UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
_X_ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal Year Ended December 31, 2000 OR
___ Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 0-21180
CELLEGY PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
California 82-0429727
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
349 Oyster Point Boulevard, Suite 200, South San Francisco, California 94080
(Address of Principal Executive Offices) (zip code)
Registrant's telephone number, including area code: (650) 616-2200
Securities registered pursuant to Section 12(b) of the Act:
None Nasdaq National Market
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of class)
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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (____)
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of February 22, 2001 was $100,559,000 (based on the closing price
for the common stock on The Nasdaq Stock Market on such date). This calculation
does not include a determination that persons are affiliates or non-affiliates
for any other purpose.
The number of shares of common stock outstanding as of February 22, 2001 was
13,870,136.
Documents Incorporated By Reference
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Shareholders of the Company
which will be filed with the Securities and Exchange Commission not later than
120 days after December 31, 2000.
CELLEGY PHARMACEUTICALS, INC. 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
Page
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Part I
Item 1. BUSINESS 1
Item 2. PROPERTIES 11
Item 3. LEGAL PROCEEDINGS 12
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
Item 4a. EXECUTIVE OFFICERS OF THE REGISTRANT 12
Part II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 15
Item 6. SELECTED FINANCIAL DATA 16
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 22
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 22
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 22
Part III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 23
Item 11. EXECUTIVE COMPENSATION 23
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 23
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 23
Part IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 24
Unless the context otherwise requires, the terms "we", "our", and
"Cellegy" refer to Cellegy Pharmaceuticals, Inc., a California corporation, and
its subsidiaries.
Anogesic and Celledirm are our registered trademarks. Tostrex,
Tostrelle, and Rectogesic are our trademarks. We also refer to trademarks of
other corporations and organizations in this document.
PART I
ITEM 1: BUSINESS
Cellegy Pharmaceuticals, Inc. ("Cellegy" or the "Company"),
incorporated in California in 1989, is a specialty biopharmaceutical company
engaged in the development of prescription drugs and skin care products. Our
prescription products are directed towards the treatment of gastrointestinal
disorders, sexual dysfunction of both men and women, and conditions affecting
women's health.
Cellegy's most advanced prescription product candidates include
Anogesic(R) (nitroglycerin ointment) for the treatment of anal fissures and
hemorrhoids, and Tostrex(TM) (testosterone gel) for the treatment of male
hypogonadism, a condition that frequently can result in lethargy and reduced
libido in men. Anogesic is undergoing a multi-center Phase III clinical trial
for treatment of pain associated with anal fissures. Cellegy is in the process
of filing a New Drug Application ("NDA") for Anogesic in the United States, and
a New Drug Submission ("NDS") for the product in Canada. We are also conducting
two Phase II clinical trials using Anogesic to treat various hemorrhoid
conditions.
In June 2000, Cellegy acquired Quay Pharmaceuticals, an Australian
company marketing RectogesicTM, a nitroglycerin ointment product similar to
Anogesic. The Australian registration package has been and will be used to file
for marketing approval in several Pacific Rim countries. Cellegy intends to
continue to self-market Rectogesic in Australia and plans to sell the product
through distributors in the Pacific Rim countries and potentially other
countries around the world.
Tostrex is undergoing a Phase III trial for male hypogonadism and
Tostrelle(TM) , a second testosterone gel product, is being evaluated in a Phase
I/II study designed to restore normal hormone levels to surgically induced
menopausal women.
In addition to our prescription product candidates, we have developed
several non-prescription skin care and cosmeceutical products which we believe
will help reverse the signs of photodamaged and aging, wrinkled skin. We plan to
commercialize these products through partners or may consider establishing a
separate subsidiary company targeting selected channels of distribution. We have
been selling one of our skin care products, C79 Intensive Moisturizer, since its
introduction in 1998, for inclusion in a finished product marketed by a major
specialty retailer. There is, of course, no certainty that C79 sales will
continue or that Cellegy's other skin care and prescription products will be
commercialized.
Cellegy's research and development programs focus on inflammation and
second generation products for anorectal diseases. In the area of inflammation,
our scientists have discovered a family of compounds that we have named
CELLEDIRM. CELLEDIRM-based products may be useful in reducing inflammation
associated with a number of skin, mucous membrane and gastrointestinal
conditions, as well as inflammation caused by many topically applied drugs and
cosmetics. In 1999, Cellegy researchers were awarded a Phase I Small Business
Innovation Research ("SBIR") grant in the amount of $100,000. After successfully
completing the initial research in 2000, we have applied for additional Phase II
SBIR funding to investigate second generation products for anorectal diseases.
This Annual Report includes forward-looking statements that involve
substantial risks and uncertainties. These forward-looking statements are not
historical facts, but rather are based on current expectations, estimates and
projections about our industry, our beliefs and our assumptions. Words such as
"believes," "anticipates," "expects," "intends" and similar expressions are
intended to identify forward-looking statements, but are not the exclusive means
of identifying such statements. These forward looking statements are not
guarantees of future performance and concern matters that involve risks and
uncertainties that could cause our actual results to differ materially from
those in the forward-looking statements. These risks and uncertainties include
those described in "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Factors That May Affect Future Operating Results"
and elsewhere in this Annual Report. Except as required by law, we undertake no
obligation to revise any forward-looking statements in order to reflect events
or circumstances that may arise after the date of this Annual Report. Actual
events or results may differ materially from those discussed in this Annual
Report.
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Marketing and Commercialization Strategy
Cellegy intends to become a leader in the development and marketing of
selected specialty pharmaceutical products that are directed towards the
treatment of gastrointestinal disorders, sexual dysfunction of both men and
women, and conditions affecting women's health. Key elements of our related
business and commercialization strategy include the following:
Self - Marketing to Specialty Physician Markets in United States.
Cellegy plans to market Anogesic, Tostrelle and related products to a targeted
audience of key physician specialists, principally Gastroenterologists ("GI's")
and Obstetrician-Gynecologists ("OB-GYN's"), through the establishment of our
own sales force. We plan to seek larger pharmaceutical partners to assist in the
promotion of these products to broader physician audiences. We plan to
commercialize our Tostrex, dermatology and skin care products through partners
with the possibility of retaining co-promotion rights in the United States.
Outlicensing of Overseas Rights. We intend to outlicense the overseas
rights for products we develop in exchange for upfront and milestone payments,
as well as royalties on sales.
Acquisition of Complementary Products and Companies. As we did with the
acquisitions of Rectogesic from Quay Pharmaceuticals in 2000 and with Anogesic
from Neptune Pharmaceuticals in 1997, we may acquire products, technologies or
companies with products and distribution capabilities consistent with our
commercial objectives.
Marketed Skin Care Products
Cellegy has completed development of certain consumer skin care and
cosmeceutical products, including skin barrier repairing/fortifying
moisturizers, skin protectants and anti-aging lotions and creams. We are
currently marketing our C79 Intensive Moisturizer formulation to a major
specialty retailer, which incorporates C79 into hand cream products. Our
revenues from sales of these products totaled $1,389,000 in 2000, and have
totaled about $2,745,000 million since product introduction late in 1998.
Cellegy intends to expand the sale of skin care formulations to this
and to other traditional specialty retailers which will market them under their
own brand names. We also plan to commercialize our cosmeceutical products
through partners or may consider establishing a separate subsidiary company
targeting selected channels of distribution.
Products Under Development
Prescription Products
Anogesic (nitroglycerin ointment)
Cellegy's leading product candidate is Anogesic, a topical,
nitroglycerin-based prescription product for the treatment of anal fissures and
hemorrhoids. Anal fissures are painful tears in the lining of the anal mucosa, a
condition affecting men and women of all age groups. Of the over 600,000 new
cases of anal fissures occurring each year in the United States, Europe and
Japan, many of these chronic cases require painful and expensive surgery, a
procedure that sometimes leaves patients incontinent. Hemorrhoids are dilated,
swollen veins and tissue located either in the anal canal or at the margin of
the anus. In the United Sates alone, there are approximately 9 million people
who suffer from hemorrhoids each year. Both conditions are characterized by an
increase in intra-anal pressure, which has been shown to be effectively reduced
by the application of Anogesic.
Current drug therapies include anesthetics and anti-inflammatory agents
that only partially relieve the symptoms of these conditions. Even though
current treatments are only partially effective, prescription product sales
currently used to treat anal fissures and hemorrhoids have been estimated to be
approximately $500 million annually in the United States, Europe and Japan.
Surgical procedures and hospitalization stays related to these conditions
represent a substantial additional cost to the healthcare systems.
Anogesic is a proprietary formulation that includes nitroglycerin, a
drug that has been used for many years in the treatment of angina pectoris and
certain other heart diseases. Once administered to the anal canal, nitroglycerin
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causes relaxation of the sphincter muscle and, as reported by several previous
studies, helps to relieve pain and promote healing of the anal fissure or
hemorrhoid in most patients.
Prior to Cellegy's clinical trial completed in November 1999, several
previously published clinical trial results in over 400 patients showed that
nitroglycerin helps to relieve pain and promote healing of the anal fissure in
most patients. We completed our own Phase III clinical trial using Anogesic for
the treatment of anal fissures and announced the results in November 1999. The
trial did not demonstrate a statistically significant rate of healing in
comparison to placebo, but did show rapid and significant pain reduction. Based
on this outcome, we initiated a second Phase III trial in 2000 to confirm the
drug's ability to reduce fissure pain, the primary trial endpoint, with healing
of chronic anal fissures as a secondary endpoint.
The confirmatory Phase III clinical trial will include about 180 to 200
patients in several study centers in the United States and overseas. Patients
receive either of two strengths of Anogesic or placebo. The product is
administered on a daily basis over an eight-week treatment period. The patient's
pain scores are tabulated and the patients are examined to determine whether the
fissure has healed.
In January 2001, we announced that we intended to file a New Drug
Application (NDA) with the FDA requesting marketing approval of Anogesic for the
treatment of pain associated with chronic anal fissures. We intend to supplement
the NDA upon completion of our on-going Phase III anal fissure pain study. The
decision to file the NDA earlier than previously contemplated followed a meeting
with the FDA at which Celllegy re-reviewed the results of its initial Anogesic
Phase III clinical trial completed in November 1999 and summary data from
several trials conducted with nitroglycerin ointment by investigators around the
world, as well as various other materials. FDA approval is not required in order
for a company to submit an NDA. Submitting the NDA before completion of the
Phase III trial does not necessarily reduce the period of time during which the
FDA reviews the filing and may have no effect on the regulatory review period;
the FDA could decide, among other things, to wait to commence its review until
the results of the current trial are submitted. There can be no assurances that
the anticipated NDA filing for Anogesic will be approved, or that earlier filing
of the NDA will result in earlier review by the FDA or product approval.
In addition to the above mentioned fissures trial, Cellegy has two
Phase II clinical trials underway for various complications of hemorrhoids.
Anogesic is protected by two domestic patents, both of which have been issued,
the most recent in December 1997. Similar Canadian and European patents have
been issued, and numerous patent applications have been filed in most major
overseas markets.
Tostrex (testosterone gel for male hormone replacement therapy)
Cellegy is currently developing a transdermal testosterone gel to
address male hypogonadism, or below normal levels of the sex hormone
testosterone, a condition which results from a decline in the body's production
of the hormone. Low levels of testosterone can result in lethargy, depression
and a decline in libido. In severely deficient cases, loss of muscle mass and
bone density can occur. Approximately 5 million men in the United States,
primarily in the aging (over 40) male population group, have lower than normal
levels of testosterone. Male hypogonadism is the first indication for which we
will seek regulatory approval in the United States, assuming successful trial
results. Subsequently, we plan to conduct trials designed to demonstrate
efficacy for "male andropause," a potentially greater market.
There are a number of companies currently marketing testosterone in
several different product forms in domestic and international markets. Cellegy
believes that a potentially significant market opportunity exists for an
improved product, as the side effects and patient inconveniences associated with
many of the currently marketed products have limited their use to less than 5%
of potential patients. Current product forms include orals, injectables,
transdermal patches and a recently launched testosterone gel. The leading patch
products are sold at prices averaging about $1,000 per year per patient with the
gel product priced at over $3,500 per year.
Cellegy's proprietary patchless testosterone gel product is
transparent, rapid-drying and non-staining. It is expected to permit a
once-a-day application from a unique metered dose dispenser to relatively small
areas of the skin. Based on Phase II dose ranging clinical studies to date, we
believe our proprietary transdermal gel formulation is capable of delivering
therapeutic levels of testosterone with reduced side effects and in a more
convenient dosage form compared with other currently marketed transdermal patch
products. These human studies demonstrated Tostrex's ability to deliver
testosterone into the bloodstream at levels that were consistently higher than a
leading
3
patch product. Based on the outcome of these studies, we began a pivotal Phase
III clinical trial early in 2000 designed to restore normal levels of
testosterone in men with testosterone deficiency. The trial is being conducted
at several study centers in the United States and is being monitored by Cellegy
and an outside contract research organization. The trial is currently designed
to include approximately 200 to 240 patients, and we expect to file an NDA by
the end of 2001, assuming no unexpected delays and successful clinical trial
results.
Tostrelle (testosterone gel for female hormone replacement therapy)
Normal blood concentrations of testosterone in women range from 10 to
20 times less than that of men. Nevertheless, in both sexes, testosterone plays
a key role in building muscle tissue or bone, and in the maintenance of sexual
drive. In women, the ovaries and adrenal glands continue to synthesize
testosterone after menopause, although the rate of production may diminish by as
much as 50%. Approximately 15 million women in the United States suffer from
symptoms of testosterone deficiency. At the present time there are no approved
products for the treatment of this condition.
Based on the results of pharmacokinetic studies in men receiving
Tostrex, Cellegy's scientists were able to estimate the proper dosage of
testosterone that would be required to achieve normal pre-menopausal hormone
levels in postmenopausal women. The result is Cellegy's Tostrelle, a product
designed to restore normal testosterone levels in hormone deficient women.
A Phase I/II dose ranging clinical study treating post-menopausal women
was successfully completed in September 2000. Based on these results, we began
an expanded Phase I/II pharmacokinetic study in which we are attempting to
determine the proper dose necessary to restore normal testosterone levels to
surgically-induced menopausal women. If this trial is successful, we intend to
initiate a Phase II/III clinical study.
Estrogen-Testosterone Gel (female hormone replacement therapy)
Cellegy's third planned product in the area of hormone replacement
therapy is a combination estrogen-testosterone gel, which utilizes our
proprietary drug delivery technologies to restore the natural levels of both
hormones in elderly or menopausal women. We believe that this product may offer
advantages over the patches in terms of reduced side effects and patient
convenience. The combination formulation is in the research stage with clinical
trials planned following development of the mono-therapy testosterone products.
Non-Prescription Cosmeceutical Products
Cellegy's core cosmeceutical program includes anti-wrinkling products*
which, based on human studies to date, appear to mitigate the visible effects of
photoaging and skin wrinkling. We believe our anti-wrinkling products have a
different mechanism of action, producing greater improvement to the skin's
appearance and causing less irritation than current market leading products.
Signs of aging and photoaging usually become visible when people reach
their early thirties, with fine lines and roughness, loss of suppleness and
elasticity of the skin becoming apparent. In subsequent decades, there may be
further deterioration marked by coarse wrinkles, spotty irregular pigmentation,
leathery texture or thinning of the skin. Many of these skin changes associated
with aging are due to ultraviolet light exposure, referred to as "photoaging."
At the retail level, the non-prescription market for products which are used to
mitigate the effects of aging and photodamage upon the skin is estimated to be
in excess of $1 billion in annual sales in the United States.
Many of these currently marketed cosmeceutical products contain low
concentrations of one or more active ingredients. Low concentrations of the
active ingredients are frequently employed in order to avoid side effects which
can include stinging, redness and skin irritation. However, the low
concentrations of the active ingredient generally limit the efficacy of the
products. Most of the cosmeceutical lines marketed to physicians contain higher
concentrations of actives, but are known to cause significant irritation.
Cellegy's anti-wrinkling products incorporate Celledirm and a
multi-action ingredient exhibiting many of the attributes of the active
cosmeceutical ingredients described above. Certain human studies were
successfully completed and others have been designed to provide stronger data
regarding the effectiveness of Cellegy's cosmeceuticals.
4
* References in this Report to "anti-wrinkling," "anti-wrinkling products" or
the "anti-wrinkling market" are intended to refer to a product category that
Cellegy believes is generally understood in the marketplace or to products in
that category, and are not intended to describe any claims that our
cosmeceutical products act in any way other than as cosmetics as defined under
applicable laws. The term "cosmeceuticals" refers to products that, if they
satisfy the definition of a cosmetic under applicable federal laws and if they
are not also drugs under those laws, are not subject to the same requirements as
drug products.
Technology
Current Research Programs
Cellegy's research and development programs focus on inflammation and
second-generation products for sexual dysfunction and anorectal diseases. In the
area of inflammation, our scientists have discovered a family of compounds
called CELLEDIRM (Cellegy's Dermal Inflammatory Response Modulators). CELLEDIRM
is a group of compounds identified by Cellegy's scientists that have
demonstrated in pre-clinical testing a reduction of the inflammation associated
with the topical application of drugs, solvents or other physiologically active
substances. These compounds consist of specially processed or purified
excipients that have been shown in pre-clinical studies to significantly reduce
skin inflammation following challenge with a number of irritating or allergenic
substances.
CELLEDIRM-based products may be useful in reducing inflammation
associated with a number of skin, mucous membrane and gastrointestinal
conditions, as well as inflammation caused by many topically applied drugs and
cosmetics. Cellegy's scientists have also identified a different class of
compounds which could potentially be used to control inflammation of the mucosal
membrane and gastrointestinal conditions. Selected compounds are currently being
studied in relevant models.
Our research on second generation products consists of internally
funded and certain external programs. In 1999, Cellegy researchers were awarded
a Phase I Small Business Innovation Research ("SBIR") grant in the amount of
$100,000. After successfully completing the initial research, including the
development of anorectal screening model in 2000, we have applied for and are
expecting funding for an additional Phase II SBIR grant of approximately
$850,000 to investigate second generation products for anorectal diseases.
The phase II SBIR funding, if approved, will support a two-year project
to conduct pre-clinical and early clinical development of two compounds selected
using our in vivo anorectal pharmacological screening model. Similar to
Anogesic, both compounds have extensive safety records in humans for
non-colorectal indications and have potential to provide additional clinical
advantages over Anogesic. Upon completion of the pre-clinical and clinical
developments, a lead compound may be selected as a development candidate and
ultimately become a second anorectal product candidate.
Cellegy's research and development expenses were $9,276,000 in 2000,
$7,965,000 in 1999, and 6.668,000 in 1998. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Patents and Trade Secrets
Our success depends, in part, on our ability to obtain patent
protection for our products and methods, both in the United States and in other
countries. The patent position of companies engaged in businesses such as our
business generally is uncertain and involves complex legal and factual
questions. There is a substantial backlog of patent applications at the U.S.
Patent and Trademark Office ("USPTO"). Patents in the United States are issued
to the party that is first to invent the claimed invention. Since patent
applications in the United States currently can be maintained in secrecy until
patents issue, we cannot be certain that Cellegy was the first inventor of the
invention covered by our pending patent applications or patents or that we were
the first to file patent applications for such inventions. Further, issued
patents can later be held invalid by the patent office issuing the patent or by
a court. There can be no assurance that any patent applications relating to our
products or methods will issue as patents, or, if issued, that the patents will
not be challenged, invalidated, or circumvented or that the rights granted
thereunder will provide a competitive advantage to us.
In addition, many other entities are engaged in research and product
development efforts in fields that may overlap with our currently anticipated
and future products. A substantial number of patents have been issued to such
companies, and such companies may have filed applications for, or may have been
issued patents or may obtain
5
additional patents and proprietary rights relating to, products or processes
competitive with those of Cellegy. Such entities may currently have, or may
obtain in the future, legally blocking proprietary rights, including patent
rights, in one or more products or methods under development or consideration by
us. These rights may prevent us from commercializing technology, or may require
us to obtain a license from the entity to practice the technology. There can be
no assurance that the manufacture, use or sale of any of our product candidates
will not infringe patent rights of others. There can be no assurance that we
will be able to obtain any such licenses that may be required on commercially
reasonable terms, if at all, or that the patents underlying any such licenses
will be valid or enforceable. Patent litigation is costly and time-consuming,
and there can be no assurance that we will have sufficient resources to bring
such litigation to a successful conclusion.
In addition, many other entities are engaged in research and product
development efforts in fields that may overlap with our currently anticipated
and future products. A substantial number of patents have been issued to such
companies, and such companies may have filed applications for, or may have been
issued patents or may obtain additional patents and proprietary rights relating
to products or processes competitive with those of Cellegy. Such entities may
currently have, or may obtain in the future, legally blocking proprietary
rights, including patent rights, in one or more products or methods under
development or consideration by us. These rights may prevent us from
commercializing technology, or may require us to obtain a license from the
entity to practice the technology. There can be no assurance that we will be
able to obtain any such licenses that may be required on commercially reasonable
terms, if at all, or that the patents underlying any such licenses will be valid
or enforceable.
Moreover, the laws of certain foreign countries do not protect
intellectual property rights relating to United States patents as extensively as
those rights are protected in the United States. The issuance of a patent in 1
country does not assure the issuance of a patent with similar claims in another
country, and claim interpretation and infringement laws vary among countries, so
the extent of any patent protection is uncertain and may vary in different
countries. As with other companies in the pharmaceutical industry, we are
subject to the risk that persons located in such countries will engage in
development, marketing or sales activities of products that would infringe our
patent rights if such activities were in the United States.
Several of Cellegy's products and product candidates, such as Anogesic,
Tostrex and Tostrelle are based on existing compounds with a history of use in
humans but which are being developed by us for new therapeutic use unrelated to
the original therapeutic indications for which the compounds were previously
approved. We cannot obtain composition patent claims on the compound itself, and
will instead need to rely on patent claims, if any, directed to use of the
compound to treat certain conditions or to specific formulations. This is the
case, for example, with our United States patents relating to Anogesic and
Tostrex. Such method-of-use patents may provide less protection than a
composition-of-matter patent, because of the possibility of "off-label" use of
the composition. Cellegy will not be able to prevent a competitor from using
that formulation or compound for a different purpose. No assurance can be given
that any additional patents will be issued to us, that the protection of any
patents that may be issued in the future will be significant, or that current or
future patents will be held valid if subsequently challenged.
Cellegy has 15 issued United States patents, more than 60 issued
foreign patents, and over 35 pending patent applications. Two issued United
States patents, 17 issued foreign patents, and more than 10 pending patent
applications relate to Cellegy's Anogesic product for the treatment of anal
fissures. One pending US patent application and 12 pending foreign applications
relate to our Tostrex and Tostrelle products. Four pending US patent
applications and one published Patent Cooperation Treaty (PCT) patent
application relate to possible backup compounds for our Anogesic product.
Additional patent applications are being prepared for filing that will cover
methods or products currently under development. Corresponding patent
applications for most of Cellegy's issued United States patents have been filed
in countries of importance to us located in major world markets, including
certain countries in Europe, Australia, South Korea, Japan, Mexico and Canada.
Federal patent law provides that for any inventions that have been
developed with government funding that are the subject of a license, the
government has the right to require the assignor or the licensee to grant a
license to third parties upon the occurrence of certain events, such as if the
government determines that no effective steps have been taken to achieve
practical application of the invention, or if health or safety needs or
requirements for public use are not reasonably satisfied.
Our policy is to protect our technology by, among other things, filing
patent applications for technology that we consider important to the development
of our business. We intend to file additional patent applications, when
appropriate, relating to our technology, improvements to our technology and to
specific products that it develops. It
6
is impossible to anticipate the breadth or degree of protection that any such
patents will afford, or whether we can meaningfully protect our rights to our
unpatented trade secrets. Cellegy also relies upon unpatented trade secrets and
know-how, and no assurance can be given that others will not independently
develop substantially equivalent proprietary information and techniques, or
otherwise gain access to our trade secrets or disclose such technology, or that
we can meaningfully protect our rights to our unpatented trade secrets. It is
our policy to require our employees to execute an invention assignment and
confidentiality agreement upon employment. Our consultants are required to
execute a confidentiality agreement upon the commencement of their consultancy
to us. Each agreement provides that all confidential information developed or
made known to the employee or consultant during the course of employment or
consultancy will be kept confidential and not disclosed to third parties except
in specific circumstances. The invention assignment generally provides that all
inventions conceived by the employee shall be the exclusive property of Cellegy.
In addition, it is our policy to require the collaborators and potential
collaborators to enter into confidentiality agreements. There can be no
assurance, however, that these agreements will provide meaningful protection for
our trade secrets.
Product Acquisitions
In June 2000, Cellegy acquired Quay Pharmaceuticals, an Australian
company marketing Rectogesic, a nitroglycerin ointment product similar to
Anogesic. The acquisition cost totaled $1,835,000, consisting of the aggregate
value of 169,224 shares with a value of $977,000, 171,146 warrants to purchase
common stock with a fair value of $489,000, and cash payments of $369,000.
Cellegy will continue to self-market Rectogesic in Australia through its
wholly-owned Cellegy Australia subsidiary and plans to sell Rectogesic through
distributors in the Pacific Rim countries and potentially other countries around
the world.
In December 1997, Cellegy acquired patent and related intellectual
property rights relating to Anogesic, a topical product candidate for the
treatment of anal fissures and hemorrhoids, from Neptune Pharmaceutical
Corporation. Pursuant to a letter of intent and a subsequent agreement between
the parties, we issued 462,809 shares of common stock to Neptune in 1997. The
agreement calls for a series of additional payments, payable in shares of common
stock, upon successful completion of various milestones tied to clinical trial
results and commercialization of the product in domestic and foreign markets. If
achieved, milestones would occur over the next several years. No milestone
payments have been made since 1997. Future potential milestones, payable in
Cellegy common stock, could result in the issuance of up to an additional
1,338,000 shares of Cellegy common stock based on the closing price of Cellegy
stock at the time of issuance. The agreement does not provide for the payment by
Cellegy of any future product royalties in connection with sales of Anogesic.
Principal License Agreements
University of California. In October 1993, Cellegy entered into a
license agreement with the University of California providing for an exclusive,
worldwide, royalty bearing license, subject to customary government rights, for
patent rights relating to barrier repair formulations jointly held by the
University and Cellegy, in consideration of the issuance to the University of
certain shares of preferred stock (which subsequently converted into shares of
common stock) and the payment by Cellegy of a licensing fee. In March 1994, we
entered into a second exclusive, worldwide, royalty bearing license agreement
with the University for patent rights, jointly held by the University and
Cellegy, relating to certain drug delivery technologies, in consideration of the
payment by Cellegy of a licensing fee, and an annual maintenance fee payable
each year until Cellegy is commercially selling a licensed product. In April
2000, Cellegy terminated the Exclusive License Agreement relating to barrier
repair formulations and assigned its rights in the invention to the University.
We are currently in the process of terminating our license for patent rights
relating to drug delivery technologies and assigning the rights to the
University as well. As a result of ongoing research in both barrier repair and
drug delivery, we have determined that commercialization of products derived
from these licenses is unlikely to occur. The termination of these licenses
reflects, in part, a shift towards
7
development of products from our own research efforts in areas we believe have
the potential to be more commercially viable
Government Regulation
FDA Requirements for Human Drugs. The research, testing, manufacturing,
labeling, distribution, and marketing of drug products are extensively regulated
by numerous governmental authorities in the United States and other countries.
In the United States, drugs are subject to rigorous FDA regulation. The Food,
Drug and Cosmetic Act (the "FD&C Act") and the regulations promulgated
thereunder, and other federal and state regulations govern, among other things,
the research, development, testing, manufacture, distribution, storage, record
keeping, labeling, advertising, promotion and marketing of pharmaceutical
products. The process of developing and obtaining approval for a new
pharmaceutical product within this regulatory framework requires a number of
years and the expenditure of substantial resources. There can be no assurance
that necessary approvals will be obtained on a timely basis, if at all.
Moreover, additional government regulations may be established that could
prevent or delay regulatory approval of our products. Delays in obtaining
regulatory approvals could have a material adverse effect on us. If we fail to
comply with applicable regulatory requirements for marketing drugs, or if our
cosmeceutical products are deemed to be drugs by the FDA, we could be subject to
administrative or judicially imposed sanctions such as warning letters, fines,
products recalls or seizures, injunctions against production, distribution,
sales, or marketing, delays in obtaining marketing authorizations or the refusal
of the government to grant such approvals, suspensions and withdrawals of
previously granted approvals, civil penalties and criminal prosecution of
Cellegy, our officers or our employees.
The steps ordinarily required before a new pharmaceutical product may
be marketed in the United States include: (i) preclinical laboratory tests,
animal studies and formulation studies; (ii) the submission to the FDA of an
Investigational New Drug Application ("IND"), which must become effective before
clinical testing may commence; (iii) adequate and well-controlled clinical
trials to establish the safety and efficacy of the product for its proposed
indication; (iv) the submission of a New Drug Application ("NDA") to the FDA;
and (v) FDA review and approval of the NDA prior to any commercial sale or
shipment of the drug. Compounds must be produced according to the FDA's current
Good Manufacturing Practice ("GMP") requirements, and preclinical tests must be
conducted in compliance with the FDA's Good Laboratory Practice regulations. The
results of preclinical testing are submitted to the FDA as part of an IND. The
FDA may, at any time, impose a clinical hold on ongoing clinical trials. If the
FDA imposes a clinical hold, clinical trials may not commence or recommence
without FDA authorization and then only under terms authorized by the FDA. In
some instances, the IND application process can result in substantial delay and
expense.
Clinical trials involve the administration of the investigational
product to healthy volunteers or patients under the supervision of a qualified
investigator. Clinical trials to support NDAs are typically conducted in three
sequential phases, which may overlap. In Phase I, the initial introduction of
the drug into healthy human subjects or patients, the drug generally is tested
to assess metabolism, pharmacokinetics, pharmacological action and safety,
including side effects associated with increasing doses, and if possible, to
gain early evidence on effectiveness. Phase II usually involves studies in a
limited patient population to (i) determine the efficacy of the drug for a
specific indication, (ii) determine dosage tolerance and optimal dosage and
(iii) identify possible short-term adverse effects and safety risks. If a
compound is found to be effective and to have an acceptable safety profile in
Phase II evaluations, Phase III trials are undertaken to further evaluate
clinical efficacy and to further test for safety within an expanded patient
population at geographically dispersed clinical study sites. A clinical trial
may combine the elements of more than one phase, and typically two or more Phase
III studies are required. There can be no assurance that Phase I, Phase II or
Phase III testing will be completed within any specific time period, if at all.
Cellegy's prescription products, and our ongoing research and clinical
activities such as those relating to Anogesic, Tostrex, and Tostrelle are
subject to extensive regulation by governmental regulatory authorities in the
United States and other countries. Extensive current pre-clinical and clinical
testing requirements and the regulatory approval process of the FDA in the
United States and of certain foreign regulatory authorities, or additional
future government regulations, could prevent or delay regulatory approval of
Cellegy's products. Notwithstanding our current relationships with those
authorities, disagreements may occur in the future, and one or more of our
ongoing or planned clinical trials could be delayed or repeated in order to
satisfy regulatory requirements. For example, if our expanded Phase I/II
pharmakokinetic study regarding Tostrelle is successful, we plan to meet with
the FDA to
8
discuss future trials, and the FDA could impose requirements on future trials
that could delay the regulatory approval process. Sales of Cellegy's products
outside the United States are subject to regulatory requirements governing
clinical trials and marketing approval. These requirements vary widely from
country to country and could delay introduction of Cellegy's products in those
countries.
Our clinical trial results are very difficult to predict in advance,
and failure of one or more clinical trials could adversely affect our business
and our stock price. Before we obtain regulatory approval for the commercial
sale of most potential drug products, we must demonstrate through pre-clinical
studies and clinical trials that the product is safe and efficacious for use in
the clinical indication for which approval is sought. We cannot assure you that
the FDA or other international regulatory authorities will permit us to
undertake any future clinical trials for potential products or to continue any
of the current clinical trials. To date, we have not sought FDA approval to
distribute any products. Moreover, results of pre-clinical studies and early
clinical trials may not be good predictors of results that will be obtained in
later-stage clinical trials. We cannot assure you that Cellegy's present or
future clinical trials, including for example, the current Phase III clinical
trials using our Anogesic and Tostrex products, or the current Phase I/II dose
ranging study for Tostrelle, will demonstrate the result required for approval
to market these potential products or even to continue with additional clinical
development. Because of the independent and blind nature of certain human
clinical testing, there will be extended periods during the testing process when
we will have only limited, or no access to information about the status or
results of the tests, including Phase III clinical trials, to be inadequate or
unsatisfactory, or that FDA Advisory Committees have declined to recommend
approval of the drugs, or that the FDA itself refused approval, with the result
that such companies' stock prices have fallen precipitously. If Anogesic or
Tostrex fail to successfully complete the current Phase III trials or related
clinical testing, including toxicology studies, our business and stock price
would be materially and adversely affected.
New and Abbreviated New Drug Applications. After completion of the
required clinical testing, generally an NDA is submitted. FDA approval of the
NDA (or, in the alternative, an Abbreviated New Drug Application ("ANDA"), as
described below) is required before marketing may begin in the United States.
The NDA must include the results of extensive clinical and other testing and the
compilation of data relating to the product's chemistry, pharmacology and
manufacture, the cost of all of which is substantial. The FDA reviews all NDAs
submitted before it accepts them for filing and may request additional
information rather than filing an NDA. The review process is often extended
significantly by FDA requests for additional information or clarification. The
FDA may refer the application to the appropriate advisory committee, typically a
panel of clinicians, for review, evaluation and a recommendation as to whether
the application should be approved. The FDA is not bound by the recommendation
of an advisory committee. During the review process, the FDA generally will
conduct an inspection of the relevant drug manufacturing facilities and clinical
sites to ensure that the facilities are in compliance with applicable Good
Manufacturing Practices ("GMP") requirements. If FDA evaluations of the NDA
application, manufacturing facilities, and clinical sites are favorable, the FDA
may issue either an approval letter or a not approvable letter, which contains a
number of conditions that must be met in order to secure approval of the NDA.
When and if those conditions have been met to the FDA's satisfaction, the FDA
will issue an approval letter, authorizing commercial marketing of the drug for
certain specific indications. If the FDA's evaluation of the NDA submission or
manufacturing facilities is not favorable, the FDA may refuse to approve the NDA
or issue a not approvable letter, outlining the deficiencies in the submission
and often requiring additional testing or information. Notwithstanding the
submission of any requested additional data or information in response to an
approvable or not approvable letter, the FDA ultimately may decide that the
application does not satisfy the regulatory criteria for approval. Even if FDA
approval is obtained, a marketed drug product and its manufacturer are subject
to continual review and inspection, and later discovery of previously unknown
problems with the product or manufacturer may result in restrictions or
sanctions on such product or manufacturer, including withdrawal of the product
from the market.
Possible Regulation of Cosmeceutical Products as Drugs.
"Cosmeceuticals" are not defined in the FD&C Act. The FDA has not defined the
term by regulation and may consider use of the term to imply drug-like
qualities. The FDA will regulate a particular cosmeceutical product as a drug or
a cosmetic (or both a drug and a cosmetic) depending primarily upon the
manufacturer's intended use for such product. Such intent may be determined from
labeling, advertising, promotional and marketing materials, and any other source
attributable to the manufacturer or its employees, representatives or agents.
Under the FD&C Act, drugs are articles intended for use in the diagnosis, cure,
mitigation, treatment or prevention of disease or to affect the structure or
function of the body. By comparison, cosmetic products are defined as articles
intended to be rubbed, poured, sprinkled or sprayed on, introduced into or
otherwise applied to the body for cleansing, beautifying, promoting
attractiveness or altering its appearance. Some
9
products, however, may satisfy the definition of a drug and a cosmetic, and the
FDA has generally regulated as drugs products that are intended to have a
physiological effect on the body, for example, to alter the skin in more than a
temporary way. Unlike drugs, products that constitute cosmetics (but not drugs
as well) under the FD&C Act do not require pre-market review or approval of the
FDA, but cosmetics must be safe under normal conditions of use, and comply with
FDA labeling and manufacturing requirements. Furthermore, the Federal Trade
Commission ("FTC"), as well as state and local authorities, oversees the
advertising of cosmetic products and prohibits false, misleading, deceptive or
unsubstantiated advertising. The FTC has the authority to seek a number of
remedies against a company that it believes fails to comply with its
requirements, including, but not limited to, preliminary injunctive relief.
We plan to label, market, promote, advertise and distribute our
cosmeceutical products with claims intended to be within the statutory
definition of cosmetic. There can be no assurance, however, that the FDA will
not determine that some or all of our cosmeceutical products are drugs, and are
therefore subject to more stringent regulatory oversight, including pre-market
approval, based on their intended use or ingredients.
The FDA has at times in the past contended, and may in the future
contend, that one or more cosmeceutical products, including Cellegy's or
competitors' anti-wrinkling or skin rejuvenating products that are currently
marketed or may in the future be marketed, are not cosmetics but instead are
subject to regulation as drugs. Even if the FDA were not ultimately to prevail
with regard to such a contention, such a claim by the FDA could have a material
adverse effect on our ability to market our proposed cosmeceutical products and
could significantly delay or prohibit marketing of such products.
OTC Monograph. Most over the counter ("OTC") drug products marketed in
the United States are not subjected to the FD&C Act's pre-market approval
requirements. In 1972, the FDA instituted the ongoing OTC Drug Review to
evaluate the safety and effectiveness of OTC drugs then on the market. Through
this process, the FDA issues monographs that set forth the specific active
ingredients, dosages, indications and labeling statements for OTC drugs that the
FDA will consider generally recognized as safe and effective and therefore not
subject to pre-market approval. For certain categories of OTC drugs not yet
subject to a final monograph, the FDA usually will not take regulatory action
against such a product unless failure to do so poses a potential health hazard
to consumers. OTC drugs not covered by pending or final OTC monographs, however,
are subject to pre-market review and approval by the FDA through the NDA/ANDA
mechanism. Even if Cellegy seeks FDA approval of a product for OTC consumer
sales, the FDA could instead require that the product be distributed by
prescription only. Such a requirement could delay for several years, or
indefinitely, distribution of our products directly to consumers.
Manufacturing. Each domestic drug manufacturing facility must be
registered with the FDA. Domestic drug and, to a lesser extent, cosmetic
manufacturing establishments are subject to routine inspection by the FDA and
other regulatory authorities and must comply with GMP requirements (albeit less
extensive ones for cosmetics than for drugs), and any applicable state or local
regulatory requirements. We intend to use contract manufacturers that operate in
conformance with these requirements to produce our compounds and finished
products in commercial quantities. There can be no assurance that manufacturing
or quality control problems will not arise at the manufacturing plants of our
contract manufacturers or that such manufacturers will be able to maintain the
compliance with the FDA's GMP requirements necessary to continue manufacturing
our products.
Foreign Regulation of Drugs. Whether or not FDA approval has been
obtained, approval of a product by comparable regulatory authorities may be
necessary in foreign countries before the commencement of marketing of the
product in such countries. The approval procedures vary among countries, can
involve additional testing, and the time required may differ from that required
for FDA approval. Although there are some procedures for unified filings for
certain European countries, in general each country has its own procedures and
requirements, many of which are time consuming and expensive. Thus, there can be
substantial delays in obtaining required approvals from both the FDA and foreign
regulatory authorities after the relevant applications are filed. We expect to
rely principally on corporate partners, licensees and contract research
organizations, along with our expertise, to obtain foreign governmental approval
in foreign countries of drug formulations utilizing its compounds.
Other Government Regulation. In addition to regulations enforced by the
FDA, Cellegy is also subject to regulation under the Occupational Safety and
Health Act, the Environmental Protection Act, the Toxic Substances Control Act,
the Resource Conservation and Recovery Act and other similar federal and state
laws regarding, among other things, occupational safety, the use and handling of
radioisotopes, environmental protection and
10
hazardous substance control. Although we believe that we have complied with
these laws and regulations in all material respects and have not been required
to take any action to correct any noncompliance, there can be no assurance that
Cellegy will not be required to incur significant costs to comply with
environmental and health and safety regulations in the future. Our research and
development involves the controlled use of hazardous materials, chemicals, and
various radioactive compounds. Although we believe that our safety procedures
for handling and disposing of such materials comply with the standards
prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, Cellegy could be held liable for any damages that
result and any such liability could exceed our resources.
Health Care Reform. In the United States, there have been, and Cellegy
expects there will continue to be, a number of federal and state proposals to
implement cost controls and other health care regulatory measures. Future
legislation could result in a substantial restructuring of the health care
delivery system. While we cannot predict whether any legislative or regulatory
proposals will be adopted or the effect such proposals may have on our business,
the uncertainty of such proposals could have an adverse effect on our ability to
raise capital and to identify and reach agreements with potential partners, and
the adoption of such proposals could have an adverse effect on Cellegy. In both
domestic and foreign markets, sales of our therapeutic products, if any, will
depend in part on the availability of reimbursement from third-party payors.
Third-party payors and others increasingly are challenging the prices charged
for medical products and services. There can be no assurance that our products
will be considered cost effective, that reimbursement will be available. We
cannot predict the outcome of any government or industry reform initiatives or
the impact thereof on our financial position or results of operations.
Restrictions on Physician Marketing. The American Medical Association
("AMA") is questioning the ethics of physicians selling cosmeceutical products
for a significant profit. Hearings on this subject by state medical
organizations are occurring and will continue to occur over the next years. Any
action by the AMA reducing profits to physicians from such sales may reduce the
number of physicians selling such products.
Competition
The pharmaceutical and cosmeceutical industries are characterized by
extensive research efforts and rapid and significant technological change. In
the development and marketing of topical prescription drugs, cosmeceutical and
skin care products, and drug delivery systems, Cellegy faces intense
competition. Competitors of Cellegy in the United States and abroad are numerous
and include, among others, major pharmaceutical, cosmetic, chemical, consumer
product, and biotechnology companies, specialized firms, universities and other
research institutions. There can be no assurance that our competitors will not
succeed in developing technologies and products that are safer, more effective
or less costly than any which are being developed by us or that would render our
technology and potential products obsolete and noncompetitive. Many of these
competitors have substantially greater financial and technical resources,
production and marketing capabilities and regulatory experience than us. Even if
our products should prove to be more effective than those developed by other
companies, other companies may be more successful than we are because of greater
financial resources, greater experience in conducting pre-clinical studies and
clinical studies and in obtaining regulatory approval, stronger sales and
marketing efforts, earlier receipt of approval for competing products and other
factors. If we commence significant commercial sales of our products, we or our
collaborators will compete in areas in which we have little or no experience,
such as manufacturing and marketing. In addition, many of our competitors have
significantly greater experience in pre-clinical testing and human clinical
trials of pharmaceutical products and in obtaining FDA and other regulatory
approvals of products for use in health care. In addition, these companies and
academic and research institutions compete with us in recruiting and retaining
highly qualified scientific and management personnel.
Therapies for sexual dysfunction and women's health product represent a
very large market opportunity, especially as the overall population continues to
age. As the size of the market continues to grow, the competition will expand.
The approval and marketing of competitive products and other products that treat
the indications targeted by Cellegy could adversely affect the market acceptance
of Cellegy's products. The presence of directly competitive products could also
result in more intense price competition than might otherwise exist, which could
have a material adverse effect on Cellegy. Cellegy believes that competition
will be intense for all of its products.
11
Employees
As of February 22, 2001, we had 30 full-time and two part-time
employees. Twenty-one of these employees, 2 of whom are M.D's and another 8 are
Ph.D.'s, are engaged in research and development. In addition, we utilize the
services of several professional consultants, as well as contract manufacturing
and research organizations to supplement our internal staff's activities. None
of our employees are represented by a labor union. We have experienced no work
stoppages and we believe that our employee relations are good.
ITEM 2: PROPERTIES
Cellegy currently leases 65,340 square feet of space located in South
San Francisco. Approximately, 33,154 square feet of this space, is in turn,
subleased to two companies under sublease agreements. The primary sublease
expires on December 17, 2001, but may be extended under certain circumstances
described in the agreement. Total rental income from rent payments to Cellegy is
estimated at $847,000 for 2001. We believe our current facilities will be
adequate for our needs for at least the next five years.
We also sublease our previous administrative offices in Foster City,
California to another company. The rent is currently $11,798 per month. Our
lease and the sublease term expire on July 31, 2001.
ITEM 3: LEGAL PROCEEDINGS
Cellegy is not a party to any material legal proceedings.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our shareholders during the
fourth quarter of the year ended December 31, 2000.
ITEM 4A: EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
The directors and executive officers of Cellegy are as follows:
Name Age Position
K. Michael Forrest 57 Chairman, President, Chief
Executive Officer and Director
Daniel L. Azarnoff, M.D. 74 Sr. Vice President, Clinical and
Regulatory Affairs
John J. Chandler 59 Vice President, Business
Development
A. Richard Juelis 52 Vice President, Finance and
Chief Financial Officer
Felix J. Baker, Ph.D. (1) 31 Director
Julian C. Baker (2) 34 Director
Jack L. Bowman (1) 68 Director
Tobi B. Klar, M.D. 46 Director
Ronald J. Saldarini, Ph.D. (2) 61 Director
Alan A. Steigrod (1) 63 Director
Carl R. Thornfeldt, M.D. 49 Director
Larry J. Wells (2) 58 Director
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12
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
K. Michael Forrest. Mr. Forrest became Chairman in May 2000 and has
been President, CEO, and a director since December 1996. From January 1996 to
November 1996, he served as a biotechnology consultant. From November 1994 to
December 1995, he served as President and CEO of Mercator Genetics, a public
biotechnology company. From March 1991 to June 1994, he served as President and
CEO of Transkaryotic Therapies, Inc., a public biotechnology company. From 1968
to 1991, Mr. Forrest held a series of positions with Pfizer, Inc. and senior
management positions with American Cyanamid, including Vice President of Lederle
U.S. and Lederle International. He is a director of AlphaGene Inc., a private
functional genomics company, and INEX Pharmaceuticals, a public company
developing anti-cancer products.
Carl R. Thornfeldt, M.D. Dr. Thornfeldt is a co-founder and a director,
as well as a physician, board certified in dermatology. Dr. Thornfeldt served
as acting CEO from July 1996 to December 1996. In addition, Dr. Thornfeldt
served as Vice President, Research and Development from October 1994 until May
1996. Since 1983, Dr. Thornfeldt has maintained a private dermatology practice
and is an Assistant Clinical Professor in Dermatology at the University of
Oregon Health Sciences Center. Dr. Thornfeldt received his M.D. from the
University of Oregon Health Sciences Center. He completed his dermatology
residency at the University of California, San Diego.
Daniel L. Azarnoff, M.D. Dr. Azarnoff joined Cellegy as Vice President,
Clinical and Regulatory Affairs in October 1997. He became Senior Vice President
in July 1999, and in February of 2001 assumed the position of Sr, Vice President
of Medical and Regulatory Affairs and was given the additional reponsibility of
Medical Director. Since January 1986, Dr. Azarnoff has been President of D.L.
Azarnoff Associates and will continue consulting to the industry on a part-time
basis. From August 1978 to December 1985, he served as President of Research and
Development at G.D. Searle and Co. From July 1967 to August 1978, he was KUMC
Distinguished Professor of Medicine and Pharmacology, as well as the Director of
the Clinical Pharmacology-Toxicology Center at the University of Kansas Medical
Center. Dr. Azarnoff has also served as a member of advisory and expert
committees within the Food and Drug Administration, World Health Organization,
American Medical Association, National Academy of Sciences and National
Institutes of Health. He received his M.D. from the University of Kansas Medical
School. Dr. Azarnoff was a director of Cibus Pharmaceutical through 1998, and is
currently director of Western Center Clinical Trials, and Entropin, Inc.
John J. Chandler. Mr. Chandler became Vice President, Corporate
Development in May 1998. From January 1995 to March 1998, he served as Vice
President, Europe for the Medical Device Division of American Home Products.
During 1994, he was Area Director, Europe/Latin America for American Home
Products. From 1968 to 1993, he held a series of management and senior
management positions with American Cyanamid Company. Mr. Chandler holds an
M.B.A. in Marketing from Seton Hall University and a B.S. in Biology from the
Queens College of the City University of New York.
A. Richard Juelis. Mr. Juelis became Vice President, Finance and Chief
Financial Officer in November 1994. From January 1993 to September 1994 he
served as Vice President, Finance and Chief Financial Officer for VIVUS, Inc., a
publicly traded drug delivery company. From October 1990 to December 1992, he
served as Vice President, Finance and Chief Financial Officer at XOMA
Corporation, a public biotechnology company. Mr. Juelis has also held domestic
and international financial and general management positions with
Hoffmann-LaRoche from 1976 to 1982, and Schering-Plough from 1983 to 1990.
Felix J. Baker, Ph.D. Dr. Baker became a director in May 2000. He has
managed healthcare investments for the Tisch Family since 1994, as well as other
investment partnerships focused on the life sciences industry. Dr. Baker is a
director of Neurogen Corporation, a public pharmaceutical company, and several
private companies. He holds a B.S. with honors and a Ph.D. in Immunology from
Stanford University.
Julian C. Baker. Mr. Baker became a director in December 2000. He has
managed healthcare investments from several investment funds including funds for
the Tisch Family since 1994. Previously, Mr. Baker was a investment banker with
the Merchant Banking Division of Credit Suisse First Boston. Mr. Baker is a
director of Neurogen Corporation, a public pharmaceutical company, and several
private companies. He holds a B.A., magna cum laude, from Harvard University.
13
Jack L. Bowman. Mr. Bowman became a director in December 1996. He is
currently a consultant to various pharmaceutical and biotechnology industry
groups. From August 1987 to January 1994, he was Company Group Chairman at
Johnson & Johnson, where he managed much of its global diagnostic and
pharmaceutical businesses. Before then, Mr. Bowman held executive positions with
CIBA-Geigy and American Cyanamid, where he had responsibility for worldwide
pharmaceutical, medical device, and consumer product divisions. He is currently
a director of Celgene Corporation, NeoRx Corp., CytRx Corp., Cell Therapeutics,
Inc., Targeted Genetics, Inc. and Osiris Therapeutics, and is the Chairman of
Reliant Pharmaceuticals.
Tobi B. Klar, M.D. Dr. Klar became a director in June 1995. She is a
physician, board certified in dermatology. Since 1986, Dr. Klar has maintained a
private dermatology practice and has served as Co-Chairperson of the Department
of Dermatology at New Rochelle Hospital Medical Center, New Rochelle, New York,
and Associate Clinical Professor in dermatology at Albert Einstein Medical
Center in New York City. Dr. Klar holds a M.D. from the State University of New
York.
Ronald J. Saldarini, Ph.D. Dr. Saldarini became a director in July
1999, after retiring from American Home Products (AHP). He is currently a
director of Idun Pharmaceuticals, Therion Biologics, Alphavax and Medarex, Inc.
He serves on two committees (Military Vaccines, Immunization Finance) at the
National Academy of Sciences Institute of Medicine and is a consultant to the
Malaria Vaccine Initiative. He is also an associate with Naimark and Associates,
a consulting firm, which provides service to the healthcare industry. Prior to
his board membership, he was the President of Wyeth Lederle Vaccines and
Pediatrics, a division of AHP from January 1995 to June 1999. He was also
President of the Lederle-Praxis Biologicals Division from 1989 through 1994. He
has been a member of the National Vaccine advisory Committee and the National
Advisory Commission on Childhood Vaccines. He received his Ph.D. from the
University of Kansas in Biochemistry and Physiology.
Alan A. Steigrod. Mr. Steigrod became a director in July 1996. Since
January 1996 he has been Managing Director of Newport HealthCare Ventures, which
invests in and advises biopharmaceutical companies. From March 1993 to November
1995, he served as President and CEO of Cortex Pharmaceuticals, Inc. From
February 1991 to February 1993, he worked as a biotechnology consultant. From
March 1981 through February 1991, Mr. Steigrod held a series of executive
positions with Glaxo, Inc., serving as Chairman of Glaxo's operating committee,
as well as on its board of directors. Prior to Glaxo, Mr. Steigrod held a number
of senior management positions with Boehringer Ingelheim, Ltd. and Eli Lilly &
Co. He is a director of Sepracor Inc. and NeoRx Corporation.
Larry J. Wells. Mr. Wells became a director in 1989. For the past
seventeen years, he has been a venture capitalist. He is the President of Wells
Investment Group, the General Partner of Daystar Partners, and the founder of
Sundance Venture Partners, L.P., a venture capital fund. Mr. Wells is a director
of Identix, Inc., Isonics Corp., Wings America and CCF Brands.
Directors hold office until the next annual meeting of shareholders and
until their respective successors have been elected and qualified. Executive
officers are chosen by and serve at the discretion of the Board of Directors,
subject to any written employment agreements with the Company.
Standing committees of the Board include an Audit Committee and a
Compensation Committee. Mr. Wells, Mr. J. Baker and Dr. Saldarini are current
members of the Audit Committee. The Audit Committee reviews the Company's
accounting practices, internal control systems and meets with the Company's
outside auditors concerning the scope and terms of their engagement and the
results of their audits. Dr. Felix Baker and Messrs. Bowman and Steigrod are the
current members of the Compensation Committee. The Compensation Committee
recommends compensation for officers and employees of the Company, and grants
options and stock awards under the Company's employee benefit plans.
14
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
Cellegy's common stock currently trades on The Nasdaq Stock Market
under the symbol "CLGY." The following table sets forth the range of high and
low sales prices for the common stock as reported on The Nasdaq Stock Market for
the periods indicated below.
2000 High Low
- ---- ----- ----
First Quarter........................................ $ 9.97 $ 3.25
Second Quarter....................................... 8.25 4.69
Third Quarter........................................ 9.43 8.00
Fourth Quarter....................................... 8.00 4.38
1999
First Quarter........................................ $ 4.63 $ 3.50
Second Quarter....................................... 5.44 3.31
Third Quarter........................................ 8.88 5.00
Fourth Quarter....................................... 10.88 3.16
Holders
As of February 22, 2001, there were approximately 125 shareholders of
record excluding beneficial holders of stock held in street name.
Dividend Policy
We have never paid cash or declared dividends on our common stock. We
do not anticipate that we will declare or pay cash dividends on our common stock
in the foreseeable future.
15
ITEM 6: SELECTED FINANCIAL DATA
Period From
June 26,
1989
(Inception)
($000's) Through
1996 1997 1998 1999 2000 2000
-------- -------- -------- -------- -------- --------
Statement of Operations Data:
Revenues ....................................... $ 648 $ 828 $ 832 $ 1,045 $ 1,586 $ 6,068
Costs and expenses ............................. 4,346 9,238 9,266 10,847 13,274 57,931
-------- -------- -------- -------- -------- --------
Loss from operations ........................... (3,698) (8,410) (8,434) (9,802) (11,689) (51,863)
Interest income (expense) and other,
net ............................................ 330 556 1,068 501 271 2,400
-------- -------- -------- -------- -------- --------
Net loss ....................................... (3,368) (7,854) (7,366) (9,301) (11,418) (49,463)
Non-cash preferred dividends ................... 1,414 35 -- -- -- 1,449
-------- -------- -------- -------- -------- --------
Net loss applicable to common
shareholders ................................. $ (4,782) $ (7,889) $ (7,366) $ (9,301) $(11,418) $(50,912)
======== ======== ======== ======== ======== ========
Basic and diluted net loss per common
shareholder .................................... $ (1.11) $ (1.18) $ (0.73) $ (0.85) $ (0.91)
======== ======== ======== ======== ========
Weighted average common shares
outstanding .................................... 4,307 6,670 10,160 10,914 12,542
As of December 31,
----------------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Balance Sheet Data:
Cash, cash equivalents and investments ......... $ 7,315 $ 21,726 $ 15,220 $ 16,737 $ 15,923 (1)
Total assets ................................... 7,696 22,751 19,484 20,913 21,259
Deficit accumulated during the
development stage ............................ (14,937) (22,826) (30,192) (39,494) (50,912)
Total shareholders' equity ..................... 7,387 21,354 14,218 15,839 18,794
<FN>
(1) Includes restricted cash of $614
</FN>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual Report on Form 10-K includes forward-looking statements
that involve substantial risks and uncertainties. These forward-looking
statements are not historical facts, but rather based on current expectations,
estimates and projections about our industry, our beliefs and our assumptions.
Words such as "believes," "anticipates," "expects," "intends" and similar
expressions are intended to identify forward-looking statements, but are not the
exclusive means of identifying such statements. These forward-looking statements
are not guarantees of future performance and concern matters that involve risks
and uncertainties that could cause actual results to differ materially from
those in the forward-looking statements. These risks and uncertainties include
those described in "Factors That May Affect Future Operating Results" and
elsewhere in this Annual Report. Except as required by law, we undertake no
obligation to revise any forward-looking statements in order to reflect events
or circumstances that may arise after the date of this Annual Report. Actual
events or results may differ materially from those discussed in this Annual
Report.
16
Cellegy Pharmaceuticals, Inc., a specialty biopharmaceutical company
incorporated in California in 1989, is engaged in the development of
prescription drugs and skin care products. We are developing several
prescription drugs, including Anogesic, a nitroglycerin-based product for the
treatment of anal fissures and hemorrhoids and two transdermal testosterone gel
products, Tostrex, for the treatment of male hypogonadism, a condition that
affects men, generally above the age of forty, and Tostrelle, for the treatment
of sexual dysfunction in menopausal women. We are testing and developing a line
of anti-wrinkling cosmeceutical products which we believe will address the skin
care needs of an affluent and aging population.
General
In December 1997, we completed an asset purchase agreement with Neptune
Pharmaceutical Corporation to acquire patent and other intellectual property
rights relating to Anogesic. Our expenses relating to Anogesic product
development and clinical trials are expected to increase during the remainder of
2001 as a result of the on-going activities associated with the second
confirmatory Phase III clinical trial initiated in 2000.
In September 1998, we began initial shipments and product sales of C79
Intensive Moisturizing formulation to Gryphon Development Inc., the product
development arm of a major specialty retailer. C79 is a key ingredient in a line
of healing hand creams sold at most of the specialty retailer's stores in the
United States.
In June 2000, we acquired all assets of the Australian company, Quay
Pharmaceuticals Pty Ltd, an Australian pharmaceutical company producing
Rectogesic, a drug similar to Anogesic. The acquired assets consisted of Quay's
inventory, other tangible assets, and purchased technology. The aggregate
purchase price of $1,835,000 included an aggregate value of 169,224 shares of
our common stock paid to Quay with an estimated value of $977,000, the warrants
to purchase 171,146 shares of common stock with an estimated value of $489,000,
and cash payments of $369,000. The purchase price was allocated to net tangible
assets of $97,000, purchased technology of $770,000, and goodwill of $968,000
based on their estimated fair values on the acquisition date. Purchased
technology and goodwill are being amortized over three and ten years,
respectively.
In October 2000, Cellegy completed a private placement of 1.5 million
shares of its common stock, resulting in $11.6 million of gross proceeds to
Cellegy. Participants in the financing included three institutional investors.
Results of Operations
Years Ended December 31, 2000, 1999 and 1998
Revenues. Cellegy had revenues of $1,586,000, $1,045,000, and $832,000
in 2000, 1999 and 1998, respectively. Revenues in 2000 consisted of $1,389,000
in product sales to Gryphon Development, the product development arm of a major
specialty retailer, $125,000 in Rectogesic sales in Australia and $72,000 in
SBIR grant funding. The increase of $541,000 in 2000 compared with 1999 is due
primarily to an increase in product sales to Gryphon Development of $491,000,
Rectogesic sales in Australia of $125,000 offset by a decrease in development
funding from Glaxo of $74,000. The increase in 1999 compared with 1998 was
primarily due to a $440,000 increase in Gryphon sales offset by grant funding
which was $227,000 lower in 1999.
Research and Development Expenses. Research and development expenses
were $9,276,000 in 2000 compared with $7,965,000 in 1999, and $6,668,000 in
1998. The increase of $1,311,000 in 2000 was primarily due to increase in
spending associated with Anogesic Phase III and Phase II clinical trials, as
well as Phase III and Phase I/II testosterone gel clinical studies for both men
and women. In addition to clinical site payments, clinical costs include costs
of manufacturing clinical supplies and costs associated with product stability
studies. The increase of $1,297,000 in 1999 compared with 1998 was due to an
increase in Anogesic clinical trial expenses. In each of the three years, we
incurred higher utility expenses than the preceding year associated with our new
laboratory facilities in South San Francisco, California.
We expect our research spending in 2001 to be, at least, equal to or
higher than 2000 levels, primarily in support of our Phase III Anogesic clinical
trial, as well as two hemorrhoid trials using Anogesic and Tostex and Tostrelle
trials. In addition, utility rates are expected to be substantially higher in
2001 than prior years.
General and Administrative Expenses. General and administrative
expenses were $3,631,000 in 2000, compared with $2,613,000 in 1999 and
$2,485,000 in 1998. The increase of $1,018,000 in 2000 was due to travel,
consulting,
17
expenses associated with our business development programs and non-cash
compensation charges related to certain warrant grants. The minor increase of
$128,000 in 1999 compared with 1998 was due to increased rent and other utility
expenses related to Cellegy's office facility, offset by professional fees in
connection with construction and design of our new facility, as well as higher
personnel related expenses. Our general and administrative expenses are expected
to continue to increase in the future in support of our research and product
commercialization efforts.
Acquired-In-Process Technology. No acquired-in-process technology
expenses were incurred during 2000 and 1999, and 1998. The charge of $3,843,000
was incurred in 1997. This non-cash charge to operations resulted from common
stock issued pursuant to the Anogesic purchase agreement we signed with Neptune
in 1997. We expect to have additional non-cash charges in future years,
including 2001, if certain milestones are achieved. Although the dollar amount
of future milestone payments is fixed by the agreement, the amount of the
non-cash accounting charge will vary as a function of the share price of
Cellegy's common stock at the time the milestone is achieved.
Interest Income and Other, Net and Interest Expenses. Cellegy
recognized $693,000 in interest income for 2000 compared with $864,000 for 1999
and $1,091,000 for 1998. Fluctuations in interest income earned were tied
primarily to changes in average investment balances during each period and lower
investment balances in 2000 compared with the prior years. Interest expense in
2000 was $201,000 compared with $363,000 in interest expense during 1999. Lower
interest expense in 2000 reflects lower average loan balances reflecting our
pay-down of bank borrowings. Other income includes rental income from our sub-
lessees of $80,000 earned during the month of December 2000. Cellegy's current
sub-lease agreement, expiring in December 2001, will result in significant
rental income throughout 2001. Other expense consists of the amortization of
intangible assets related to the acquisition of Quay Pharmaceuticals Pty Ltd.
Net Loss. The net loss applicable to common shareholders in 2000 was
$11,418,000 or $0.91 per share based on 12,542,000 weighted average shares
outstanding compared with $9,301,000 or $0.85 per share in 1999 based on
10,914,000 weighted average shares outstanding and a net loss of $7,366,000 or
$0.73 per share in 1998 based on 10,160,000 weighted average shares outstanding.
Liquidity and Capital Resources
We have experienced net losses and negative cash flow from operations
each year since our inception. Through December 31, 2000, we had incurred an
accumulated deficit of $50.9 million and had consumed cash from operations of
$41.7 million. Cash from equity financing transactions have included $6.4
million in net proceeds from our initial public offering in August 1995, $6.8
million in net proceeds from a preferred stock financing in April 1996, $3.8
million in net proceeds from a private placement of common stock in July 1997,
$13.8 million in net proceeds from a follow-on public offering in November 1997,
$10.0 million in net proceeds from a private placement in July 1999 and $11.6
million in net proceeds from a private placement in October 2000. In June 1998,
we entered into a loan agreement with a commercial bank to provide up to $4.5
million with an initial interest rate at the bank's prime lending rate plus
three quarters of one percentage point (10.25% at December 31, 2000). In
December 1999, the loan was amended to include a revolving credit line allowing
us to pay down principal balances at any time or increase borrowings up to a
maximum of $2.5 million. As of December 31, 2000, $0.9 million was outstanding
under this arrangement.
Our cash and investments were $15.9 million at December 31, 2000, of
which $614,000 is classified as restricted cash, compared with $16.7 million at
December 31, 1999. The decrease in cash and investments of $0.8 million was
principally due to net proceeds from the financing completed in October 2000
offset by net cash used in operating activities and in the acquisition of Quay
Pharmaceuticals completed in June 2000. Our operations have used and will
continue to use substantial amounts of cash. Future expenditures and capital
requirements depend on numerous factors including, without limitation, the
progress and focus of our research and development programs, the progress and
results of pre-clinical and clinical testing, the time and costs involved in
obtaining regulatory approvals, the costs of filing, prosecuting, defending and
enforcing any patent claims and other intellectual property rights, our ability
to establish new collaborative arrangements, the initiation of commercialization
activities, the purchase of capital equipment, and the availability of other
financing.
In order to complete the research and development and other activities
necessary to commercialize our products, additional financing will be required.
As a result, we will seek private or public equity investments and future
collaborative arrangements or other transactions with third parties to meet such
needs. There is no assurance that such financing will be available for us to
fund our operations on acceptable terms, if at all. Insufficient funding may
require us to delay, reduce or eliminate some or all of its research and
development activities, planned clinical trials and administrative programs. We
believe that available cash resources and the interest thereon will be adequate
to satisfy our capital needs through at least December 31, 2001.
18
Factors That May Affect Future Operating Results
This report contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ significantly from the results
discussed in this Annual Report. Factors that might cause such a difference
include, but are not limited to, those discussed below.
We have a history of losses, and we expect losses to continue for at least
several years.
Our accumulated deficit as of December 31, 2000 was approximately $50.9
million. We have never operated profitably and, given our planned level of
operating expenses, we expect to continue to incur losses for at least the next
several years. We plan to increase our operating expenses as we continue to
devote significant resources to pre-clinical studies, clinical trials,
administrative, marketing and patent activities. We have not generated any
significant revenues from royalties or licensing of our technologies, and we
expect that it will take several years for our major prescription products to be
approved in the larger pharmaceutical markets. Accordingly, without substantial
revenues from new corporate collaborations, royalties on product sales or other
revenue sources, we expect to incur substantial and increased operating losses
in the foreseeable future as our earlier stage potential products move into
clinical development, and as we invest in research or acquire additional
technologies, product candidates or businesses. Our losses may increase in the
future, and even if we achieve our revenue targets, we may not be able to
sustain or increase profitability on a quarterly or annual basis. The amount of
future net losses, and the time required to reach profitability, are both highly
uncertain. To achieve sustained profitable operations, we must, among other
things, successfully discover, develop, obtain regulatory approvals for and
market pharmaceutical or cosmeceutical products. We cannot assure you that we
will ever be able to achieve or sustain profitability.
Our clinical trial results are very difficult to predict in advance, and failure
of one or more clinical trials could adversely affect our business and our stock
price.
Before we obtain regulatory approval for the commercial sale of most
potential drug products, we must demonstrate through pre-clinical studies and
clinical trials that the product is safe and efficacious for use in the clinical
indication for which approval is sought. We cannot assure you that the FDA or
other international regulatory authorities will permit us to undertake any
future clinical trials for potential products or to continue any of the current
clinical trials. To date, we have not sought FDA approval to distribute any
products. Moreover, results of pre-clinical studies and early clinical trials
may not be good predictors of results that will be obtained in later-stage
clinical trials. We cannot assure you that Cellegy's present or future clinical
trials, including for example, the current Phase III clinical trials using our
Anogesic and Tostrex products, or the current Phase I/II dose ranging study for
Tostrelle, will demonstrate the results required for approval to market these
potential products or even to continue with additional clinical development.
Because of the independent and blind nature of certain human clinical testing,
there will be extended periods during the testing process when we will have only
limited, or no, access to information about the status or results of the tests,
and this is the case with our current Phase III Anogesic clinical trial. Other
pharmaceutical companies have believed that their products performed
satisfactorily in early tests, only to find their performance in later tests,
including Phase III clinical trials, to be inadequate or unsatisfactory, or that
FDA Advisory Committees have declined to recommend approval of the drugs, or
that the FDA itself refused approval, with the result that such companies' stock
prices have fallen precipitously. If Anogesic or Tostrex fail to successfully
complete the current Phase III trials or related clinical testing, including
toxicology studies, our business and stock price would be materially and
adversely affected.
The Company faces intense competition from larger companies, and in the future
Cellegy may not have the resources required to develop innovative products.
Cellegy's products are subject to competition from existing products.
The pharmaceutical and cosmeceutical industries are subject to rapid
and significant technological changes. In the development and marketing of
topical prescription drugs, skin care and other cosmeceutical products and drug
delivery systems, Cellegy faces intense competition. Cellegy is much smaller in
terms of size and resources than many of its competitors in the United States
and abroad, which include, among others, major pharmaceutical, chemical,
cosmetic, consumer product and biotechnology companies, specialized firms,
universities and other research institutions. Cellegy's competitors may succeed
in developing technologies and products that are more effective than any that we
are developing and could render Cellegy's technology and potential products
obsolete
19
and noncompetitive. Many of these competitors have substantially greater
financial and technical resources, clinical production and marketing
capabilities and regulatory experience. In addition, Cellegy's products are
subject to competition from existing products. For example, Cellegy's Tostrex
product, if commercialized, is expected to compete with two currently marketed
transdermal patch products sold by Alza Corporation and one transdermal
testosterone gel product marketed by Unimed/Solvay. Cellegy's Anogesic product,
if commercialized, is expected to compete with over-the-counter products, such
as Preparation H marketed by American Home Products, and various other
prescription products. As a result, we cannot assure you that Cellegy's products
under development will be able to compete successfully with existing products or
innovative products under development by other organizations.
The type and scope of patent coverage we have may limit the commercial success
of our products.
Cellegy's success depends, in part, on our ability to obtain patent
protection for our products and methods, both in the United States and in other
countries. Several of Cellegy's products are based on existing compounds with a
history of use in humans but are being developed by Cellegy for new therapeutic
use in skin diseases. Cellegy cannot obtain composition patent claims on the
compound itself, and will instead need to rely on patent claims, if any,
directed to the use of the compound to treat certain conditions or to specific
formulations we are attempting to develop. Cellegy may not be able to prevent a
competitor from using our formulations or compounds for a different purpose. We
cannot assure you that any additional patents will be issued to Cellegy, that
the protection of any patents issued in the future will be commercially valuable
or that current or future patents will be held valid if subsequently challenged.
The patent position of companies engaged in businesses such as
Cellegy's business generally is uncertain and involves complex legal and factual
questions. There is a substantial backlog of patent applications at the United
States Patent and Trademark Office. Further, issued patents can later be held
invalid by the patent office issuing the patent or by a court. There can be no
assurance that any patent applications relating to Cellegy's products or methods
will issue as patents, or, if issued, that the patents will not be challenged,
invalidated or circumvented or that the rights granted thereunder will provide
us a competitive advantage. In addition, many other organizations are engaged in
research and product development efforts in drug delivery, skin biology and
cosmeceutical fields that may overlap with Cellegy's products. Such
organizations may currently have, or may obtain in the future, legally blocking
proprietary rights, including patent rights, in one or more products or methods
under development or consideration by Cellegy. These rights may prevent us from
commercializing technology, or may require Cellegy to obtain a license from the
organizations to use the technology. Cellegy may not be able to obtain any such
licenses that may be required on reasonable financial terms, if at all, or that
the patents underlying any such licenses will be valid or enforceable. Moreover,
the laws of certain foreign countries do not protect intellectual property
rights relating to United States patents as extensively as those rights are
protected in the United States. Cellegy is subject to the risk that individuals
or organizations located in such countries will engage in development, marketing
or sales activities of Cellegy's products.
Our product sales strategy involving corporate partners is highly uncertain. No
new partnership agreements have been finalized.
Cellegy is seeking to enter into agreements with certain corporate
partners granting rights to commercialize our lead products, Anogesic and
Tostrex. As of the date of this Annual Report, Cellegy has not entered into any
agreements with third parties to commercialize either product. Cellegy may not
be able to establish any such collaborative arrangements. Failure to enter into
any such arrangements could prevent, delay or otherwise have a material adverse
effect on our ability to develop and market Anogesic, Tostrex or other products
(particularly in certain international markets) that we desire to commercialize
through third party arrangements, and we may not have the resources or the
experience to successfully commercialize any such products on our own.
Similarly, if we are unable to find another corporate partner to develop or
market our cosmeceutical products, they may never be commercialized. If we are
able to enter into one or more corporate partner arrangements, we may rely on
our partners to conduct clinical trials, obtain regulatory approvals and, if
approved, manufacture and market or co-promote these products. However, reliance
on third party partners can create risks to our product commercialization
efforts. Once agreements are completed, Cellegy may have little or no control
over the development of these potential products and little or no opportunity to
review clinical data before or after public announcement of results. Further,
any arrangements that may be established may not be successful.
20
We are subject to regulation by regulatory authorities including the FDA, which
could delay or prevent marketing of our products.
Cellegy's prescription products, and our ongoing research and clinical
activities such as those relating to Anogesic, Tostrex, and Tostrelle, are
subject to extensive regulation by governmental regulatory authorities in the
United States and other countries. Extensive current pre-clinical and clinical
testing requirements and the regulatory approval process of the FDA in the
United States and of certain foreign regulatory authorities, or additional
future government regulations, could prevent or delay regulatory approval of
Cellegy's products. Notwithstanding our current relationships with those
authorities, disagreements may occur in the future, and one or more of our
ongoing or planned clinical trials could be delayed or repeated in order to
satisfy regulatory requirements. For example, if our expanded Phase I/II trial
regarding Tostrelle(TM) is successful, we plan to meet with the FDA to discuss
future trials, and the FDA could impose requirements on future trials that could
delay the regulatory approval process. Sales of Cellegy's products outside the
United States are subject to regulatory requirements governing clinical trials
and marketing approval. These requirements vary widely from country to country
and could delay introduction of Cellegy's products in those countries.
Our prospects for obtaining additional financing, if required, are uncertain and
failure to obtain needed financing could affect our ability to develop or market
products.
Throughout our history, we have consumed substantial amounts of cash.
Our cash needs are expected to continue to increase significantly over at least
the next several years in order to fund the additional expenses required to
expand our current research and development programs. Cellegy has no current
source of significant ongoing revenues or capital beyond existing cash and
investments, and certain product sales of Rectogesic in Australia and sales to
Gryphon, the development subsidiary of a major specialty retailer. In order to
complete the research and development and other activities necessary to
commercialize our products, additional financing will be required.
Cellegy will seek private or public equity investments and future
collaborative arrangements with third parties to help fund future cash needs.
Such funding may not be available on acceptable terms, if at all. Insufficient
funding may require Cellegy to delay, reduce or eliminate some or all of our
research and development activities or planned clinical trial programs. Cellegy
believes that available cash resources and interest earned will be adequate to
satisfy its capital needs through at least December 31, 2001.
We currently have no products we sell on our own and have limited sales and
marketing experience.
We may market certain of our products, if successfully developed and
approved, through a direct sales force in the United States and through sales
and marketing partnership or distribution arrangements outside the United
States. Cellegy has very limited experience in sales, marketing or distribution.
To market our products directly, we intend to establish a marketing group and
direct sales force in the United States or obtain the assistance of our
marketing partner. If we enter into marketing or licensing arrangements with
established pharmaceutical companies, our revenues will be subject to the terms
and conditions of such arrangements and will be dependent on the efforts of our
partner. Cellegy may not be able to successfully establish a direct sales force,
or assure you that our collaborators may not effectively market any of our
potential products, and either circumstance could have a material adverse effect
on our business and stock price.
We have not manufactured products before and are dependent on a limited number
of critical suppliers.
Cellegy has no direct experience in manufacturing commercial quantities
of products and currently does not have any capacity to manufacture products on
a large commercial scale. We currently rely on a limited number of contract
manufacturers and suppliers to manufacture our formulations. Manufacturing or
quality control problems could occur at the contract manufacturers such that
they may not be able to maintain compliance with the FDA's current good
manufacturing practice requirements necessary to continue manufacturing our
products.
We have very limited staffing and will continue to be dependent upon key
employees
Our success is dependent upon the efforts of a small management team,
including K. Michael Forrest, our chief executive officer. We have an employment
agreement with Mr. Forrest and certain other officers, but none of our
21
officers is bound by an employment for any specific term. If key individuals
leave Cellegy, we could be adversely affected if suitable replacement personnel
are not quickly recruited. Our future success depends upon our ability to
continue to attract and retain qualified scientific, marketing and technical
personnel. There is intense competition for qualified personnel in all
functional areas, and competition particularly in the San Francisco Bay Area
where our principal facility is located, which make it difficult to attract and
retain the qualified personnel necessary for the development and growth of our
business.
We are subject to the risk of product liability lawsuits.
The testing, marketing and sale of human health care products entails
an inherent risk of allegations of product liability. We are subject to the risk
that substantial product liability claims could be asserted against us in the
future. Cellegy has obtained $4 million in insurance coverage relating to our
clinical trials. There can be no assurance that Cellegy will be able to obtain
or maintain insurance on acceptable terms, particularly in overseas locations,
for clinical and commercial activities or that any insurance obtained will
provide adequate protection against potential liabilities.
Our stock price could be volatile.
Our stock price has from time to time experienced significant price and
volume fluctuations. Sometimes our stock price has varied depending on
fluctuations in the Nasdaq National Market generally, and sometimes fluctuations
have resulted from matters more specific to Cellegy, such as an announcement of
clinical trial results or other corporate developments. Announcements that could
significantly impact our stock price include:
o clinical trial results, such as results of the Anogesic or
Tostrex trials;
o developments or disputes concerning patent or proprietary
rights;
o publicity regarding actual or potential clinical results or
regulatory developments relating to our products under
development or by our competitors; and
o period-to-period fluctuations in our financial results,
including operating expenses or profits.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Cellegy invests its excess cash in short-term, investment grade, fixed
income securities under an investment policy. All of our investments are
classified as available-for-sale (see Financial Statements - Note 2). All of our
of our securities will mature by the end of 2001. We believe that potential
near-term losses in future earnings, fair values or cash flows related to their
investment portfolio would not be significant. Cellegy has a long-term note
payable outstanding (see Financial Statements - Note 4) with an interest rate
which currently varies with the lender's prime rate.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by item 7 are
set forth below on pages F-1 through F-21 of this report.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
22
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item with respect to directors and
compliance with Section 16(a) of the Securities Exchange Act of 1934 may be
found in the sections captioned "Election of Cellegy Directors" and "Compliance
under Section 16(a) of the Securities Exchange Act of 1934" appearing in the
definitive Proxy Statement to be delivered to shareholders in connection with
the Annual Meeting of Shareholders expected to be held on May 31, 2000. Such
information is incorporated herein by reference. Information required by this
Item with respect to executive officers may be found in Part I hereof in the
section captioned "Executive Officers of the Registrant."
ITEM 11: EXECUTIVE COMPENSATION
Information with respect to this Item may be found in the section
captioned "Executive Compensation" appearing in the definitive Proxy Statement
to be delivered to shareholders in connection with the Annual Meeting of
Shareholders expected to be during 2001. Such information is incorporated herein
by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this Item may be found in the section
captioned "Security Ownership of Certain Beneficial Owners and Management"
appearing in the definitive Proxy Statement to be delivered to Shareholders in
connection with the Annual Meeting of Shareholders expected to be held during
2001. Such information is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this Item may be found in the section
captioned "Certain Relationships and Related Transactions" appearing in the
definitive Proxy Statement to be delivered to Shareholders in connection with
the Annual Meeting of Shareholders expected to be held during 2001. Such
information is incorporated herein by reference.
23
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Exhibits
(a) The following exhibits are attached hereto or incorporated herein by
reference:
Exhibit
Number Exhibit Title
------ -------------
2.1 Asset Purchase Agreement dated December 31, 1997 between the Company
and Neptune Pharmaceutical Corporation. (Confidential treatment has
been granted with respect to portions of this agreement.)
(Incorporated by reference to Exhibit 4.4 of the Company's
Registration Statement on Form S-3 declared effective on February 19,
1998.)
3.1 Amended and Restated Articles of Incorporation of the Company.
(Incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form SB-2 (Registration No. 33-93288 LA)
declared effective on August 11, 1995 (the "SB-2").)
3.2 Bylaws of the Company. (Incorporated by reference to Exhibit 3.3 to
the SB-2.)
4.1 Specimen Common Stock Certificate. (Incorporated by reference to
Exhibit 4.1 to the SB-2.)
10.1 Barrier Repair Formulations License Agreement, dated October 26, 1993
between the Company and the University of California. (Incorporated
by reference to Exhibit 10.5 to the SB-2.)
10.2 License Agreement, dated March 4, 1994, regarding Drug Delivery by
Skin Barrier Disruption, between the Company and University of
California. (Incorporated by reference to Exhibit 10.6 to the SB-2.)
*10.3 Employment Agreement, dated as of January 21, 1996, between the
Company and Dr. Carl Thornfeldt. (Incorporated by reference to
Exhibit 10.7 to the Company's Form 10-KSB for fiscal year ended
December 31, 1995 (the "1995 Form 10-KSB".)
10.4 Amended and Restated Registration Rights Agreement dated April 10,
1992. (Incorporated by reference to Exhibit 10.11 to the SB-2.)
*10.5 1992 Stock Option Plan. (Incorporated by reference to Exhibit 10.12
to the SB-2.)
10.6 Secured Debenture and Warrant Purchase Agreement dated as of February
10, 1995. (Incorporated by reference to Exhibit 10.13 to the SB-2.)
10.7 Amended and Restated Registration Rights Agreement dated as of
February 10, 1995. (Incorporated by reference to Exhibit 10.14 to the
SB-2.)
24
Exhibit
Number Exhibit Title
------ -------------
10.8 Warrant Agreement dated as of February 10, 1995. (Incorporated by
reference to Exhibit 10.15 to the SB-2.)
10.9 Agency Agreement dated as of February 10, 1995. (Incorporated by
reference to Exhibit 10.16 to the SB-2.)
*10.10 1995 Equity Incentive Plan (Incorporated by reference to Exhibit
10.17 to the 1995 Form 10-KSB.)
*10.11 1995 Directors' Stock Option Plan (Incorporated by reference to
Exhibit 10.18 to the 1995 Form 10-KSB.)
10.12 Standard Industrial Lease dated April 6, 1992, between the Company
and H&H Management. (Incorporated by reference to Exhibit 10.20 to
the 1995 Form 10-KSB.)
10.13 Loan and Security Agreement between Silicon Valley Bank and the
Company dated June 10, 1998 (Incorporated by reference to Exhibit
10.01 to the Company's Form 10-QSB for the fiscal quarter ended June
30, 1998.)
10.14 Lease Agreement between the Company and TCNorthern California Inc.
dated April 8, 1998 (Incorporated by reference to Exhibit 10.01 to
the Company's Form 10-QSB for fiscal quarter ended March 31, 1998.)
*10.15 Employment Agreement dated November 20, 1996, between the Company and
K. Michael Forrest. (Incorporated by reference to Exhibit 10.19 to
the Company's Form 10-KSB for fiscal year ended December 31, 1996
(the "1996 Form 10-KSB".)
10.16 Exclusive Licensing Agreement for Glylorin between the Company and
Glaxo Wellcome Inc. dated November 11, 1996. (Confidential treatment
has been granted with respect to portions of this agreement.)
(Incorporated by reference to Exhibit 10.20 to the 1996 Form 10-KSB.)
10.17 Termination of Exclusive Licensing Agreement between the Company and
Glaxo Wellcome Inc. dated October 15, 1999.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (See signature page.)
27.1 Financial Data Schedule.
- ----------------
* Represents a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
One report on Form 8-K was filed by the Company on 12/1/99 reporting on the
results of the Phase III Anogesic trial.
(c) Financial Statement Schedules
All schedules are omitted because they are not applicable or are not
required, or the information required to be set forth therein is included
in the financial statements or notes thereto.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of South San Francisco, State of California, on the 2nd day of March, 2001.
CELLEGY PHARMACEUTICALS, INC.
By: /s/ K. Michael Forrest
-----------------------------------
K. Michael Forrest
Chairman, President and Chief
Executive Officer
Power of Attorney
Each person whose signature appears below constitutes and appoints K.
Michael Forrest and A. Richard Juelis, jointly and severally, his true and
lawful attorneys-in-fact, each with the power of substitution, for him in any
and all capacities, to sign amendments to this Report on Form 10-K, and to file
the same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and conforming all
that said attorneys-in-fact, or his substitute or substitutes, may do or cause
to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons in the capacities
and on the dates indicated.
Name Title Date
---- ----- ----
Principal Executive Officer:
/s/ K. Michael Forrest Chairman, President, Chief Executive Officer March 2, 2001
- ----------------------------------- and Director
K. Michael Forrest
Principal Financial Officer
and Principal Accounting Officer:
/s/ A. Richard Juelis Vice President, Finance, Chief Financial March 2, 2001
- ----------------------------------- Officer and Secretary
A. Richard Juelis
Directors:
/s/ Carl R. Thornfeldt Director March 2, 2001
- -----------------------------------
Carl R. Thornfeldt, M.D.
/s/ Jack L. Bowman Director March 2, 2001
- -----------------------------------
Jack L. Bowman
/s/ Felix J. Baker Director March 2, 2001
- -----------------------------------
Felix J. Baker
/s/ Julian C. Baker Director March 2, 2001
- -----------------------------------
Julian C. Baker
/s/ Tobi B. Klar Director March 2, 2001
- -----------------------------------
Tobi B. Klar
/s/ Ronald J. Saldarini Director March 2, 2001
- -----------------------------------
Ronald J. Saldarini
/s/ Alan A. Steigrod Director March 2, 2001
- -----------------------------------
Alan A. Steigrod
/s/ Larry J. Wells Director March 2, 2001
- -----------------------------------
Larry J. Wells
26
Index to Financial Statements
Page
----
Report of Ernst & Young LLP, Independent Auditors F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-8
Notes to Financial Statements F-10
F-1
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders
Cellegy Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Cellegy
Pharmaceuticals, Inc. (a development stage company) as of December 31, 2000 and
1999, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2000, and for the period from June 26, 1989 (inception) through December 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cellegy
Pharmaceuticals, Inc. at December 31, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000, and for the period from June 26, 1989
(inception) through December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
Palo Alto, California
February 9, 2001
F-2
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Balance Sheets
December 31,
--------------------------------
2000 1999
------------ ------------
Assets
Current assets
Cash and cash equivalents $ 8,838,192 $ 804,089
Short-term investments 6,470,537 10,970,718
Prepaid expenses and other current assets 956,076 1,026,326
------------ ------------
Total current assets 16,264,805 12,801,133
Property and equipment, net 2,848,020 3,149,384
Long-term investments -- 4,962,420
Restricted cash 613,999 --
Intangible assets 1,531,939 --
------------ ------------
Total assets $ 21,258,763 $ 20,912,937
============ ============
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 1,443,230 $ 714,003
Accrued compensation and related expenses 139,073 106,223
Current portion of note payable 548,133 1,152,828
------------ ------------
Total current liabilities 2,130,436 1,973,054
Long-term portion of note payable 333,937 2,882,070
Other long term liabilities -- 218,993
Shareholders' equity
Preferred stock, no par value; 5,000,000 shares authorized: Series A
convertible preferred stock 1,100 shares designated; no shares issued
or outstanding at December 31, 2000 and 1999 -- --
Common stock, no par value; 20,000,000 shares authorized: 13,838,053 shares
issued and outstanding at December 31, 2000 and 12,010,242 shares issued and
outstanding at December 31, 1999 69,735,022 55,367,903
Accumulated other comprehensive loss (28,807) (35,471)
Deficit accumulated during the development stage (50,911,825) (39,493,612)
------------ ------------
Total shareholders' equity 18,794,390 15,838,820
------------ ------------
Total liabilities and shareholders' equity $ 21,258,763 $ 20,912,937
============ ============
<FN>
See accompanying notes.
</FN>
F-3
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statements of Operations
Period from
June 26, 1989
(inception)
through
Years ended December 31, December 31,
---------------------------------------------------------
2000 1999 1998 2000
------------ ------------ ------------ ------------
Revenues:
Licensing and contract revenue from affiliate $ -- $ -- $ -- $ 1,145,373
Licensing, milestone, and development funding -- 117,303 271,248 1,551,408
Government grants 71,793 29,976 102,502 501,769
Product sales 1,513,830 897,859 457,970 2,869,659
------------ ------------ ------------ ------------
Total revenues 1,585,623 1,045,138 831,720 6,068,209
Costs and expenses:
Cost of products sold 368,113 269,358 113,073 750,544
Research and development 9,275,942 7,965,477 6,668,014 36,818,073
General and administrative 3,630,616 2,612,601 2,485,341 16,519,107
Acquired in-process technology -- -- -- 3,842,968
------------ ------------ ------------ ------------
Total costs and expenses 13,274,671 10,847,436 9,266,428 57,930,692
------------ ------------ ------------ ------------
Operating loss (11,689,048) (9,802,298) (8,434,708) (51,862,483)
Interest expense (200,689) (362,735) (22,146) (1,449,310)
Interest income and other, net 471,524 863,877 1,090,523 3,848,473
------------ ------------ ------------ ------------
Net loss (11,418,213) (9,301,156) (7,366,331) (49,463,320)
Non-cash preferred dividends -- -- -- 1,448,505
------------ ------------ ------------ ------------
Net loss applicable to common shareholders $(11,418,213) $ (9,301,156) $ (7,366,331) $(50,911,825)
============ ============ ============ ============
Basic and diluted net loss per common share $ (0.91) $ (0.85) $ (0.73)
============ ============ ============
Weighted average common shares used in computing
basic and diluted net loss per common share 12,542,232 10,913,554 10,160,026
============ ============ ============
<FN>
See accompanying notes.
</FN>
F-4
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statements of Shareholders' Equity
Series A Convertible Series B Convertible Series C Convertible
Preferred Stock Preferred Stock Preferred Stock Common Stock
--------------- --------------- --------------- ------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
Issuance of common stock for
cash through December 31,
1997 --- $ --- --- $ --- --- $ --- 953,400 $ 126,499
Issuance of common stock for
services rendered through
December 31, 1997 --- --- --- --- --- --- 269,116 24,261
Repurchase of common shares
in 1992 --- --- --- --- --- --- (3,586) (324)
Issuance of convertible
preferred stock, net of
issuance cost through
December 31, 1997 27,649 6,801,730 --- --- 477,081 4,978,505 --- ---
Issuance of Series A
convertible preferred
stock and warrants to
purchase 14,191
shares of Series A
convertible preferred
stock in exchange for
convertible
promissory notes and
accrued interest through
December 31, 1997 625,845 1,199,536 --- --- --- --- --- ---
Issuance of convertible
preferred stock for
services rendered, and
license agreement through
December 31, 1997 50,110 173,198 --- --- --- --- --- ---
Issuance of Series B
convertible preferred
stock in exchange for
convertible promissory
notes in 1992 --- --- 12,750 114,000 --- --- --- ---
Issuance of common stock in
exchange for notes payable --- --- --- --- --- --- 42,960 268,500
Issuance of warrants in
connection with notes
payable financing --- --- --- --- --- --- --- 487,333
Issuance of common stock in
connection with IPO in
August 1995 --- --- --- --- --- --- 1,322,500 6,383,785
<FN>
See accompanying notes.
</FN>
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statements of Shareholders' Equity
Accumulated Deficit
Other Accumulated
Comprehensive During Total
Income Development Shareholders'
(Loss) Stage Equity
------ ----- ------
Issuance of common stock for
cash through December 31,
1997 --- --- $ 126,499
Issuance of common stock for
services rendered through
December 31, 1997 --- --- 24,261
Repurchase of common shares
in 1992 --- --- (324)
Issuance of convertible
preferred stock, net of
issuance cost through
December 31, 1997 --- --- 11,780,235
Issuance of Series A
convertible preferred
stock and warrants to
purchase 14,191
shares of Series A
convertible preferred
stock in exchange for
convertible
promissory notes and
accrued interest through
December 31, 1997 --- --- 1,199,536
Issuance of convertible
preferred stock for
services rendered, and
license agreement through
December 31, 1997 --- --- 173,198
Issuance of Series B
convertible preferred
stock in exchange for
convertible promissory
notes in 1992 --- --- 114,000
Issuance of common stock in
exchange for notes payable --- --- 268,500
Issuance of warrants in
connection with notes
payable financing --- --- 487,333
Issuance of common stock in
connection with IPO in
August 1995 --- --- 6,383,785
F-5
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statements of Shareholders' Equity - (Continued)
Series A Convertible Series B Convertible Series C Convertible
Preferred Stock Preferred Stock Preferred Stock Common Stock
--------------- --------------- --------------- ------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
Conversion of preferred
stock, including
dividends, to common stock
through December 31,
1997 (703,409) $(7,426,958) (12,750) $ (114,000) (477,081) $(4,978,505) $2,426,762 $12,519,463
Exercise of warrants to
purchase common stock --- --- --- --- --- --- 363,103 52,744
Exercise of options to
purchase common stock --- --- --- --- --- --- 138,481 373,856
Compensation expense related
to the extension of option
exercise periods --- --- --- --- --- --- --- 333,481
Non-cash preferred dividends --- 1,448,505 --- --- --- --- --- ---
Unrealized gains on
investments --- --- --- --- --- --- --- ---
Conversion of preferred
stock, including
dividends, to common stock (195) (2,196,011) --- --- --- --- 587,879 2,196,011
Issuance of common stock in
connection with the
private placement in July
1997, net of issuance costs --- --- --- --- --- --- 1,547,827 3,814,741
Issuance of common stock in
connection with the public
offering of common stock
in November 1997, net of
issuance costs --- --- --- --- --- --- 2,012,500 13,764,069
Issuance of common stock in
connection with the
acquisition of product
rights from Neptune --- --- --- --- --- --- 462,809 3,842,968
Pharmaceutical Corp.
Unrealized loss on investments --- --- --- --- --- --- --- ---
Net loss - 1997 --- --- --- --- --- --- --- ---
---------------------------------------------------------------------------------------------------
Total Comprehensive Loss -
1997 --- --- --- --- --- --- --- ---
---------------------------------------------------------------------------------------------------
Balances at December 31, 1997
--- --- --- --- --- --- 10,123,751 $44,192,387
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statements of Shareholders' Equity - (Continued)
Accumulated Deficit
Other Accumulated
Comprehensive During the Total
Income Development Shareholders'
(Loss) Stage Equity
------ ----- ------
Conversion of preferred
stock, including
dividends, to common stock
through December 31,
1997 $ --- $ --- $ ---
Exercise of warrants to
purchase common stock --- --- 52,744
Exercise of options to
purchase common stock --- --- 373,856
Compensation expense related
to the extension of option
exercise periods --- --- 333,481
Non-cash preferred dividends --- (1,448,505) ---
Unrealized gains on
investments 22,167 --- 22,167
Conversion of preferred
stock, including
dividends, to common stock --- --- ---
Issuance of common stock in
connection with the
private placement in July
1997, net of issuance costs --- --- 3,814,741
Issuance of common stock in
connection with the public
offering of common stock
in November 1997, net of
issuance costs --- --- 13,764,069
Issuance of common stock in
connection with the
acquisition of product
rights from Neptune --- --- 3,842,968
Pharmaceutical Corp.
Unrealized loss on investments (34,000) --- (34,000)
Net loss - 1997 --- (7,854,068) (7,854,068)
--------------------- -----------
Total Comprehensive Loss -
1997 --- --- (7,888,068)
--------------------- -----------
Balances at December 31, 1997 $(11,833) $(22,826,125) $21,354,429
See accompanying notes.
F-6
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statements of Shareholders' Equity - (Continued)
Series A Convertible Series B Convertible Series C Convertible
Preferred Stock Preferred Stock Preferred Stock Common Stock
--------------- --------------- --------------- ------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
Exercise of warrants to
purchase common stock --- --- --- --- --- --- 13,979 47,740
Exercise of options to
purchase common stock --- --- --- --- --- --- 35,564 123,006
Unrealized gain on investments --- --- --- --- --- --- --- ---
Net loss - 1998
--- --- --- --- --- --- --- ---
----- -------- ------ ------- ----- ---------- ---------- -----------
Total Comprehensive Loss -
1998 --- --- --- --- --- --- --- ---
----- -------- ------ ------- ----- ---------- ---------- -----------
Balances at December 31,
1998 --- --- --- --- --- --- 10,173,294 $44,363,133
Issuance of common stock in
connection with the
private placement of
common stock in July 1999,
net of issuance costs --- --- --- --- --- --- 1,616,000 $10,037,662
Exercise of warrants to
purchase common stock --- --- --- --- --- --- 119,171 502,195
Exercise of options to
purchase common stock --- --- --- --- --- --- 101,777 464,913
Unrealized loss on investments --- --- --- --- --- --- --- ---
Net loss - 1999 --- --- --- --- --- --- --- ---
----- -------- ------ ------- ----- ---------- ---------- -----------
Total Comprehensive Loss-1999 --- --- --- --- --- --- --- ---
----- -------- ------ ------- ----- ---------- ---------- -----------
Balances at December 31, 1999 --- --- --- --- --- --- 12,010,242 $55,367,903
Issuance of common stock in
connection with the
private placement of
common stock in October
2000, net of issuance
costs of $22,527 --- --- --- --- --- --- 1,500,000 11,602,473
Exercise of warrants to
purchase common stock --- --- --- --- --- --- 62,833 315,800
Exercise of options to
purchase common stock --- --- --- --- --- --- 95,754 380,516
Fair value of warrants issued
in Quay acquisition --- --- --- --- --- --- --- 489,477
Common stock issued in
connection with Quay --- --- --- --- --- --- 169,224 977,105
acquisition
Compensation expense related
to warrants and options
granted to non-employees --- --- --- --- --- --- --- 601,748
Unrealized loss on investments --- --- --- --- --- --- --- ---
Foreign currency translation --- --- --- --- --- --- --- ---
Net loss - 2000 --- --- --- --- --- --- --- ---
----- -------- ------ ------- ----- ---------- ---------- -----------
Total Comprehensive Loss-2000 --- --- --- --- --- --- --- ---
----- -------- ------ ------- ----- ---------- ---------- -----------
Balances at December 31, 2000 --- $ --- --- $ --- --- $ --- 13,838,053 $69,735,022
===== ======== ====== ======= ===== ========== ========== ===========
See accompanying notes.
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statements of Shareholders' Equity - (Continued)
Accumulated Deficit
Other Accumulated
Comprehensive During the Total
Income Development Shareholders'
(Loss) Stage Equity
------ ----- ------
Exercise of warrants to
purchase common stock --- --- 47,740
Exercise of options to
purchase common stock --- --- 123,006
Unrealized gain on investments 59,186 --- 59,186
Net loss - 1998
--- (7,366,331) (7,366,331)
-------- ------------ ------------
Total Comprehensive Loss -
1998 --- --- (7,307,145)
-------- ------------ ------------
Balances at December 31,
1998 $ 47,353 $(30,192,456) $ 14,218,030
Issuance of common stock in
connection with the
private placement of
common stock in July 1999,
net of issuance costs --- --- 10,037,662
Exercise of warrants to
purchase common stock --- --- 502,195
Exercise of options to
purchase common stock --- --- 464,913
Unrealized loss on investments (82,824) --- (82,824)
Net loss - 1999 --- (9,301,156) (9,301,156)
-------- ------------ ------------
Total Comprehensive Loss-1999 --- --- (9,383,980)
-------- ------------ ------------
Balances at December 31, 1999 $(35,471) $(39,493,612) $ 15,838,820
Issuance of common stock in
connection with the
private placement of
common stock in October
2000, net of issuance
costs of $22,527 --- --- 11,602,473
Exercise of warrants to
purchase common stock --- --- 315,800
Exercise of options to
purchase common stock --- --- 380,516
Fair value of warrants issued
in Quay acquisition --- --- 489,477
Common stock issued in
connection with Quay --- --- 977,105
acquisition
Compensation expense related
to warrants and options
granted to non-employees --- --- 601,748
Unrealized loss on investments 8,201 --- 8,201
Foreign currency translation (1,537) --- (1,537)
Net loss - 2000 --- (11,418,213) (11,418,213)
-------- ------------ ------------
Total Comprehensive Loss-2000 --- --- (11,411,549)
-------- ------------ ------------
Balances at December 31, 2000 $(28,807) $(50,911,825) $ 18,794,390
======== ============ ============
See accompanying notes.
F-7
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statements of Cash Flows
Period from
June 26, 1989
(inception)
Years ended December 31, through
------------------------------------------------ December 31,
2000 1999 1998 2000
------------ ------------ ------------ ------------
Operating activities
Net loss $(11,418,213) $ (9,301,156) $ (7,366,331) $(49,463,320)
Adjustment to reconcile net loss to net cash
used in operating activities:
Acquired in-process technology -- -- -- 3,842,968
Depreciation and amortization 502,470 428,980 15,015 1,214,445
Intangible assets amortization 298,351 -- -- 298,351
Compensation expense related to warrants and
options granted 601,748 -- -- 601,748
Compensation expense related to the extension of
option exercise periods -- -- -- 338,481
Amortization of discount on notes payable and
deferred financing costs -- -- -- 567,503
Issuance of common shares for services -- -- -- 24,261
Issuance of convertible preferred stock for
services rendered, interest, and license
agreement -- -- -- 240,918
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 70,250 407,068 (421,481) (956,076)
Accounts payable and accrued liabilities 729,227 (931,685) 785,870 1,443,230
Deferred revenue -- (250,000) (250,000) --
Accrued compensation and related expenses 32,850 37,126 31,877 139,073
------------ ------------ ------------ ------------
Net cash used in operating activities (9,183,317) (9,609,667) (7,205,050) (41,708,418)
Investing activities
Purchases of property and equipment (201,106) (747,556) (2,832,160) (3,953,715)
Purchases of investments (10,575,000) (19,947,556) (5,039,440) (71,100,449)
Sales of investments 9,549,557 8,525,450 5,893,870 23,968,877
Maturities of investments 10,500,000 9,015,000 5,500,000 40,637,520
Acquisition of Quay Corporation, net of cash acquired (369,000) -- -- (369,000)
------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities 8,904,451 (3,154,662) 3,522,270 (10,816,767)
<FN>
See accompanying notes.
</FN>
F-9
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statements of Cash Flows - (Continued)
Period from
June 26, 1989
(inception)
Years ended December 31, through
------------------------------------------------ December 31,
2000 1999 1998 2000
------------ ------------ ------------ ------------
Financing activities
Proceeds from notes payable $ -- $ 1,279,187 $ 3,220,813 $ 8,047,424
Repayment of notes payable (3,152,828) (465,102) -- (5,728,538)
Net proceeds from issuance of common stock 12,298,789 11,004,770 170,746 47,980,925
Other assets (613,999) -- -- (613,999)
Other long-term liabilities (218,993) 138,737 80,256 --
Issuance of convertible preferred stock, net of
issuance costs -- -- -- 11,757,735
Deferred financing costs -- -- -- (80,170)
------------ ------------ ------------ ------------
Net cash provided by financing activities 8,312,969 11,957,592 3,471,815 61,363,377
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 8,034,103 (806,737) (210,965) $ 8,838,192
Cash and cash equivalents, beginning of period 804,089 1,610,826 1,821,791 --
Cash and cash equivalents, end of period $ 8,838,192 $ 804,089 $ 1,610,826 $ 8,838,192
============ ============ ============ ============
Supplemental cash flow information
Interest Paid $ 200,689 $ 362,735 $ 22,146 $ 585,570
============ ============ ============ ============
Supplemental disclosure of non-cash transactions:
Issuance of common stock in connection with
acquired-in-process technology $ -- $ -- $ -- $ 3,842,968
============ ============ ============ ============
Conversion of preferred stock to common stock $ -- $ -- $ -- $ 14,715,474
============ ============ ============ ============
Issuance of common stock for notes payable $ -- $ -- $ -- $ 277,250
============ ============ ============ ============
Issuance of warrants in connection with notes payable
financing $ -- $ -- $ -- $ 487,333
============ ============ ============ ============
Issuance of convertible preferred stock for notes
payable $ -- $ -- $ -- $ 1,268,316
============ ============ ============ ============
See accompanying notes.
F-10
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
1. Accounting Policies
Description of Business and Principles of Consolidation
The consolidated financial statements include the accounts of Cellegy
Pharmaceuticals, Inc. and its subsidiaries (the "Company"). All significant
inter-company balances and transactions have been eliminated in consolidation.
The Company was incorporated in California in June 1989 and is a
development stage company. Since its inception, the Company has engaged
primarily in research and development activities based upon its patented
transdermal and topical formulation expertise. The Company has conducted a
number of clinical trials using its products, including the preparation of
manufactured clinical materials. Laboratory equipment and facility improvements
have been purchased and installed in support of its research and development
activities. A number of sponsored, external research programs have been
undertaken.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Revenue Recognition and Research and Development Expenses
Revenues related to cost reimbursement provisions under development
contracts are recognized as the costs associated with the projects are incurred.
Revenues related to milestones specified under development contracts are
recognized as the milestones are achieved. The Company receives certain United
States government grants that support the Company's research effort in defined
research projects. These grants generally provide for reimbursement of approved
costs incurred as defined in the various grants. Revenues associated with these
grants are recognized as costs under each grant are incurred. Revenues related
to cosmeceutical product sales are recognized upon shipment when title to goods
has been transferred to the customer. There is no right of return for
cosmeceutical sales.
Research and development costs are expensed as incurred.
Cash, Cash Equivalents and Investments
Cash equivalents consist of highly liquid financial instruments with
original maturities of three months or less. The carrying value of cash and cash
equivalents approximates fair value at December 31, 2000 and 1999. The Company
considers all its investments as available-for-sale and reports these
investments at estimated fair market value using available market information.
Unrealized gains or losses on available-for-sale securities are included in
shareholders' equity as other comprehensive income until their disposition. The
cost of securities sold is based on the specific identification method. Realized
gains or losses and declines in value judged to be other than temporary on
available-for-sale securities are included in interest income and other, net.
F-11
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation. Furniture and fixtures, and office and laboratory equipment are
depreciated using the straight-line method over estimated useful lives ranging
from three to five years. Depreciation for leasehold improvements is taken over
the shorter of the estimated useful life of the asset or the remaining lease
term.
Goodwill
Goodwill, included in intangible assets, represents the excess purchase
price over the fair value of net assets acquired and is amortized over 10 years
using the straight-line method. The carrying value of goodwill is based on
management's current assessment of recoverability using objective and subjective
factors. Amortization taken to date at December 31, 2000 was approximately
$298,000.
Stock-Based Compensation
The Company accounts for its stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB Opinion No. 25") and related Interpretations. The Company has
elected to follow the disclosure-only alternative prescribed by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). Under APB 25, because the exercise price of the
Company's employee stock option equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized. Deferred
compensation for options granted to non-employees has been determined in
accordance with FAS 123 as the fair value of the consideration received or the
fair value of the equity instruments issued whichever is more reliably measured.
Deferred compensation for options granted to non-employees is periodically
remeasured as the underlying options vest.
Foreign Currency Translation
The financial statements of foreign subsidiaries have been translated
into U.S. dollars in accordance with SFAS 52, "Foreign Currency Translation".
The foreign subsidiaries functional currency is its local currency. All balance
sheet accounts have been translated using the exchange rates in effect at the
balance sheet date. Income statement amounts have been translated using the
average exchange rate for the year. The gains and losses resulting from the
changes in exchange rates have been reported in other comprehensive income.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net loss and other
comprehensive income or loss. Accumulated other comprehensive loss presented in
the consolidated balance sheets consists of the accumulated net unrealized gain
(loss) on available-for-sale investments and foreign currency translation
adjustments.
Basic and Diluted Net Loss per Common Share
Basic net loss per common share is computed using the weighted average
number of common shares outstanding during the period. Diluted net loss per
common share incorporates the incremental shares issued upon the assumed
exercise of stock options and warrants, when dilutive. There is no difference
between basic and diluted net loss per common share, as presented in the
statement of operations, because all options and warrants are anti-dilutive. The
total number of shares excluded was 5,232,337, 5,386,830 and 5,485,848 for the
years ended December 31, 2000, 1999 and 1998, respectively.
F-12
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
New Accounting Standard
In June 1998, the Financial Accounting Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
required to be adopted in years beginning after June 15, 2000. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of the new statement will have a significant effect on earnings, or the
financial position of the Company.
2. Investments
At December 31, 2000 and 1999, available-for-sale securities consist
of the following:
2000 1999
------------------------------------------------ -------------------------------------------------
Gross Gross
Unrealized Unrealized
Gains Estimated Gains Estimated
Cost (Losses) Fair Value Cost (Losses) Fair Value
------------ ------------ ------------ ------------ ------------ ------------
Corporate notes $ 999,836 $ (8,879) $ 990,957 $ 8,264,411 $ (18,793) $ 8,245,618
U.S. government
notes 1,997,971 (18,391) 1,979,580 6,481,239 (17,019) 6,464,220
Time deposits -- -- -- 227,500 -- 227,500
Commercial paper 3,500,000 -- 3,500,000 999,459 341 995,800
------------ ------------ ------------ ------------ ------------ ------------
$ 6,497,807 $ (27,270) $ 6,470,537 $ 15,968,609 $ (35,471) $ 15,933,138
============ ============ ============ ============ ============ ============
There have been no significant gross realized gains or losses on the
sale of available-for-sale securities for the years ended December 31, 2000 and
1999. All available-for-sale securities at December 31, 2000 have maturities
less than twelve months.
3. Property and Equipment
Property and equipment consist of the following:
2000 1999
----------- -----------
Furniture and fixtures $ 175,271 $ 163,965
Office equipment 173,419 136,287
Laboratory equipment 662,506 553,724
Leasehold improvements 2,919,390 2,875,504
----------- -----------
Less accumulated depreciation and amortization 3,930,586 3,729,480
(1,082,566) (580,096)
----------- -----------
$ 2,848,020 $ 3,149,384
=========== ===========
F-13
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
4. Note Payable
In June 1998, the Company entered into a loan agreement with a bank to
provide up to $4.5 million through December 1999 with interest rates equal to
the bank's prime rate plus one percentage point. The Company is required to
repay the principal amount borrowed in 48 equal monthly installments ending in
July 2003. In December 1999, the loan was amended to include a revolving credit
line allowing the Company to pay down principal balances at any time or increase
its borrowing up to a maximum of $2.5 million at an interest rate equal to the
bank's prime rate plus three fourths of one percentage point (10.25% at December
31, 2000). The fair value of the note payable is estimated based on current
interest rates available to the Company for debt instruments with similar terms,
degrees of risk, and remaining maturities. The carrying value of the note
approximates its fair value. As of December 31, 2000, a total of approximately
$0.9 million is outstanding under the arrangement and $2.5 million of unused
credit is available through March 23, 2001. The note is secured by all of
Cellegy's assets and requires the Company to maintain certain financial
covenants, all of which were met as of December 31, 2000.
5. Lease Commitments
The Company leases its facilities and equipment under non-cancelable
operating leases. Future minimum lease payments, net of future minimum sublease
income at December 31, 2000, are as follows:
Lease
Commitments
Lease Sublease Net of Sublease
Commitments Income Income
------------ ------------ ------------
2001 $ 1,635,772 $ (846,827) $ 788,945
2002 1,499,094 -- 1,499,094
2003 1,466,552 -- 1,466,552
2004 1,505,756 -- 1,505,756
2005 1,544,960 -- 1,544,960
2006 and thereafter 5,075,369 -- 5,075,369
------------ ------------ ------------
$ 12,727,503 $ (846,827) $ 11,880,676
============ ============ ============
Rental expense, net of sublease income, was $1,817,427, $1,815,502, and
$437,245 for the years ended December 31, 2000, 1999, and 1998, respectively.
The Company received $827,742 in sublease income during the year ended December
31, 2000.
Restricted cash at December 31, 2000 was approximately $614,000 and
secures two letters of credit related to our facility, and is therefore not
available for operations.
6. 401(k) Plan
The Company maintains a savings and retirement plan under Section
401(k) of the Internal Revenue Code. All employees are eligible to participate
on their first day of employment with the Company. Under the plan, employees may
contribute up to 15% of salaries per year subject to statutory limits. The
Company provides a matching contribution equal to 25% of the employee's rate of
contribution, up to a maximum contribution rate of 4% of the employee's annual
salary. Expenses related to the plan for the years ended December 31, 2000, 1999
and 1998 were not significant.
7. Acquisitions
In December 1997, the Company acquired patent and related intellectual
property rights relating to Anogesic (the "Agreement"), a topical product
candidate for the treatment of anal fissures and hemorrhoids from Neptune
Pharmaceuticals Corporation.
F-14
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
Under the terms of the Agreement, the Company issued 429,752 shares of common
stock to Neptune on December 31, 1997. Upon the signing of a letter of intent on
November 3, 1997, 33,057 shares of common stock were issued to Neptune. No
additional shares have been issued to Neptune through December 31, 2000. The
Agreement calls for a series of additional payments, payable in shares of common
stock, upon successful completion of various milestones which, if achieved,
would occur over the next several years. Depending on several factors, including
the market price of the common stock, such payments, which is fixed based on the
agreement, could result in issuance of a significant number of shares of common
stock. Future potential milestones payable in Cellegy common stock could result
in the issuance of up to an additional 1,388,000 shares of Cellegy common stock
based on the closing price of Cellegy stock at time of issuance. The Agreement
does not provide for the payment by the Company of any future product royalties
in connection with sales of Anogesic.
In June 2000, we acquired all assets of the Australian company, Quay
Pharmaceuticals Pty Ltd ("Quay"), an Australian pharmaceutical company producing
Rectogesic(TM), a drug similar to Anogesic. The acquired assets consisted of the
Quay's inventory, purchased at Quay's cost at the time of acquisition, other
tangible assets and purchased technology. The aggregate purchase price of
$1,835,000 included an aggregate value of 169,224 shares of our common stock
issued to Quay with a value of $977,000, shares of our warrants to purchase
171,146 common stock with a fair value of $489,000, and cash payments of
$369,000. The purchase price was allocated to net tangible asset of $97,000,
purchased technology of $770,000, and goodwill of $968,000, based on their
estimated fair values on the acquisition date. Purchased technology and goodwill
are being amortized over three and ten years, respectively.
This transaction has been accounted for by the purchase method of
accounting and accordingly, the approximated purchase price, shown above, has
been allocated to the net assets acquired and the liabilities assumed based on
the estimated fair values at the date of acquisition, with the excess of the
purchase price over assigned asset values recorded as goodwill, which the
Company is amortizing over 10 years. The results of operating the acquired
Company have been included in the Company's consolidated financial statements
since the acquisition date.
8. License Agreements
In November 1996, the Company entered into an agreement with Glaxo
Wellcome Inc. ("Glaxo") for licensing rights to Glylorin, Cellegy's compound for
the treatment of ichthyoses. Under the terms of the agreement, Cellegy provided
Glaxo with an exclusive license of patent rights and know-how covering Glylorin
in most of the world's major markets. In exchange for this license, the Company
received from Glaxo an initial license fee payment. In October 1999, Cellegy and
Glaxo terminated the license agreement with the return to Cellegy of Glylorin
product rights.
In October 1993, Cellegy entered into a license agreement with the
University of California providing for an exclusive, worldwide, royalty bearing
license, subject to customary government rights, for patent rights relating to
barrier repair formulations, jointly held by the University and Cellegy, in
consideration of the issuance to the University of certain shares of preferred
stock (which subsequently converted into shares of common stock) and the payment
by Cellegy of a licensing fee. In March 1994, we entered into a second
exclusive, worldwide, royalty bearing license agreement with the University for
patent rights jointly held by the University and Cellegy, relating to certain
drug delivery technologies, in consideration of the payment by Cellegy of a
licensing fee, and an annual maintenance fee payable each year until Cellegy is
commercially selling a licensed product. In April 2000, Cellegy terminated the
Exclusive License Agreement relating to barrier repair formulations and assigned
its rights in the invention to the University. We are now in the process of
terminating our license for patent rights relating to drug technologies and
assigning the rights to the University as well.
F-15
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
9. Shareholders' Equity
Common Stock Private Placement
On July 23, 1997, the Company completed a $3,850,000 private placement
of 1,547,827 shares of common stock. Net proceeds were $3,814,741. The purchase
price for all investors, except the Company's chief executive officer, was
$2.375 per share. The purchase price for the shares purchased by the Company's
chief executive officer in the private placement was $2.875 per share, which is
equal to the closing price of the common stock on the Nasdaq SmallCap Market on
the date immediately preceding the closing date of the private placement.
Common Stock Private Placement
On July 30, 1999, Cellegy completed a private placement of 1,616,000
shares of common stock at a price of $6.25 per share to a small group of
institutional investors and the Company's President and Chief Executive Officer.
Net proceeds were $10,038,000.
Common Stock Private Placement
On October 2, 2000, Cellegy completed a private placement of 1,500,000
shares of common stock at a price of $7.75 per share to Four Partners,
Framlington Health Fund, Munder Framlington Healthcare Fund, and Capital
Research and Management Company (SMALLCAP World Fund Inc). Net proceeds were
$11,602,473.
Common Stock Issued in Conjunction with Quay Acquisition
On June 16, 2000, Cellegy issued 169,224 shares of common stock with a
value of $977,105 to Richcone Pty Ltd and Quay Pharmaceuticals Pty Ltd as part
of the $1.8 million purchase price of Quay Pharmaceuticals Pty Ltd. (See note 7
for further discussion.)
Preferred Stock
The Company's Articles of Incorporation provide that the Company may
issue up to 5,000,000 shares of preferred stock in one or more series. The Board
of Directors is authorized to establish from time to time the numbers of shares
to be included in, and the designation of, any such shares to determine or alter
the rights, preferences, privileges, and restrictions granted to or imposed upon
any wholly unissued series of preferred stock and to increase or decrease the
number of shares of any such series without any further vote or action by the
shareholders.
Warrants
The Company has the following warrants outstanding to purchase common
stock at December 31, 2000:
Number of Exercise Price Date Expiration
Shares per Share Issued Date
---------------- ----------------- ------------------ ---------------------
12,400 $ 7.23 April 1996 April 18, 2001
94,063 9.75 November 1997 November 24, 2002
12,000 4.00 January 1999 January 19, 2001
3,500 6.81 February 2000 February 25, 2002
150,000 8.50 March 2000 March 21, 2004
150,000 15.00 March 2000 March 21, 2004
171,146 6.60 June 2000 June 13, 2002
------------
593,109
============
F-16
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
Stock Option Plans
In 1995, Cellegy adopted the Equity Incentive Plan (the "Plan") to
provide for the issuance of incentive stock options and non-statutory stock
options. When the Plan was established, Cellegy reserved 700,000 shares for
issuance. From 1996 to 2000, an additional 2,750,000 shares were reserved for
issuance under the Plan.
Activity under the Plan is summarized as follows:
Shares Price Weighted
Under Range Average
Option Per Share Exercise Price
------------------ ------------------- -------------------
Balance at January 1, 1998 1,081,336 $0.46 - $8.81 $4.62
--------------
Granted 544,000 $3.25 - $8.50 $6.68
Canceled (46,344) $3.07 - $8.25 $6.19
Exercised (35,564) $0.46 - $5.50 $3.46
---------------
Balance at December 31, 1998 1,543,428 $0.46 - $8.81 $5.32
Granted 905,100 $3.69 - $6.25 $4.13
Canceled (124,655) $3.62 - $8.81 $5.14
Exercised (136,110) $0.46 - $7.25 $4.57
--------------
Balance at December 31, 1999 2,187,763 $0.46 - $8.81 $4.82
Granted 191,350 $3.31 - $9.00 $6.21
Canceled (132,718) $3.00 - $9.00 $5.35
Exercised (95,754) $1.81 - $6.25 $3.97
--------------
Balance at December 31, 2000 2,150,641 $0.50 - $9.00 $5.00
==============
At December 31, 2000, options to purchase 1,283,744 shares of common
stock were vested and exercisable at exercise prices ranging from $0.50 to $8.81
per share. At December 31, 2000, 872,004 options to purchase shares of common
stock were available for future option grants under the Plan.
The following table summarizes information about stock options
outstanding and exercisable related to the Plan at December 31, 2000:
Options Outstanding Options Exercisable
----------------------------------------------------------- --------------------------------------
Weighted Weighted Weighted
Average Average Average
Outstanding at Remaining Exercise Exercisable at Exercise
Range of Exercise Price December 31, 2000 Contractual Life Price December 31, 2000 Price
----------------------- ----------------- ---------------- ----- ----------------- -----
$0.50 - $3.88 884,061 7.6 years $3.52 472,498 $3.32
$4.00 - $6.63 820,480 6.6 years $5.20 533,162 $5.15
$7.00 - $9.00 446,100 7.5 years $7.55 278,084 $7.60
------- -------
Total 2,150,641 7.2 years $5.00 1,283,744 $5.01
========= =========
F-17
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
Director's Stock Option Plan
In 1995, Cellegy adopted the 1995 Directors' Stock Option Plan (the
"Directors' Plan") to provide for the issuance of non-qualified stock options to
eligible outside Directors. When the Plan was established, Cellegy reserved
150,000 shares for issuance. During 2000, Cellegy reserved additional 100,000
shares. Activity under the Directors' Plan is summarized as follows:
Shares Price Weighted
Under Range Average
Option Per Share Exercise Price
------------------ ------------------- -------------------
Balance at January 1, 1998 76,000 $3.25 - $8.50 $5.07
-------------
Granted 40,000 $5.50 $5.50
Cancelled (2,000) $3.25 - $8.50 $5.88
-------------
Balance at December 31, 1998 114,000 $3.25 - $8.50 $5.20
Granted 32,000 $5.00 $5.00
Cancelled (12,083) $3.25 - $8.50 $5.46
Exercised (21,417) $3.25 - $8.50 $5.12
-------------
Balance at December 31, 1999 112,500 $3.25 - $8.50 $5.13
Granted 70,000 $4.81 $4.81
-------------
Balance at December 31, 2000 182,500 $3.25 - $8.50 $5.01
=============
At December 31, 2000, options to purchase 87,004 shares of common stock
were vested and exercisable at exercise prices ranging from $3.25 to $8.50 per
share. At December 31, 2000, options to purchase 46,083 shares of common stock
were available for future option grants under the Directors' Plan.
The following table summarizes information about stock options
outstanding and exercisable related to the Directors' Plan at December 31, 2000:
Options Outstanding Options Exercisable
----------------------------------------------------------- --------------------------------------
Weighted Weighted Weighted
Average Average Average
Outstanding at Remaining Exercise Exercisable at Exercise
Range of Exercise Price December 31, 2000 Contractual Life Price December 31, 2000 Price
- ----------------------- ----------------- ---------------- ----- ----------------- -----
$3.25 4,000 6.4 years $3.25 3,000 $3.25
$4.50 - $5.50 176,500 8.0 years $5.01 82,004 $5.01
$8.50 2,000 5.4 years $8.50 2,000 $8.50
------- ------
Total 182,500 7.9 years $5.01 87,004 $5.11
======= ======
The Company has elected to follow APB Opinion No. 25 and related
interpretations in accounting for its stock options since, as discussed below,
the alternative fair market value accounting provided for under FAS 123 requires
use of option valuation models that were not developed for use in valuing stock
options. Under APB Opinion No. 25, if the exercise price of the Company's stock
options is equal to the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
F-18
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
Pro forma information regarding net loss and net loss per common share
is required by FAS 123, which requires that the information be determined as if
the Company has accounted for its common stock options granted under the fair
market value method. The fair market value of options granted has been estimated
at the date of the grant using a Black-Scholes option-pricing model.
The Company valued its options using the following weighted average
assumptions for the years ended December 31, 2000, 1999 and 1998:
2000 1999 1998
------------- ------------- --------------
Risk-free interest rate 6.00% 5.54% 5.14%
Dividend yield 0% 0% 0%
Volatility 0.91 0.826 0.531
Expected life of options in years 4.3 3.7 4.6
The Black-Scholes option valuation model was developed for use in
estimating the fair market value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions, including the expected stock
price volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair market value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair market value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for the years ended December 31 as follows:
2000 1999 1998
-------------- --------------- ---------------
Net loss as reported $ (11,418,213) $ (9,301,156) $ (7,366,331)
Pro forma net loss applicable to common
shareholders $ (13,105,202) $ (10,612,716) $ (8,220,952)
Basic and diluted net loss as reported $ (0.91) $ (0.85) $ (0.73)
Pro forma basic and diluted net loss per
share applicable to common shareholders $ (1.04) $ (0.97) $ (0.81)
The weighted average grant date fair value of options granted during
the years ended December 31, 2000, 1999, and 1998 was $4.30, $2.47, and $2.88,
respectively. The weighted average remaining contractual life of those options
is 7.2 years, 8.1 years and 8.3 years during the years ended December 31, 2000,
1999 and 1998.
The effects of applying FAS 123 pro forma disclosures are not likely to
be representative of the effects on reported net loss for future years.
Shares reserved
As of December 31, 2000, the Company has reserved shares of common
stock for future issuance as follows:
Warrants 593,109
Stock Option Plans 3,251,228
Neptune Agreement 1,388,000
---------
Total 5,232,337
=========
F-19
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
10. Income Taxes
At December 31, 2000, the Company had net operating loss carryforwards
of approximately $43,000,000 and $13,000,000 for federal and state purposes,
respectively. The federal net operating loss carryforwards expire between the
years 2004 and 2020. The state net operating loss carryforwards expire between
the years 2001 and 2005. At December 31, 2000, the Company also had research and
development credit carryforwards of approximately $1,100,000 and $700,000 for
federal and state purposes, respectively. The federal credits expire between the
years 2006 and 2020. Pursuant to the "change in ownership" provisions of the Tax
Reform Act of 1986, utilization of the Company's net operating loss and research
and development tax credit carryforwards may be limited if a cumulative change
of ownership of more than 50% occurs within any three-year period. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company's deferred tax liabilities and assets are as follows
December 31,
-------------------------------
2000 1999
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 15,400,000 $ 11,600,000
Credit carryforwards 1,600,000 1,100,000
Capitalized intangibles 1,200,000 2,400,000
Other, net 400,000 --
Total deferred tax assets 18,600,000 15,100,000
Valuation allowance (18,600,000) (15,100,000)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
The valuation allowance for deferred tax assets for 2000, 1999, and
1998 increased by approximately $3,500,000, $3,800,000, and $4,100,000,
respectively.
11. Segment Reporting
The Company has two business segments: pharmaceuticals and
cosmeceuticals. Pharmaceuticals include primarily research and development
expenses for potential prescription products to be marketed directly by the
Company or through corporate partners. Current pharmaceutical revenues consist
primarily of SBIR grant funding. The Company expects to complete other corporate
collaborations in the future for a number of its potential pharmaceutical
products, which may result in milestones, development funding and royalties on
sales. Cellegy expects to generate future revenues on potential products it
intends to self-market.
The cosmeceutical business segment includes primarily development
expenses for non-prescription, anti-aging products. Using related technologies,
Cellegy is currently incurring development expenses and receiving all of its
product sales from one customer, Gryphon Development, Inc., which is selling the
product, exclusively in the United States, through a major specialty retailer.
Cellegy allocates its research expenses and personnel to each business
segment, but does not assess segment performance or allocate resources based on
a segment's assets and, therefore, asset depreciation and amortization and
capital expenditures are not reported by segment. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies.
F-20
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
The Company's segments are business units that will, in some cases,
distribute products to different types of customers through different marketing
programs. The potential future sales of cosmeceutical products requires a
significantly different marketing effort than sales of pharmaceutical products
to physicians and other traditional pharmaceutical distribution channels.
Pharmaceutical products require more extensive clinical testing and ultimately
regulatory approval by the FDA and other worldwide health registration agencies,
requiring a more extensive level of development, manufacturing and compliance
than a cosmeceutical product.
The following table contains information regarding revenues and
operating income (loss) of each business segment for the years ended December
31, 2000, 1999, and 1998:
Years ended December 3
-----------------------------------------------
2000 1999 1998
------------ ------------ ------------
Revenues:
Pharmaceuticals $ 196,434 $ 147,279 $ 373,750
Cosmeceuticals 1,389,189 897,859 457,970
------------ ------------ ------------
$ 1,585,623 $ 1,045,138 $ 831,720
============ ============ ============
Operating Gain (Loss):
Pharmaceuticals $(12,545,352) $ (9,888,212) $ (8,011,630)
Cosmeceuticals 1,127,139 85,914 (423,078)
------------ ------------ ------------
$(11,418,213) $ (9,802,298) $ (8,434,708)
============ ============ ============
Revenue from Major Customer
Revenues from sales to one customer of the Company's product
represented approximately 88%, 86%, and 55% of consolidated revenue for 2000,
1999 and 1998, respectively.
Total assets were minimal for the cosmeceutical segment.
12. Quarterly Financial Data ( unaudited )
(amounts in thousands except per share data)
2000 First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- --------
Total Revenue $ 530 $ 132 $ 626 $ 297 $ 1,585
Operating Loss (1,981) (2,864) (2,988) (3,856) (11,689)
Net Loss (1,915) (2,690) (3,059) (3,754) (11,418)
Basic & diluted loss per common share $ (0.16) $ (0.22) $ (0.25) $ (0.28) $ (0.91)
1999 First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- --------
Total Revenue $ 360 $ 394 $ 25 $ 266 $ 1,045
Operating Loss (2,786) (2,751) (2,149) (2,116) (9,802)
Net Loss (2,670) (2,280) (1,911) (2,440) (9,301)
Basic & diluted loss per common share $ (0.26) $ (0.22) $ (0.17) $ (0.20) $ (0.85)
F-21
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
EXHIBITS
to
Form 10-K
Under
THE SECURITIES EXCHANGE ACT OF 1934
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CELLEGY PHARMACEUTICALS, INC.
27