SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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 April 15, 2002:
Class Number of Shares
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Common Stock $.01 par value 11,119,594
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, 2001
and March 31, 2002 (unaudited).............................. 2
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 2001 and 2002 (unaudited)............ 3
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2001 and 2002 (unaudited)............ 4
Notes to Condensed Consolidated Financial Statements
(unaudited)................................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 9
Results of Operations.......................................... 10
Liquidity and Capital Resources................................ 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 21
PART II. OTHER INFORMATION................................................. 22
Item 2. Changes in Securities and Use of Proceeds...................... 22
Item 5. Other Information.............................................. 22
Item 6. Exhibits and Reports on Form 8-K............................... 23
SIGNATURES................................................................. 24
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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, 2001 and March 31, 2002
(dollars in thousands, except per share data)
DECEMBER 31, MARCH 31,
ASSETS 2001 2002
------------- -------------
(unaudited)
Current assets:
Cash and cash equivalents........................................... $ 6,171 $ 4,195
Accounts receivable, net of allowance of $950 and $1,067 at
December 31, 2001 and March 31, 2002, respectively............... 4,478 5,698
Inventories......................................................... 1,402 1,483
Prepaid expenses and other current assets........................... 1,200 1,533
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Total current assets.......................................... 13,251 12,909
Equipment and leasehold improvements, net........................... 537 639
Other assets........................................................ 910 885
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Total assets.................................................. $ 14,698 $ 14,433
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of note payable..................................... $ 35 $ 15
Accounts payable.................................................... 3,769 4,436
Accrued expenses.................................................... 3,153 2,562
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Total current liabilities..................................... 6,957 7,013
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Deferred revenue.................................................... 614 552
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, 2001 and March 31, 2002
(liquidation value of $20,000 at March 31, 2002).................. 2 2
Common stock, $0.01 par value; 25,000,000 shares authorized,
10,999,573 and 11,116,019 shares issued and outstanding at
December 31, 2001 and March 31, 2002, respectively............... 110 111
Common stock to be issued (103,196 shares at December 31, 2001
and none at March 31, 2002) ..................................... 840 --
Additional paid in capital.......................................... 80,129 81,266
Accumulated deficit................................................. (73,954) (74,511)
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Stockholders' equity.......................................... 7,127 6,868
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Total liabilities and stockholders' equity.................... $ 14,698 $ 14,433
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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 March 31, 2001 and 2002
(dollars in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED MARCH 31,
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2001 2002
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Revenues:
Product sales........................................... $ 6,113 $ 9,881
Contract revenues....................................... 875 792
License revenues........................................ 36 87
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Total revenues..................................... 7,024 10,760
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Operating expenses:
Cost of product sales................................... 1,366 1,580
Research and development................................ 944 829
Selling, general and administrative..................... 7,477 8,928
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Total operating expenses.......................... 9,787 11,337
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Operating loss.................................... (2,763) (577)
Other income (expense):
Interest income......................................... 63 22
Interest expense........................................ (3) (1)
Other income (expense).................................. 12 (1)
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Net loss.......................................... (2,691) (557)
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Preferred stock dividend.................................. 420 420
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Net loss allocable to common stockholders................. $ (3,111) $ (977)
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Basic and diluted net loss per share allocable to common
stockholders............................................ $ (0.33) $ (0.09)
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Shares used in computing basic and diluted net loss per
share allocable to common stockholders.................. 9,336,639 11,078,258
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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 Three Months Ended March 31, 2001 and 2002
(dollars in thousands)
(unaudited)
THREE MONTHS ENDED MARCH 31,
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2001 2002
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Cash flows from operating activities:
Net loss................................................ $ (2,691) $ (557)
Adjustments to reconcile net loss to net cash used in
operating activities:
Noncash compensation expense........................ 7 --
Depreciation and amortization expense............... 64 90
Change in assets and liabilities:
Accounts receivable............................... (438) (1,220)
Inventories....................................... (227) (81)
Prepaid expenses and other assets................. (1,523) (86)
Accounts payable.................................. 621 667
Accrued expenses.................................. (349) (591)
Deferred revenue.................................. (15) (62)
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Net cash used in operating activities...... (4,551) (1,840)
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Cash flows from investing activities:
Capital expenditures.................................... (8) (167)
Proceeds from the sale of short term investments........ 1,739 --
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Net cash provided by (used in) investing
activities................................. 1,731 (167)
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Cash flows from financing activities:
Net proceeds from issuance of common stock.............. 6,878 51
Repayment of long-term debt............................. (18) (20)
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Net cash provided by financing activities.. 6,860 31
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Net increase (decrease) in cash and cash equivalents...... 4,040 (1,976)
Cash and cash equivalents at beginning of period.......... 3,709 6,171
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Cash and cash equivalents at end of period................ $ 7,749 $ 4,195
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Supplemental schedule of noncash financing activities:
Common stock dividends issued or to be issued
on preferred stock.................................... $ 420 $ 420
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Issuance of common stock to be issued................. 872 840
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Issuance of warrants to purchase common stock in
connection with equity line........................... -- 248
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Supplemental disclosure of cash flow information:
Cash paid during the period for interest.............. $ 3 $ 1
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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
MARCH 31, 2001 AND 2002
(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 the annual 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 2001 audited consolidated
financial statements and footnotes included in its Form 10-K for the year ended
December 31, 2001.
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 March 31,
2002, their results of operations for the three months ended March 31, 2001 and
2002, and their cash flows for the three months ended March 31, 2001 and 2002.
Interim results are not necessarily indicative of results anticipated for the
full fiscal year.
NOTE 2 -- INVENTORIES:
Inventories at December 31, 2001 and March 31, 2002 consisted of the
following:
2001 2002
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Raw materials $ 174 $ 347
Work-in-process 66 891
Finished goods 1,162 245
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$ 1,402 $ 1,483
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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(R). Effective January 1, 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 months ended March 31, 2001 and 2002, the Company
recognized $15 and $16, respectively, in license revenues which were deferred
upon the implementation of SAB 101 as of January 1, 2000 and which were
previously recognized as license revenues under the historical revenue
recognition policy prior to the adoption of SAB 101. During 2000, the Company
recorded a $764 charge as a result of the cumulative effect of the change in
accounting principle for revenue recognized prior to January 1, 2000; $149 of
this deferred revenue has been recognized through March 31, 2002.
NOTE 4 -- COMMON STOCK AND DEBT FINANCINGS:
On March 19, 2001, the Company consummated a one-year revolving credit
facility (the "Facility") with Silicon Valley Bank (the "Bank"). The Facility
was subsequently amended on March 22, 2002 to increase the amount available to
the Company under the Facility to the lesser of $4,000 or 80% of eligible
accounts receivable, as defined in the amendment. 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 Facility may be used only for working capital purposes. The Company is
not obligated to draw amounts under the Facility and any such draws under the
Facility will bear interest at the then prevailing prime rate plus 1.0 to 1.5%
per annum. The Company must also maintain (i) a tangible net worth of $5,000,
subject to certain upward adjustments as defined in the amendment, as a result
of profitable operation or additional debt or equity financings and (ii) a
minimum of $2,000 in cash, net of borrowings under the facility, at all times
during the term of the Facility, which expires March 15, 2004. 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. 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 March 31,
2002, there were no borrowings against the Facility, however, on March 26, 2002,
the Company issued an irrevocable letter of credit under the Facility for
$1,343. This letter of credit will be used to secure future purchases of
inventory that the Company expects to make from a supplier. As the Company pays
down amounts under the letter of credit, the amount available to the Company
under the Facility will increase.
On February 14, 2002, the Company entered into an equity line (the "Equity
Line") arrangement under the terms of a Common Stock Purchase Agreement (the
"Agreement") with
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Kingsbridge Capital Limited ("Kingsbridge"). Under the terms of the Agreement,
the Company may, at its sole discretion and from time to time over the next 12
months, sell shares of its Common Stock to Kingsbridge at a discount to market
price of up to 10%, as determined prior to each such sale. The maximum amounts
of individual draws is based on the Company's market capitalization and may not
exceed $3,000 and availability is subject to certain representations, warranties
and covenants of the Company. The Company has committed to: (i) draw down on the
Equity Line an amount aggregating at least $1,500 in registered shares of Common
Stock, prior to August 14, 2002 (the "Minimum Commitment Amount"); or (ii) if
the Company has not satisfied such Minimum Commitment Amount, pay to Kingsbridge
an amount equal to 10% of the amount by which the Minimum Commitment Amount
exceeds the aggregate of all amounts drawn down under the Equity Line in respect
of the shares of Common Stock issued and sold thereunder, except if the price of
the Company's Common Stock is below certain levels during this period. The
Equity Line provides for the sale of up to an aggregate $8,500 in registered
shares of Common Stock. In connection with the consummation of the Equity Line,
the Company issued to Kingsbridge a warrant to purchase 40,000 shares of Common
Stock at an exercise price of $9.38 per share. Such warrant will not become
exercisable until August 14, 2002, and will expire on August 13, 2007. The
Company recorded the fair value of the warrants issued in connection with the
Equity Line of approximately $248 as an increase to additional paid in capital
and other current assets in the accompanying condensed consolidated balance
sheet as of March 31, 2002.
NOTE 5 -- COMMITMENTS:
During 1999, the Company entered into a three-year co-promotion agreement
with Merck & Co., Inc. for Vioxx under which the Company is committed to spend
up to $1,000 annually for promotional expenses, unless the agreement is earlier
terminated pursuant to the terms of the agreement.
Pursuant to the terms of an exclusive License Agreement with Atrix
Laboratories, the Company has committed to spend no less than $2,000 in
advertising and selling expenses related to the licensed products during 2002,
and the lesser of $4,000 or 30% of the Company's contribution margin, as defined
in the agreement, relating to a specific Atrix product that the Company markets
and the lesser of $2,000 or 30% of the Company's contribution margin, as defined
in the agreement, relating to a separate Atrix product that the Company markets
commencing with fiscal year 2003. For the three months ended March 31, 2002, the
Company has fulfilled $439 of the $2,000 advertising and selling expense
commitment for 2002. Accordingly, the Company's obligation as of March 31, 2002
is $1,561. Additionally, the Company must maintain a minimum amount of full time
sales professionals and make a specific amount of sales presentations over the
first 24 months of the agreement.
On February 11, 2002, the Company executed a Co-operation, Development and
Licensing Agreement with Thomas Skold pursuant to which the Company was granted
an exclusive, sublicenseable, transferable license with respect to the
Restoraderm(TM) topical drug delivery system which the Company intends to
develop for dermatological applications. Pursuant to the terms of such
agreement, upon the occurrence of certain events, the Company will be required
to pay certain consulting, royalty and milestone payments in the aggregate
amount of up to $4,170, of which no more than $533, $950, $1,650 and $1,037
shall be payable
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prior to December 31, 2002, January 1, 2003, January 1, 2004 and January 1,
2005, respectively. The term of such agreement is for the life of any patent
that may be issued to the Company for the first product the Company develops
utilizing such technology, or, if the Company does not acquire any patentable
products, seven years.
NOTE 6 -- SUBSEQUENT EVENTS:
At the Company's 2002 Annual Meeting of Stockholders held on May 9, 2002,
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 the Company's Common Stock available for issuance under the 1996
Stock Option Plan from 2,000,000 to 2,500,000 shares and to reserve an
additional 500,000 shares of the Company's Common Stock 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 is a specialty
pharmaceutical company currently focused on providing innovative medical
therapies to the dental and dermatology markets. Our first product, Periostat,
is an orally administered, prescription pharmaceutical product that was approved
by the United States Food and Drug Administration in September 1998 and is the
first and only pharmaceutical to treat adult periodontitis by inhibiting the
enzymes that destroy periodontal support tissues. We are marketing Periostat to
the dental community through our own professional dental pharmaceutical sales
force of approximately 120 sales representatives and managers. Pursuant to an
exclusive License and Marketing Agreement with Atrix Laboratories, Inc., we
began, in October 2001, to actively market Atrix's proprietary dental products,
Atridox(R), Atrisorb FreeFlow(R) and Atrisorb-D(R), to the United States dental
market. We distribute Periostat through drug wholesalers and large retail chains
in the United States and the United Kingdom. The Atrix dental products are
distributed through a specialty distributor who sells these products directly to
dental practitioners in the United States. Our sales force also co-promotes
Vioxx, a prescription non-steroidal anti-inflammatory drug developed by Merck &
Co., Inc., in the United States, and Pandel(R), a topical corticosteroidal
product developed by Altana Inc. and indicated for dermatologic use.
We began operations in January 1992 and functioned primarily as a research
and development company until 1998. During this period, we operated with a
minimal number of employees, and substantially all of our pharmaceutical
development activities were contracted to independent contract research and
other organizations. Following FDA approval of Periostat in September 1998, we
significantly increased our number of employees, primarily in the areas of sales
and marketing. We continue to contract our research and development activities
as well as manufacturing, warehousing and distribution functions.
We have incurred losses each year since inception and have an accumulated
deficit of $74.5 million at March 31, 2002.
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 uncertainties. Our business of selling, marketing and
developing pharmaceutical products is subject to a number of significant risks,
including risks relating to the implementation of our sales and marketing plans
for Periostat and other products that we market, 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. Our success 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, approved by the Medicines
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Control Agency for marketing in the United Kingdom and approved for marketing in
Austria, Finland and Israel. There can be no assurance that any of our 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 us. In addition, there can be no assurance that we will
successfully commercialize Vioxx, Pandel, Atridox, Atrisorb FreeFlow and
Atrisorb-D. As a result of these risks, and others expressed from time to time
in our filings with the Securities and Exchange Commission, our actual results
may differ materially from the results discussed in the forward-looking
statements contained herein.
Periostat(R), Metastat(R), Dermostat(R), Nephrostat(R), Osteostat(R),
Arthrostat(R), Rheumastat(R), Corneostat(R), Gingistat(R), IMPACS(TM), PS20(TM),
The Whole Mouth Treatment(TM), Restoraderm(TM) and Dentaplex(TM) are United
States trademarks of CollaGenex Pharmaceuticals, Inc. Periostat(R),
Nephrostat(R), Optistat(R), and Xerostat(R) are European Community trademarks of
CollaGenex Pharmaceuticals, Inc. Periostat(R), Nephrostat(R), Optistat(R),
Xerostat(R), IMPACS(R) and Dentaplex(R) are United Kingdom trademarks of our
wholly-owned subsidiary, CollaGenex International Limited. CollaGenex(R) and
PS20(R) are both European Community and United Kingdom trademarks of CollaGenex
International Limited. All other trade names, trademarks or service marks
appearing in this Quarterly Report on Form 10-Q are the property of their
respective owners and are not property of CollaGenex Pharmaceuticals, Inc. or
any of our subsidiaries.
RESULTS OF OPERATIONS
During the three months ended March 31, 2002, we achieved net product sales
of $9.9 million, including approximately $9.0 million from the sale of Periostat
and approximately $900,000 from the sale of Atridox, Atrisorb FreeFlow and
Atrisorb-D. We launched each of Atridox and Atrisorb FreeFlow in October 2001,
and launched Atrisorb-D in February 2002. In addition, during the three months
ended March 31, 2002, we generated $792,000 in contract revenues from our two
(2) co-promotion agreements for Vioxx and Pandel, and $87,000 in licensing
revenue.
Critical Accounting Judgments and Estimates
Management's discussion and analysis of its financial position and results
of operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make judgments and estimates that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. Management believes the critical accounting policies and areas
that require the most significant judgments and estimates to be used in the
preparation of the consolidated financial statements pertain to revenue
recognition.
We recognize sales revenue upon shipment, net of estimated returns,
provided that collection is determined to be probable and no significant
obligations remain. Sales revenue from our customers is subject to agreements
allowing limited rights of return, rebates and price protection. Accordingly, we
reduce revenue recognized for estimated future returns, rebates and price
protection at the time the related revenue is recorded. The estimates for
returns are
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adjusted periodically based upon historical rates of returns, inventory levels
in the distribution channel and other related factors. While management believes
it can make reliable estimates for these matters, unsold products in these
distribution channels may be exposed to expiration. Accordingly, it is possible
that these estimates will change in the future or that the actual amounts could
vary materially from our estimates and that the amounts of such changes could
impact our results of operations, financial condition and our business.
Since our inception, a portion of our revenue has been generated from
license and distribution agreements for our products. We recognize nonrefundable
signing or license fees that are not dependent on future performance under these
agreements as revenue when received and over the term of the arrangement if we
have continuing performance obligations. Any amounts deferred are amortized to
revenue over the expected performance period of each underlying agreement. The
expected performance period is based on management's best estimate and subject
to change based on current market conditions. Deferred revenue represents the
portion of up front license payments received that has not been earned.
Milestone revenue from licensing arrangements is recognized upon completion of
the milestone event or requirement if it represents the achievement of a
significant step in the research, development or regulatory process.
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31,
2001
REVENUES
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Revenues 2002 CHANGE 2001
(dollars in thousands) ---- ------ ----
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Product Sales $ 9,881 62% $ 6,113
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Contract Revenues 792 (9%) 875
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License Revenues 87 142% 36
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Total $ 10,760 53% $ 7,024
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Total revenues during the three months ended March 31, 2002 were $10.8
million, representing a 53% increase over total revenues of $7.0 million during
the three months ended March 31, 2001. Such 2002 revenues included approximately
$9.0 million in net sales of Periostat, approximately $900,000 in net sales of
Atridox, Atrisorb FreeFlow and Atrisorb-D, $792,000 in contract revenues, which
were derived from our co-promotion of Vioxx and Pandel, and $87,000 in foreign
license and milestone revenues for Periostat. Product sales increased $3.8
million, or 62%, during the three months ended March 31, 2002 to $9.9 million
compared to $6.1 during the three months ended March 31, 2001, mainly as a
result of the Direct-To-Consumer, or DTC, advertising campaign for Periostat in
addition to new incremental sales of the Atrix products we market.
Total revenues during the three months ended March 31, 2001 included $6.1
million in net sales of Periostat, $875,000 in contract revenues, which were
derived from our co-promotion of Vioxx and Denavir, a prescription cold sore
medication owned by Novartis Pharmaceuticals Corporation, and $36,000 in license
revenues. Revenues from Denavir accounted for approximately $175,000 of such
contract revenues. Novartis, which acquired Denavir from SmithKline Beecham
Consumer Healthcare in early 2001, terminated our Co-Promotion
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Agreement with respect to Denavir effective April 13, 2001. We have not
recognized any revenue with respect to sales of Denavir since April 2001. There
were no sales of Atridox,
Atrisorb FreeFlow or Atrisorb-D in the first quarter of 2001.
In accordance with SAB 101, which we adopted in 2000, $16,000 and $15,000
of our licensing revenues recorded during each of the three months ended March
31, 2002 and March 31, 2001, respectively, were attributable to our recognition
of previously recognized up-front license fees received for various agreements
that were deferred upon the adoption of SAB 101 and are being recognized as
income over the expected performance period of these agreements.
COST OF PRODUCT SALES
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Cost of Product Sales 2002 CHANGE 2001
(dollars in thousands) ---- ------ ----
- --------------------------------------------------------------------------------
Cost of Product Sales $ 1,580 16% $ 1,366
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Percent of Product Sales 16.0% 22.3%
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Cost of product sales includes product packaging, third-party royalties,
amortization of new product licensing fees, and the costs associated with the
manufacturing, storage and stability of Periostat and the Atrix products.
Cost of product sales were $1.6 million, or 16.0% of product sales during
the three months ended March 31, 2002, compared to $1.4 million, or 22.3% of
product sales during the three months ended March 31, 2001. Cost of product
sales increased in absolute dollars but decreased as a percentage of product
sales during such period in 2002 compared to 2001, primarily due to our
continued manufacturing cost savings for Periostat tablets, which we launched in
July 2001. For Periostat, cost of product sales as a percent of sales, declined
to 13.7% during the three months ended March 31, 2002 from 22.3% during the
three months ended March 31, 2001. The cost of product sales for Atridox,
Atrisorb FreeFlow and Atrisorb-D were 39.0% for the first quarter of 2002.
RESEARCH AND DEVELOPMENT
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Research and Development 2002 CHANGE 2001
(dollars in thousands) ---- ------ ----
- --------------------------------------------------------------------------------
Research and Development $ 829 (12%) $ 944
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Percentage of Total Revenue 7.7% 13.4%
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Research and development expenses consist primarily of funds paid to third
parties for the provision of services and materials for drug development,
manufacturing and formulation enhancements, clinical trials, statistical
analysis and report writing and regulatory compliance costs.
Research and development expenses decreased to $829,000 during the three
months ended March 31, 2002 from $944,000 during the three months ended March
31, 2001. This decrease of $115,000, or 12%, was mainly the result of higher
research and clinical development expenses incurred exclusively in 2001 for
Metastat, our antiangiogenesis drug, and Dentaplex, a
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nutritional supplement, as well as European regulatory expenses for Periostat.
This was partially offset by the initial spending in 2002 for clinical trials
for Periostat in dermatologic and opthalmologic indications.
Development projects contracted during the three months ended March 31,
2002 included our continuation of a feasibility study and formulation
development work for a once-a-day formulation of Periostat and our Restoraderm
technology, which totaled $155,000 and $70,000, respectively. Future development
of the once-a-day technology will be contingent on the outcome of the initial
phase of the project, which is expected to be determined by mid-2002. Additional
expenses ranging from approximately $1.0 million in 2002 to as much as $6.0
million through completion could be incurred if the project is successful.
Clinical projects totaling $273,000 were conducted during the three months
ended March 31, 2001 and included several Phase IV studies for Periostat in
various dental indications and the continuation of clinical trials for Periostat
in dermatological indications. We are currently in discussions with the FDA
regarding protocols for additional trials with Periostat for acne and rosacea.
Until these discussions are finalized, it is premature to estimate the future
costs associated with the continued development of Periostat for dermatological
indications.
Other expenses incurred during the three months ended March 31, 2002
included $44,000 in regulatory consulting and filing fees under the Mutual
Recognition Procedure in Europe and $61,000 for various regulatory costs,
including annual FDA filing fees, legal, and regulatory expenses in the United
States. Direct salaries and other personnel expenses incurred during the three
months ended March 31, 2002 were $145,000. Additionally, during such period we
incurred $81,000 in travel and other office expenses.
Research and development expenses incurred during the three months ended
March 31, 2001 included $130,000 in research grants to various academic
institutions for conducting research related to our core technology, $105,000 in
Periostat Phase IV clinical trial grants, $180,000 in contracted clinical and
development expenses related to a safety and pharmacokinetic study for Metastat
and other IMPACS compounds in the development stage and $180,000 in
manufacturing development and validation expenses for Dentaplex.
Other expenses incurred during the three months ended March 31, 2001
included $90,000 in regulatory consulting and filing fees under the Mutual
Recognition Procedure in Europe and $92,000 for various regulatory costs,
including annual FDA filing fees and legal and regulatory expenses in the United
States related to obtaining FDA approval for Periostat tablets. Research and
development expenses incurred during the three months ended March 31, 2001 also
included $122,000 in direct salaries and other personnel related expenses and
$45,000 in travel and other office expenses.
SELLING, GENERAL AND ADMINISTRATIVE
- --------------------------------------------------------------------------------
Selling, General and Administrative 2002 CHANGE 2001
(dollars in thousands) ---- ------ ----
- --------------------------------------------------------------------------------
Selling, General and Administrative $ 8,928 19% $ 7,477
- --------------------------------------------------------------------------------
Percentage of Total Revenue 83.0% 106.4%
- --------------------------------------------------------------------------------
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Selling, general and administrative expenses consist primarily of personnel
salaries and benefits, direct marketing costs, professional, legal and
consulting fees, insurance and general office expenses.
Selling, general and administrative expenses increased 19% to $8.9 million
during the three months ended March 31, 2002 from $7.5 million during the three
months ended March 31, 2001. Significant components of selling, general and
administrative expenses incurred during the three months ended March 31, 2002
included $4.4 million in direct selling and sales training expenses, $3.2
million in marketing expenses (including Periostat DTC advertising expenditures,
launch expenditures for the Atrix products and co-promotion expenses relating to
Vioxx and Pandel) and $1.3 million in general and administrative expenses, which
include business development, finance and corporate activities. Significant
components of selling, general and administrative expenses during the three
months ended March 31, 2001 included $3.3 million in direct selling and training
expenses, $3.1 million in marketing expenses (including Periostat DTC
advertising expenditures and co-promotion expenses related to Vioxx) and $1.1 in
general and administrative expenses.
This increase of $1.4 million, or 19%, from the three months ended March
31, 2001 to the three months ended March 31, 2002, was primarily the result of
increases in incentive compensation and salaries for our dental sales force,
which are directly related to higher sales during this period. Additionally, we
incurred an incremental $200,000 in selling expenses associated with our Pandel
sales initiative, which we began in 2002.
During the three months ended March 31, 2002 we incurred $1.5 million in
DTC advertising expenses compared to $1.4 million during the same period in
2001.
OTHER INCOME/EXPENSE
- --------------------------------------------------------------------------------
Other Income / Expense 2002 CHANGE 2001
---- ------ ----
- --------------------------------------------------------------------------------
Interest Income $ 22,000 (65%) $ 63,000
- --------------------------------------------------------------------------------
Interest Expense $ 1,000 (67%) $ 3,000
- --------------------------------------------------------------------------------
Other (Expense) Income $ (1,000) N/A $ 12,000
- --------------------------------------------------------------------------------
Interest income decreased to $22,000 for the three months ended March 31,
2002 compared to $63,000 for the three months ended March 31, 2001. This
decrease was due to lower average balances in cash and short-term investments
and lower investment yields during the three months ended March 31, 2002.
Interest expense for the three months ended March 31, 2002 was $1,000, compared
to $3,000 for the year ended December 31, 2001. Other expense during the three
months ended March 31, 2002 was $1,000. Other income during the three months
ended March 31, 2001 of $12,000 was recognized as a result of foreign currency
transactions.
PREFERRED STOCK DIVIDEND
Preferred stock dividends were $420,000 during each of the three months
ended March 31, 2002 and March 31, 2001. Such preferred stock dividends, paid in
shares of our Common
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Stock, were the result of our obligations in connection with the issuance of our
Series D Preferred Stock in May 1999. Beginning in mid-2002, as more fully set
forth in the Amended Certificate of Designation, Preferences and Rights of the
Series D Cumulative Convertible Preferred Stock, we will no longer pay dividends
on the Series D Preferred Stock in shares of our Common Stock, and will become
obligated to pay such dividends in cash, at a rate equal to 8% per annum.
LIQUIDITY AND CAPITAL RESOURCES
Since our origin in January 1992, we have financed our operations through
private placements of our preferred and Common Stock, an initial public offering
of 2,000,000 shares of Common Stock, which generated net proceeds to us 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 us of approximately $11.6 million after underwriting fees and
related expenses. On May 12, 1999, we consummated a $20.0 million financing
through the issuance of our Series D cumulative convertible preferred stock,
which generated net proceeds to us of $18.5 million. The issuance of the Series
D Preferred Stock was approved by a majority of our stockholders at our Annual
Meeting of Stockholders on May 11, 1999. A portion of the proceeds of the
preferred stock financing consummated in May 1999 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 such financing. The remaining proceeds have
been and will be used for general working capital purposes.
The Series D Preferred Stock is convertible at any time into shares of our
Common Stock 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 in March 2001 and the sale of
shares of our Common Stock to Atrix Laboratories, Inc. in August 2001. Such
conversion price is not subject to reset except in the event that we should fail
to declare and pay dividends when due or we 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 Preferred
Stock. During the first three years following issuance, holders of the Series D
Preferred Stock have and are entitled to receive dividends payable in shares of
fully registered Common Stock at a rate of 8.4% per annum. Thereafter, and
beginning in 2002, dividends will be payable in cash at a rate of 8.0% per
annum.
All or a portion of the shares of Series D Preferred Stock shall, at our
option (as determined by our 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 National Market is at least 200% of the conversion price then in
effect (as of March 31, 2002, such conversion price was $9.91 per share) for
forty consecutive trading days; and (ii) a shelf registration statement is in
effect for the shares of Common Stock to be issued upon conversion of the Series
D Preferred Stock. Without written approval of a majority of the holders of
record of the Series D Preferred Stock, we, among other things, shall not: (i)
declare or pay any dividend or distribution on any shares of our capital stock
other than dividends on the Series D Preferred Stock; (ii) make any loans, incur
any indebtedness or
-15-
guarantee any indebtedness, advance capital contributions to, or investments in
any person, issue or sell any securities or warrants or other rights to acquire
our debt securities, except that we 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 we have reported positive net income for four consecutive
quarters immediately prior to such twelve month period.
In April 1999, we received $219,000 in proceeds from our issuance of a note
payable. We used the proceeds of such note to fund the purchase of equipment,
fixtures and furniture for our 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, we 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 us of approximately $6.8 million. We are using such
proceeds primarily for our 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 our 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. We also issued
to our financial advisor in such financing warrants to purchase an aggregate of
150,000 shares of our 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 financing. Such warrants may be deemed
automatically exercised in certain circumstances based upon our stock price. In
connection with the March 2001 financing, we are 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 we will be required to issue to the investors
and the financial advisor an additional 27,500 shares of our Common Stock, in
the aggregate, for no additional consideration.
On March 19, 2001, we consummated a revolving credit facility with Silicon
Valley Bank, which was subsequently amended in March 2002. The credit facility,
as amended, extends through March 15, 2004. We may borrow up to the lesser of
$4.0 million or 80% of eligible accounts receivable, as defined under the credit
facility. The amount available to us is also reduced by outstanding letters of
credit which may be issued under the credit facility in amounts totaling up to
$1.5 million. On March 26, 2002, we secured our expected purchase order
commitments for Periostat from Pharmaceutical Manufacturing Research Services,
Inc., a contract manufacturing company, with a letter of credit under the credit
facility for approximately $1.3 million. As we pay down amounts under the letter
of credit, the amount available to us under the Facility will increase. We are
not obligated to draw amounts and any such borrowings bear interest, payable
monthly, currently at the prime rate plus 1.0 to 1.5% per annum and may be used
only for working capital purposes. Without the consent of the Silicon Valley
Bank, we, 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 our Common Stock. We must also maintain a
certain tangible net worth and a minimum of $2.0 million in cash at Silicon
Valley Bank, net of borrowings under the credit
-16-
facility, at all times during the term thereto. In addition, we have secured our
obligations under the credit facility through the granting of a security
interest in favor of the bank with respect to all of our assets, including our
intellectual property. As of March 31, 2002, we had no current borrowings
outstanding against the credit facility.
On August 24, 2001, we signed a License and Marketing Agreement with Atrix
Laboratories, Inc. to market Atrix's proprietary dental products, Atridox,
Atrisorb FreeFlow and Atrisorb-D, to the United States dental market. Pursuant
to the terms of this agreement, among other things: (i) Atrix will manufacture
the dental products for us at an agreed upon transfer price and will receive
royalties on future net sales of the products each calendar year; (ii) we paid
to Atrix a $1.0 million licensing fee to market such products; (iii) we have
committed to no less than $2.0 million in advertising and selling expenses
related to the Atrix products during the fiscal year beginning January 1, 2002;
(iv) we have 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) we have agreed that the Atrix products will be the subject of a specific
number of detail calls in the United States during 2002. We will also be
required to make certain minimum expenditures for advertising and promotional
activities after 2002, including: (i) the lesser of $4,000,000 or 30% of our
contribution margin relating to a specific Atrix product that we market, and
(ii) the lesser of $2,000,000 or 30% of our contribution margin relating to a
separate Atrix product that we market.
In addition, pursuant to the terms of a Stock Purchase Agreement that we
executed with Atrix, dated August 24, 2001, Atrix purchased 330,556 unregistered
shares of our 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 our Series D Preferred Stock was reduced from $9.94 to $9.91 per share.
On February 14, 2002, we entered into an equity line arrangement under the
terms of a Common Stock purchase agreement with Kingsbridge Capital Limited.
Pursuant to this agreement, we may, at our sole discretion and from time to time
over the next 12 months, sell shares of our Common Stock to Kingsbridge at a
discount to market price, as determined prior to each such sale. We have
committed to: (i) draw down on this equity line, an amount aggregating at least
$1.5 million in registered shares of Common Stock, prior to August 14, 2002; or
(ii) if, prior to August 14, 2002, we have not drawn down an amount aggregating
at least $1.5 million in registered shares of Common Stock, we will be obligated
to pay Kingsbridge, in cash, an amount equal to 10% of the amount by which $1.5
million exceeds the aggregate of all amounts drawn down by us under the equity
line up to that date. The equity line provides for the sale of up to $8.5
million in registered shares of our Common Stock to Kingsbridge.
Additionally, in connection with the consummation of the equity line and
pursuant to the terms of a warrant agreement executed by us, we issued
Kingsbridge a warrant to purchase 40,000 shares of our Common Stock at an
exercise price of $9.38 per share. The conversion price of our Series D
Preferred Stock was not reduced as a result of such issuance. Such warrant will
not become exercisable until August 14, 2002, and will thereafter expire on
August 13, 2007. We have registered the shares of our Common Stock which may be
issued by us under the
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equity line and upon any exercise of the warrant by Kingsbridge, under our
recent shelf registration statement on Form S-3, which registered an aggregate
of 964,880 shares of our Common Stock for use in connection the equity line. On
April 29, 2002, the Securities and Exchange Commission declared such shelf
registration statement on Form S-3 effective.
At March 31, 2002, we had cash, cash equivalents and short-term investments
of approximately $4.2 million, a decrease of $2.0 million from the $6.2 million
balance at December 31, 2001. In accordance with investment guidelines approved
by our 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. Our working
capital at March 31, 2002 was $5.9 million, a decrease of $400,000 from $6.3
million at December 31, 2001. This decrease was primarily attributable to our
continued use of cash to fund operations during the quarter ended March 31,
2002.
We anticipate that our existing working capital will be sufficient to fund
our current operations through at least the end of 2002 and that existing cash
and cash equivalents, internally generated funds from operations and the
anticipated cash inflows from both our equity line of credit with Kingsbridge
and our revolving credit facility with Silicon Valley Bank will be sufficient to
support our operations through 2003. Our actual future cash requirements,
however, will depend on many factors, including market acceptance of our
products and technology.
We believe that other key factors that could affect our internal and
external sources of cash are:
o Revenues and margins from sales of Periostat and other products and
contracted services;
o The success of our dermatology franchise;
o The success of our pre-clinical, clinical and development programs;
o The receptivity of the capital markets to future financings;
o Our ability to enter into additional strategic collaborations and to
maintain existing and new collaborations and the success of such
collaborations; and
o Our ability to meet the covenant requirements under our revolving
credit facility.
CONTRACTUAL OBLIGATIONS
Our major outstanding contractual obligations relate to cash dividends on
our Series D Preferred Stock outstanding, operating leases for our office space
and other contractual commitments with our marketing partners for certain
selling and promotional expenses associated with the products we are currently
detailing. Additionally, we also expect to make certain inventory purchases from
our contract manufacturer of Periostat, guaranteed by our irrevocable Letter of
Credit with Silicon Valley Bank.
Our Series D Preferred Stock paid dividends in Common Stock at a rate of
8.4% per
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annum from the date of issuance of such Series D Preferred Stock through May 11,
2002. After May 11, 2002, the Series D Preferred Stock pays dividends in cash at
a rate of 8.0% per annum. The Series D Preferred Stock is convertible into our
Common Stock at a current conversion price of $9.91 per share, subject to
adjustment, at any time by the holder and under certain conditions by us. The
conversion price of the Series D Preferred Stock is subject to adjustment in the
event we fail to declare or pay dividends when due or should we issue new equity
securities or convertible securities at a price per share or having a conversion
price per share lower than the applicable conversion price of the Series D
Preferred Stock.
In May 1999, we entered into a lease agreement relating to our office space
in Newtown, Pennsylvania. The lease has an initial term of 10 years. Rent is
expected to be approximately $318,000 per year and is subject to market
adjustments at the end of the 5th year.
In August of 1999, we entered into a three-year co-promotion agreement with
Merck & Co., Inc. for Vioxx under which we are committed to spend up to $1.0
million annually for promotional expenses, unless the agreement is earlier
terminated.
Pursuant to our License and Marketing Agreement with Atrix Laboratories, we
have committed to: (i) expend no less than $2.0 million in advertising and
selling expenses related to the Atrix products during the fiscal year beginning
January 1, 2002; (ii) maintain, through 2003, 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 (iii) make
the Atrix products the subject of a specific number of detail calls in the
United States during 2002. We will also be required to make certain minimum
expenditures for advertising and promotional activities after 2002, including:
(i) the lesser of $4,000,000 or 30% of our contribution margin, as defined in
the agreement, relating to a specific Atrix product that we market, and (ii) the
lesser of $2,000,000 or 30% of our contribution margin, as defined in the
agreement, relating to a separate Atrix product that we market. For the three
months ended March 31, 2002, the Company has fulfilled $439,000 of the
$2,000,000 advertising and selling expense commitment for 2002. Accordingly, the
Company's obligation as of March 31, 2002 is $1,561,000.
On February 11, 2002, we executed a Co-operation, Development and Licensing
Agreement with Thomas Skold pursuant to which we were granted an exclusive,
sublicenseable, transferable license with respect to the Restoraderm(TM) topical
drug delivery system which we intend to develop for dermatological applications.
Pursuant to the terms of such agreement, upon the occurrence of certain events,
we will be required to pay certain consulting, royalty and milestone payments in
the aggregate amount of up to $4.2 million, of which no more than $533,000,
$950,000, $1,650,000 and $1,037,000 shall be payable prior to December 31, 2002,
January 1, 2003, January 1, 2004 and January 1, 2005, respectively. The term of
such agreement is for the life of any patent that may be issued to us for the
first product we develop utilizing such technology, or, if we do not acquire any
patentable products, seven years.
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Below is a table which presents our contractual obligations and commercial
commitments as of March 31, 2002:
- ------------------------------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
------------------------------------------------------------------------------------
9 MONTHS
CONTRACTUAL ENDING
OBLIGATIONS DECEMBER 31, 2003 AND 2005 AND 2007 AND
TOTAL 2002 2004 2006 AFTER
- ------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT(1) $ 15,000 $ 15,000 $0 $0 $0
- ------------------------------------------------------------------------------------------------------------------
OPERATING LEASES(2) $ 2,448,000 $ 251,000 $ 667,000 $ 668,000 $ 862,000
- ------------------------------------------------------------------------------------------------------------------
UNCONDITIONAL $ 293,000(3)
PURCHASE $ 894,000(4)
OBLIGATIONS $ 2,748,000 $ 1,561,000(5) (5) -- --
- ------------------------------------------------------------------------------------------------------------------
CASH DIVIDEND ON SERIES D
PREFERRED STOCK $ 7,600,000(6) $ 1,200,000(6) $ 3,200,000(6) $ 3,200,000(6) (6)
- ------------------------------------------------------------------------------------------------------------------
TOTAL CONTRACTUAL
OBLIGATIONS $ 12,811,000 $ 4,214,000 $ 3,867,000 $ 3,868,000 $ 862,000
- ------------------------------------------------------------------------------------------------------------------
(1) Balance payable on April 1999 $219,000 note.
(2) Such amounts primarily include minimum rental payments for our office lease
in Newtown, Pennsylvania.
(3) Such amount represents committed inventory purchases on a purchase order
under the terms of our Agreement with Pharmaceutical Research Manufacturing
Services, Inc.
(4) Such amount represents the maximum amounts payable under the terms of our
Co-Promotion Agreement with Merck & Co., Inc. for Vioxx.
(5) Such amounts are payable under the terms of our Agreement with Atrix
Pharmaceuticals. As of March 31, 2002, we will be required to expend
$1,561,000 in advertising and selling expenses related to the Atrix
products in 2002, and to make certain minimum expenditures for advertising
and promotional activities after 2002, including: (i) the lesser of
$4,000,000 or 30% of our contribution margin (as defined in the agreement)
relating to a specific Atrix product that we market, and (ii) the lesser of
$2,000,000 or 30% of our contribution margin (as defined in the agreement)
relating to a separate Atrix product that we market.
(6) Pursuant to the terms of our Series D Cumulative Convertible Preferred
Stock issued in May 1999, and unless earlier converted pursuant to its
terms, the holders of the Series D Preferred Stock are entitled to
dividends payable in our Common Stock at a rate of 8.4% per annum for the
first three years and dividends payable in cash at a rate of 8.0% per annum
thereafter.
-20-
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.
-21-
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Changes in Securities
On February 14, 2002, in connection with the consummation of our equity
line arrangement with Kingsbridge Capital Limited and pursuant to the terms of a
warrant agreement executed by us, we issued Kingsbridge a warrant to purchase
40,000 shares of our Common Stock at an exercise price of $9.38 per share. The
warrant will not become exercisable until August 14, 2002, and will thereafter
expire on August 13, 2007. Such warrant was not registered under the Securities
Act of 1933, as amended, at the time of such issuance.
We have registered the shares of our Common Stock which may be issued by us
under the equity line and upon any exercise of the warrant by Kingsbridge, on
our shelf Registration Statement on Form S-3 (File No. 333-72166), which
registered an aggregate of 964,880 shares of our Common Stock and was declared
effective by the Securities and Exchange Commission on February 14, 2002.
We believe that the issuance of such warrant to Kingsbridge was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended, as a
transaction not involving any public offering. Kingsbridge had adequate access
to information about us.
ITEM 5. OTHER INFORMATION.
Receipt of Marketing Authorization
On April 23, 2002, we announced that we had received final Marketing
Authorizations for our lead product, Periostat, from the Ministries of Health in
Austria and Finland. Periostat will be marketed and commercialized in Austria by
Willvonseder & Marchesani Ges.m.b.H & Co. KG, a Vienna based company, with which
we entered into a marketing and distribution agreement on June 9, 2000. We are
currently in discussions with suitable partner companies for the Scandinavian
countries.
Additionally, on May 6, 2002, we announced that the Israeli Ministry of
Health granted a Marketing Authorisation for Periostat to our Israeli commercial
partner, Taro Pharmaceutical Industries Ltd. ("Taro"). Taro will market and
distribute Periostat in Israel pursuant to the terms of a Marketing and
Distribution Agreement which we entered into with Taro on August 24, 2000.
Periostat tablets will be supplied to Taro by our wholly-owned United Kingdom
subsidiary, CollaGenex International Limited.
Publication of Metastat Phase I Results
On March 7, 2002, we announced that the January 2002 issue of the Journal
of Clinical Oncology featured a report describing the results of a Phase I
clinical trial carried out by the AIDS Malignancy Consortium and sponsored by
the National Cancer Institute designed to evaluate the use of our
anti-angiogenesis compound, COL-3 (Metastat(R)), in the treatment of
AIDS-related Kaposi's sarcoma.
-22-
Co-operation, Development and Licensing Agreement
On February 11, 2002, we executed a Co-operation, Development and Licensing
Agreement with Thomas Skold pursuant to which we were granted an exclusive,
sublicenseable, transferable license with respect to the Restoraderm(TM) topical
drug delivery system which we intend to develop for dermatological applications.
Pursuant to the terms of such agreement, upon the occurrence of certain events,
we will be required to pay certain consulting, royalty and milestone payments in
the aggregate amount of up to $4.2 million, of which no more than $533,000,
$950,000, $1,650,000 and $1,037,000 shall be payable prior to December 31, 2002,
January 1, 2003, January 1, 2004 and January 1, 2005, respectively. The term of
such agreement is for the life of any patent that may be issued to us for the
first product we develop utilizing such technology, or, if we do not acquire any
patentable products, seven years.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
*10.1 - Wholesale Service Agreement effective as of November 1, 2001,
by and between the Company and National Specialty Services, Inc.
*10.2 - First Amendment to Wholesale Service Agreement effective as of
November 12, 2001, by and between the Company and National Specialty
Services, Inc.
*10.3 - Exclusive Distribution Agreement dated as of March 1, 2002, by
and between the Company and CORD Logistics, Inc.
10.4 - First Loan Modification Agreement dated as of March 22, 2002 by
and between the Company and Silicon Valley Bank.
10.5 - Second Loan Modification Agreement dated as of March 27, 2002
by and between the Company and Silicon Valley Bank.
(b) Reports on Form 8-K.
On February 15, 2002 we filed a current report on Form 8-K with the
Securities and Exchange Commission relating to our equity line
arrangement with Kingsbridge Capital Limited.
* Confidential Treatment has been sought for a portion of this Exhibit
-23-
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: May 15, 2002 By: /s/ Brian M. Gallagher, Ph.D.
-------------------------------------
Brian M. Gallagher, Ph.D.
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 2002 By: /s/ Nancy C. Broadbent
-------------------------------------
Nancy C. Broadbent
Chief Financial Officer (Principal
Financial and Accounting Officer)
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