's Common Stock to Atrix, less cash used to fund
operations during the nine months ended September 30, 2001.
The Company anticipates that its existing working capital will be
sufficient to fund the Company's operations through at least 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
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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.
-17-
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Changes in Securities
(c) On August 24, 2001, the Company issued and sold 330,556 unregistered
shares of its Common Stock to Atrix for an aggregate purchase price of $3.0
million. Such sale and issuance of Common Stock was consummated in connection
with the grant of an exclusive license and marketing rights to the Company by
Atrix to market certain of Atrix's proprietary dental products in the United
States. The Company believes that the issuance of the foregoing securities was
exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended, as a transaction not involving any public offering. Atrix had adequate
access to information about the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On October 15, 2001, the Company received the unanimous consent of the
holders of its Series D Stock to amend the terms of the Series D Stock to
provide that: (i) a vacancy in any directorship elected by the holders of the
Company's Common Stock may be filled, until the next annual meeting of the
stockholders of the Company, by the vote or written consent of a majority of the
directors then in office elected by the holders of Common Stock; (ii) the
maximum aggregate number of Common Stock or options to purchase shares of Common
Stock constituting Permitted Options (as defined in the certificate of
designation, preferences and rights for the Series D Stock) be increased from
Two Million Three Hundred Two Thousand (2,302,000) shares to Three Million One
Hundred Seventeen Thousand Four Hundred Thirty Nine (3,117,439) shares; and
(iii) any subsequent option grant which otherwise requires the approval of the
board of directors, shall require, prior to the time of such grant, the approval
of the director elected by the holders of the Series D Stock.
On October 18, 2001, the Company filed a current report on Form 8-K with
the Securities and Exchange Commission regarding such amendments.
ITEM 5. OTHER INFORMATION.
Licensing and Marketing Agreement
On August 24, 2001, the Company signed an exclusive License Agreement (the
"Atrix License Agreement") with Atrix Laboratories, Inc. ("Atrix") to market
Atrix's proprietary dental products, Atridox(R), Atrisorb(R)-Free Flow and
Atrisorb(R)-D, to the United States dental market. Under the terms of the Atrix
License Agreement, Atrix will manufacture the dental products for the Company at
an agreed upon transfer price and will receive royalties on future net sales. In
addition, Atrix purchased 330,556 unregistered shares of the Company's Common
Stock for an aggregate purchase price of $3.0 million.
-18-
Results From Dermostat Acne Study
On October 1, 2001, the Company announced the clinically and statistically
significant results of a six-month, 60-patient clinical trial designed to
evaluate the efficacy of Dermostat, a sub-antimicrobial regimen of doxycycline
hyclate tablets, 20 mg., for the treatment of patients with moderate acne.
The results showed that the patients receiving Dermostat experienced more
than a 50% reduction in comedones and inflammatory lesions. Patent applications
for Dermostat have been filed with the U.S. Patent and Trademark Office.
The Dermostat clinical trial was a multi-center, placebo-controlled,
double-blind study chaired by Dr. Robert Skidmore, Chief of Dermatology at the
University of Florida Medical Center, and was also conducted by Dr. Rodney
Kovach, Chief of Dermatology at West Virginia University Health Sciences Center.
The results revealed statistically significant benefits to patients receiving
Dermostat for all three of the pre-established primary endpoints: change in
total comedones, total inflammatory lesions and total lesion counts.
Shelf Registration Statement on Form S-3
In October 2001, the Company filed a shelf Registration Statement on Form
S-3 to register 964,880 shares of its Common Stock. Such Registration Statement
has not yet been declared effective by the Securities and Exchange Commission.
Upon the declaration of the effectiveness of such Registration Statement, the
Company will be permitted to issue such registered shares of Common Stock from
time to time and may use the proceeds thereof for research and development of
additional products, expansion of the Company's sales and marketing
capabilities, potential product acquisitions and other general corporate
purposes, including, but not limited to, working capital and capital
expenditures.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
* 10.1 - License Agreement dated as of August 24, 2001 by and
between the Company and Atrix Laboratories, Inc.
* 10.2 - Stock Purchase Agreement dated August 24, 2001 by and
between the Company and Atrix Laboratories, Inc.
(b) Reports on Form 8-K.
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.
On October 18, 2001, the Company filed a Current Report on Form
8-K with the Securities and Exchange Commission with respect to
the filing of: (i) the Amended Certificate of Designation,
Preferences and Rights of the Series D
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Cumulative Convertible Preferred Stock of CollaGenex
Pharmaceuticals, Inc.; (ii) Amendment No. 1 to the Stockholders
and Registration Rights Agreement, dated March 19, 1999, by and
among CollaGenex Pharmaceuticals, Inc., OCM Principal
Opportunities Fund, L.P. and the Purchasers set forth therein;
(iii) Amendment No. 2 to the Stockholders and Registration Rights
Agreement, dated March 19, 1999, by and among CollaGenex
Pharmaceuticals, Inc., OCM Principal Opportunities Fund, L.P. and
the Purchasers set forth therein; and (iv) Amendment No. 2 to the
Shareholder Protection Rights Agreement, dated September 15,
1997, between CollaGenex Pharmaceuticals, Inc. and American Stock
Transfer & Trust Company, as amended.
* Confidential Treatment has been sought for a portion of these
exhibits.
-20-
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: November 14, 2001 By:/s/ Brian M. Gallagher, Ph.D.
--------------------------------------
Brian M. Gallagher, Ph.D.
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2001 By:/s/ Nancy C. Broadbent
--------------------------------------
Nancy C. Broadbent
Chief Financial Officer (Principal
Financial and Accounting Officer)
EXHIBIT 10.1
LICENSE AGREEMENT DATED AS OF AUGUST 24, 2001 BY AND BETWEEN THE
COMPANY AND ATRIX LABORABORIES, INC.
EXHIBIT 10.2
STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 24, 2001 BY AND
BETWEEN THE COMPANY AND ATRIX LABORATORIES, INC.