CONFORMED COPY
UNITED STATES
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, 2004
Commission File Number
0-28308
CollaGenex Pharmaceuticals, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-1758016
- ------------------------------- ---------------------------------
(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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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 May 1, 2004:
Class Number of Shares
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Common Stock $.01 par value 14,332,867
COLLAGENEX PHARMACEUTICALS, INC.
TABLE OF CONTENTS
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Page
PART I. FINANCIAL INFORMATION........................................... 1
Item 1. Financial Statements (unaudited)........................... 1
Condensed Consolidated Balance Sheets as of March 31, 2004
and December 31, 2003 (unaudited).................... 2
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 2004 and 2003 (unaudited)..... 3
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2004 and 2003 (unaudited)..... 4
Notes to Condensed Consolidated Financial Statements
(unaudited).......................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 11
Results of Operations...................................... 14
Liquidity and Capital Resources............................ 18
Additional Risks That May Affect Results................... 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 28
Item 4. Controls and Procedures.................................... 29
PART II. OTHER INFORMATION............................................ 30
Item 1. Legal Proceedings......................................... 30
Item 2. Changes in Securities and Use of Proceeds................. 31
Item 5. Other Information......................................... 31
Item 6. Exhibits and Reports on Form 8-K.......................... 33
SIGNATURES............................................................... 34
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited).
-1-
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, 2004 and December 31, 2003
(amounts in thousands, except share data)
(unaudited)
March 31, December 31,
Assets 2004 2003
------------- ------------
Current assets:
Cash and cash equivalents........................................... $ 31,168 $ 32,670
Accounts receivable, net of allowances of $1,348 and $1,308 at
March 31, 2004 and December 31, 2003, respectively................ 6,419 4,959
Inventories......................................................... 1,711 1,672
Prepaid expenses and other current assets........................... 2,506 1,732
----- -----
Total current assets.......................................... 41,804 41,033
Equipment and leasehold improvements, net.............................. 542 496
Acquired product rights, net........................................... 1,603 1,749
Other assets........................................................... 27 27
----- -----
Total assets.................................................. $ 43,976 $ 43,305
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.................................................... $ 3,939 $ 3,273
Accrued expenses.................................................... 4,997 4,950
Preferred dividends payable......................................... -- 800
------- -------
Total current liabilities..................................... 8,936 9,023
------- -------
Deferred revenue....................................................... 318 326
------- -------
Commitments and Contingencies
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 March 31, 2004 and
December 31, 2003 (liquidation value of $20,800); 150,000
shares of Series A participating preferred stock, $0.01 par
value, designated and no shares issued
and outstanding at March 31, 2004 and December 31, 2003.......... 2 2
Common stock, $0.01 par value; 25,000,000 shares authorized,
14,131,377 and 13,842,200 shares issued and outstanding at
March 31, 2004 and December 31, 2003, respectively................ 141 138
Additional paid in capital.......................................... 104,467 103,670
Accumulated deficit................................................. (69,888) (69,854)
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Total stockholders' equity.................................... 34,722 33,956
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Total liabilities and stockholders' equity.................... $ 43,976 $ 43,305
========== ==========
See accompanying notes to unaudited condensed financial statements.
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COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 2004 and 2003
(amounts in thousands, except share and per share data)
(unaudited)
Three Months Ended March 31,
---------------------------
2004 2003
---- ----
Revenues:
Net product sales.............................................. $ 13,328 $ 11,370
Contract revenues.............................................. 60 550
License revenues............................................... 18 237
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Total revenues............................................ 13,406 12,157
--------- ---------
Operating expenses:
Cost of product sales.......................................... 2,001 1,914
Research and development....................................... 1,389 1,023
Selling, general and administrative - other.................... 8,119 8,017
Selling, general and administrative - legal settlement (note 7) 2,000 --
--------- ---------
Total operating expenses................................. 13,509 10,954
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Operating (loss) income.................................. (103) 1,203
--------- ---------
Other income (expense):
Interest income................................................ 72 31
Other expense.................................................. (3) (6)
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Net (loss) income........................................ (34) 1,228
Preferred stock dividend.......................................... 400 400
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Net (loss) income allocable to common stockholders................ $ (434) $ 828
========== =========
Net (loss) income per basic share allocable to common stockholders $ (0.03) $ 0.07
========== =========
Weighted average shares used in computing net income per basic
share allocable to common stockholders......................... 13,970,730 11,394,226
============ ===========
Net (loss) income per diluted share allocable to common
stockholders................................................... $ (0.03) $ 0.07
========== =========
Weighted average shares used in computing net income per diluted
share allocable to common stockholders......................... 13,970,730 12,181,045
============ ===========
See accompanying noted 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, 2004 and 2003
(dollars in thousands)
(unaudited)
Three Months Ended March 31,
----------------------------
2004 2003
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Cash flows from operating activities:
Net (loss) income..................................................... $ (34) $ 1,228
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Non-cash compensation expense................................... -- 251
Depreciation and amortization expense........................... 249 222
Accounts receivable provisions.................................. 40 175
Changes in operating assets and liabilities:
Accounts receivable............................................. (1,500) 615
Inventories..................................................... (39) (96)
Prepaid expenses and other assets............................... (774) (529)
Accounts payable................................................ 666 (231)
Accrued expenses................................................ 47 (635)
Deferred revenue................................................ (8) (210)
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Net cash (used in) provided by operating activities......... (1,353) 790
------- -------
Cash flows from investing activities:
Capital expenditures.................................................. (149) (136)
------- -------
Net cash used in investing activities....................... (149) (136)
------- -------
Cash flows from financing activities:
Net proceeds from issuance of common stock............................ 800 163
Payment of preferred dividends........................................ (800) (800)
Repayment of long-term debt........................................... -- --
------- -------
Net cash provided by (used in) financing activities......... -- (637)
------- -------
Net (decrease) increase in cash and cash equivalents........ (1,502) 17
Cash and cash equivalents at beginning of period......................... 32,670 10,112
------- -------
Cash and cash equivalents at end of period............................... $ 31,168 $ 10,129
============ ===========
See accompanying notes to unaudited condensed consolidated financial statements.
-4-
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004 and 2003
(dollars in thousands, except per share data)
(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 consolidated 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 2003 audited
consolidated financial statements and footnotes included in its Annual Report on
Form 10-K for the year ended December 31, 2003.
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.
Certain amounts in the 2003 consolidated financial statements have been
reclassified to the 2004 presentation.
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 for
the year ended December 31, 2003 and contain adjustments, all of which are of a
normal recurring nature, necessary to present fairly the Company's consolidated
financial position at March 31, 2004, the results of operations for the three
months ended March 31, 2004 and 2003, and the cash flows for the three months
ended March 31, 2004 and 2003. Interim results are not necessarily indicative of
results anticipated for the full fiscal year.
Statement of Financial Accounting Standards (SFAS) No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation," encourages but does not require
companies to record compensation cost for stock-based employee compensation
plans at fair value. Accordingly, the Company has elected to account for
stock-based compensation under Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations and
compensation cost for stock options issued to employees is measured as the
excess, if any, of the market price of the Company's stock at the date both the
number of shares and price per share are known (measurement date) over the
exercise price. Such amounts are amortized on a straight-line basis over the
respective vesting periods of the option grants. Transactions with nonemployees
(if any) in which goods or
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services are the consideration received for the issuance of equity instruments
are accounted for on a fair value basis in accordance with SFAS 123 and related
interpretations.
As set forth below, the pro forma disclosures of net (loss) income
allocable to common stockholders and loss per share allocable to common
stockholders are as if the Company had adopted the fair value based method of
accounting in accordance with SFAS No. 123, as amended by SFAS No. 148, which
assumes the fair value based method of accounting had been adopted:
Three Months Ended
March 31,
-----------------------------
2004 2003
----- -----
Net (loss) income allocable to
common stockholders:
As reported............................ $ (434) $ 828
Add: Stock-based employee
compensation expenses
included in net (loss) income
allocable to common stockholders.... -- 251
Less: Stock-based employee
compensation under fair value
based method........................ (1,025) (1,194)
------- -------
Pro forma.............................. $ (1,459) $ (115)
======== =======
Basic and diluted net (loss) income
per share allocable to common
stockholders:
As reported........................... $ (0.03) $ 0.07
======== =======
Pro forma............................. $ (0.10) $ (0.01)
======== =======
Note 2 -- Inventories
Inventories at March 31, 2004 and December 31, 2003 consist of the
following:
2004 2003
---- ----
Raw materials......................... $ 137 $ 396
Work-in-process....................... 1,104 52
Finished goods........................ 470 1,224
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$ 1,711 $ 1,672
======== =======
-6-
Note 3 - Letter of Commitment for Line of Credit
On May 3, 2004, the Company executed a letter of commitment to renew its
revolving credit facility with Silicon Valley Bank, which expired on March 15,
2004. Pursuant to the terms of the commitment letter, the Company shall be
permitted to borrow up to the lesser of $5,000 or 80% of eligible accounts
receivable, as defined. The amount eligible to the Company will be reduced by
any outstanding letters of credit which may be issued under the credit facility
in amounts totaling up to $2,000. As the Company pays down amounts under any
letter of credit, the amount available to it under the credit facility
increases. The Company is not obligated to draw amounts and any borrowings shall
bear interest, payable monthly, at the current prime rate. Without the consent
of Silicon Valley 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 maintain a minimum tangible net worth equal to $28,000,
subject to certain upward adjustments, as a result of profitable operations or
additional debt or equity financings. In addition, the Company must maintain a
quick ratio of at least 2.0 to 1.0. The Company expects to secure its
obligations under the credit facility through the granting of a security
interest in favor of the bank with respect to all of the Company's corporate
assets.
Note 4 - Commitments and Contingencies
On August 24, 2001, the Company signed an exclusive License Agreement (the
"Atrix License Agreement") with Atrix Laboratories, Inc. to market Atrix's
proprietary dental products, Atridox(R), Atrisorb(R) FreeFlow and Atrisorb(R)-D,
to the United States dental market. Pursuant to the terms of the Atrix License
Agreement, the Company is required to make certain annual minimum expenditures
for 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 another Atrix product that the Company markets.
The Company met the required spending requirements in 2003 related to this
Agreement.
On February 11, 2002, the Company executed a Co-operation, Development and
Licensing Agreement 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 future consulting,
royalty and milestone payments in the aggregate amount of up to approximately
$3,150, of which no more than $1,000 shall be payable prior to January 1, 2005.
The Company paid $38 under this Agreement during the three months ended March
31, 2004 and has paid an aggregate of $968 through March 31, 2004. 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
such a patent fails to issue, seven years.
As of March 31, 2004, the Company has an obligation to purchase $1,082 of
inventory from the Company's third-party manufacturer of Periostat over the next
twelve months.
-7-
On June 10, 2002, the Company executed a Development and Licensing
Agreement with Shire Laboratories, Inc. pursuant to which the Company was
granted an exclusive worldwide license (including the right to sublicense) to
develop, make, have made, use, supply, export, import, register and sell
products for the treatment of various inflammatory disorders. In addition, under
the agreement, certain product development functions shall be performed for the
Company. Also under the agreement, the Company has committed to payments, in
cash or at the Company's option, a combination of cash and the Company's common
stock, upon the achievement of certain clinical and regulatory milestones in the
event the Company pursues certain applications of the technology which could
total up to $7,900 in the aggregate. Pursuant to the terms of such agreement,
the Company shall also pay a percentage of certain net sales of products, if
any, utilizing any part of the technology. The Company may terminate the
agreement upon sixty days notice.
Note 5 -- Stock Compensation Charge
During March 2003, the Company executed an agreement with Brian M.
Gallagher, Ph.D., the Company's former chairman, chief executive officer and
president, pursuant to which Dr. Gallagher was compensated for, among other
things, his services during a transition period and to recognize his historical
contributions to the Company. As a result of this agreement, the Company
recognized a non-cash compensation charge relating to certain modifications of
Dr. Gallagher's stock option agreements of approximately $251 during the three
months ended March 31, 2003. The Company also entered into a consulting
agreement with Dr. Gallagher pursuant to which he is providing consulting
services to the Company for a period of 24 months, commencing in December 2003.
Note 6 -- Termination of Co-Promotion/License Agreements
On March 14, 2003, the Company terminated its license agreement with Roche
S.P.A. As a result of the termination of the agreement, during the first quarter
of 2003, the Company accelerated the recognition of $222 of unamortized deferred
revenue related to the $400 up-front payment received in 1996.
Pursuant to a Co-Promotion Agreement the Company executed with Merck & Co.,
Inc. in September 1999, the Company received the exclusive right to co-promote
Vioxx(R), a prescription strength non-steroidal anti-inflammatory drug that was
approved by the United States Food and Drug Administration (the "FDA") on May
20, 1999 to relieve osteoarthritis and manage acute pain in adults, including
dental pain. The agreement provided for certain payments by Merck to the Company
upon sales of Vioxx to the dental community. On September 23, 2002, the Company
executed an amendment, extension and restatement of the Co-Promotion Agreement
with Merck with respect to Vioxx. In accordance with that amendment, extension
and restatement, the Company's agreement with Merck automatically expired on
December 31, 2003. The Company will continue to earn nominal residual contract
revenues through 2005 from the expired agreement with Merck.
In March 2003, the Company executed co-promotion agreements with Sirius
Laboratories, Inc. pursuant to which the Company jointly marketed Sirius'
Laboratories' AVAR(TM) product line and Pandel(R) to dermatologists in the
United States. These agreements
-8-
were mutually terminated on December 31, 2003. The Company did not receive any
revenue during the quarter ended March 31, 2004 and does not expect to receive
contract revenues from Sirius Laboratories' AVAR hereafter.
On October 1, 2002, the Company entered into a Product Detailing Agreement
with Novartis Consumer Health, Inc. pursuant to which the Company co-promoted
Denavir(R) to our target dentists in the United States and received detailing
fees and performance incentives from Novartis Consumer Health, Inc. The
agreement with Novartis to co-promote Denavir expired on September 30, 2003, and
the Company and Novartis decided not to renew the arrangement with respect to
Denavir. The Company did not receive any revenue during the quarter ended March
31, 2004 and does not expect to receive contract revenues from Novartis with
respect to Denavir hereafter.
Note 7 -- Mutual Settlement
In July 2003, the Company sued United Research Laboratories, Inc./Mutual
Pharmaceutical Company, Inc. ("Mutual") in the United States District Court for
the Eastern District of New York, alleging that Mutual infringed the Company's
patents for Periostat(R) for the treatment of adult periodontitis. The Company's
complaint also alleged that Mutual infringed the Company's patent rights by
submitting an Abbreviated New Drug Application ("ANDA") with the FDA, seeking
FDA approval to market a generic tablet version of Periostat.
In a separate action in the United States District Court for the District
of Columbia, the Company sought and, on July 22, 2003, was granted a preliminary
injunction preventing the FDA from approving generic versions of Periostat,
including Mutual's version. Mutual intervened in that case.
In July 2003, Mutual commenced an action against the Company in the United
States District Court for the Eastern District of Pennsylvania. Mutual alleged
that the Company had engaged in an effort to monopolize the market for low-dose
doxycycline products.
On April 8, 2004, the Company announced that it had settled all pending
litigation between the Company and Mutual.
In connection with the settlement, the Company and Mutual entered into a
License and Supply Agreement pursuant to which Mutual received a license to sell
a branded version of Periostat. Under this agreement, the Company will be the
sole supplier of this product to Mutual, subject to certain conditions. The
product will be sold to Mutual at prices below the Company's average
manufacturer's price through May 2007 or the earlier termination of such supply
arrangements under certain circumstances. In addition, the Company agreed not to
grant any license to sell Periostat in generic form to any third party during
the supply term.
In the settlement, Mutual agreed and confessed to judgment that the
Company's Periostat patents are valid and would be infringed by the commercial
manufacture, use, sale, importation or offer for sale of the generic version of
Periostat for which Mutual submitted its ANDA. Mutual consented to a judgment
enjoining Mutual and any party acting in concert with Mutual from infringing the
Company's patents by making and selling a generic version of Periostat until the
Company's patents expire or are declared invalid or unenforceable by a court of
competent
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jurisdiction, or until Mutual is granted a license under the patents, which will
occur under the License and Supply Agreement if a third-party, generic version
of Periostat is launched and remains on the market for a certain period of time
or the Company materially breaches its obligations under the agreement. Finally,
Mutual agreed to withdraw from the FDA case in the District of Columbia.
The Company agreed to pay to Mutual the amount of $2,000, which represents
a portion of the anticipated fees and expenses that the Company will save as a
result of the settlement of the pending actions with Mutual. This charge has
been recorded in the first quarter of 2004. Under the Company's license
agreement with the Research Foundation of the State University of New York
("SUNY") covering Periostat, the Company is entitled to deduct costs incurred to
defend its patents, including this payment, from current and future royalties
due SUNY on net sales of Periostat and Mutual's branded version of Periostat.
During the three months ended March 31, 2004, the Company incurred $2,493
in legal defense, litigation and settlement costs for the aforementioned suits
with Mutual, $587 of which was deducted from royalties payable to SUNY during
the period. Such cumulative legal costs exceeded the amount of the royalties
payable to SUNY as of March 31, 2004. As of March 31, 2004, the Company has
$3,677 in previously recognized legal expenses available to offset future
royalties earned by SUNY, if any.
Note 8 -- Sales Force Restructuring
On April 22, 2004, the Company announced the restructuring of the Company's
pharmaceutical sales organization into dedicated dental and dermatology sales
forces. The restructuring is intended to increase the Company's sales focus on
high-prescribing dentists and dermatologists while reducing the Company's cost
base. Prior to the reorganization, virtually all of the Company's 115-person
pharmaceutical sales force called on both dentists and dermatologists to market
the Company's portfolio of dental and dermatology products. After the
restructuring, the Company has a 56-person dental sales force calling on a
highly targeted group of 10,000 high prescribing dentists and a 33-person
dermatology sales force calling on the 5,600 dermatologists who are the highest
prescribers of acne, rosacea and dermatitis products. The Company expects to
incur a charge for such restructuring costs during the second quarter of 2004.
-10-
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(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.
We are marketing Periostat and other pharmaceutical products to the dental
and dermatology communities through our own dedicated professional sales force
of approximately 90 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)
and Atrisorb FreeFlow(R), and, in February 2002, Atrisorb-D(R), to the United
States dental market (the "Atrix Products"). In May 2002, we executed a
sublicense agreement with Altana Inc. to, among other things, market and
distribute, in the United States and Puerto Rico, Pandel(R), a mid-potency
topical corticosteroid product developed by Altana Inc. We distribute Periostat
and Pandel through drug wholesalers and large retail chains in the United
States. Periostat is also sold through wholesalers and direct to dentists in the
United Kingdom through our wholly-owned subsidiary, CollaGenex International
Ltd., and by distributors and licensees in certain other overseas markets. The
Atrix Products are distributed through specialty distributors who sell these
products directly to dental practitioners in the United States and Puerto Rico.
We incurred a net loss of approximately $34,000 for the three months ended
March 31, 2004. With the exception of the years ended December 31, 2002 and
December 31, 2003, during which years we achieved net income of approximately
$902,000 and $6.4 million, respectively, we have incurred losses in each year
since inception and have an accumulated deficit of $69.9 million at March 31,
2004.
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 CollaGenex's sales and
marketing plans for Periostat and other products that we market, risks
associated with our arrangement with Mutual, risks inherent in research and
development activities, risks associated with enforcement of our intellectual
property rights, risks that the FDA will approve products that will compete with
and limit the market for Periostat, risks relating to our litigation with the
FDA, risks associated with conducting business in a highly regulated environment
and uncertainty relating to clinical trials of products under development.
-11-
CollaGenex's success depends to a large degree upon the market acceptance of
Periostat by periodontists, dental practitioners, other health care providers,
patients and insurance companies and the success of our dermatology product
candidates. There can be no assurance that CollaGenex's product candidates
(other than the FDA's approval of Periostat for marketing in the United States,
the United Kingdom Medicines Control Agency's approval of Periostat for
marketing in the United Kingdom and Periostat's marketing approval in Austria,
Finland, Switzerland, Ireland, Israel, Italy, Luxembourg, the Netherlands,
Portugal and Canada) will be approved by any regulatory authority for marketing
in any jurisdiction or, if approved, that any such products will be successfully
commercialized by CollaGenex. In addition, there can be no assurance that
CollaGenex will successfully promote Pandel, Atridox, Atrisorb-FreeFlow or
Atrisorb-D. As a result of such risks, those risks set forth in the section
entitled "Additional Risks That May Affect Results" and others expressed from
time to time in CollaGenex's filings with the Securities and Exchange
Commission, CollaGenex's actual results may differ materially from the results
discussed in or implied by the forward-looking statements contained herein. We
undertake no obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
Periostat(R), Metastat(R), Dermostat(R), Nephrostat(R), Osteostat(R),
Arthrostat(R), Rheumastat(R), Corneostat(R), Gingistat(R), IMPACS(TM), PS20(R),
The Whole Mouth Treatment(R), Restoraderm(TM), Dentaplex(R), Lytra(TM),
Periostat-MR(TM) and Xerostat(TM) are United States trademarks of CollaGenex
Pharmaceuticals, Inc. Periostat(R), Nephrostat(R), Optistat(R), Xerostat(R) and
IMPACS(TM) are European Community trademarks of CollaGenex Pharmaceuticals, Inc.
Periostat(R), Nephrostat(R), Optistat(R), Xerostat(R), IMPACS(R), Dentaplex(R),
Restoraderm(TM), Periocycline(R), Periostatus(R) and Periostat-SR(R) are United
Kingdom trademarks of our wholly-owned subsidiary, CollaGenex International Ltd.
CollaGenex(R), PS20(R), Dermastat(R), Periostan(R), "C" Logo(R) and "The Whole
Mouth Treatment" Logo(R) are European Community and United Kingdom trademarks of
CollaGenex International Ltd. Periocycline(TM), Restoraderm(TM) and
Periostat-SR(TM) are European Community Trademarks of CollaGenex International
Ltd. All other trade names, trademarks or service marks appearing in this
Quarterly Report are the property of their respective owners and are not
property of CollaGenex Pharmaceuticals, Inc. or any of our subsidiaries.
Critical Accounting Policies 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 of America. 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, stock compensation and deferred taxes.
Revenue Recognition
We recognize product sales revenue upon shipment, net of estimated returns,
provided
-12-
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 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. Our contract
revenues are fee-based arrangements where revenue is earned as prescriptions are
filled. Accordingly, since we never take title to the product being promoted, no
significant obligations exist beyond the point that revenue is recognized.
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 or 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 is
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.
Stock-Based Compensation
It is our policy to apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations to
account for our stock option grants rather than Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation." As
such, compensation expense is recorded on fixed stock option grants only if the
current market value of the underlying stock exceeds the exercise price of the
option at the date of grant and is recognized on a straight-line basis over the
vesting period. Had we applied SFAS No. 123, which requires recording stock
option grants at their fair value, our net income (loss) would have varied from
the reported net income (loss) as we would have recorded additional expenses in
each period.
Deferred Taxes
In assessing the realizability of deferred tax assets, we consider whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. This assessment requires significant judgment and
estimates. The ultimate realization of the deferred tax assets is dependent upon
the generation of future taxable income during the period in which those
temporary differences become deductible. We consider our history of losses,
scheduled reversal of deferred tax assets and liabilities and projected future
taxable income over the periods in which the deferred tax asset items are
deductible. The Tax Reform Act of 1986 contains
-13-
provisions that may limit the net operating loss (NOL) and research and
experimentation credit carryforwards available to be used in any given year upon
the occurrence of certain events, including significant changes in ownership
interest. The rules providing for the definition of an ownership change are
complex.
Results of Operations
During the three months ended March 31, 2004, we achieved net product sales
of $13.3 million from the sale of Periostat, the Atrix Products and Pandel. In
addition, during the three months ended March 31, 2004, we generated $60,000 in
contract revenues mainly from residual contract revenues from our expired
agreement with Merck & Co., Inc. for Vioxx(R) and $18,000 in international
licensing revenues for Periostat.
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31,
2003
Revenues
- --------------------------------------------------------------------------------
Revenues
(dollars in thousands) 2004 Change 2003
- --------------------------------------------------------------------------------
Net Product Sales......... $ 13,328 17.2% $ 11,370
- --------------------------------------------------------------------------------
Contract Revenues......... 60 (89.1)% 550
- --------------------------------------------------------------------------------
License Revenues.......... 18 (92.4)% 237
------------- ------- ---------
- --------------------------------------------------------------------------------
Total................ $ 13,406 10.3% $ 12,157
- --------------------------------------------------------------------------------
Total revenues during the three months ended March 31, 2004 were $13.4
million, representing a 10.3% increase over total revenues of $12.2 million
during the three months ended March 31, 2003. Such 2004 revenues included
approximately $13.3 million in net product sales of Periostat, Pandel and the
Atrix Products, $60,000 in contract revenues, which were derived from residual
contract revenues from our expired agreement with Merck for Vioxx, and $18,000
of international licensing revenues for Periostat. Net product sales increased
$2.0 million, or 17.2%, to $13.3 million during the three months ended March 31,
2004 compared to $11.4 million during the three months ended March 31, 2003
primarily due to higher sales of Periostat and Pandel. Periostat net product
sales increased as a result of price increases and unit volume growth.
Contract revenues for the three months ended March 31, 2004 decreased 89.1%
to $60,000 from $550,000 during the three months ended March 31, 2003, primarily
due to the expiration and/or mutual termination of our co-promotion agreements
with Merck, Novartis and Sirius Laboratories during 2003. Such 2004 revenue
related to residual contract revenue from our expired agreement with Merck for
Vioxx.
We recorded $18,000 and $237,000 in licensing revenues for the three months
ended March 31, 2004 and March 31, 2003, respectively, that was attributable to
our recognition of previously received up-front license fees recognized for
various agreements that were deferred and are being recognized as licensing
revenue over the expected performance period of the agreements.
-14-
Cost of Product Sales
- --------------------------------------------------------------------------------
Cost of Product Sales 2004 Change 2003
(dollars in thousands)
- --------------------------------------------------------------------------------
Cost of Product Sales.................. $ 2,001 4.5% $ 1,914
- --------------------------------------------------------------------------------
Percent of Net Product Sales........... 15.0% N/A 16.8%
- --------------------------------------------------------------------------------
Cost of product sales includes product packaging, third-party royalties,
amortization of product licensing fees, and the costs associated with the
manufacturing, storage and stability of Periostat, Pandel and the Atrix
Products.
Cost of product sales were $2.0 million, or 15.0% of net product sales
during the three months ended March 31, 2004, compared to $1.9 million, or 16.8%
of net product sales during the three months ended March 31, 2003. As a
percentage of net product sales, cost of net product sales decreased compared to
the three months ended March 31, 2003, due to Periostat price increases and
product mix.
Research and Development
- --------------------------------------------------------------------------------
Research and Development 2004 Change 2003
(dollars in thousands)
- --------------------------------------------------------------------------------
Research and development............... $ 1,389 35.8% $ 1,023
- --------------------------------------------------------------------------------
Percentage of Total Revenues........... 10.4% N/A 8.4%
- --------------------------------------------------------------------------------
Research and development expenses consist primarily of funds paid to third
parties for the provision of services and materials for drug development,
including milestone fees, manufacturing and formulation enhancements, clinical
trials, statistical analysis and report writing and regulatory compliance costs.
Research and development expenses increased $366,000, or 35.8%, to $1.4
million during the three months ended March 31, 2004 from $1.0 million during
the three months ended March 31, 2003.
Development projects conducted during the three months ended March 31, 2004
included our continuing clinical and manufacturing development work for a
once-a-day formulation of Periostat and formulation and stability testing for
several potential products utilizing our licensed Restoraderm(TM) technology,
which totaled $71,000 and $55,000, respectively. If all of the potential
products are successful, additional formulation development expenses and
milestones fees could be as much as $11.1 million.
Clinical projects totaling $704,000 were conducted during the three months
ended March 31, 2004 and primarily included a Phase III trial in 134 patients to
evaluate the 20 mg current commercial formulation of Periostat for the treatment
of rosacea and a separate Phase III study to evaluate Periostat MR, a modified
release formulation of Periostat, for the treatment of adult periodontitis.
Additional clinical development costs could include as much as $7.5 million in
costs associated with the clinical development of Periostat MR for the treatment
of both adult
-15-
periodontitis and rosacea. At this time, it is premature to estimate the future
costs associated with the clinical development of our licensed Restoraderm
technology.
Other research and development expenses incurred during the three months
ended March 31, 2004 included $25,000 in regulatory consulting and legal and
filing fees under the Mutual Recognition Procedure in Europe, $128,000 for
various regulatory costs, including annual FDA filing fees, patent fees and
regulatory expenses in the United States, and $51,000 in manufacturing
development costs for Metastat(R) and the ImpacsTM compounds. Direct salaries
and other personnel expenses incurred during the three months ended March 31,
2004 were $256,000. Additionally, during such period we incurred $98,000 in
consulting, travel and other office expenses.
Development projects conducted during the three months ended March 31, 2003
included our continuation of formulation development work for a once-a-day
formulation of Periostat and formulation and stability testing for several
potential products utilizing our licensed Restoraderm technology, which totaled
$320,000 and $49,000, respectively.
Clinical projects totaling $248,000 were conducted during the three months
ended March 31, 2003 and included several Phase IV studies for Periostat in
various dental indications and continued clinical development work relating to
Periostat in dermatological indications, including a Phase III trial in patients
to evaluate Periostat for the treatment of rosacea.
Other research and development expenses incurred during the three months
ended March 31, 2003 included $11,000 in regulatory consulting and legal and
filing fees under the Mutual Recognition Procedure in Europe and $162,000 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, 2003 were $140,000.
Additionally, during such period we incurred $93,000 in consulting, travel and
other office expenses.
Selling, General and Administrative
- --------------------------------------------------------------------------------
Selling, General and Administrative 2004 Change 2003
(dollars in thousands)
- --------------------------------------------------------------------------------
Selling, General and Administrative -
other....................................... $ 8,119 1.3% $ 8,017
- --------------------------------------------------------------------------------
Selling, General and Administrative -
legal settlement........................... 2,000 N/A --
------- -------
- --------------------------------------------------------------------------------
Subtotal...................................... $ 10,119 26.2% $ 8,017
- --------------------------------------------------------------------------------
Percentage of Total Revenues.................. 75.5% N/A 65.9%
- --------------------------------------------------------------------------------
Selling, general and administrative - other expenses consist primarily of
personnel salaries and benefits, direct marketing costs, professional, legal and
consulting fees, insurance and general office expenses.
-16-
Selling, general and administrative - other expenses increased 1.3% to $8.1
million during the three months ended March 31, 2004 from $8.0 million during
the three months ended March 31, 2003.
Significant components of selling, general and administrative - other
expenses incurred during the three months ended March 31, 2004 included $4.5
million in direct selling and sales training expenses, $2.0 million in marketing
expenses (including advertising and promotion expenditures for Periostat, the
Atrix Products and Pandel) and $1.6 million in general and administrative
expenses, which include business development, finance, legal and corporate
activities. Significant components of selling, general and administrative
expenses incurred during the three months ended March 31, 2003 included $4.0
million in direct selling and sales training expenses, $2.1 million in marketing
expenses (including advertising and promotion expenditures for Periostat, the
Atrix Products and co-promotion expenses relating to Vioxx and Pandel), $1.7
million in general and administrative expenses, which include business
development, finance and corporate activities and $251,000 related to the
modifications of certain stock options.
Selling, general and administrative - legal settlement consisted of $2.0
million during the three months ended March 31, 2004 which resulted from the
accrual for a one-time payment to United Research Laboratories, Inc./Mutual
Pharmaceutical Company, Inc. ("Mutual") in connection with the settlement of all
outstanding litigation between us and Mutual.
Other Income/Expense
- --------------------------------------------------------------------------------
Other Income/Expense 2004 Change 2003
- --------------------------------------------------------------------------------
Interest income..................... $ 72,000 132.2% $ 31,000
- --------------------------------------------------------------------------------
Other expense....................... $ 3,000 (50.0)% $ 6,000
- --------------------------------------------------------------------------------
Interest income increased to $72,000 for the three months ended March 31,
2004 compared to $31,000 for the three months ended March 31, 2003. This
increase was due to higher average investment balances in 2004. Other expense
was $3,000 for the three months ended March 31, 2004 compared to $6,000 for the
three months ended March 31, 2003.
Preferred Stock Dividend
Preferred stock dividends included in net income allocable to common
stockholders were $400,000 during each of the three months ended March 31, 2004
and March 31, 2003. Such preferred stock dividends, paid in shares of our common
stock through May 11, 2002, and thereafter in cash, are the result of our
obligations in connection with the issuance of our Series D preferred stock in
May 1999. As more fully set forth in the Amended Certificate of Designation,
Preferences and Rights of the Series D Cumulative Convertible Preferred Stock,
after May 11, 2002, we no longer pay dividends on the Series D preferred stock
in shares of our common stock at a rate of 8.4%, and we became obligated to pay
such dividends in cash, at a rate equal to 8% per annum.
-17-
Liquidity and Capital Resources
On October 3, 2003, we announced that we had entered into agreements for
the sale of 2,000,000 shares of our common stock registered under a registration
statement on Form S-3 to certain institutional investors, at a per share
purchase price of $10.00 for aggregate gross proceeds of $20.0 million, which
generated net proceeds to us of approximately $18.7 million, after the payment
of placement agent fees and related expenses.
Our Series D preferred stock is convertible at any time into shares of our
common stock at a current conversion price of $9.89 per share, which conversion
price reflects a decrease from the initial conversion price of $11.00 per share
as a result of certain subsequent equity issuances by us. 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 received dividends payable in shares of fully registered common
stock at a rate of 8.4% per annum. Thereafter, and beginning on May 12, 2002, we
began paying such dividends 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, 2004, such conversion price was $9.89 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 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.
On May 3, 2004, we executed a letter of commitment to renew our revolving
credit facility with Silicon Valley Bank, which expired on March 15, 2004.
Pursuant to the terms of the commitment letter, we shall be permitted to borrow
up to the lesser of $5.0 million or 80% of eligible accounts receivable, as
defined. The amount eligible to us will be reduced by any outstanding letters of
credit which may be issued under the credit facility in amounts totaling up to
$2.0 million. As we pay down amounts under any letter of credit, the amount
available to us under the credit facility increases. We are not obligated to
draw amounts and any borrowings shall bear interest, payable monthly, at the
current prime rate. Without the consent of Silicon Valley Bank, we, among other
things, shall not: (i) merge or consolidate with another entity;
-18-
(ii) acquire assets outside the ordinary course of business; or (iii) pay or
declare any cash dividends on our common stock. We must maintain a minimum
tangible net worth equal to $28.0 million, subject to certain upward
adjustments, as a result of profitable operations or additional debt or equity
financings. In addition, we must maintain a quick ratio of at least 2.0 to 1.0.
We expect to secure our obligations under the credit facility through the
granting of a security interest in favor of the bank with respect to all of our
corporate assets. We cannot be certain that we will sign definitive documents
with respect to the credit facility with Silicon Valley Bank or, if executed,
that such documents will contain each of the above-described terms and
conditions.
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
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
(which requirement we met during 2002); (iv) we agreed to maintain, through
August 2003, a force of no less than ninety full time dental consultants and
divisional and regional managers to make sales and product recommendation calls
on dental professionals (which requirement we have fulfilled); and (v) we agreed
that the Atrix products would be the subject of a specific number of detail
calls in the United States during 2002, which we achieved. We are also required
to make certain annual minimum expenditures for advertising and promotional
activities over the term of the agreement beginning January 1, 2003, including:
(i) the lesser of $4.0 million 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 $2.0 million or 30% of our contribution margin, as defined in the
agreement, relating to a separate Atrix product that we market. These annual
requirements were met by us during 2003.
During 2003, our co-promotional agreements with Merck, Novartis and Sirius,
generated approximately $3.1 million in revenue and approximately $1.6 million
in positive cash-flows. As of December 31, 2003, all of these agreements either
expired or were mutually terminated. We do not expect any future revenues or
cash in-flows from Merck, Novartis and Sirius other than nominal residual
contract revenues through 2005 from our expired agreement with Merck for Vioxx.
On February 11, 2002, we executed a Co-operation, Development and Licensing
Agreement pursuant to which we were granted an exclusive, sublicenseable,
transferable license with respect to the Restoraderm 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 future consulting, royalty and milestone payments in the
aggregate amount of up to approximately $3.2 million, of which no more than $1.0
million shall be payable prior to January 1, 2005. We paid $38,000 under this
agreement during the three months ended March 31, 2004 and have paid an
aggregate of $968,000 through March 31, 2004. 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 such a patent fails to issue, seven years.
-19-
At March 31, 2004, we had cash and cash equivalents of approximately $31.2
million, a decrease of $1.5 million from the $32.7 million balance at December
31, 2003. 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 money market funds. Our working capital at March 31, 2004 was
$32.9 million, an increase of $900,000 from $32.0 million at December 31, 2003.
This increase was primarily attributable to the cash proceeds from the exercise
of stock options and warrants. During the three months ended March 31, 2004, we
invested $149,000 in capital expenditures and paid $800,000 in cash dividends to
the holders of our Series D preferred stock.
We currently believe that projected sales of our United States marketed
products in combination with contract and license revenues and working capital
at March 31, 2004, will allow us to fund our operations, capital expenditures
and preferred stock dividend requirements for at least the next twelve months.
At this time, however, we cannot accurately predict the effect of certain
developments on future product sales such as the degree of market acceptance of
our products and technology, our arrangement with Mutual, competition, the
effectiveness of our sales and marketing efforts and the outcome of our research
and development to demonstrate the utility of Periostat in indications beyond
those already included in the FDA approved label. We expect to significantly
increase our investment in research and development in 2004. Contract and
license revenues include receipts from co-promotion agreements and performance
milestones.
We believe that other key factors that could affect our internal and
external sources of cash are:
o Revenues and profits 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 renewal of our credit facility with Silicon Valley Bank;
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;
o The effect of our arrangement with Mutual; and
o The outcome and consequences of our litigation with the FDA.
Contractual Obligations
Our major outstanding contractual obligations relate to cash dividends on
our outstanding Series D preferred stock, operating leases for our office space
and contractual commitments with our marketing partners for certain selling and
promotional expenses associated with the products
-20-
we are currently detailing. Additionally, we also expect to make certain
inventory purchases from our contract manufacturer of Periostat.
Below is a table which presents our contractual obligations and commercial
commitments as of March 31, 2004:
Payments Due by Period
Nine Months
ending
Contractual December 31, 2005 and 2007 and 2009 and
Obligations Total 2004 2006 2008 after
- ---------------------------------------------------------------------------------------------------------------------
Operating Leases(1)...... $ 2,411,000 $ 413,000 $ 1,108,000 $ 694,000 $196,000
- ---------------------------------------------------------------------------------------------------------------------
Unconditional Purchase
Obligations........... $ 1,082,000(2) $ 1,082,000 -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Co-Promotional
Commitments........... (3) (3) (3) (3) (3)
- ---------------------------------------------------------------------------------------------------------------------
Cash Dividends on
Series D Preferred
Stock................. $ 7,200,000(4) $ 800,000(4) $ 3,200,000(4) $ 3,200,000(4) (4)
- ---------------------------------------------------------------------------------------------------------------------
Consulting Payments...... $ 601,000(5) $ 297,000(5) $ 304,000(5) -- --
- ---------------------------------------------------------------------------------------------------------------------
Total Contractual $ 11,294,000 $ 2,592,000 $ 4,612,000 $ 3,894,000 $196,000
Obligations...........
- ---------------------------------------------------------------------------------------------------------------------
(1) Such amounts primarily include minimum rental payments for our office lease
in Newtown, Pennsylvania, as well as payments for sales force computer
leases.
(2) Such amounts represent a minimum purchase order commitment with our
third-party manufacturer of Periostat. This commitment relates to the
twelve month period commencing on March 31, 2004.
(3) We are required to make certain annual minimum expenditures for advertising
and promotional activities amounting to: (i) the lesser of $4.0 million 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 $2.0 million
or 30% of our contribution margin (as defined in the agreement) relating to
another Atrix product that we market. See further information regarding the
Atrix License and Marketing Agreement under the heading "Liquidity and
Capital Resources."
(4) Pursuant to the terms of our Series D Cumulative Convertible preferred
stock and unless earlier converted pursuant to its terms, the holders of
the Series D preferred stock are entitled to dividends payable in cash at a
rate of 8.0% per annum, which are declared and paid every six months. See
further information regarding our Series D preferred stock under the
heading "Liquidity and Capital Resources."
-21-
(5) Such amount represents consulting payments to be made to Brian M.
Gallagher, our former chief executive officer and president in connection
with his separation from the Company and pursuant to the terms of a
consulting agreement executed March 18, 2003.
In May 1999, we entered into a lease agreement relating to our office space
in Newtown, Pennsylvania. The lease has an initial term of ten years. Rent is
expected to be approximately $318,000 per year and is subject to market
adjustments in 2004.
On February 11, 2002, we executed a Co-operation, Development and Licensing
Agreement pursuant to which we were granted an exclusive, sublicenseable,
transferable license with respect to the Restoraderm 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 future consulting, royalty and milestone payments in the
aggregate amount of up to $3.2 million, of which no more than $1.0 million shall
be payable prior to January 1, 2005. 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 such a patent fails to issue, seven years.
On June 10, 2002, we executed a Development and Licensing Agreement with
Shire Laboratories, Inc. pursuant to which we were granted an exclusive
worldwide license (including the right to sublicense) to develop, make, have
made, use, supply, export, import, register and sell products for the treatment
of various inflammatory disorders. In addition, under the agreement, certain
product development functions shall be performed for us. Pursuant to the terms
of such agreement, we will pay to Shire a percentage of certain net sales of
products, if any, utilizing any part of Shire's technology. Also under the
agreement, we have committed to payments in cash, or, at our option, a
combination of cash and our common stock, upon the achievement of certain
clinical and regulatory milestones in the event we pursue certain applications
of the technology, which could total up to $7.9 million in the aggregate.
Additional Risks That May Affect Results
Important factors could cause our actual results to differ materially from
those indicated or implied by forward-looking statements contained or
incorporated by reference in this Quarterly Report on Form 10-Q. Factors that
could cause or contribute to such differences include those factors discussed
below. If any of the following risks actually occur, our business, financial
condition or results of operations would likely suffer.
We Rely on Periostat for Most of Our Revenue.
During the three months ended March 31, 2004 and for the years ended 2003
and 2002, Periostat accounted for approximately 89%, 82% and 82% of our total
net revenues, respectively. Although we currently derive additional revenue from
marketing and/or selling other products (Atridox, Atrisorb FreeFlow, Atrisorb-D
and Pandel) and from licensing fees from foreign marketing partners, our revenue
and profitability in the near future will depend on our ability to successfully
market and sell Periostat.
Although we recently settled our litigation with West-ward Pharmaceutical
Corporation and Mutual, other companies may have submitted applications for
approval of generic versions
-22-
of Periostat. We have filed suits to enforce our patent rights and to compel the
FDA to award patent and exclusivity protections that would prevent a generic
drug application from being approved. On July 23, 2003, we announced that the
United States District Court for the District of Columbia had granted a
preliminary injunction temporarily restraining the FDA from approving any
Abbreviated New Drug Applications ("ANDAs") submitted for any generic version of
Periostat. Until the Court has made a final ruling on our complaint, the FDA
cannot approve any ANDAs for a generic version of Periostat. The Court could
make a final ruling at any time. If the Court decides in favor of the FDA, the
FDA could begin to approve generic drugs immediately thereafter.
We cannot be sure that one or more generic versions of Periostat will not
be approved and marketed. If one or more generic versions of Periostat are
approved and marketed, our revenues from Periostat would significantly decrease,
and as result, our business, financial condition, cash flows and results of
operations would be materially adversely affected.
In addition, in connection with our settlement with Mutual, we will be the
sole supplier to Mutual of a branded version of Periostat, subject to certain
conditions, at prices below our average manufacturer's price through May 2007 or
the earlier termination of such supply arrangements due to certain
circumstances. During the second quarter of 2004, we will ship an initial
stocking order of product to Mutual, including a one-time promotional allowance,
which we expect will affect our quarterly sales patterns and profitability for a
portion of 2004. Although we expect to generate gross margins in the range of
86% to 88% of our total net sales of Periostat, our overall Periostat revenues
could decline significantly, which could materially harm our business.
We May Not Be Able to Maintain Profitability.
From our founding in 1992 through the commercial launch of Periostat in
November, 1998, we had no revenue from sales of our own products. As of March
31, 2004, we have an accumulated deficit of $69.9 million. Our historical losses
have resulted primarily from the expenses associated with our pharmaceutical
development program, clinical trials, the regulatory approval process associated
with Periostat and sales and marketing activities relating to Periostat.
Although we achieved net income of $6.4 million for the year ended December 31,
2003, we incurred a net loss of $34,000 for the three months ended March 31,
2004 and we expect to incur significant future expenses, particularly with
respect to the sales and marketing of Periostat, new products and continuing
clinical and manufacturing development for other indications and formulations of
Periostat, and therefore, we cannot be certain that we will be able to maintain
our profitability in the future, if at all.
Our Competitive Position in the Marketplace Depends on Enforcing and
Successfully Defending Our Intellectual Property Rights.
In order to be competitive in the pharmaceutical industry, it is important
to establish, enforce, and successfully defend patent and trade secret
protection for our established and new technologies. We must also avoid
liability from infringing the proprietary rights of others.
Our core technology is licensed from The Research Foundation of the State
University of
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New York, or SUNY, and other academic and research institutions collaborating
with SUNY. Under the license agreement with SUNY, or the SUNY License, we have
an exclusive worldwide license to SUNY's rights in certain patents and patent
applications to make and sell products employing tetracyclines to treat certain
disease conditions. The SUNY License imposes various payment and reporting
obligations on us, and our failure to comply with these requirements permits
SUNY to terminate the SUNY License. If the SUNY License is terminated, we would
lose our right to exclude competitors from commercializing similar products, and
we could be excluded from marketing the same products if SUNY licensed the
underlying technology to a competitor after terminating the SUNY License.
SUNY owns 31 United States patents and six United States patent
applications that are licensed to us. The patents licensed from SUNY expire
between 2004 and 2019. Two of the patents are related to Periostat and expire in
2004 and 2007. Technology covered by these patents becomes available to
competitors as the patents expire.
Since many of our patent rights cover new treatments using tetracyclines,
we may be required to bring expensive infringement actions to enforce our
patents and protect our technology. Although federal law prohibits making and
selling pharmaceuticals for infringing use, competitors and/or practitioners may
provide generic forms of tetracycline for treatment(s) which infringe our
patents, rather than prescribe our Periostat product. Enforcement of patents can
be expensive and time consuming.
Although we have settled all pending litigation with Mutual, we cannot be
certain that other third parties will not receive FDA approval and introduce a
competitive generic version of Periostat. Any infringement or related action
involving any third party will likely result in significant expenditures, even
if such actions are settled, require substantial management time and may not be
resolved in our favor.
Our success also depends upon know-how, trade secrets, and the skills,
knowledge and experience of our scientific and technical personnel. To that end,
we require all of our employees and, to the extent possible, all consultants,
advisors and research collaborators, to enter into confidentiality agreements
prohibiting unauthorized disclosure. With respect to information and chemical
compounds we provide for testing to collaborators in academic institutions, we
cannot guarantee that the institutions will not assert property rights in the
results of such tests nor that a license can be reasonably obtained from such
institutions which assert such rights. Failure to obtain the benefit of such
testing could adversely affect our commercial position and, consequently, our
financial condition.
If We Materially Default on or Breach Our Agreement With Mutual or if a
Generic Version of Periostat is Shipped by a Generic Third-Party Competitor and
Remains Available For Sale for a Certain Period of Time, Mutual May
Independently Manufacture and Sell a Branded Version of Periostat, and Our
Business will be Materially Harmed.
In connection with our settlement with Mutual, we entered into a License
and Supply Agreement with Mutual, pursuant to which Mutual received a license to
sell a branded version of Periostat. Under this agreement, we will be the sole
supplier of this product to Mutual, subject to certain conditions, at prices
below our average manufacturer's price through May 2007 or the
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earlier termination of such supply arrangements under certain circumstances.
Upon a material default by us or a breach of our obligations under our agreement
with Mutual or if a generic version of Periostat is shipped by a third-party
generic competitor and remains available for sale for a certain period of time,
Mutual would be entitled to independently manufacture and sell its own branded
version of Periostat. If Mutual manufactures and sells its own branded version
of Periostat, Mutual will be entitled to freely sell its branded product to the
market, including to our customers, and we will not receive any revenues from
these sales. If Mutual manufactures and sells its own branded version of
Periostat, our revenues could decline significantly and our business will be
materially harmed.
If We Lose Our Sole Supplier of Doxycycline Hyclate or Our Current
Manufacturer of Periostat, Our Commercialization of Periostat Will be
Interrupted, Halted or Less Profitable.
We rely on a single supplier, Hovione International Limited, or Hovione,
for doxycycline, the active ingredient in Periostat. There are relatively few
alternative suppliers of doxycycline and Hovione produces the majority of the
doxycycline used in the United States. Our current supply agreement with Hovione
expires on May 14, 2006 and thereafter automatically renews for successive
two-year periods unless, 90 days prior to the expiration of any such periods,
either party gives the other party written notice of termination. In addition,
in the event of a default, uncured for 90 days, the non-defaulting party can
terminate the supply agreement effective immediately at the end of such
ninety-day period. We rely on Hovione as our sole supplier of doxycycline and
have no back-up supplier at this time. If we are unable to procure a commercial
quantity of doxycycline from Hovione on an ongoing basis at a competitive price,
or if we cannot find a replacement supplier in a timely manner or with favorable
pricing terms, our costs may increase significantly and we may experience delays
in the supply of Periostat.
We have entered into an agreement with a contract manufacturer,
Pharmaceutical Manufacturing Research Services, Inc., or PMRS, for our tablet
formulation for Periostat. Our current arrangement with PMRS has been extended
until the earlier of March 30, 2007 or until a generic 20 mg doxycycline hyclate
tablet is available on the market. Currently, PMRS is the sole third-party
contract manufacturer to supply a tablet formulation of Periostat to us,
including the branded version of Periostat that we supply to Mutual. Any
inability of PMRS to produce and supply product on agreed upon terms could
result in delays in the supply of Periostat and could result in a default in our
agreement with Mutual which would permit Mutual to independently manufacture and
sell its own branded version of Periostat. The introduction of a generic 20 mg
doxycycline hyclate tablet could leave us without a manufacturer or force us to
negotiate a new arrangement, possibly on less favorable terms. We intend to
contract with additional manufacturers for the commercial manufacture of
Periostat tablets. We believe, however, that it could take up to one year to
successfully transition from PMRS to a new manufacturer.
Our Products are Subject to Extensive Regulation by the FDA.
Drugs and medical devices generally require approval or clearance from the
FDA before they can be marketed in the United States. Periostat, Pandel and
Atridox have been approved by the FDA as drugs. Atrisorb FreeFlow and Atrisorb-D
have been cleared by the FDA as medical devices. Our drug products under
development, however, will have to be approved by the FDA
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before they can be marketed in the United States. Also, we cannot market our
approved products for new indications until the FDA approves the product for
that indication. If the FDA does not approve our products under development or
additional indications for marketed products in a timely fashion, or does not
approve them at all, our financial condition may be adversely affected.
In addition, drug and medical device products remain subject to
comprehensive regulation by the FDA while they are being marketed. The drug and
medical device regulatory schemes differ in detail, but they are essentially
similar. The FDA regulates, for example, the safety, manufacturing, labeling,
and promotion of both drug and medical device products. If we or our partners
who manufacture our products fail to comply with regulatory requirements,
various adverse consequences can result, including recalls, civil penalties,
withdrawal of the product from the market and/or the imposition of civil or
criminal sanctions.
We are, and will increasingly be, subject to a variety of foreign
regulatory regimes governing clinical trials and sales of our products. Other
than Periostat, which has been approved by the Medicines Control Agency for
marketing in the United Kingdom and approved for marketing in Austria, Finland,
Switzerland, Ireland, Israel, Italy, Luxembourg, the Netherlands, Portugal and
Canada, our products in development have not been approved in any foreign
country. Whether or not FDA approval has been obtained, approval of drug
products by the comparable regulatory authorities of foreign countries must be
obtained prior to the commencement of marketing of those products in those
countries. The approval process varies from country to country, and other
countries may also impose post-approval requirements.
A Small Number of Wholesale Customers and Large Retail Chains Account for
the Majority of Our Sales, and the Loss of One of Them, or Changes in Their
Purchasing Patterns, Could Result in Reduced Sales, Thereby Adversely Affecting
Our Operating Results.
We sell most of our products to a small number of wholesale drug
distributors. For the year ended December 31, 2003, sales to Cardinal Health,
Inc., McKesson Corporation and Amerisource-Bergen Corporation, represented
approximately 43%, 31% and 20%, respectively, of our aggregate net product
sales. For the three months ended March 31, 2004, sales to Cardinal Health,
Inc., McKesson Corporation and Amerisource-Bergen Corporation, represented
approximately 39%, 41% and 16% of our aggregate net product sales. The small
number of wholesale drug distributors, consolidation in this industry or
financial difficulties of these distributors could result in the combination or
elimination of warehouses, which could temporarily increase returns of our
products or, as a result of distributors reducing inventory levels, delay the
purchase of our products. In addition, wholesalers may increase purchase levels
in anticipation of future price increases or may capitalize on volume discounts
to acquire inventory. This may cause an unexpected increase in the level of
trade inventories normally maintained by wholesalers. Although we have developed
a plan to manage Periostat trade inventory levels, this plan may not be
effective. If Periostat trade inventory levels become too high, or if
prescription growth of Periostat is lower than expected by the trade,
wholesalers and large retail chains could reduce their orders for Periostat,
which could result in reduced sales of Periostat and adversely affect our
operating results.
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We Cannot Assure You that Our Pursuit of Business in the Dermatology Market
will be Successful.
During 2003, we began to implement our plans to expand into the dermatology
market. We have completed and announced the preliminary results of a
double-blind, placebo-controlled 134-patient Phase III clinical trial to
evaluate the safety and efficacy of Periostat to treat rosacea, we have licensed
a new dermal and transdermal drug delivery technology called Restoraderm and we
executed a sublicense agreement with Altana Inc. with respect to the marketing
and distribution of Pandel. In addition, we continue to actively seek product
licensing opportunities to enhance our near-term offerings to the dermatology
market. On April 22, 2004, we announced the restructuring of our pharmaceutical
sales organization into dedicated dental and dermatology sales forces. After the
restructuring, we have a 56-person dental sales force calling on a highly
targeted group of 10,000 high prescribing dentists and a 33-person dermatology
sales force calling on the 5,600 dermatologists who are the highest prescribers
of acne, rosacea and dermatitis products. Our future success will depend on,
among other things, our ability to: (i) achieve market acceptance for any
current or future dermatological offerings; (ii) hire and retain personnel with
experience in the dermatology market; (iii) execute our business plan with
respect to this market segment; and (iv) adapt to technical or regulatory
changes once operational. Furthermore, while we have experience in the sales and
marketing of dental products, we have limited experience in this market. This
market is very competitive and some of our competitors have substantially
greater resources than we have. New product development is a lengthy, complex
and uncertain process that will require significant attention and resources from
management. A product candidate can fail at any stage of the development process
due to, among other things, efficacy or safety concerns, the inability to obtain
necessary regulatory approvals, the difficulty or excessive cost to manufacture
and/or the infringement of patents or intellectual property rights of others.
Furthermore, the sales of new products may prove to be disappointing and fail to
reach anticipated levels. We therefore cannot assure you that we will be
successful in our pursuit of business in the dermatology market, or that we can
sustain any business in which we achieve initial success.
If Our Products Cause Injuries, We May Incur Significant Expense and
Liability.
Our business may be adversely affected by potential product liability risks
inherent in the testing, manufacturing and marketing of Periostat and other
products developed by or for us or for which we have licensing or co-promotion
rights. We have an aggregate of $10.0 million in product liability insurance for
Periostat, our product candidates and products for which we have licensing or
co-promotion rights. This level of insurance may not adequately protect us
against product liability claims. Insufficient insurance coverage or the failure
to obtain indemnification from third parties for their respective liabilities
may expose us to product liability claims and/or recalls and could cause our
business, financial condition and results of operations to decline.
Because Our Executive Officers, Directors and Affiliated Entities Own
Approximately 22.1% of Our Capital Stock, They Could Influence Our Actions in a
Manner That Conflicts With Our Interests and the Interests of Our Other
Stockholders.
Currently, our executive officers, directors and affiliated entities
together beneficially own approximately 22.1% of the outstanding shares of our
common stock or equity securities
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convertible into common stock. As a result, these stockholders, acting together,
or in the case of our preferred stockholders, in certain instances, as a class,
will be able to influence corporate actions requiring stockholder approval,
including the election of directors. This concentration of ownership may have
the effect of delaying or preventing a change in control, including transactions
in which our stockholders might otherwise receive a premium for their shares
over then current market prices.
Our Stock Price is Highly Volatile and, Therefore, the Value of Your
Investment May Fluctuate Significantly.
The market price of our common stock has fluctuated and may continue to
fluctuate as a result of variations in our quarterly operating results. These
fluctuations may be exaggerated if the trading volume of our common stock is
low. In addition, the stock market in general has experienced dramatic price and
volume fluctuations from time to time. These fluctuations may or may not be
based upon any business or operating results. Our common stock may experience
similar or even more dramatic price and volume fluctuations that may continue
indefinitely.
The following table sets forth the high and low closing market price per
share for our common stock for each of the quarters in the period beginning
January 1, 2001 through March 31, 2004, as reported on the Nasdaq National
Market:
Quarter Ended High Low
------------- ---- ---
March 31, 2001..................... $6.00 $4.47
June 30, 2001...................... $8.80 $5.06
September 30, 2001................. $10.00 $7.25
December 31, 2001.................. $9.50 $7.50
March 31, 2002..................... $12.00 $7.72
June 30, 2002...................... $11.65 $5.75
September 30, 2002................. $7.34 $4.70
December 31, 2002.................. $9.93 $4.05
March 31, 2003..................... $11.03 $6.66
June 30, 2003...................... $13.27 $8.62
September 30, 2003................. $15.84 $10.50
December 31, 2003.................. $11.82 $8.90
March 31, 2004..................... $14.16 $10.10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We had cash and cash equivalents at March 31, 2004 which are exposed to the
impact of interest rate changes and our interest income fluctuates as our
interest rates change. Due to the short-term nature of our investments in money
market funds, the carrying values of our cash equivalents approximate their fair
value at March 31, 2004.
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Item 4. Controls and Procedures.
Our management, with the participation of our chief executive officer and
chief financial officer, evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended, or Exchange Act) as of March 31, 2004. In
designing and evaluating our disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving their objectives
and management necessarily applied its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based on this evaluation, our
chief executive officer and chief financial officer concluded that, as of March
31, 2004, our disclosure controls and procedures were (1) designed to ensure
that material information relating to us, including our consolidated
subsidiaries, is made known to our chief executive officer and chief financial
officer by others within those entities, particularly during the period in which
this report was being prepared and (2) effective, in that they provide
reasonable assurance that information required to be disclosed by us in our
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
No change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal
quarter ended March 31, 2004 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
United Research Laboratories, Inc./Mutual Pharmaceutical Company, Inc.
Litigation
In July 2003, we sued Mutual in the United States District Court for the
Eastern District of New York, alleging that Mutual infringed our patents for
Periostat for the treatment of adult periodontitis. Our complaint also alleged
that Mutual infringed our patent rights by submitting an ANDA with the FDA,
seeking FDA approval to market a generic tablet version of Periostat.
In a separate action in the United States District Court for the District
of Columbia, we sought and, on July 22, 2003, we were granted a preliminary
injunction preventing the FDA from approving generic versions of Periostat,
including Mutual's version. Mutual intervened in that case.
In July 2003, Mutual commenced an action against us in the United States
District Court for the Eastern District of Pennsylvania. Mutual alleged that we
had engaged in an effort to monopolize the market for low-dose doxycycline
products.
On April 8, 2004, we announced that we had settled all pending litigation
between us and Mutual.
In connection with the settlement, we and Mutual entered into a License and
Supply Agreement pursuant to which Mutual received a license to sell a branded
version of Periostat. Under this agreement, we will be the sole supplier of this
product to Mutual, subject to certain conditions, at prices below our average
manufacturer's price through May 2007 or the earlier termination of such supply
arrangements under certain circumstances. In addition, we agreed not to grant
any license to sell Periostat in generic form to any third party during the
supply term.
In the settlement, Mutual agreed and confessed to judgment that our
Periostat patents are valid and would be infringed by the commercial
manufacture, use, sale, importation or offer for sale of the generic version of
Periostat for which Mutual submitted its ANDA. Mutual consented to a judgment
enjoining Mutual and any party acting in concert with Mutual from infringing our
patents by making and selling a generic version of Periostat until our patents
expire or are declared invalid or unenforceable by a court of competent
jurisdiction, or until Mutual is granted a license under the patents, which will
occur under the License and Supply Agreement if a third-party, generic version
of Periostat is launched and remains on the market for a certain period of time
or we materially breach our obligations under the agreement. Finally, Mutual
agreed to withdraw from the FDA case in the District of Columbia.
We agreed to pay to Mutual the amount of $2,000,000, which represents a
portion of the anticipated fees and expenses that we will save as a result of
the settlement of the pending actions with Mutual. This charge has been recorded
in the first quarter of 2004. Under our license agreement with SUNY covering
Periostat, we are entitled to deduct costs incurred to defend its patents,
including this payment, from current and future royalties due SUNY on net sales
of Periostat and Mutual's branded version of Periostat.
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Item 2. Changes in Securities and Use of Proceeds.
Changes in Securities
The following information relates to all of the securities sold by us
within the past quarter which were not registered under the securities laws at
the time of grant, issuance and/or sale:
Option Grants
During the first quarter of 2004, we granted stock options pursuant to our
1996 Stock Plan which were not registered under the Securities Act of 1933, as
amended, or the Securities Act. All of such option grants were granted at the
then current fair value of the common stock. The following table sets forth
certain information regarding such grants during the quarter:
Weighted Average
Number of Shares Exercise Price Per Share
----------------- ---------------------------------
428,707 $10.29
We did not employ an underwriter in connection with the issuance of the
securities described above. We believe that the issuance of the foregoing
securities was exempt from registration under either (i) Section 4(2) of the
Securities Act as transactions not involving any public offering and such
securities having been acquired for investment and not with a view to
distribution, or (ii) Rule 701 under the Securities Act as transactions made
pursuant to a written compensatory benefit plan or pursuant to a written
contract relating to compensation. All recipients had adequate access to
information about the Company. We registered these securities on a Registration
Statement on Form S-8 filed with the Securities and Exchange Commission on
February 6, 2004.
Item 5. Other Information.
Appointment of Klaus P. Theobald, M.D. as Senior Vice President and Chief
Medical Officer
On January 21, 2004, we announced the appointment of Klaus P. Theobald,
M.D., to the position of Senior Vice President and Chief Medical Officer.
Positive Outcome of Phase III Clinical Study
On February 17, 2004, we announced the positive outcome of a Phase III
double-blinded, placebo-controlled clinical study designed to evaluate the
safety and efficacy of Periostat for the treatment of rosacea. The study
enrolled 134 patients and was the largest clinical trial ever conducted to
evaluate a systemic therapy for rosacea. Preliminary data analysis indicated
that patients treated with Periostat showed a continuous improvement during the
16-week course of the study compared to patients on placebo. In the study,
patients on Periostat had a significantly greater reduction in the number of
inflammatory lesions (papules and pustules) compared to patients on placebo.
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Patient Screening and Enrollment of Multi-center Phase III Clinical Study of
Periostat MR for Adult Periodontitis
On April 5, 2004, we announced that we had initiated patient screening and
enrollment of a multi-center, double-blinded, placebo-controlled Phase III
clinical study to evaluate the efficacy of Periostat MR for the treatment of
adult periodontitis. Periostat MR is a new, once-daily formulation of Periostat
for the treatment of adult periodontitis.
Settlement of Litigation with Mutual
On April 8, 2004, we announced that we had settled all pending litigation
between us and Mutual.
In connection with our settlement with Mutual, we entered into a License
and Supply Agreement with Mutual, pursuant to which Mutual received a license to
sell a branded version of Periostat. Under this agreement, we will be the sole
supplier of this product to Mutual, subject to certain conditions, at prices
below our average manufacturer's price through May 2007 or the earlier
termination of such supply arrangements due to certain circumstances.
We agreed to pay to Mutual the amount of $2,000,000, which represents a
portion of the anticipated fees and expenses that we will save as a result of
the settlement of the pending actions with Mutual. This charge has been recorded
in the first quarter of 2004. Under our license agreement with SUNY covering
Periostat, we are entitled to deduct costs incurred to defend its patents,
including this payment, from current and future royalties due SUNY on net sales
of Periostat and Mutual's branded version of Periostat.
Formation of Dedicated Dental and Dermatology Sales Forces
On April 22, 2004, we announced the restructuring of our pharmaceutical
sales organization into dedicated dental and dermatology sales forces. The
restructuring is intended to increase our sales focus on high-prescribing
dentists and dermatologists while reducing our cost base. Prior to the
reorganization, virtually all of our 115-person pharmaceutical sales force
called on both dentists and dermatologists to market our portfolio of dental and
dermatology products. After the restructuring, we have a 56-person dental sales
force calling on a highly targeted group of 10,000 high prescribing dentists and
a 33-person dermatology sales force calling on the 5,600 dermatologists who are
the highest prescribers of acne, rosacea and dermatitis products.
Letter of Commitment for Renewal of Credit Facility
On May 3, 2004, we executed a letter of commitment to renew our revolving
credit facility with Silicon Valley Bank, which expired on March 15, 2004.
Pursuant to the terms of the commitment letter, we will be permitted to borrow
up to the lesser of $5.0 million or 80% of eligible accounts receivable, as
defined. We are not obligated to draw amounts and any borrowings shall bear
interest, payable monthly, at the current prime rate. We expect to secure our
obligations under the credit facility through the granting of a security
interest in favor of the bank with respect to all of our corporate assets.
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32 Certification Pursuant to 18 U.S.C. Section 1350.
(b) Reports on Form 8-K.
On February 24, 2004, we filed a Current Report on Form 8-K containing
a copy of our earnings release for the quarter and year ended
December 31, 2003 (including financial information) pursuant to Item 12
(Results of Operations and Financial Condition).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CollaGenex Pharmaceuticals, Inc.
Date: May 10, 2004 By: /s/ Colin W. Stewart
----------------------------------------
Colin W. Stewart
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 10, 2004 By: /s/ Nancy C. Broadbent
---------------------------------------
Nancy C. Broadbent
Chief Financial Officer (Principal
Financial and Accounting Officer)
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