SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-28308
COLLAGENEX PHARMACEUTICALS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-1758016
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
41 University Drive, Newtown, Pennsylvania 18940
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (215) 579-7388
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Each Exchange on Which Registered
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None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
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(Title of Class)
Preferred Stock Purchase Rights, $0.01 par value
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(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 twelve (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 ninety (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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes: [ ] No: [X]
The aggregate market value of the registrant's voting shares of common
stock held by non-affiliates of the registrant on June 28, 2002, based on $7.40
per share, the last reported sale price on the NASDAQ National Market on that
date, was $71.1 million.
The number of shares outstanding of each of the registrant's classes of
common stock, as of March 15, 2003:
Class Number of Shares
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Common Stock, $0.01 par value 11,406,204
The following documents are incorporated by reference into the Annual
Report on Form 10-K: Portions of the registrant's definitive Proxy Statement for
its 2003 Annual Meeting of Stockholders are incorporated by reference into Part
III of this Report.
TABLE OF CONTENTS
Item Page
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PART I 1. Business................................................. 1
2. Properties............................................... 31
3. Legal Proceedings........................................ 32
4. Submission of Matters to a Vote of Security Holders...... 32
PART II 5. Market for the Company's Common Equity and Related
Stockholder Matters.................................. 33
6. Selected Consolidated Financial Data..................... 34
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 37
7A. Quantitative and Qualitative Disclosures about Market
Risk................................................. 54
8. Financial Statements and Supplementary Data.............. 55
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 55
PART III 10. Directors and Executive Officers of the Registrant....... 56
11. Executive Compensation................................... 56
12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters........... 56
13. Certain Relationships and Related Transactions........... 56
14. Controls and Procedures.................................. 56
PART IV 15. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.......................................... 57
SIGNATURES................................................................ 58
EXHIBIT INDEX............................................................. 62
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULE.................................................................. F-1
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PART I
Item 1. Business.
General
CollaGenex Pharmaceuticals, Inc. and subsidiaries is a specialty
pharmaceutical company currently focused on providing innovative medical
therapies to the dental and dermatology markets. Our first product,
Periostat'r', is an orally administered, prescription pharmaceutical product
that was approved by the United States Food and Drug Administration in September
1998 and is the first and only pharmaceutical to treat adult periodontitis by
inhibiting the enzymes that destroy periodontal support tissues. Periostat is
indicated as an adjunct to scaling and root planing, the most prevalent therapy
for adult periodontitis, to promote attachment level gain and to reduce pocket
depth in patients with adult periodontitis. Adult periodontitis, a chronic
disease characterized by the progressive loss of attachment between the tooth
root and the surrounding periodontal structures, may result in tooth loss if
untreated. See "- Periostat."
We are marketing Periostat and other pharmaceutical products to the dental
and dermatology communities through our own professional pharmaceutical sales
force of approximately 115 sales representatives and managers. Pursuant to an
exclusive License and Marketing Agreement with Atrix Laboratories, Inc., we
began, in October 2001, to actively market Atrix's proprietary dental products,
Atridox'r' and Atrisorb FreeFlow'r', and, in February 2002, Atrisorb-D'r', to
the United States dental market. In May 2002, we executed a sublicense agreement
with Altana Inc. to market and distribute Pandel'r', a prescription mid-potency
topical corticosteroid product developed by Altana Inc. to dermatologists in the
United States and Puerto Rico. In March 2003, we executed a co-promotion
agreement with Sirius Laboratories, Inc. pursuant to which we will jointly
market Sirius' AVAR'TM' product line and Pandel to dermatologists in the United
States. We distribute Periostat and Pandel through drug wholesalers and large
retail chains in the United States. Periostat is also sold through wholesalers
and direct to dentists in the United Kingdom through our wholly-owned
subsidiary, CollaGenex International, Ltd., and by distributors and licensees in
certain other overseas markets. The Atrix dental products are distributed
through specialty distributors who sell these products directly to dental
practitioners in the United States and Puerto Rico. Our sales force also
co-promotes Vioxx'r', a prescription non-steroidal, anti-inflammatory drug
developed by Merck & Co., Inc., in the United States, and, effective October 1,
2002, Denavir'r', a topically applied prescription medication for the treatment
of recurrent cold sores in adults, for Novartis Consumer Health, Inc.
Research has shown that certain unique properties of the tetracyclines
discovered during the development of Periostat may be applicable to other
diseases involving inflammation and/or destruction of the body's connective
tissues, including acne, rosacea, meibomianitis and cancer metastasis, among
others. CollaGenex is further evaluating Periostat and a series of novel,
proprietary compounds known as IMPACS'r' (Inhibitors of Multiple Proteases and
Cytokines), to assess whether they are safe and effective in these applications.
Phase I clinical trials for Metastat'r', our lead compound for the treatment of
metastatic cancer, were initiated in January 1998 under the sponsorship of the
National Cancer Institute. In Phase I clinical trials, Metastat demonstrated an
overall tumor response rate of 44% in patients with Kaposi's sarcoma, and the
National Cancer Institute has completed enrollment for a Phase II clinical trial
to continue to evaluate the safety and efficacy of Metastat in HIV-related
Kaposi's sarcoma.
In January 2002, we announced our plans to expand into the dermatology
market. In September 2001, we announced the results of a 59-patient,
double-blinded, placebo-controlled clinical trial designed to evaluate the
efficacy of Periostat to treat adult patients with acne. The results from this
trial revealed that the patients who were administered Periostat experienced a
greater than 50% reduction in the number of comedones, inflammatory lesions and
total lesions relative to baseline lesion counts, a statistically greater number
than in the placebo group. During 2002, we initiated a 150-patient Phase III
clinical trial to evaluate the use of Periostat to treat rosacea, a
dermatological condition that affects approximately 15 to 20 million patients in
the United States. In February 2002, we announced that we had licensed a new
dermal and transdermal drug delivery technology called Restoraderm'TM', which we
intend to develop for dermatological applications. The first products based on
the Restoraderm technology have completed preliminary stability studies and are
undergoing technology transfer to a manufacturer in the United States. In May
2002, we executed a sublicense Agreement with Altana Inc. with respect to the
marketing and distribution of Pandel and, in October 2002, we trained our sales
force to promote Pandel in the dermatological arena. In March 2003, we executed
a co-promotion agreement with Sirius Laboratories, Inc. pursuant to which we
will jointly market Sirius' AVAR'TM' product line and Pandel to dermatologists
in the United States. We are actively seeking product licensing opportunities to
enhance our near-term offerings to the dermatology market.
Our core technology is licensed on an exclusive basis from the Research
Foundation of the State University of New York at Stony Brook, or SUNY. SUNY
also conducts research and development on other potential applications of the
core technology on a project basis.
We are a Delaware corporation. We were incorporated and began operations
in 1992 under the name CollaGenex, Inc. and changed our name to CollaGenex
Pharmaceuticals, Inc. in April 1996. Our principal executive offices are located
at 41 University Drive, Suite 200, Newtown, Pennsylvania 18940, and our
telephone number is (215) 579-7388.
In this Annual Report on Form 10-K, the terms "CollaGenex," "we," "us" and
"our" includes CollaGenex Pharmaceuticals, Inc. and its subsidiaries.
Periostat'r', Metastat'r', Dermostat'r', Nephrostat'r', Osteostat'r',
Arthrostat'r', Rheumastat'r', Corneostat'r', Gingistat'r', IMPACS'TM', PS20'r',
The Whole Mouth Treatment'r', Restoraderm'TM' and Dentaplex'r' are United States
trademarks of CollaGenex Pharmaceuticals, Inc. Periostat'r', Nephrostat'r',
Optistat'r', Xerostat'r' and IMPACS'TM' are European Community trademarks of
CollaGenex Pharmaceuticals, Inc. Periostat'r', Nephrostat'r', Optistat'r',
Xerostat'r', IMPACS'r', Dentaplex'r', Restoraderm'r', Dermastat'r' ,
Periocycline'r', Periostatus'r' and Periostan'r' are United Kingdom trademarks
of our wholly-owned subsidiary, CollaGenex International Ltd. CollaGenex'r',
PS20'r', "C" Logo'r' and The Whole Mouth Treatment'r' are European Community and
United Kingdom trademarks of CollaGenex International Ltd. Periocycline'TM' and
Periostan'TM' are European Community Trademarks of CollaGenex International Ltd.
All other trade names, trademarks or service marks appearing in this Annual
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Report are the property of their respective owners and are not property of
CollaGenex Pharmaceuticals, Inc. or any of our subsidiaries.
Products and Product Agreements
Periostat
Adult periodontitis is a chronic disease characterized by the progressive
loss of attachment between the periodontal ligament and the surrounding alveolar
bone, ultimately resulting in tooth loss. According to industry data, in the
United States alone, an estimated one-third of all adults, or approximately 67
million people, suffer from some form of periodontal disease. Approximately 13
million people seek professional treatment annually for periodontal disease,
resulting in over 15 million periodontal procedures and annual expenditures of
approximately $6.0 billion, primarily for procedures and surgeries performed by
a periodontist or a dental professional.
The most prevalent therapy for adult periodontitis is scaling and root
planing, a mechanical procedure that removes bacteria deposits called plaque
from tooth and root surfaces above and below the gum line. Periostat is the
first orally administered, systemically delivered pharmaceutical indicated as an
adjunct to scaling and root planing to promote attachment level gain and to
reduce pocket depth in patients with adult periodontitis.
Periostat, a 20 mg dose of doxycycline hyclate, is a unique
sub-anti-microbial dosage strength that suppresses the chronic and progressive
tissue degradation characteristic of periodontitis without exerting any
anti-microbial effect. Doxycycline is an active ingredient of several FDA
approved drugs and has been in use for approximately 35 years for the treatment
of microbial infections and, along with other tetracyclines, has a well
established safety record. Periostat is intended to be taken orally by the
patient between dental visits. Periostat's mechanism of action is believed in
part to be through the down-regulation of the activity of collagenases, enzymes
that belong to a broad class of enzymes known as matrix metalloproteinases.
Collagenase is excessively produced as a result of inflammation resulting from
bacterial infection in the gums. In September 1998, the FDA granted United
States marketing approval for Periostat as an adjunct to scaling and root
planing to promote attachment level gain and reduce pocket depth in patients
with adult periodontitis. Periostat was made available for prescription use in
November 1998 and was fully launched commercially in January 1999. Since January
1999, more than 2.3 million Periostat prescriptions have been filled and over
35,000 dentists have written a Periostat prescription. In December 2000, the FDA
granted marketing approval for our tablet formulation of Periostat. In July
2001, we launched a new tablet formulation of Periostat. The Periostat tablet
formulation is easier to swallow and offers manufacturing cost advantages over
our capsule formulation of Periostat, which has been discontinued.
Periostat tablets are manufactured for us by Pharmaceutical Manufacturing
Research Services, Inc., a contract manufacturing company. We intend to supply
Periostat tablets to our foreign marketing partners upon receipt of requisite
regulatory approvals, if at all, for distribution in countries other than the
United States and the United Kingdom.
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We currently actively sell Periostat in the United States and the United
Kingdom and our partners have begun initial sales of Periostat in Israel and
Austria. Our partners also intend to begin selling Periostat in Portugal, Canada
(through Pharmascience Inc.) and Switzerland later in 2003, and we have
marketing and distribution partnerships for the sale of Periostat in various
foreign countries, subject to regulatory approval.
Atridox, Atrisorb FreeFlow and Atrisorb-D
Pursuant to the terms of an exclusive License and Marketing Agreement that
we executed with Atrix Laboratories, Inc. in August 2001, we obtained the right
to market, sell and distribute Atrix's proprietary dental products, Atridox,
Atrisorb FreeFlow and Atrisorb-D to the United States dental community. We
believe that these products generally complement Periostat in the treatment of
adult periodontitis.
Atridox is a locally-applied anti-microbial therapy for the treatment of
chronic adult periodontitis. Atridox uses Atrix's patented drug delivery
technology, Atrigel'r', for the targeted delivery of the doxycycline, which has
been shown to reduce the levels of bacteria in the periodontal pocket. Atridox
is a gel that is placed into affected periodontal pockets by a dental
professional and resorbs over a two week period. In pivotal double-blinded,
placebo-controlled clinical trials conducted by Atrix, the administration of
Atridox was shown to increase attachment level between the gums and the teeth
and decrease periodontal pocket depth in patients with adult periodontitis.
Atrisorb FreeFlow is a guided tissue regeneration (GTR) barrier product
used in the surgical treatment of periodontal defects to help regenerate tissue.
In periodontal surgery, a section of the gums called a flap is cut away from the
underlying bone structure to allow the periodontist to repair the periodontal
support structure. When the flap is subsequently repositioned, a membrane
barrier product such as Atrisorb FreeFlow is placed between the flap and the
bone to prevent the downgrowth of epithelial tissues, which interferes with the
re-attachment of the gums to the teeth.
Atrisorb-D is the first GTR barrier product to incorporate an antibiotic,
which has been shown to reduce the incidence of infections during GTR
procedures.
Under the terms of our License and Marketing Agreement with Atrix, we have
committed to: (i) expend no less than $2.0 million in advertising and selling
expenses related to the Atrix products during the fiscal year beginning January
1, 2002, during which year we met this requirement; (ii) maintain, for a period
of 24 months, a force of no less than 90 full time dental consultants and
divisional and regional managers to make sales and product recommendation calls
on dental professionals; and (iii) making the Atrix products the subject of a
specific number of detail calls in the United States during 2002, which we
achieved. We are required to make certain annual minimum expenditures for
advertising and promotional activities after 2002, including: (i) the lesser of
$4.0 million or 30% of our contribution margin, as defined in the agreement,
relating to a specific Atrix product that we market, and (ii) the lesser of $2.0
million or 30% of our contribution margin, as defined in the agreement, relating
to a separate Atrix product that we market.
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The License and Marketing Agreement terminates incrementally with respect
to each Atrix product, upon each successive expiration date of the patent
protection afforded to such product. We may terminate the License and Marketing
Agreement at any time, with or without cause, upon twelve (12) months prior
written notice to Atrix. Furthermore, either party may terminate the agreement
upon the occurrence of certain conditions, as more fully set forth in the
License and Marketing Agreement.
Vioxx
Pursuant to a Co-Promotion Agreement we executed with Merck in September
1999, we received the exclusive right to co-promote Vioxx to the dental
community. Vioxx is a prescription strength non-steroidal anti-inflammatory drug
that was approved by the FDA on May 20, 1999 to relieve osteoarthritis, manage
acute pain in adults, including dental pain, and treat primary dysmenorrhea.
Merck promotes Vioxx to the general physician community. The agreement provides
for certain payments by Merck to us upon sales of Vioxx to the dental community.
On September 23, 2002, we executed an amendment, extension and restatement of
our Co-Promotion Agreement with Merck with respect to Vioxx, having a term
through December 31, 2003.
Pandel
On May 24, 2002, we executed a Sublicense Agreement with Altana Inc., the
United States subsidiary of Altana Pharma AG, pursuant to which we were granted
the exclusive right to create improvements to, market, advertise, promote,
distribute, offer for sale and sell, in the United States and Puerto Rico,
Pandel Cream, a mid-potency topical corticosteroid that is indicated for the
relief of mild-to-moderate inflammatory disorders of the skin in adults, such as
atopic dermatitis and psoriasis. We had detailed Pandel on a co-promotional
basis with Altana since October 2001. In March 2003, we entered into an
arrangement with Sirius Laboratories, Inc. pursuant to which Sirius has agreed
to, among other things, co-promote Pandel. Altana currently licenses such rights
from Taisho Pharmaceutical Co., Ltd., a company organized and existing under the
laws of Japan. Pursuant to the terms of such agreement, we agreed to pay Altana
an aggregate sublicense fee of $1.7 million, $800,000 of which was paid on June
30, 2002 and $900,000 of which is due on May 31, 2003. We purchase from Altana
all Pandel products to be sold and are required to pay a royalty fee equal to a
percentage of the net sales of Pandel.
AVAR
In March 2003, we executed a co-promotion agreement with Sirius
Laboratories, Inc. pursuant to which we will jointly market Sirius' AVAR'TM'
product line and Pandel to dermatologists in the United States.
Denavir
Denavir is an FDA-approved topical antiviral cream used for the treatment
of recurrent cold sores in adults. We marketed Denavir to the dental community
under a Co-Promotion Agreement that we executed with SmithKline Beecham Consumer
Healthcare in October 1998, which provided for certain payments by SmithKline
Beecham to us. Following the acquisition
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of SmithKline Beecham by Novartis Consumer Health, Inc., Novartis terminated
this Co-Promotion Agreement effective April 13, 2001.
On October 1, 2002, we entered into a Product Detailing Agreement with
Novartis Consumer Health, Inc. pursuant to which we co-promote Denavir to our
target dentists in the United States and we receive detailing fees and
performance incentives from Novartis Consumer Health, Inc. Our agreement with
Novartis expires on September 30, 2004.
Dentaplex
In June 2001, we launched Dentaplex, a nutritional supplement specifically
formulated to help maintain optimal oral health. Based upon a review of the
market acceptance of Dentaplex, we discontinued marketing Dentaplex in January
2003.
Sales and Marketing
We market and sell our dental and dermatological products in the United
States through a dedicated sales force comprised of approximately 115 sales
representatives and managers. We currently market Periostat in certain foreign
markets, either through our wholly-owned subsidiary, CollaGenex International
Ltd., or through marketing and distribution partnerships with companies in these
markets and intend to market Periostat in additional foreign markets upon
receipt of all requisite regulatory approvals. We currently have such agreements
with foreign companies, subject to requisite regulatory approvals, covering
Japan, Canada, Spain, Portugal, Greece, Israel, Austria and Switzerland, and
have an export marketing agreement for countries in the Middle East.
Typically, our foreign marketing and distribution agreements provide for
milestone payments upon the achievement of various regulatory and commercial
events as well as supply agreements for manufactured product.
United States
Our field sales organization is currently comprised of one regional
manager, eleven district managers and approximately 100 full-time equivalent
sales representatives. Each full-time equivalent sales representative is
responsible for covering a territory that includes approximately 200 dentists
and periodontists that are believed to be high volume potential prescribers of
Periostat based on the estimated number of scaling and root planings performed
in their respective practices. Additionally, each representative calls on
approximately 50 dermatology offices that have high potential for prescription
of CollaGenex dermatology products.
Our field sales organization currently details Periostat, Atridox,
Atrisorb FreeFlow, Atrisorb-D, Vioxx and Denavir to dental professionals and
Pandel and the AVAR product line to dermatological professionals.
We believe that our dental sales effort is distinguished from typical
dental promotion by our focus on education and the clinical benefits of
pharmaceutical dentistry, a new approach to treating dental diseases.
Accordingly, we produce educational marketing materials, detail aids
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and product samples that are used extensively by our representatives in their
presentations to dentists. Clinical reprints and video presentations are also
provided. We believe that peer-to-peer communications are vital to increasing
the acceptance of Periostat and, therefore, we arrange speaking engagements and
teleconferences where Periostat advocates share their experiences with other
dental professionals.
Sales training is an important component of our sales and marketing
efforts. New representatives receive four weeks of field training and two weeks
of intensive office training in periodontal disease, host response, pain
management, territory management and selling skills. Training continues at
district-level meetings throughout the year. During 2002, our entire sales force
was trained to promote Pandel in the dermatological arena.
In order to provide an integrated dental and dermatology product line and
leverage our sales and marketing organization, we are actively seeking to
in-license or acquire other high-quality therapeutic dental and dermatology
products.
International
We are establishing relationships with key partners to market and sell
Periostat internationally, upon receipt of the requisite foreign regulatory
approvals. In 1996, we executed a manufacturing and distribution agreement with
Roche S.P.A. (formerly Boehringer Mannheim Italia) pursuant to which Roche
S.P.A. had the exclusive right to market Periostat in Italy, San Marino and The
Vatican City pending requisite regulatory approval. In 1997, we announced that a
Marketing Authorization for Approval was filed for Periostat by Roche S.P.A.
with the Italian Ministry of Health. Due to delays incurred in the review of
national filings, Roche S.P.A. withdrew the Marketing Authorization for Approval
in Italy, and Italy was included under the pan-European Mutual Recognition
Procedure, which we filed in June 2001. In February 2002, we received
provisional approval to market Periostat in Italy. In June 2002, we received
final approval to market Periostat in Italy, triggering a milestone payment due
from Roche. Subsequent to this approval, we were notified by Roche that due to
changes in Roche's local market strategy, Roche was not going to launch
Periostat in the Italian market. In January 2003, we attempted to reach
agreement with Roche regarding compensation for outstanding milestone payments.
In March 2003, we terminated our agreement with Roche and notified them of our
intent to take the matter to arbitration as is provided for in our agreement
with Roche. As of December 31, 2002, we have not recognized the revenue related
to this milestone due to the uncertainty of collection.
In October 1998, we announced that a Marketing Authorization Application
had been filed with the United Kingdom Medicines Control Agency with respect to
Periostat. A capsule formulation of Periostat was approved by the United Kingdom
Medicines Control Agency in February 2000, and we launched a modest direct
marketing effort in the United Kingdom to dentists through our United Kingdom
subsidiary, CollaGenex International Limited. Sales of Periostat capsules
commenced in the United Kingdom in September 2000. In December 2000, the United
Kingdom Medicines Control Agency approved a tablet formulation of Periostat, and
in June 2001, we applied for the registration of Periostat tablets with the
European Union Member States and Norway under the Mutual Recognition Procedure,
with the United Kingdom Medicines Control Agency acting as our Reference Member
State.
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Under the Mutual Recognition Procedure, once marketing approval for a
pharmaceutical is granted by one European Member State, such state then acts as
a Reference Member State, and assists in expediting the review and approval of
the pharmaceutical in other European Member States.
In February 2002, we received provisional approval for the marketing of
Periostat from seven European Member States including Austria, Finland, Ireland,
Italy, Luxembourg, the Netherlands and Portugal. In April 2002, we announced
that we received the final Marketing Authorizations from the Ministries of
Health in Austria and Finland. In June 2002, we announced that we had received
final Marketing Authorizations from the Ministries of Health in the Netherlands
and Portugal. In June 2002 we received final approval to market Periostat in
Ireland and Italy.
We cannot be certain that we will achieve other foreign regulatory
approvals or will be successful in marketing Periostat in the United Kingdom or
other European countries.
We executed a licensing agreement with Pharmascience Inc. in June 1999
pursuant to which Pharmascience will market and distribute Periostat in Canada.
In the fourth quarter of 1999, Pharmascience submitted an application to the
Canadian Therapeutic Products Program of Health Canada for Canadian marketing
approval of a capsule formulation of Periostat which was approved in March 2003.
Pharmascience will launch Periostat in Canada later in 2003.
On May 2, 2000, we announced that we had executed an exclusive marketing
and distribution agreement with ISDIN S.A., a joint venture between the Spanish
companies Laboratorios del Dr. Esteve S.A. and Antonio Puig S.A, for the
marketing and distribution of Periostat tablets in Spain, pending requisite
regulatory approval, and Portugal, when we have received such regulatory
approval. Such agreement was subsequently extended, granting ISDIN S.A. the
right to market and distribute Periostat in Greece, pending requisite regulatory
approval.
On June 9, 2000, we announced that we had executed marketing and
distribution agreements with Willvonseder & Marchesani Ges.m.b.H & Co. KG, a
Vienna based company and Karr Dental Ltd., a Zurich based company, with respect
to the marketing and distribution of Periostat tablets in Austria and
Switzerland, respectively. In April 2002, Periostat received regulatory approval
under the Mutual Recognition Procedure for marketing in Austria. We believe the
product will be launched in April 2003 in Austria. The regulatory authorities in
Switzerland approved Periostat for sale in March 2003. Karr Dental plans to
launch the product later in 2003.
On August 9, 2000, we announced that we had executed an exclusive
marketing and supply agreement with Showa Yakuhin Kako Co. Ltd., a Japanese
company, with respect to the marketing and supply of Periostat tablets in Japan,
pending requisite regulatory approval. Showa continues to work with the
regulatory authorities in Japan to establish the appropriate clinical
development program in order to gain regulatory approval for Periostat in Japan.
In connection therewith, Showa intends to conduct a study during 2003 to
establish that the pharmacokinetics of Periostat are similar in Japanese and
Caucasian populations.
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On August 24, 2000, we announced that we had executed an agreement for the
marketing and distribution of Periostat in Israel with Taro International Ltd.,
a wholly-owned subsidiary of Taro Pharmaceutical Industries Limited, an Israeli
company. This agreement provides for the payment of milestone fees to us
associated with the regulatory approvals of Periostat. In February 2002, the
Israeli authorities notified Taro with respect to the provisional approval of
Periostat in Israel. In May 2002, we announced that the Israeli Ministry of
Health had granted a Marketing Authorization to Taro. Periostat was launched in
Israel in January 2003.
On January 30, 2001, we announced that we had signed an exclusive Middle
East Export Marketing Agreement with Pharma Med Inc. to distribute and manage
the introduction of Periostat in certain Middle Eastern countries, pending
requisite regulatory approval. In return for such services, Pharma Med will be
paid a fee contingent on Periostat sales to the distributors. A regulatory
filing has been made with the authorities in Oman.
In February 2002, we announced that we had appointed Dexcel-Dental, a
division of Dexcel-Pharma Limited, to handle the field selling of Periostat to
the dental profession in the United Kingdom and, upon receipt of final
regulatory approval, the Republic of Ireland. In October 2002, we provided
Dexcel-Dental with a formal termination notice of our agreement and we are
currently negotiating such termination. We continue to market Periostat in the
United Kingdom through our wholly-owned subsidiary, CollaGenex International
Ltd.
In November 2001, we terminated our distribution and marketing agreement
for Germany with Hain Diognostika GmbH due to Hain's failure to fulfill its
obligations under the agreement. We signed a settlement agreement with Hain in
November 2002 with respect to Hain's non-payment of milestone fees due to
CollaGenex.
Manufacturing, Distribution and Suppliers
In 1995, we entered into a supply agreement with Hovione International
Limited pursuant to which the active ingredient in Periostat, doxycycline
hyclate, is supplied to us by Hovione from its offshore facilities. Hovione
supplies a substantial portion of the doxycycline used in the United States from
two independent facilities, providing for a back-up supply in the event that one
facility is unable to manufacture. The initial term of the supply agreement
expired on January 25, 2000 and, pursuant to an addendum to that agreement, the
term was extended to May 14, 2006 and thereafter automatically renews for
successive two-year periods unless, 90 days prior to the expiration of any such
periods, either party gives the other party written notice of termination. In
addition, in the event of a default that remains uncured for 90 days, the
non-defaulting party can terminate the supply agreement effective immediately at
the end of such ninety-day period. We rely on Hovione as our sole supplier of
doxycycline, and have no back-up supplier at this time.
We historically relied on a single third-party contract manufacturer,
Applied Analytical Industries, Inc., to produce Periostat in a capsule
formulation. In an effort to capitalize on certain manufacturing cost
advantages, in July 2001, we launched our new tablet formulation of Periostat,
which has now replaced our capsule formulation of Periostat.
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On September 26, 2000, we entered into a Service and Supply Agreement with
a contract manufacturer, Pharmaceutical Manufacturing Research Services, Inc.,
for the tablet formulation of Periostat and no longer use AAI for contract
manufacturing services. Our current arrangement with Pharmaceutical
Manufacturing Research Services has been extended until the earlier of March 30,
2007 or until a generic 20 mg doxycycline hyclate tablet is available on the
market. Currently, Pharmaceutical Manufacturing Research Services is the sole
third-party contract manufacturer to supply a tablet formulation of Periostat to
us. We intend to contract with additional manufacturers for the commercial
manufacture of Periostat tablets. Pharmaceutical Manufacturing Research Services
is required to comply with current good manufacturing practices, or cGMP
requirements.
In November 1998, we executed a Distribution Services Agreement with Cord
Logistics, Inc., now known as Cardinal Health Specialty Pharmaceutical Services
("SPS"), pursuant to which SPS acts as our exclusive logistics provider for
Periostat in the United States and Puerto Rico. Under this agreement, SPS
warehouses and ships Periostat from its central distribution facility to
wholesalers that distribute Periostat to pharmacies throughout the United States
for prescription sale to patients. SPS also provides sample fulfillment services
for our sales force and various customer and financial support services to us,
including billing and collections, contract pricing maintenance, cash
application, chargeback processing and related reporting services. The
Distribution Services Agreement has an initial term of 3 years and will renew
automatically for successive one-year periods unless notice of termination is
provided by either party 90 days prior to expiration. We negotiated a three-year
extension of such agreement having similar terms to the original agreement with
an effective date of March 1, 2002.
In February 2002, we executed a Wholesale Service Agreement effective
November 2001 with National Specialty Services, Inc., now known as Cardinal
Health Specialty Pharmaceutical Distribution ("SPD"), pursuant to which SPD acts
as our non-exclusive authorized distributor of Atridox, Atrisorb FreeFlow and
Atrisorb-D. Under this agreement, SPD will also provide certain additional
services, including marketing, sales detail report production, contract
administration and chargeback processing. The Wholesale Service Agreement has an
initial term of 3 years and shall renew automatically for successive one-year
periods unless notice of termination is provided by either party 90 days prior
to expiration.
We cannot be certain that we will be able to enter into additional, or
maintain existing manufacturing, distribution or supply agreements on acceptable
terms, if at all. In the event that we are unable to obtain sufficient
quantities of doxycycline hyclate or Periostat on commercially reasonable terms,
or in a timely manner, or if our suppliers fail to comply with current good
manufacturing practices, or cGMP, or if our distributors are unable to ship or
support our products, our business, financial condition and results of
operations may be materially adversely affected. See "- Government Regulation."
Customers/Backlog
During 2002, net product sales to each of Cardinal Health, Inc., McKesson
Corporation and Amerisource-Bergen Corporation and accounted for 32%, 24% and
19% respectively, of our aggregate net product sales. As is common practice in
the pharmaceutical industry, wholesalers may become very speculative in their
purchasing practices in anticipation of product price
-10-
increases. Accordingly, we may limit, fulfill or delay shipment of customer
purchase orders depending on the availability of product and other factors
necessary to operate our business efficiently. At December 31, 2002, there were
open customer purchase orders with an aggregate value of approximately $6.4
million. These orders were shipped complete during January 2003. There were no
open customer purchase orders outstanding at December 31, 2001.
Research and Development
Our research and development activities are conducted primarily by third
parties including contract research organizations and academic and government
institutions. The main focus of these activities is the identification and
development of novel tetracycline-based compounds for application in a variety
of inflammatory and tissue-destructive disorders. Other than Periostat, the most
advanced program involves Metastat, our lead compound for treating metastatic
cancer.
On October 18, 2000, we announced that we had received a Phase I Small
Business Technology Transfer grant from the National Heart, Lung and Blood
Institute, a division of the National Institute of Health. The grant will
support the potential development of one of our compounds known as IMPACS
(Inhibitors of Multiple Proteases and Cytokines) for the prevention and
treatment of acute lung injury.
Major research programs currently being conducted at CollaGenex include:
(i) the clinical development of the sub-antimicrobial dose of doxycycline
commercialized as Periostat for the treatment of rosacea, perioral dermatitis
and meibomianitis (a disorder characterized by "dry eye"); (ii) the development
of a "once-a-day" formulation of Periostat; and (iii) limited support for the
conduct of exploratory studies in the utility of Metastat (COL-3) as a treatment
for soft tissue sarcoma and periodontitis and rosacea.
The clinical development of Periostat in perioral dermatitis and
meibomianitis remains exploratory. The clinical development in rosacea is
directed towards the filing of an NDA for this indication in the future, should
such studies demonstrate safety and effectiveness for this indication. Programs
are being developed to support the possible submission of a new drug application
for any or all of the potential clinical indications. During 2002, we initiated:
(i) Phase III study in rosacea recruiting 150 patients; (ii) an exploratory
study in rosacea recruiting 36 patients; and (iii) an exploratory study in
meibomianitis, recruiting approximately 70 patients. It is unlikely that these
studies will yield results until later in 2003.
The development of the once-a-day formulation of Periostat is being
conducted through a development agreement with a third party contractor. The
first formulations arising from this research were administered to human
volunteers during 2002 and exhibited promising results, leading to the selection
of a formulation for more complete clinical testing in 2003. It is anticipated
that this formulation will undergo testing for clinical efficacy in late 2003,
should it perform adequately in earlier tests.
Metastat, our anti-angiogenesis compound, continues development under the
auspices of a cooperative research and development agreement, or CRADA, with the
National Cancer Institute, which was extended in February 2002 for an additional
two (2) years. We are
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responsible for providing a formulated, encapsulated version of Metastat to
support this clinical study. The clinical component of these studies is
completely funded by the National Cancer Institute, except for a nominal payment
to the investigators with respect to enrollment. A sufficient quantity of
Metastat was produced in 2001 to support the National Cancer Institute's
development program as it is currently proposed. Two studies are actively
recruiting patients. A Phase I/II study in astrocytoma and glioblastoma (both
brain cancers) is currently recruiting patients. Based on the positive results
from the Phase I study carried out in Kaposi's sarcoma, the AIDS Malignancy
Consortium of the National Cancer Institute is sponsoring a randomized, two-dose
Phase II study in Kaposi's sarcoma. This study has completed recruitment of 75
patients and has closed to accrual. Initial indications suggest that the drug is
affording disease-modifying efficacy in some patients, with early reports of
both partial and complete responses. However, until complete data are available,
it is not possible to determine whether there is a dose response and/or the drug
has sufficient efficacy to justify the conduct of a Phase III clinical study.
During 2001, we submitted two investigational new drug applications to the
FDA for the conduct of exploratory clinical studies with COL-3 (the active
ingredient in Metastat) in the treatment of cardiopulmonary bypass patients and
the treatment of adult periodontitis. In 2002, we submitted a further IND for
the conduct of a study in rosacea. The cardiopulmonary bypass IND has not begun
because FDA placed it on clinical hold; however, the rosacea and periodontitis
studies will be recruiting patients during 2003. A Phase I, ascending dose trial
with COL-3 in normal human volunteers succeeded in establishing the maximum
tolerated dose that could be supported in the investigational new drug
application-based exploratory studies. While the National Cancer Institute is
carrying out studies with 50 mg and 100 mg of COL-3 per day as the proposed
efficacious dose, our Phase I study suggested that the maximum tolerated dose
for indications other than cancer may be as low as 20 mg per day. We do not know
whether the drug will exhibit sufficient efficacy in the treatment of rosacea
and periodontitis to justify further clinical investigation, particularly if the
dose is significantly limited.
We have not developed forecasts for the sale of products arising from the
commercialization of COL-3, nor do we anticipate spending significant resources
on the development of COL-3 until it is clear from the studies being carried out
with National Cancer Institute or other sources of external funding that the
drug has a tolerable safety profile and a high likelihood of clinical and
commercial success.
As of December 31, 2001, we had two products or product candidates in
various stages of clinical trials. Completion of clinical trials may take
several years or more, but the length of time can vary substantially according
to the type, complexity, novelty and intended use of a product candidate. In
2001, we completed a pilot trial of Periostat in inflammatory acne and initiated
additional clinical trials for Periostat in rosacea and meibomianitis patients.
We also initiated and completed several Phase IV studies of Periostat in dental
applications. Results from a study of Periostat in conjunction with periodontal
surgery were presented during 2002 and revealed encouraging findings. Additional
data on the use of Periostat in diabetic patients was published in 2003 and
suggested that the drug may provide benefits not only in improved periodontal
outcomes but also in improved diabetic control. Extensive additional studies are
required before this finding could be confirmed, if at all. Phase IV studies are
designed to help support product marketing and are not typically designed to
provide data suitable for submission
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to the FDA for a new indication for the product. We intend to continue the Phase
IV development of Periostat in 2003.
Upon successful completion of the pilot and Phase II trials we will assess
the data obtained and make a decision on whether to pursue Phase III trials for
any indication studied in Phase II or pilot studies. If we successfully complete
Phase III trials, we intend to submit the results to the FDA to support
regulatory approval. However, we cannot be certain that any of our products will
prove to be safe or effective, will receive regulatory approvals, or will be
successfully commercialized.
The duration and the cost relating to preclinical testing and clinical
trials may vary significantly over the life of a project. Our joint development
arrangement for Metastat with the National Cancer Institute may also result in
variability in our development costs. We closely monitor our research and
development costs in order to ensure that our investment is consistent with the
return we predict from each project.
Technology
Our core technology involves the use of pharmaceutical products to prevent
the destruction of the connective tissues of the body and to down-regulate the
pathological host response to a variety of external and internal mediators of
inflammation and tissue destruction.
One manifestation of this technology is the ability of the compounds under
development by us to pharmaceutically modulate the activity of matrix
metalloproteinases. Matrix metalloproteinases are responsible for the normal
turnover of collagen and other proteins that are integral components of a
variety of connective tissues such as skin, bone, cartilage and ligaments.
Under normal physiological conditions, the natural breakdown of collagen
is in part regulated by the interaction between the degradative properties of
matrix metalloproteinases and a group of naturally occurring biomolecules called
tissue inhibitors of metalloproteinases, which modulate the level of matrix
metalloproteinase activity. In many pathological conditions, however, the
balance between collagen production and degradation is disrupted resulting in
excessive loss of tissue collagen, a process called collagenolysis. One such
example is the progressive destruction of the periodontal ligament and alveolar
bone in adult periodontitis. Similar degradative activity is associated with
other disorders and conditions such as cancer metastasis, wounds,
osteoarthritis, osteoporosis, rheumatoid arthritis and diabetic nephropathy.
Elements of our core technology are licensed on an exclusive basis from
SUNY and results from the research of Drs. Lorne M. Golub and Thomas F. McNamara
and their colleagues at SUNY. These researchers demonstrated that tetracyclines
can significantly reduce the pathologically excessive collagen degradation
associated with periodontitis. They also were able to demonstrate that this
result was unrelated to the antibiotic properties of tetracyclines. Furthermore,
they demonstrated that the administration of doses of antibiotic tetracyclines
well below the dosage levels necessary to destroy microbes (sub-antimicrobial
doses) was effective in preventing the loss of connective tissue in models of
periodontitis. Studies published in scientific journals support the hypothesis
that the mechanism of action for this activity is the
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result, in part, of the direct binding of tetracyclines to certain metal binding
sites associated with the matrix metalloproteinase structure.
Additional information obtained suggests that tetracyclines also have the
ability to stimulate new bone protein synthesis by a variety of mechanisms.
These properties, which are independent from the anticollagenoyltic properties
of compounds, are particularly important during the development of certain types
of bone deficiency disorders, of which periodontitis is one. Particularly in
patients with concomitant disorders such as diabetic osteopenia and peri- or
post-menopausal osteoporosis, periodontitis can occur in the absence of
inflammatory-mediated elevated collagenolytic activity, and is primarily a
function of alterations in the balance of osteoblast and osteoclast mediated
resorption and bone formation (in particular a reduction of bone formation). In
these and other circumstances during development of the bony lesion
characterizing adult periodontitis, the property of tetracyclines to stimulate
new bone formation is the means by which the compounds are able to effectively
treat periodontitis.
Although commercially available antibiotic tetracyclines show effective
anti-collagenolytic and independent bone protein synthesis stimulating
potential, long-term administration of these compounds at normal antibiotic
doses can result in well-known complications of long-term antibiotic therapy,
such as gastrointestinal disturbance, overgrowth of yeast and fungi, and the
emergence of antibiotic-resistant bacteria. Our Phase III clinical trials using
Periostat demonstrated that the administration of sub-antimicrobial doses of
doxycycline over a twelve-month period exerted no anti-microbial effects. Thus,
the use of this dosage strength provides the anti-collagenolytic and bone
protein synthesis effects without the complications of long-term antibiotic
therapies. We have conducted, and are currently conducting, Phase IV clinical
studies to support future marketing activities of Periostat.
Our license from SUNY also covers the uses of a broad class of chemically
modified tetracyclines (IMPACS) that have been chemically modified to retain and
enhance their anti-collagenolytic and other properties but which have had the
structural elements responsible for their antibiotic activity removed. These
compounds, which lack any antibiotic activity, have shown potential in a number
of pre-clinical models of excessive connective tissue breakdown. Our current
research and development programs focus on the potential use of Periostat for a
variety of disorders characterized by inflammation and connective tissue
destruction, as well as the use of IMPACS in drug therapies for potential
applications where more potent doses of tetracyclines may enhance the efficacy
of the treatment.
Additional research has been conducted to identify, synthesize and
characterize a new generation of IMPACS compounds, for which patents owned by
CollaGenex have been filed. The first of these claiming a new compound, a
chemically-modified form of minocycline called COL-1002, recently issued in the
United States.
Periostat
We are planning and conducting various Phase IV clinical trials that
evaluate the use of Periostat for other therapeutic indications. Phase IV
studies being conducted at Boston University, SUNY at Stony Brook and the
University of Michigan are evaluating Periostat's ability to promote attachment
level, decrease pocket depth and promote healing in patients
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undergoing periodontal flap surgery. The data from the University of Michigan
was presented at the American Academy of Periodontology meeting in 2002 and
suggested that Periostat significantly improved certain clinical and biochemical
parameters key to the successful outcome of periodontal surgery. Another Phase
IV study being conducted at the University of Southern California was designed
to study the use of Periostat to prevent root resorption during orthodontic
tooth movement. Other Phase IV clinical trials are being conducted or are
planned to evaluate Periostat as an adjunct to scaling and root planing in
institutionalized geriatric patients, the evaluation of Periostat as an adjunct
to scaling and root planing in patients with Type I and Type II diabetes and the
use of Periostat in a population of smokers. Two of the studies in diabetic
patients reported encouraging preliminary data at the American Association for
Dental Research meeting in March 2003, suggesting that Periostat had the
potential to improve periodontal clinical outcomes and possibly contribute to
improvements in diabetic control in these patients. A large study (180 patients)
was initiated in 2003 to study the synergies which may exist between the
administration of Periostat and the local use of Atridox, along with scaling and
root planing, in patients with adult periodontitis.
To extend the possible therapeutic use of Periostat beyond the oral
cavity, we and our collaborators are planning, conducting or have completed
clinical trials to evaluate whether Periostat can manage meibomianitis, prevent
repeat heart attack, decrease bone loss in postmenopausal women, prevent the
growth and rupture of aortic aneurysms and prevent or reverse the clinical
manifestations of disease secondary to diabetes. Of these studies, only the
meibomianitis study is being fully funded by us, although we support additional
studies through the provision of active drug and placebo without charge.
A study of Periostat in the management of patients with acute coronary
syndromes was presented at the 75th anniversary meeting of the American Heart
Association in November 2002. Results suggested that Periostat could have a
direct impact on markers of systemic inflammation such as the cytokine IL-6, the
enzymes MMP-2 and MMP-9, and serum levels of high sensitivity C-Reactive Protein
(hsCRP) in these patients. While in this study no differences were observed in
clinical outcome between Periostat and placebo, the investigators who
participated in this study have suggested that the favorable change in
biological markers of systemic inflammation warrants follow up in a larger
controlled study.
In January 2002, we announced plans for expansion into the dermatology
market. On October 1, 2001, we announced the clinically and statistically
significant results of a six-month, 59-patient clinical trial designed to
evaluate the efficacy of Periostat for the treatment of patients with moderate
acne.
The results showed that the patients receiving Periostat experienced more
than a 50% mean reduction in comedones and inflammatory lesions from baseline
levels. Patent applications for Periostat to treat acne have been filed with the
U.S. Patent and Trademark Office.
The Periostat acne clinical trial was a multi-center, placebo-controlled,
double-blind study chaired by Dr. Robert Skidmore, Chief of Dermatology at the
University of Florida Medical Center, and was also conducted by Dr. Rodney
Kovach, Chief of Dermatology at West Virginia University Health Sciences Center.
The results revealed statistically and clinically
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significant benefits to patients receiving Periostat for all three of the
pre-established primary endpoints: change in total comedones, total inflammatory
lesions and total lesion counts.
In June 2002, we announced that we had initiated a multi-center,
double-blinded, placebo-controlled clinical study to evaluate the efficacy of
Periostat for the treatment of meibomianitis, a disorder of the eyelid
characterized by symptoms of "dry eye". There is currently no FDA-approved
systemic treatment for meibomianitis.
In July 2002, we announced the publication in a peer reviewed journal of
data from a Phase IV clinical trial conducted at the University of Pittsburgh
Dental School, the results of which were first announced by us in October 2000,
which demonstrated significant clinical benefit in patients with severe
generalized periodontitis who were administered Periostat in conjunction with a
course of repeated dental cleaning, above and below the gum-line, compared to
the same therapy plus a placebo.
In August 2002, we announced that we had initiated a multi-center,
double-blinded, placebo-controlled Phase III clinical study to evaluate the
efficacy of Periostat for the treatment of rosacea. There is currently no
FDA-approved systemic treatment for rosacea.
During 2002, we also reported data from an exploratory study evaluating
the effect of Periostat on markers of systemic inflammation on patients with
acute coronary syndromes. Periostat significantly reduced hsCRP, MMP 9, and IL-6
in these patients.
In January 2003, we announced that the first patients have entered a
multi-center, double-blinded, placebo-controlled Phase IV clinical study to
evaluate the combined efficacy of Periostat, and Atridox (doxycycline hyclate)
10%, a locally-applied antimicrobial gel, in the treatment of adult
periodontitis.
Metastat
Cancer metastasis is the spread of cancer cells from a diseased organ to
the lymphatic or circulatory system, where such cells then migrate throughout
the body causing cancer to develop in other organs. Tumor cell invasion is a
complex process that involves the destruction of the basement membrane, or
structural support tissue, of the lymphatic or circulatory system, and the
migration of tumor cells to secondary sites, followed by proliferation of these
cells. Data from pre-clinical studies sponsored by us at two major universities
suggest that several of our IMPACS drug candidates have potent activity in
models of cancer invasion, including prostate, breast, lung, colon and melanoma.
These studies also demonstrated that the down-regulation of the invasive
phenotype by conventional tetracyclines and IMPACS results in a decreased
ability of tumor cells to invade the lung in models of metastasis. For example,
IMPACS have been shown to modulate the specific type of matrix
metalloproteinases isolated from human lung cancer cells, the activity of which
has been correlated with the metastatic potential of tumors. In animal models
involving a variety of human cancer cell types, including prostate, breast,
lung, colon and melanoma, IMPACS developed by us exhibited an ability to inhibit
metastasis.
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In October 1996, we executed a letter of intent with the National Cancer
Institute to formalize a collaborative research and development agreement
pursuant to which the National Cancer Institute agreed to perform pharmacology,
toxicology and Phase I clinical trials using our lead compound for the
prevention of cancer metastasis, Metastat.
In June 1997, we announced that we had formally extended our Collaboration
Agreement with the National Cancer Institute with respect to the development of
Metastat. On December 5, 1997, we announced that the National Cancer Institute
had filed an investigational new drug application for Metastat. In January 1998,
we initiated Phase I clinical trials with respect to Metastat. Such studies were
sponsored by the National Cancer Institute pursuant to our Collaboration
Agreement with the National Cancer Institute. In February 1999, we released
initial findings related to such studies. Following oral administration, desired
plasma concentrations of the compound were achieved and no dose-limiting side
effects other than manageable phototoxicity were encountered. In February 1999,
we also announced the allowance of a United States patent which provides
intellectual property protection for the use of Metastat for the inhibition of
cancer metastasis. Subsequently, the National Cancer Institute advised us that
it believed that the level of photosensitivity, although manageable, could limit
the commercial viability of Metastat. However, the National Cancer Institute
also advised us that it remained interested in the mechanism of action of this
class of compounds and it intended to complete the current clinical trials to
establish "proof of principle" with respect to a variety of surrogate markers.
Two Phase I clinical trials were completed in 1999, one Phase I clinical trial
is ongoing and a fourth was initiated in the first half of 2001. Results from
the two initial Phase I studies of Metastat in refractory solid tumors and
refractory metastatic cancer demonstrated limited disease stabilization, with
one patient, suffering from an hemangioendothelioma (an unusual type of lung
tumor), remaining on Metastat for over three (3) years without progressive
disease. The studies established a maximum tolerated dose, with phototoxicity
proving to be the dose-limiting toxicity.
On May 18, 2000, we announced positive findings from an 18-patient,
National Cancer Institute sponsored Phase I dose-escalating study of Metastat,
administered once daily to patients with Kaposi's sarcoma, a disfiguring and
potentially deadly malignancy frequently associated with human immunodeficiency
virus (HIV). In this clinical trial, Metastat demonstrated an overall tumor
response rate of 44% in patients with Kaposi's sarcoma.
In 2001, the National Cancer Institute initiated an open-label, two-dose
study to establish clinical efficacy of Metastat in approximately 70 patients
with HIV-related Kaposi's sarcoma. This trial closed enrollment in March 2003,
and we believe data will be available for analysis in October 2003. Early
reports of this open-label study suggest that certain patients obtained
significant relief (both partial responses and complete responses) of their
clinical symptoms during the course of the study, but we cannot be sure what the
results will be until the data is analyzed.
Preclinical and Other Research and Development Activities
We have an active preclinical program in place to identify and
characterize IMPACS that exhibit the potential for enhanced biological
activities compared to Periostat and Metastat. In collaboration with the
University of Rochester, we have synthesized over thirty new IMPACS.
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These novel compounds underwent preliminary evaluation in a variety of in vitro
and in vivo assay systems under a three-year research agreement with SUNY, which
concluded in May 2001. In March 2003, we announced the issuance of the first
United States patent claiming a compound that was discovered as a result of
these efforts.
We receive certain proprietary rights to inventions or discoveries that
arise as a result of this research. Our current research and development
objective is to develop additional products utilizing our IMPACS technology,
preferably in conjunction with development partners.
In October 2002, we announced with Discovery Laboratories, Inc. the
formation of a research collaboration to evaluate the combination of Discovery's
platform technologies for the development of novel respiratory disease
therapeutics. We will collaborate on the preclinical evaluation of an
aerosolized formulation of Discovery's humanized lung surfactants combined with
our IMPACS compounds for the treatment of respiratory diseases.
In October 2002, we also announced the execution of a license agreement
with Medtronic, Inc. involving our IMPACS compounds, pursuant to which Medtronic
obtained an exclusive, worldwide license to technology relating to the use of
the compounds to treat aortic aneurysms and other forms of vascular disease with
medical devices.
In February 2002 we announced that we had licensed a dermal and
transdermal drug delivery technology, named Restoraderm'TM', from its inventor.
Restoraderm is designed to enhance the dermal delivery of a variety of active
ingredients and we intend that it will form the basis for a portfolio of topical
dermatological pharmaceuticals.
The Restoraderm technology is based on the ability of certain lipid
compositions to enhance the natural skin barrier and facilitate the dermal and
transdermal delivery of known active ingredients. The Restoraderm technology is
currently still under development, and we anticipate that the first products to
be developed using the technology will be available during 2003. In exchange for
the rights to the technology, we will pay the inventor milestone fees upon the
achievement of certain objectives as well as royalties on future sales of
products based on the technology.
Our research and development expenditures were approximately $4.4 million,
$3.8 million and $3.1 million in 2002, 2001 and 2000, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations."
Patents, Trade Secrets and Licenses
Our success will depend in part on patent and trade secret protection for
our technologies, products and processes, and on our ability to operate without
infringement of proprietary rights of other parties both in the United States
and in foreign countries. Because of the substantial length of time and expense
associated with bringing new products through development to the marketplace,
the pharmaceutical industry places considerable importance on obtaining and
maintaining patent and trade secret protection for new technologies, products
and processes.
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We depend on our license from the Research Foundation of the State of New
York at Stony Brook for all of our core technology. The SUNY License grants us
an exclusive worldwide license to make and sell products employing tetracyclines
that are designed or utilized to alter a biological process. Thirty-one (31)
United States patents and six (6) United States patent applications held by SUNY
are licensed to us under the SUNY License. Three (3) of the thirty-one (31)
patents have been co-assigned to the University of Miami, Florida, and another
patent has been co-assigned to Washington University. Other institutions are
co-owners with SUNY as follows: one (1) patent is co-owned with the Hospital for
Joint Diseases in New York City; three (3) patents are co-owned with the
University of Helsinki; and one (1) patent is co-owned with the University of
Rochester.
The primary United States patent claims methods of use of conventional
tetracyclines to inhibit pathologically excessive collagenolytic activity (the
"Primary Patent"), while a related United States patent claims methods of use of
tetracyclines which have no antibiotic activity (the "Secondary Patent"). The
twenty-nine (29) other United States patents relate to chemically modified
tetracyclines, or CMTs, and compositions of certain CMTs with anti-proteinase
properties, including anti-gelatinase, anti-membrane-type metalloproteinase,
anti-collagenase, and anti-elastase properties and methods of use of
tetracyclines to reduce bone loss and skeletal muscle wasting; and methods of
use of tetracyclines to enhance bone growth and promote synthesis in skeletal
muscle, inhibit protein glycosylation, inhibit excess phospholipase A2
activity/production, inhibit endogenous production of nitric oxide (NO), enhance
endogenous production of interleukin 10, reduce dental plaque adhesion, and
inhibit or reduce pulmonary neutrophil infiltration (or accumulation). SUNY did
not apply in foreign countries for patents corresponding to the Primary Patent,
but has obtained patents that correspond to the Secondary Patent in Australia,
Canada and certain European countries. One of the Secondary Patents has also
been issued in Japan. SUNY also has obtained patents in certain European
countries, Canada and Japan, and has pending patent applications in certain
other foreign countries which correspond to its United States patents relating
to methods of use of tetracyclines to reduce bone loss. Eighty-one (81) patents
have been issued in foreign countries. All of SUNY's United States and foreign
patents expire between 2004 and 2019. Our rights under the SUNY License are
subject to certain statutory rights of the United States government resulting
from federal support of research activities at SUNY. The failure to obtain and
maintain patent protection may mean that we will face increased competition in
the United States and in foreign countries. The SUNY License is terminable by
SUNY on ninety (90) days prior notice only upon our failure to make timely
payments, reimbursements or reports, if the failure is not cured by us within
ninety (90) days. The termination of the SUNY License, or the failure to obtain
and maintain patent protection for our technologies, would have a material
adverse effect on our business, financial condition and results of operations.
One of the United States patents and a corresponding Japanese patent
application licensed to us under the SUNY License are owned jointly by SUNY and
a Japanese company. These patent rights, which expire in 2012, cover particular
CMTs (the "Jointly Owned CMTs") that were involved in research activities
between SUNY and the Japanese company. The Japanese company may have exclusive
rights to these Jointly Owned CMTs in Asia, Australia and New Zealand and may
have a non-exclusive right to exploit these Jointly Owned CMTs in other
territories. These Jointly Owned CMTs are not involved in our Periostat product
but could, in the future, prove to be important for one or more of our other
potential applications of its
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technology. If we incorporate the Jointly Owned CMTs in any future product, we
may be precluded from marketing these products in Asia, Australia and New
Zealand and could experience increased competition in other markets from the
joint owner.
In consideration of the license granted to us, we: (i) issued to SUNY
78,948 shares of common stock in 1992; and (ii) have agreed to pay SUNY
royalties on the net sales of products employing tetracyclines, with minimum
annual royalty payments of $50,000 per year. The term of the license is: (i)
until the expiration of the last to expire of the licensed patents in each
country; or (ii) until November 18, 2018, at which time we have a fully paid,
non-exclusive license.
In addition to the patents and patent applications licensed from SUNY
which represent the core technology, we own additional technology for which
applications for United States patents have been filed and have been issued. In
this regard, we report the existence of an issued patent for a
toothpaste/mouthwash formulation for the amelioration of dentin
hypersensitivity. A second patent was issued which covers one of the novel
compounds discovered by CollaGenex and its use to treat abdominal aortic
aneurysm, ulceration of the cornea, periodontal disease, diabetes, diabetes
mellitus, scleroderma, progeria, lung disease (such as ARDS, cystic fibrosis,
emphysema or acute lung injury resulting from inhalation of toxicants), cancer,
graft versus host disease, disease of depressed bone marrow function,
thrombocytopenia, prosthetic joint loosening, spondyloarthropathies,
osteoporosis, Paget's disease, autoimmune disease, systemic lupus erythematosus,
acute or chronic inflammatory condition (such as inflammatory bowel disease,
arthritis, osteoarthritis, rheumatoid arthritis, pancreatitis, nephritis,
glomerulongephritis, sepsis, septic shock, lipopolysaccharide endotoxin shock,
multisystem organ failure or psoriasis), renal disease (such as chronic renal
failure, acute renal failure, nephritis or glomerulonephritis), connective
tissue disease, and neurological or neurodegenerative condition (such as
Alzheimer's disease, Guillain-Barre Syndrome, Krabbe's disease,
adrenoleukodystrophy, Parkinson's disease, Huntington's disease, multiple
sclerosis, amyotrophic lateral sclerosis or an encephalopathy, e.g., spongiform
encephalopathy). Furthermore, we report pending applications covering other new
tetracycline derivatives, and, among other things, methods of treating acne,
rosacea, meibomianitis and Kaposi's sarcoma.
We intend to enforce our patent rights against third-party infringers. Due
to the general availability of generic tetracyclines for use as antibiotics, we
could become involved in infringement actions, which could entail substantial
costs to us. Regardless of the outcome, defense or prosecution of patent claims
is expensive and time consuming, and results in the diversion of substantial
financial, management and other resources from our other activities.
We are currently enforcing our patent rights against a generic drug
company, West-ward Pharmaceutical Corporation. A patent infringement action has
been brought in the Eastern District of New York to prevent West-ward from
introducing a generic version of Periostat'r'. A motion for preliminary
injunction has been filed and West-ward has agreed to refrain from introducing
product until the court has fully heard and decided the motion. Negotiations are
also currently underway to resolve the matter without protracted litigation.
Our patent positions, like those of other pharmaceutical firms, are
generally uncertain and involve complex legal and factual questions.
Consequently, as to the patent applications licensed
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to us, even though we currently prosecute such patent applications with United
States and foreign patent offices, we do not know whether any of such
applications will result in the issuance of any additional patents or, if any
additional patents are issued, whether they will provide significant proprietary
protection or will be circumvented or invalidated. Since patent applications in
the United States are maintained in secrecy until published or until patents
issue, and since publication of discoveries in the scientific and patent
literature tends to lag behind actual discoveries by several months, we cannot
be certain that we were the first creator of inventions covered by pending
patent applications or that we were the first to file patent applications for
such inventions.
There can be no assurance that patent applications to which we hold rights
will result in the issuance of patents, that any patents issued or licensed to
us will not be challenged and held to be invalid, or that any such patents will
provide commercially significant protection to our technology, products and
processes. In addition, there can be no assurance that others will not
independently develop substantially equivalent proprietary information not
covered by patents to which we own rights or obtain access to our know-how, or
that others will not be issued patents which may prevent the sale of one or more
of our products, or require licensing and the payment of significant fees or
royalties by us to third parties in order to enable us to conduct our business.
In the event that any relevant claims of third-party patents are upheld as valid
and enforceable, we could be prevented from selling our products or could be
required to obtain licenses from the owners of such patents. There can be no
assurance that such licenses would be available or, if available, would be on
terms acceptable to us. Our failure to obtain these licenses would have a
material adverse effect on our business, financial condition and results of
operations.
Our success is also dependent upon know-how, trade secrets, and the
skills, knowledge and experience of our scientific and technical personnel. We
require all employees to enter into confidentiality agreements that prohibit the
disclosure of confidential information to anyone outside the Company. In
addition, we seek to obtain such agreements from our consultants, advisors and
research collaborators. There can be no assurance that adequate protection will
be provided for our trade secrets, know-how or other proprietary information in
the event of any unauthorized use or disclosure. We occasionally provide
information and chemical compounds to research collaborators in academic
institutions, and request that the collaborators conduct tests in order to
investigate certain properties of the compounds. There can be no assurance that
the academic institutions will not assert intellectual property rights in the
results of the tests conducted by the research collaborators, or that the
academic institutions will grant licenses under such intellectual property
rights to us on acceptable terms. If the assertion of intellectual property
rights by an academic institution can be substantiated, failure of the academic
institution to grant intellectual property rights to us could have a material
adverse effect on our business, financial condition and results of operations.
Government Regulation
Government authorities in the United States and other countries
extensively regulate, among other things, the research, development, testing,
manufacture, labeling, promotion, advertising, distribution, and marketing of
the products we develop and market. In the United States, the FDA regulates
Periostat and our products in development as drugs under the Federal Food, Drug,
and Cosmetic Act and implementing regulations. The FDA regulates Atrisorb
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FreeFlow and Atrisorb-D as medical devices under the Food, Drug and Cosmetic Act
and implementing regulations. Failure to comply with FDA requirements may
subject us to administrative or judicial sanctions, such as the FDA's refusal to
approve pending applications or warning letters, product recalls, product
seizures, total or partial suspension of production or distribution, withdrawal
of approvals, import detentions, injunctions, and/or criminal prosecution.
Our products in development are drugs. The steps required before a drug
may be marketed in the United States include:
o pre-clinical laboratory tests, animal studies, and formulation
studies;
o submission to the FDA of an investigational new drug exemption
for human clinical testing, which must become effective before
human clinical trials may begin;
o adequate and well-controlled clinical trials to establish the
safety and efficacy of the drug for each indication;
o submission to the FDA of a new drug application for approval;
o satisfactory completion of an FDA inspection of the
manufacturing facility or facilities at which the drug is
produced to assess compliance with current Good Manufacturing
Practice; and
o FDA review and approval of the new drug application.
Pre-clinical tests include laboratory evaluations of product chemistry,
toxicity, and formulation, as well as animal studies. The results of the
pre-clinical tests, together with manufacturing information, analytical data,
and a plan for studying the product in humans, are submitted to the FDA as part
of an investigational new drug exemption, which must become effective before
human clinical trials may begin. An investigational new drug exemption
automatically becomes effective thirty (30) days after receipt by the FDA,
unless before that time the FDA raises concerns or questions about issues such
as the conduct of the trials outlined in the investigational new drug exemption.
In that case, the investigational new drug exemption is placed on clinical hold
and the sponsor and the FDA must resolve any outstanding FDA concerns or
questions before clinical trials can proceed. Submission of an investigational
new drug exemption does not always result in the FDA allowing clinical trials to
commence.
Clinical trials involve administration of the investigational drug to
human subjects under the supervision of qualified investigators and are
conducted under protocols detailing the objectives of the study, the parameters
to be used in monitoring safety, and the effectiveness criteria to be evaluated.
Each protocol must be submitted to the FDA as part of the investigational new
drug exemption process, and must be reviewed and approved by an independent
Institutional Review Board before it can begin. Clinical trials typically are
conducted in three sequential phases, but the phases may overlap or be combined.
Phase I usually involves the initial introduction of the investigational drug
into people to evaluate its
-22-
safety, dosage tolerance, phamacodynamics, and, if possible, to gain an early
indication of its effectiveness. Phase II usually involves trials in a limited
patient population to evaluate dosage tolerance and appropriate dosage, identify
possible adverse effects and safety risks and evaluate preliminarily the
efficacy of the drug for specific indications. Phase III trials usually further
evaluate clinical efficacy and test further for safety by using the drug in its
final form in an expanded patient population. We cannot guarantee that Phase I,
Phase II, or Phase III testing for our products in development will be completed
successfully within any specified period of time, if at all. Many products that
initially appear promising are found, after clinical evaluation, not to be safe
and effective. Also, we, or the FDA, may suspend clinical trials at any time on
various grounds, including a finding that the subjects or patients are being
exposed to an unacceptable health risk.
Assuming successful completion of the required clinical testing, the
results of the preclinical studies and of the clinical studies, together with
other detailed information, including information on the manufacture and
composition of the drug, are submitted to the FDA in the form of a new drug
application requesting approval to market the product for one or more
indications. Before approving an application, the FDA usually will inspect the
facility or the facilities at which the drug is manufactured, and will not
approve the product unless compliance with cGMP is satisfactory. If the FDA
determines the application and the manufacturing facilities are acceptable, the
FDA will issue an approval letter. If the FDA determines the application or
manufacturing facilities are not acceptable, the FDA will outline the
deficiencies in the submission and often will request additional testing or
information. Notwithstanding the submission of any requested additional
information, the FDA ultimately may decide that the application does not satisfy
the regulatory criteria for approval. The FDA approved our new drug application
for Periostat in 1998; we cannot be sure that any additional approvals will be
granted on a timely basis, if at all. After approval, certain changes to the
approved product, such as adding new indications, manufacturing changes, or
additional labeling claims are subject to further FDA review and approval. For
example, before we can market Periostat for additional indications now being
evaluated, we will be required to obtain an additional FDA approval.
As a condition of approval of an application, the FDA may require
postmarketing testing and surveillance to monitor the drug's safety or efficacy.
As part of the new drug application for Periostat, the FDA has requested a
postmarket animal study related to long-term dosing and carcogenicity, which was
completed in 2000.
In some circumstances, approved drugs are provided protection from
competitive versions of the approved drug for specified time periods. For
example, the law provides for patent extension or market exclusivity in certain
circumstances. FDA has not provided such protection to Periostat.
Approved and cleared drugs and medical devices remain subject to
comprehensive regulation by the FDA while they are being marketed. The drug and
medical device regulatory schemes differ in detail, but they are essentially
similar. For example, marketers of approved and cleared drugs and medical
devices are required to report certain adverse reactions and production
problems, if any, to the FDA, and to comply with requirements concerning
advertising and promotional labeling for their products. Also, the FDA does not
permit a manufacturer to market or promote an approved or cleared drug product
or medical device for an
-23-
unapproved or uncleared use. Also, quality control and manufacturing procedures
must continue to conform to the FDA's requirements for current Good
Manufacturing Practices (for drugs) or Quality Systems Regulation (for medical
devices) after approval. Accordingly, manufacturers must continue to expend
time, money, and effort in the area of production and quality control to
maintain compliance with these and other aspects of regulatory compliance. The
FDA periodically inspects manufacturers to assess compliance with manufacturing
and other requirements. We buy bulk active ingredient for Periostat and our
products in development from third party suppliers and finish the products in
third party manufacturing facilities. The other products we market, Vioxx,
Atridox, Atrisorb FreeFlow, Atrisorb-D, Denavir and Pandel are provided by
suppliers. Our failure, or the failure of our suppliers, to comply with FDA
requirements could disrupt production and subject us to administrative or
judicial sanctions.
In addition to the applicable FDA requirements, we are subject to foreign
regulatory authorities governing clinical trials and drug sales. Whether or not
FDA approval has been obtained, approval of a pharmaceutical product by the
comparable regulatory authorities of foreign countries must be obtained prior to
the commencement of marketing of the product in those countries. The approval
process varies from country to country and the time required may be longer or
shorter than that required for FDA approval.
Competition
The pharmaceutical industry is subject to intense competition as well as
rapid and significant technological change. We expect that competition in the
periodontal area will be based on a variety of factors, including product
efficacy, safety, cost-effectiveness, ease of use, patient discomfort,
availability, price, patent position and effective product promotion.
We believe that Periostat is distinguished from other existing and known
periodontitis treatments in that it is the only treatment that is directed to
suppression of the enzymes that degrade periodontal support tissues. We believe
that all other therapies of which we are aware focus on temporarily removing the
bacteria associated with periodontitis. Periostat is a prescription
pharmaceutical tablet indicated as an adjunct to scaling and root planing to
promote attachment level gain and to reduce pocket depth in patients with adult
periodontitis that is taken by the patient between dental visits. We believe
that the following chart summarizes the pharmacotherapies available in the
United States and indicated for the treatment of adult periodontitis:
-24-
Product Manufacturer/ Dental Delivery Patient Treatment
Product Name Marketer Procedure Route Administered Focus Indication
- ------------ --------------------- --------- -------- ------------- ----------- ---------------------
Periostat CollaGenex No Systemic Yes Tissue As an adjunct to
Pharmaceuticals, degradation scaling and root
Inc. planing to promote
attachment level gain
and to reduce pocket
depth in patients
with adult
periodontitis
*Atridox Atrix Laboratories/ Yes Local No Bacteria For treatment of
CollaGenex chronic adult
Pharmaceuticals, Inc. periodontitis for a
gain in clinical
attachment, reduction
in probing depth and
reduction in bleeding
on probing
Periochip Vendent on behalf of Yes Local No Bacteria As an adjunct to
Dexcel scaling and root
planing procedures
for reduction of
pocket depth in
patients with adult
periodontitis
Arestin Orapharma, a Yes Local No Bacteria As an adjunct to
Division of Johnson scaling and root
& Johnson, Inc. planing procedures
for reduction of
pocket depth in
patients with adult
periodontitis
* In August 2001, we entered into a License and Marketing Agreement with
Atrix Laboratories, Inc. pursuant to which we market Atridox, Atrisorb FreeFlow
and Atrisorb-D to the United States dental community. See - "Item 1. Business"
Many of the companies participating in the periodontal area have
substantially greater financial, technical and human resources than we do, and
may be better equipped to develop,
-25-
manufacture and market products. These companies may develop and introduce
products and processes competitive with or superior to ours.
Employees
We have historically outsourced our manufacturing, clinical trials, new
drug application preparation, warehousing, distribution and other activities. We
intend to continue to outsource many of the activities which we have
historically outsourced. As of December 31, 2002, we employed 148 persons. Each
of our management personnel has had extensive prior experience with
pharmaceutical, biotechnology or medical products companies. We cannot be
certain that we will be able to recruit and retain qualified inside sales and
marketing personnel, additional foreign sub-licensees or distributors or
marketing partners or that our marketing and sales efforts will be successful.
Currently, none of our employees are covered by collective bargaining
agreements. In general, our employees are covered by confidentiality agreements.
We consider relations with our employees to be excellent.
Additional Factors That May Affect Future Results
We Rely on Periostat for Most of Our Revenue.
During 2002, 2001 and 2000, Periostat accounted for approximately 82%, 87%
and 84% of our total net revenues, respectively. Although we currently derive
additional revenue from marketing and/or selling other products (Vioxx, Atridox,
Atrisorb FreeFlow, Atrisorb-D, Pandel and Denavir) and from licensing fees from
foreign marketing partners, our revenue and profitability in the near future
will depend on our ability to successfully market and sell Periostat.
West-ward Pharmaceutical Corporation has submitted an application to FDA
for approval of a generic version of Periostat. We have filed suit to enforce
our patent rights and are also attempting to persuade FDA to award the patent
and exclusivity protections available to non-antibiotic drugs. If the West-ward
or any other generic version of Periostat is approved and marketed, our revenues
from Periostat would be materially affected.
We May Not Be Able to Maintain Profitability.
From our founding in 1992 through the commercial launch of Periostat in
November, 1998, we had no revenue from sales of our own products. During the
year ended December 31, 2000, we experienced a net loss of approximately $8.8
million. During the year ended December 31, 2001, we experienced a net loss of
approximately $8.1 million. During the year ended December 31, 2002, we earned
net income of approximately $900,000. From inception through December 31, 2002,
we have experienced an aggregate net loss of $68.6 million. Our historical
losses have resulted primarily from the expenses associated with our
pharmaceutical development program, clinical trials, the regulatory approval
process associated with Periostat and sales and marketing activities relating to
Periostat. Although we achieved net income of $756,000 for the three months
ended September 30, 2002 and net income of $1.1 million for the three months
ended December 31, 2002, we expect to incur significant future expenses,
particularly with respect to the sales and marketing of Periostat, new products
and continuing clinical and manufacturing development for other indications and
formulations of Periostat, we cannot be certain that we will be profitable in
the future, if at all.
-26-
Our Competitive Position in the Marketplace Depends on Enforcing and
Successfully Defending Our Intellectual Property Rights.
In order to be competitive in the pharmaceutical industry, it is important
to establish, enforce, and successfully defend patent and trade secret
protection for our established and new technologies. We must also avoid
liability from infringing the proprietary rights of others.
Our core technology is licensed from The Research Foundation of the State
University of New York ("SUNY"), and other academic and research institutions
collaborating with SUNY. Under the license agreement with SUNY (the "SUNY
License") we have an exclusive worldwide license to SUNY's rights in certain
patents and patent applications to make and sell products employing
tetracyclines to treat certain disease conditions. The SUNY License imposes
various payment and reporting obligations on us and our failure to comply with
these requirements permits SUNY to terminate the SUNY License. If the SUNY
License is terminated, we would lose our right to exclude competitors from
commercializing similar products, and we could be excluded from marketing the
same products if SUNY licensed the underlying technology to a competitor after
terminating the SUNY License.
SUNY owns thirty-one (31) United States patents and six (6) United States
patent applications that are licensed to us. The patents licensed from SUNY
expire between 2004 and 2019. Two of the patents are related to Periostat and
expire in 2004 and 2007. Technology covered by these patents becomes available
to competitors as the patents expire.
Since many of our patent rights cover new treatments using tetracyclines,
which are generally available for their known use as antibiotics, we may be
required to bring expensive infringement actions to enforce our patents and
protect our technology. Although federal law prohibits making and selling
pharmaceuticals for infringing use, competitors and/or practitioners may provide
generic forms of tetracycline for treatment(s) which infringe our patents,
rather than prescribe our Periostat product. Enforcement of patents can be
expensive and time consuming.
We are currently enforcing our patent rights against a generic drug
company, West-ward Pharmaceutical Corporation. A patent infringement action has
been brought in the Eastern District of New York to prevent West-ward from
introducing a generic version of Periostat'r'. A motion for preliminary
injunction has been filed and West-ward has agreed to refrain from introducing
product until the court has fully heard and decided the motion. Negotiations are
also currently underway to resolve the matter without protracted litigation.
Our success also depends upon know-how, trade secrets, and the skills,
knowledge and experience of our scientific and technical personnel. To that end,
we require all of our employees and, to the extent possible, all consultants,
advisors and research collaborators, to enter into confidentiality agreements
prohibiting unauthorized disclosure. With respect to information and chemical
compounds we provide for testing to collaborators in academic institutions, we
cannot guarantee that the institutions will not assert property rights in the
results of such tests nor that a license can be reasonably obtained from such
institutions which assert such rights. Failure to obtain the benefit of such
testing could adversely affect our commercial position and, consequently, our
financial condition.
-27-
If We Lose Our Sole Supplier of Doxycycline Hyclate or Our Current
Manufacturer of Periostat, Our Commercialization of Periostat Will be
Interrupted, Halted or Less Profitable.
We rely on a single supplier, Hovione International Limited ("Hovione"),
for doxycycline, the active ingredient in Periostat. There are relatively few
alternative suppliers of doxycycline and Hovione produces the majority of the
doxycycline used in the United States. Our current supply agreement with Hovione
expires on May 14, 2006 and thereafter automatically renews for successive
two-year periods unless, 90 days prior to the expiration of any such periods,
either party gives the other party written notice of termination. In addition,
in the event of a default, uncured for 90 days, the non-defaulting party can
terminate the supply agreement effective immediately at the end of such
ninety-day period. We rely on Hovione as our sole supplier of doxycycline and
have no back-up supplier at this time. If we are unable to procure a commercial
quantity of doxycycline from Hovione on an ongoing basis at a competitive price,
or if we cannot find a replacement supplier in a timely manner or with favorable
pricing terms, our costs may increase significantly and we may experience delays
in the supply of Periostat.
We have entered into an agreement with a contract manufacturer,
Pharmaceutical Manufacturing Research Services, Inc. ("PMRS"), for our tablet
formulation for Periostat. Our current arrangement with PMRS has been extended
until the earlier of March 30, 2007 or until a generic 20 mg doxycycline hyclate
tablet is available on the market. Currently, PMRS is the sole third-party
contract manufacturer to supply a tablet formulation of Periostat to us. Any
inability of PMRS to produce and supply product on agreed upon terms could
result in delays in the supply of Periostat. We also intend to contract with
additional manufacturers for the commercial manufacture of Periostat tablets. We
believe, however, that it could take up to one year to successfully transition
from PMRS to a new manufacturer.
Our Products are Subject to Extensive Regulation by the FDA.
Drugs and medical devices generally require approval or clearance from the
FDA before they can be marketed in the United States. Periostat, Vioxx, and
Atridox have been approved by the FDA as drugs. Atrisorb FreeFlow and Atrisorb-D
have been cleared by the FDA as medical devices. Our drug products under
development, however, will have to be approved by the FDA before they can be
marketed in the United States. Also, we cannot market our approved products for
new indications until FDA approves the product for that indication. If the FDA
does not approve our products under development or additional indications for
marketed products in a timely fashion, or does not approve them at all, our
financial condition may be adversely affected.
In addition, drug and medical device products remain subject to
comprehensive regulation by the FDA while they are being marketed. The drug and
medical device regulatory schemes differ in detail, but they are essentially
similar. The FDA regulates, for example, the safety, manufacturing, labeling,
and promotion of both drug and medical device products. If we or our partners
who manufacture our products fail to comply with regulatory requirements,
various adverse consequences can result, including recalls, civil penalties,
withdrawal of the product from the market and/or the imposition of civil or
criminal sanctions.
-28-
We are, and will increasingly be, subject to a variety of foreign
regulatory regimes governing clinical trials and sales of our products. Other
than Periostat, which has been approved by the Medicines Control Agency for
marketing in the United Kingdom and approved for marketing in Austria, Finland,
Ireland, Israel, Italy, Canada, Switzerland, the Netherlands and Portugal, our
products in development have not been approved in any foreign country. Whether
or not FDA approval has been obtained, approval of drug products by the
comparable regulatory authorities of foreign countries must be obtained prior
to the commencement of marketing of those products in those countries. The
approval process varies from country to country and other countries may also
impose post-approval requirements.
A Small Number of Wholesale Customers and Large Retail Chains Account for the
Majority of Our Sales and the Loss of One of Them, or Changes in Their
Purchasing Patterns, Could Result in Reduced Sales, Thereby Adversely Affecting
Our Operating Results.
We sell most of our products to a small number of wholesale drug distributors.
For the year ended December 31, 2002, sales to Cardinal Health, Inc., McKesson
Corporation and Amerisource-Bergen Corporation, represented approximately 32%,
24%, and 19%, respectively, of our aggregate net product sales. The small number
of wholesale drug distributors, consolidation in this industry or financial
difficulties of these distributors could result in the combination or
elimination of warehouses, which could temporarily increase returns of our
products or, as a result of distributors reducing inventory levels, delay the
purchase of our products. In addition, wholesalers may increase purchase levels
in anticipation of future price increases or may capitalize on volume discounts
to acquire inventory. This may cause an unexpected increase in the level of
trade inventories normally maintained by wholesalers. Although we have developed
a plan to manage Periostat trade inventory levels, this plan may not be
effective. If Periostat trade inventory levels become too high, or if
perscription growth of Periostat is lower than expected by the trade,
wholesalers and large retail chains could reduce their orders for Periostat,
which could result in reduced sales of Periostat and adversely affect our
operating results.
We Cannot Assure You that Our Pursuit of Business in the Dermatology Market will
be Successful.
In January 2002, we announced our plans to expand into the dermatology
market. During 2002, we initiated a 150-patient Phase III clinical trial to
evaluate the use of Periostat to treat rosacea, we announced that we had
licensed a new dermal and transdermal drug delivery technology called
Restoraderm, we executed a sublicense Agreement with Altana Inc. with respect to
the marketing and distribution of Pandel, and in March 2003, we executed a
co-promotion agreement with Sirius Laboratories, Inc. pursuant to which we will
jointly market Sirius' AVAR product line. In addition, we continue to actively
seek product licensing opportunities to enhance our near-term offerings to the
dermatology market. We cannot assure you that we will be able to (i) achieve
market acceptance for any of these or future dermatological offerings, (ii) hire
and retain personnel with experience in the dermatology market, (iii) execute
our business plan with respect to this market segment, or (iv) adapt to
technical or regulatory changes once operational. Furthermore, while we have
experience in the sales and marketing of dental products, we have virtually no
experience in dermatology. This market is very competitive and some of our
competitors have substantially greater resources than we have. New product
development is a lengthy, complex and uncertain process that will
-29-
require significant attention and resources from management. A product candidate
can fail at any stage of the development process due to, among other things,
efficacy or safety concerns, the inability to obtain necessary regulatory
approvals, the difficulty or excessive cost to manufacture and/or the
infringement of patents or intellectual property rights of others. Furthermore,
the sales of new products may prove to be disappointing and fail to reach
anticipated levels. We therefore cannot assure you that we will be successful in
our pursuit of business in the dermatology market, or that we can sustain any
business in which we achieve initial success.
If Our Products Cause Injuries, We May Incur Significant Expense and
Liability.
Our business may be adversely affected by potential product liability
risks inherent in the testing, manufacturing and marketing of Periostat and
other products developed by or for us or for which we have licensing or
co-promotion rights. We have $10.0 million in product liability insurance for
Periostat. This level of insurance may not adequately protect us against product
liability claims. Insufficient insurance coverage or the failure to obtain
indemnification from third parties for their respective liabilities may expose
us to product liability claims and/or recalls and could cause our business,
financial condition and results of operations to decline.
Because Our Executive Officers, Directors and Affiliated Entities Own
Approximately 32.6% of Our Capital Stock, They Could Control Our Actions in a
Manner That Conflicts With Our Interests and the Interests of Our Other
Stockholders.
Currently, our executive officers, directors and affiliated entities
together beneficially own approximately 32.6% of the outstanding shares of our
common stock or equity securities convertible into common stock. As a result,
these stockholders, acting together, or in the case of our preferred
stockholders, in certain instances, as a class, will be able to exercise control
over corporate actions requiring stockholder approval, including the election of
directors. This concentration of ownership may have the effect of delaying or
preventing a change in control, including transactions in which our stockholders
might otherwise receive a premium for their shares over then current market
prices.
Our Stock Price is Highly Volatile and, Therefore, the Value of Your
Investment May Fluctuate Significantly.
The market price of our common stock has fluctuated and may continue to
fluctuate as a result of variations in our quarterly operating results. These
fluctuations may be exaggerated if the trading volume of our common stock is
low. In addition, the stock market in general has experienced dramatic price and
volume fluctuations from time to time. These fluctuations may or may not be
based upon any business or operating results. Our common stock may experience
similar or even more dramatic price and volume fluctuations that may continue
indefinitely.
-30-
The following table sets forth the high and low closing market price per
share for our common stock for each of the quarters in the period beginning
January 1, 2000 through December 31, 2002 as reported on the Nasdaq National
Market:
Quarter Ended High Low
----------------------------------- ---------------------- ------------------
March 31, 2000..................... $27.13 $12.63
June 30, 2000...................... $15.50 $8.25
September 30, 2000................. $9.88 $8.06
December 31, 2000.................. $7.88 $3.13
March 31, 2001..................... $6.00 $4.47
June 30, 2001...................... $8.80 $5.06
September 30, 2001................. $10.00 $7.25
December 31, 2001.................. $9.50 $7.50
March 31, 2002..................... $12.00 $7.72
June 30, 2002...................... $11.65 $5.75
September 30, 2002................. $7.34 $4.70
December 31, 2002.................. $9.93 $4.05
Recent Developments
On March 19, 2003, we announced that Brian M. Gallagher, PhD, our
chairman, chief executive officer and president, will be leaving the Company to
pursue other interests. Dr. Gallagher has agreed to remain in his current
position until a successor is appointed, and he will work closely with us as a
consultant for a period of time thereafter to ensure a smooth transition. We
have established a search committee of our board of directors and have engaged
an executive recruiting firm to help identify a successor to Dr. Gallagher.
We have executed an agreement with Dr. Gallagher, pursuant to which we
will compensate Dr. Gallagher for, among other things, his services during the
transition period and to recognize his historical contributions to CollaGenex.
As a result of this agreement, the Company will recognize a non-cash
compensation charge relating to certain modifications of Dr. Gallagher's stock
option agreements of approximately $250,000 in the first quarter of 2003. We
have also entered into a consulting agreement with Dr. Gallagher pursuant to
which he will provide consulting services to CollaGenex for a period of 24
months following the employment of a new chief executive officer.
Item 2. Properties.
We own no real property. Our principal executive offices, located at 41
University Drive, Suite 200, Newtown, Pennsylvania, consist of approximately
14,204 square feet. Our lease for such premises continues through April 2009.
-31-
Item 3. Legal Proceedings.
On February 14, 2003, we announced that we had served a complaint on
West-ward Pharmaceutical Corporation, thereby completing initiation of Federal
Civil Action to enforce our patents.
The complaint was previously filed on November 18, 2002 in the District
Court for the Eastern District of New York. Concurrent with the service of the
complaint, we filed and served a motion for preliminary injunction in the same
court seeking to prevent West-ward from introducing a 20 mg capsule of
doxycycline hyclate into the market in the United States. The court has
conducted a conference with the parties during which West-ward has agreed to
refrain from introducing a generic form of Periostat'r' to the marketplace. At
the court's request, the parties are undergoing settlement discussions.
West-ward's agreement remains in effect until the court has an opportunity to
fully hear and decide the motion for preliminary injunction.
We are the exclusive licensee of patents, assigned to the Research
Foundation of State University of New York, that cover, among other things, the
use of doxycycline to treat adult periodontitis. Under our agreement with the
Research Foundation, legal fees incurred to defend these patents may be offset
against royalties due to the Foundation.
We market a proprietary tablet dosage form of doxycycline hyclate for the
treatment of adult periodontitis under the registered trademark Periostat'r'.
We alleged that West-ward has infringed our Periostat patents under the
Hatch-Waxman Act by filing an Abbreviated New Drug Application ("ANDA") for a
capsule formulation of Periostat. Our suit specifically alleges that West-ward
infringes and intends to continue to infringe two patents to which we are the
exclusive licensee: U.S. Patent No. 4,666,897 and Re-Issue Patent RE 34,656.
Furthermore, we have sought a declaratory judgment from the court to
prohibit West-ward from infringing acts, such as manufacturing and sales of the
capsule formulation of doxycycline hyclate 20 mg, should the FDA approve
West-ward's ANDA. The remedies that we are seeking include an award of treble
damages, costs and reasonable attorneys' fees.
To date, West-ward has not received FDA approval to market its 20 mg
doxycycline hyclate capsules.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
-32-
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters.
Prior to June 1996, there was no established market for our common stock.
Since June 20, 1996, our common stock has traded on the Nasdaq National Market
under the symbol "CGPI."
The following table sets forth the high and low per share sales prices for
our common stock for each of the quarters in the period beginning January 1,
2001 through December 31, 2002 as reported on the Nasdaq National Market.
Quarter Ended High Low
----------------------------------- ---------------------- ------------------
March 31, 2001..................... $6.00 $4.47
June 30, 2001...................... $8.80 $5.06
September 30, 2001................. $10.00 $7.25
December 31, 2001.................. $9.50 $7.50
March 31, 2002..................... $12.00 $7.72
June 30, 2002...................... $11.65 $5.75
September 30, 2002................. $7.34 $4.70
December 31, 2002.................. $9.93 $4.05
As of March 10, 2003, the approximate number of holders of record of our
common stock was 121 and the approximate number of beneficial holders of our
common stock was 3,023.
We have never declared or paid any cash dividends on our common stock. Except as
set forth below, we intend to retain earnings, if any, to fund future growth and
the operation of our business. On May 12, 1999, we consummated a $20.0 million
financing through the issuance of our Series D cumulative convertible preferred
stock. As a result of such financing, we had certain common stock dividend
obligations and continue to have certain cumulative cash dividend obligations to
the holders of the Series D preferred stock. Such financing arrangement also
limits our ability to generally declare dividends to our common stockholders. In
addition, our ability to generally declare dividends to our common stockholders
is further limited by the terms of our credit facility with Silicon Valley Bank.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The following information relates to all securities of the Company sold by
us during the year ended December 31, 2002 which were not registered under the
securities laws at the time of sale and/or issuance:
On August 12, 2002, we issued 87,636 shares of our common stock to holders
of our Series D preferred stock which were not registered under the Securities
Act of 1933, as amended (the "Securities Act"). Pursuant to our contractual
obligations to the holders of our Series D preferred stock, we paid dividends in
common stock at a rate of 8.4% per annum from the date of issuance of such
Series D preferred stock through May 11, 2002. After May 11, 2002, we no
-33-
longer pay dividends on the Series D preferred stock in shares of our common
stock, and we became obligated to pay such dividends in cash, at a rate equal to
8% per annum.
We believe that the issuance of the foregoing securities was exempt from
registration under Section 4(2) of the Securities Act as transactions not
involving any public offering. All recipients had adequate access to information
about us.
On January 28, 2003, we filed a registration statement on Form S-3 with
the Securities and Exchange Commission with respect to the foregoing securities.
Item 6. Selected Consolidated Financial Data.
The selected consolidated financial data set forth below with respect to
our consolidated statement of operations data for each of the years in the
three-year period ended December 31, 2002, and with respect to the consolidated
balance sheet data at December 31, 2002 and 2001 are derived from and are
qualified by reference to our audited consolidated financial statements and the
related notes thereto found at "Item 15. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K" herein. The consolidated statement of
operations data for the years ended December 31, 1999 and 1998 and with respect
to the consolidated balance sheet data at December 31, 2000, 1999 and 1998
are derived from audited consolidated financial statements not included in this
Annual Report on Form 10-K. The selected consolidated financial data set forth
below should be read in conjunction with and is qualified in its entirety by our
audited consolidated financial statements and related notes thereto found at
"Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K" and
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" which are included elsewhere in this Annual Report on Form 10-K.
-34-
Years Ended December 31,
------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(In thousands except for per share data)
------------------------------------------------------------
Consolidated Statement of Operations
Data:
Revenues:
Net product sales ..................... $ 42,111 $ 31,358 $ 20,501 $ 15,211 $ 3,053
Contract revenues ..................... 2,332 3,386 3,240 770 8
License revenues ...................... 176 488 530 100 400
-------- -------- -------- -------- --------
Total revenues ........................... 44,619 35,232 24,271 16,081 3,461
Operating expenses:
Cost of product sales ................. 6,713 5,825 4,070 3,139 745
Research and development .............. 4,394 3,764 3,128 5,005 4,670
Selling, general and administrative ... 32,699 34,010 25,746 23,180 10,600
-------- -------- -------- -------- --------
Operating income (loss) ........... 813 (8,367) (8,673) (15,243) (12,554)
Interest income .......................... 77 232 613 851 988
Interest expense ......................... (5) (17) (15) (197) --
Other income (expense) ................... 17 8 9 (2) --
-------- -------- -------- -------- --------
Income (loss) before cumulative
effect of change in accounting
principle ............................. 902 (8,144) (8,066) (14,591) (11,566)
Cumulative effect of change in
accounting principle(1) ............... -- -- (764) -- --
-------- -------- -------- -------- --------
Net income (loss) ........................ $ 902 $ (8,144) $ (8,830) $(14,591) $(11,566)
======== ======== ======== ======== ========
Net loss allocable to common
stockholders .......................... $ (727) $ (9,824) $(10,519) $(15,683) $(11,566)
======== ======== ======== ======== ========
Basic and diluted net loss per share
allocable to common stockholders
before cumulative effect of change
in accounting principle ............... $ (0.06) $ (0.94) $ (1.12) $ (1.82) $ (1.35)
======== ======== ======== ======== ========
Basic and diluted net loss per share
allocable to common stockholders(2) ... $ (0.06) $ (0.94) $ (1.21) $ (1.82) $ (1.35)
======== ======== ======== ======== ========
Shares used in computing basic and
diluted per share amounts(2) .......... 11,235 10,414 8,712 8,598 8,579
-35-
As of December 31,
------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(in thousands)
------------------------------------------------------------
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments ........................... $ 10,112 $ 6,171 $ 5,448 $ 14,367 $ 10,250
Working capital .......................... 6,578 6,294 5,308 12,987 9,001
Total assets ............................. 17,634 14,698 10,431 18,563 14,740
Note payable, less current portion ....... -- -- 47 116 --
Accumulated deficit ...................... (74,681) (73,954) (64,130) (53,611) (37,928)
Total stockholders' equity ............... 8,352 7,127 5,264 13,607 9,281
(1) See Note 9 of Notes to Consolidated Financial Statements for information
concerning the cumulative effect of change in accounting principle.
(2) See Note 2 of Notes to Consolidated Financial Statements for information
concerning computation of net loss per share.
-36-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
CollaGenex Pharmaceuticals, Inc. and subsidiaries is a specialty
pharmaceutical company currently focused on providing innovative medical
therapies to the dental and dermatology markets. Our first product,
Periostat'r', is an orally administered, prescription pharmaceutical product
that was approved by the United States Food and Drug Administration in September
1998 and is the first and only pharmaceutical to treat adult periodontitis by
inhibiting the enzymes that destroy periodontal support tissues.
We are marketing Periostat and other pharmaceutical products to the dental
and dermatology communities through our own professional pharmaceutical sales
force of approximately 115 sales representatives and managers. Pursuant to an
exclusive License and Marketing Agreement with Atrix Laboratories, Inc., we
began, in October 2001, to actively market Atrix's proprietary dental products,
Atridox'r' and Atrisorb FreeFlow'r', and, in February 2002, Atrisorb-D'r', to
the United States dental market. In May 2002, we executed a sublicense agreement
with Altana Inc. to, among other things, market and distribute, in the United
States and Puerto Rico, Pandel'r', a mid-potency topical corticosteroid product
developed by Altana Inc. In March 2003, we executed a co-promotion agreement
with Sirius Laboratories, Inc. pursuant to which we will jointly market Sirius'
AVAR'TM' product line and Pandel to dermatologists in the United States. We
distribute Periostat and Pandel through drug wholesalers and large retail chains
in the United States. Periostat is also sold through wholesalers and direct to
dentists in the United Kingdom through our wholly-owned subsidiary, CollaGenex
International Ltd., and by distributors and licensees in certain other overseas
markets. The Atrix dental products are distributed through specialty
distributors who sell these products directly to dental practitioners in the
United States and Puerto Rico. Our sales force also co-promotes Vioxx'r', a
prescription non-steroidal, anti-inflammatory drug developed by Merck & Co.,
Inc., in the United States, and, effective October 1, 2002, Denavir'r', a
topically applied prescription medication for the treatment of recurrent cold
sores in adults, for Novartis Consumer Health, Inc.
With the exception of the year ended December 31, 2002, during which year
we achieved net income of approximately $900,000, we have incurred losses each
year since inception and have an accumulated deficit of $74.7 million at
December 31, 2002.
This Annual Report on Form 10-K and the documents incorporated herein
contain forward-looking statements within the meaning of Section 21E of the
Securities and Exchange Act of 1934, as amended. For this purpose, any
statements contained herein or incorporated herein that are not statements of
historical fact may be forward-looking statements. For example, the words "may,"
"will," "continue," "believes," "expects," "anticipates," "intends,"
"estimates," "should" and similar expressions are intended to identify
forward-looking statements. There are a number of important factors that could
cause CollaGenex's results to differ materially from those indicated by such
forward-looking statements. These factors include those set forth in the section
entitled "Additional Factors That May Affect Future Results" included in Item 1
of this Annual Report. In particular, CollaGenex's business of selling,
marketing and developing pharmaceutical products is subject to a number of
significant risks, including risks relating to the
-37-
implementation of CollaGenex's sales and marketing plans for Periostat and other
products that we market, risks inherent in research and development activities,
risks associated with enforcement of our intellectual property rights, including
risks relating to the outcome and consequences of our patent litigation against
West-ward Pharmaceutical Corporation, risks associated with conducting business
in a highly regulated environment and uncertainty relating to clinical trials of
products under development. CollaGenex's success depends to a large degree upon
the market acceptance of Periostat by periodontists, dental practitioners, other
health care providers, patients and insurance companies. There can be no
assurance that CollaGenex's product candidates (other than the FDA's approval of
Periostat for marketing in the United States, the United Kingdom Medicines
Control Agency's approval of Periostat for marketing in the United Kingdom and
Periostat's marketing approval in Austria, Finland, Switzerland, Ireland,
Israel, Italy, the Netherlands, Portugal and Canada) will be approved
by any regulatory authority for marketing in any jurisdiction or, if approved,
that any such products will be successfully commercialized by CollaGenex. In
addition, there can be no assurance that CollaGenex will successfully promote
Vioxx, Denavir, Pandel, Atridox, Atrisorb-FreeFlow, Atrisorb-D and the AVAR
product line. As a result of such risks and others expressed from time to time
in CollaGenex's filings with the Securities and Exchange Commission,
CollaGenex's actual results may differ materially from the results discussed in
or implied by the forward-looking statements contained herein.
Critical Accounting Policies and Estimates
Management's discussion and analysis of its financial position and results
of operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make judgments and estimates that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. Management believes the critical accounting policies and areas
that require the most significant judgments and estimates to be used in the
preparation of the consolidated financial statements pertain to revenue
recognition.
We recognize product sales revenue upon shipment, net of estimated
returns, provided that collection is determined to be probable and no
significant obligations remain. Sales revenue from our customers is subject to
agreements allowing limited rights of return, rebates and price protection.
Accordingly, we reduce revenue recognized for estimated future returns, rebates
and price protection at the time the related revenue is recorded. The estimates
for returns are adjusted periodically based upon historical rates of returns,
inventory levels in the distribution channel and other related factors. While
management believes it can make reliable estimates for these matters, unsold
products in these distribution channels may be exposed to expiration.
Accordingly, it is possible that these estimates will change in the future or
that the actual amounts could vary materially from our estimates and that the
amounts of such changes could impact our results of operations, financial
condition and our business. Our contract revenues are fee-based arrangements
where revenue is earned as prescriptions are written. Accordingly, since we
never take title to the product being promoted, no significant obligations exist
beyond the point that revenue is recognized.
-38-
Since our inception, a portion of our revenue has been generated from
license and distribution agreements for our products. We recognize nonrefundable
signing or license fees that are not dependent on future performance under these
agreements as revenue when received and over the term of the arrangement if we
have continuing performance obligations. Any amounts deferred are amortized to
revenue over the expected performance period of each underlying agreement. The
expected performance period is based on management's best estimate and is
subject to change based on current market conditions. Deferred revenue
represents the portion of up front license payments received that has not been
earned. Milestone revenue from licensing arrangements is recognized upon
completion of the milestone event or requirement if it represents the
achievement of a significant step in the research, development or regulatory
process.
Results of Operations
From our founding through the quarter ended September 30, 1998, we had no
revenues from sales of our own products. During the fourth quarter of 1998, we
achieved net product sales of $3.1 million following the commercial launch of
Periostat in November 1998. Most of the 1998 sales represented initial wholesale
and retail stocking. During the year ended December 31, 1999, we achieved net
product sales of $15.2 million from sales of Periostat, contract revenues of
$770,000 and $100,000 in license fees relating to the signing of a distribution
agreement for Periostat in Canada.
During the year ended December 31, 2000, we achieved net product sales of
$20.5 million, contract revenues of $3.2 million and license and milestone fees
of $530,000 from various foreign distribution and marketing agreements for
Periostat. Included in this $530,000 was $397,000 in license revenues that were
deferred upon the implementation of Staff Accounting Bulletin SAB 101 ("SAB
101"), effective January 1, 2000; these amounts were previously recognized as
license revenues in prior years under the historical revenue recognition policy
prior to the adoption of SAB 101.
During the year ended December 31, 2001, we achieved net product sales of
$31.4 million from the sale of Periostat, Atridox and Atrisorb FreeFlow. In
addition, during the year ended December 31, 2001, we generated $3.4 million in
contract revenues and $488,000 in licensing revenue, which included $60,000 in
license fees that were deferred in accordance with SAB 101.
During the year ended December 31, 2002, we achieved net product sales of
$42.1 million from the sale of Periostat, Atridox, Atrisorb FreeFlow, Atrisorb-D
and Pandel. In addition, during the year ended December 31, 2002, we generated
$2.3 million in contract revenues and $176,000 in licensing revenue, which
included $59,000 in license fees that were deferred in accordance with SAB 101.
-39-
Years Ended December 31, 2002 and December 31, 2001
Revenues
- --------------------------------------------------------------------------------------
Revenues
(dollars in thousands) 2002 Change 2001
- --------------------------------------------------------------------------------------
Net Product Sales $ 42,111 34.3% $ 31,358
- --------------------------------------------------------------------------------------
Contract Revenues 2,332 (31.1) 3,386
- --------------------------------------------------------------------------------------
License Revenues 176 (63.9) 488
- --------------------------------------------------------------------------------------
Total $ 44,619 26.6% $ 35,232
- --------------------------------------------------------------------------------------
Total revenues during the year ended December 31, 2002 were $44.6 million,
representing a 26.6% increase over total revenues of $35.2 million during the
year ended December 31, 2001. Such 2002 revenues included approximately $42.1
million in net product sales of Periostat, Atridox, Atrisorb FreeFlow,
Atrisorb-D and Pandel (since July 1, 2002), $2.3 million in contract revenues,
which were derived from our co-promotion of Vioxx and Pandel (prior to June 30,
2002) and Denavir (effective October 1, 2002), and $176,000 in deferred foreign
license and milestone revenues for Periostat. Net product sales increased $10.8
million, or 34.3%, during the year ended December 31, 2002 to $42.1 million
compared to $31.4 million during the year ended December 31, 2001, mainly due to
increased volume of prescriptions and price increases relating to Periostat, the
addition of the Atrix dental products, which we began marketing in October 2001,
and Pandel, which we began selling on July 1, 2002.
Contract revenues for the year ended December 31, 2002 declined 31.1% to
$2.3 million from $3.4 million during the year ended December 31, 2001 as a
result of the termination in April 2001 of our prior agreement with Novartis to
co-promote Denavir and a decline in contract revenues from Merck relating to our
co-promotion of Vioxx. Contract revenues for the year ended December 31, 2001
included $297,000 in co-promotion revenues for Denavir. Contract revenues for
the year ended December 31, 2002 included $100,000 in co-promotion revenues for
Denavir, pursuant to our Product Detailing agreement with Novartis executed in
October 2002. We are compensated at a higher rate for sales growth versus the
previous years sales of Vioxx. In 2001, a significant portion of our
Vioxx-related compensation was attributed to sales growth. Vioxx sales, however,
were lower in 2002 compared to 2001, and therefore we were paid at lower rates,
resulting in a decline in contract revenues.
License revenues for the year ended December 31, 2002 declined 63.9% to
$176,000 from $488,000 for the year ended December 31, 2001. In accordance with
SAB 101, which we adopted in 2000, $59,000 and $60,000 in licensing revenues,
respectively, for the years ended December 31, 2002 and 2001 was attributable to
our recognition of up-front license fees received for various agreements that
were deferred in accordance with SAB 101 and is being recognized as income over
the expected performance period of these agreements. We also recorded milestone
revenues from our foreign licensing partners of $70,000 and $425,000 during the
years ended December 31, 2002 and 2001, respectively, related to obtaining
regulatory approval in certain countries.
-40-
Cost of Product Sales
- -----------------------------------------------------------------------------------------------
Cost of Product Sales
(dollars in thousands) 2002 Change 2001
- -----------------------------------------------------------------------------------------------
Cost of Product Sales $ 6,713 15.2% $ 5,825
- -----------------------------------------------------------------------------------------------
Percent of Net Product Sales 15.9% 18.6%
- -----------------------------------------------------------------------------------------------
Cost of product sales includes product packaging, third-party royalties,
obsolete inventory provisions, amortization of product licensing fees, and the
costs associated with the manufacturing, storage and stability of Periostat,
Pandel and the Atrix products.
Cost of product sales were $6.7 million, or 15.9% of net product sales
during the year ended December 31, 2002, compared to $5.8 million, or 18.6% of
net product sales during the year ended December 31, 2001. Cost of product sales
increased in absolute dollars but decreased as a percentage of net product sales
during 2002 compared to 2001, primarily due to manufacturing cost savings for
Periostat tablets, which we launched in July 2001, compared to Periostat
capsules and product price increases. Cost of product sales in 2001 also
included a $602,000 provision for obsolete inventory; there was no such
provision in 2002. This decrease in percent of Periostat net product sales in
2002 was slightly offset by a higher percent of product sales for the Atrix
products and Pandel, launched in November 2001 and July 2002, respectively,
which have lower margins than Periostat.
Research and Development
- -----------------------------------------------------------------------------------------------
Research and Development
(dollars in thousands) 2002 Change 2001
- -----------------------------------------------------------------------------------------------
Research and Development $ 4,394 16.7% $ 3,764
- -----------------------------------------------------------------------------------------------
Percentage of Total Revenue 9.8% 10.7%
- -----------------------------------------------------------------------------------------------
Research and development expenses consist primarily of funds paid to third
parties for the provision of services and materials for drug development,
manufacturing and formulation enhancements, clinical trials, statistical
analysis, report writing, regulatory compliance and internal payroll and related
costs.
Research and development expenses increased $630,000, or 16.7% to $4.4
million during the year ended December 31, 2002 from $3.8 million during the
year ended December 31, 2001.
Development projects conducted during the year ended December 31, 2002
included our continuing formulation development work for a once-a-day
formulation of Periostat and formulation and stability testing for several
potential products utilizing our licensed Restoraderm technology, which totaled
$1.3 million and $349,000, respectively. Future development of the once-a-day
technology is contingent on the outcome of the initial phase of the project,
which should be determined by the end of 2003. If successful, additional
expenses could be as much as $4.7 million through 2006.
-41-
Clinical projects totaling $1.1 million were conducted during the year
ended December 31, 2002 and included several Phase IV studies for Periostat in
various dental indications, initiation of a 70-patient clinical study to
evaluate the efficacy of Periostat to treat meibomianitis, clinical development
work relating to Periostat in dermatological indications, limited clinical
testing of Restoraderm formulations and initiation of a Phase III trial in 150
patients to evaluate Periostat for the treatment of rosacea. Until the outcome
of these trials is determined, it is premature to estimate the future costs
associated with the development of Periostat for any indication. Additionally,
during 2002 we granted $253,000 for research to various academic institutions
for conducting research related to our core technology.
Other research and development expenses incurred during the year ended
December 31, 2002 included $247,000 in regulatory consulting and filing fees
under the Mutual Recognition Procedure in Europe and $373,000 for various
regulatory costs, including annual FDA filing fees, legal, and regulatory
expenses in the United States. Direct salaries and other personnel expenses
incurred during the year ended December 31, 2002 were $480,000. Additionally,
during such period we incurred $266,000 in consulting, travel and other office
expenses.
Research and development expenses incurred in 2001 included $210,000 in
research grants to various academic institutions for conducting research related
to our core technology and $765,000 in contracted clinical and development
expenses related to a completed safety and pharmacokinetic study for Metastat
and other IMPACs compounds that we are currently developing. During 2001, our
three-year evaluation testing agreement for such compounds with SUNY expired and
was not renewed. The amount paid to SUNY in 2001 under this agreement was
$168,000. The total cumulative costs incurred through 2001 under this agreement
were approximately $1.4 million.
Development projects contracted in 2001 included an initial feasibility
study and formulation development work for a once-a-day formulation of
Periostat, which totaled $455,000 in 2001.
Clinical projects conducted during 2001 included the completion of several
Phase 3b studies for Periostat in various dental indications and the initiation
of clinical trials for Periostat in dermatological indications. Clinical project
costs incurred in 2001 were $230,000.
Other expenses incurred in 2001 included $400,000 in regulatory consulting
and filing fees under the Mutual Recognition Procedure in Europe and $535,000
for various regulatory costs, including annual FDA filing fees, legal, and
regulatory expenses in the United States related to obtaining FDA approval for
Periostat tablets. During 2001 we incurred $535,000 in direct salaries and other
personnel and $164,000 in noncash compensation expense relating to the extension
of the exercisability of certain stock options for one of our ex-board members.
Additionally, we incurred $110,000 in ongoing manufacturing support relating to
our existing products and $194,000 in travel and other office expenses.
-42-
Selling, General and Administrative
- -----------------------------------------------------------------------------------------------
Selling, General and Administrative 2002 Change 2001
(dollars in thousands)
- -----------------------------------------------------------------------------------------------
Selling, General and Administrative $ 32,699 (3.9%) $ 34,010
- -----------------------------------------------------------------------------------------------
Percentage of Total Revenues 73.3% 96.5%
- -----------------------------------------------------------------------------------------------
Selling, general and administrative expenses consist primarily of
personnel salaries and benefits, direct marketing costs, professional, legal and
consulting fees, insurance and general office expenses.
Selling, general and administrative expenses decreased 3.9% to $32.7
million during the year ended December 31, 2002 from $34.0 million during the
year ended December 31, 2001. The decrease of $1.3 million in selling, general
and administrative expenses, or 3.9%, from the year ended December 31, 2001 to
the year ended December 31, 2002, was the result of spending $3.8 million less
on our DTC campaign in 2002 compared to 2001. This was partially offset by
incremental promotional expenses for the newly licensed Atrix dental products,
other direct professional Periostat promotion expenses and the launch and
promotional expenses for Pandel, effective July 1, 2002.
Significant components of selling, general and administrative expenses
incurred during the year ended December 31, 2002 included $15.7 million in
direct selling and sales training expenses, $11.3 million in marketing expenses
(including Periostat DTC advertising and promotion expenditures for Periostat,
the Atrix products and co-promotion expenses relating to Vioxx and Pandel) and
$5.7 million in general and administrative expenses, which include business
development, finance and corporate activities. Significant components of
selling, general and administrative expenses during the year ended December 31,
2001 included $13.9 million in direct selling and training expenses, $14.9
million in marketing expenses (including Periostat DTC advertising expenditures,
launch expenses for the Atrix products and Dentaplex and co-promotion expenses
related to Vioxx) and $5.2 million in general and administrative expenses.
Other Income/Expense
- -----------------------------------------------------------------------------------------------
Other Income / Expense 2002 Change 2001
- -----------------------------------------------------------------------------------------------
Interest Income $ 77,000 (66.8%) $ 232,000
- -----------------------------------------------------------------------------------------------
Interest Expense $ 5,000 (70.6%) $ 17,000
- -----------------------------------------------------------------------------------------------
Other Income $ 17,000 (112.5%) $ 8,000
- -----------------------------------------------------------------------------------------------
Interest income decreased to $77,000 for the year ended December 31, 2002
compared to $232,000 for the year ended December 31, 2001. This decrease was due
to lower average balances in cash and short-term investments and lower
investment yields during the year ended December 31, 2002. Interest expense for
the year ended December 31, 2002 was $5,000, compared to $17,000 for the year
ended December 31, 2001 due to lower average principle amounts outstanding on
our notes payable. Other income for the year ended December 31, 2002
-43-
was $17,000 compared to $8,000 for the year ended December 31, 2001. These
amounts represent foreign currency transaction gains and vary based on
transaction volume.
Preferred Stock Dividend
Preferred stock dividends were $1.6 million for the year ended December
31, 2002 and $1.7 million for the year ended December 31, 2001. Such preferred
stock dividends, paid in shares of our common stock through May 11, 2002, and
thereafter in cash, were the result of our obligations in connection with the
issuance of our Series D preferred stock in May 1999. As more fully set forth in
the Amended Certificate of Designation, Preferences and Rights of the Series D
Cumulative Convertible preferred stock, after May 11, 2002, we no longer pay
dividends on the Series D preferred stock in shares of our common stock, and we
became obligated to pay such dividends in cash, at a rate equal to 8% per annum.
Cash dividends incurred for the period May 12, 2002 to December 31, 2002 were
approximately $1.0 million.
Years Ended December 31, 2001 and December 31, 2000
Revenues
- -----------------------------------------------------------------------------------
Revenues
(dollars in thousands) 2001 Change 2000
- -----------------------------------------------------------------------------------
Net Product Sales $ 31,358 53.0% $ 20,501
- -----------------------------------------------------------------------------------
Contract Revenues 3,386 4.5 3,240
- -----------------------------------------------------------------------------------
License Revenues 488 (7.9) 530
- -----------------------------------------------------------------------------------
Total $ 35,232 45.2% $ 24,271
- -----------------------------------------------------------------------------------
Revenues in 2001 included $31.3 million in net sales of Periostat, Atridox
and Atrisorb FreeFlow, $3.4 million in contract revenues, which were derived
from our co-promotion of Vioxx and Denavir, and $488,000 in foreign license and
milestone revenues for Periostat. Net product sales increased $10.9 million, or
53.0%, in 2001 mainly as a result of the DTC advertising campaign for Periostat
that we launched in the United States in January 2001. Revenues from Denavir
accounted for approximately $297,000 of 2001 contract revenues. Novartis, which
acquired Denavir from SmithKline Beecham Consumer Healthcare in early 2001,
terminated our Co-Promotion Agreement with respect to Denavir effective April
13, 2001.
Revenues in 2000 included $20.5 million in net product sales, $3.2 million
in contract revenues, which were derived from our co-promotion of Vioxx and
Denavir, and $530,000 in foreign license and milestone revenues for Periostat.
Revenues from Denavir accounted for approximately $700,000 of such contract
revenues. There were no sales of Atridox or Atrisorb FreeFlow in 2000.
In accordance with SAB 101, which we adopted in 2000, $60,000 of our 2001
licensing revenues of $488,000 were attributable to our recognition of
previously recognized up-front license fees received for various agreements that
were deferred upon the adoption of SAB 101 and are being recognized as revenue
over the expected performance period of these agreements. License revenues in
2001 also included $425,000 in milestone fees associated with obtaining
regulatory approval in certain countries. Our 2000 licensing revenues of
$530,000 included
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$410,000 of up-front license fees received for various agreements which are
being recognized as revenue over the expected performance period of these
agreements in accordance with SAB 101. We also recorded another $120,000 in
milestone fees associated with obtaining regulatory approval in certain
countries.
Cost of Product Sales
- ------------------------------------------------------------------------------------------
Cost of Product Sales
(dollars in thousands) 2001 Change 2000
- ------------------------------------------------------------------------------------------
Cost of Product Sales $ 5,825 43.1% $ 4,070
- ------------------------------------------------------------------------------------------
Percent of Net Product Sales 18.6% 19.9%
- ------------------------------------------------------------------------------------------
Cost of product sales includes product packaging, third-party royalties,
obsolete inventory provisions, amortization of new product licensing fees, and
the costs associated with the manufacturing, storage and stability Periostat of
our products and the Atrix products (effective October 2001).
Cost of product sales were $5.8 million, or 18.6% of net product sales in
2001, compared to $4.1 million, or 19.9% of net product sales in 2000. Cost of
product sales increased in absolute dollars but decreased as a percentage of net
product sales in 2001 compared to 2000, primarily due to the manufacturing cost
savings for Periostat tablets, which we launched in July 2001. For Periostat,
cost of product sales as a percent of sales, declined to 16.1% in 2001 from
19.9% in 2000. The cost of product sales for Atridox and Atrisorb FreeFlow were
38.0% for the two months of sales recorded during 2001. In 2001, we also
recorded a provision for obsolete inventory of $602,000; there was no such
provision in 2000.
Research and Development
- ------------------------------------------------------------------------------------------
Research and Development
(dollars in thousands) 2001 Change 2000
- ------------------------------------------------------------------------------------------
Research and Development $ 3,764 20.3% $ 3,128
- ------------------------------------------------------------------------------------------
Percentage of Total Revenue 10.7% 12.9%
- ------------------------------------------------------------------------------------------
Research and development expenses consist primarily of funds paid to third
parties for the provision of services and materials for drug development,
manufacturing and formulation enhancements, clinical trials, statistical
analysis, report writing, regulatory compliance costs, and internal payroll and
related costs.
Research and development expenses increased to $3.8 million in 2001 from
$3.1 million in 2000. Research and development expenses incurred in 2001
included $535,000 in direct salaries and benefits, $164,000 in noncash
compensation expense relating to the extension of the exercisability of certain
stock options for one of our ex-board members, $210,000 in research grants to
various academic institutions for conducting research related to our core
technology and $765,000 in contracted clinical and development expenses related
to a completed safety and pharmacokinetic study for Metastat and other IMPACs
compounds that we are currently developing. During 2001, our three-year
evaluation testing agreement for such compounds with SUNY expired and was not
renewed. The amount paid to SUNY in 2001 under this agreement
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was $168,000. The total cumulative costs incurred to date under this agreement
were approximately $1.4 million.
Development projects contracted in 2001 include an initial feasibility
study and formulation development work for a once-a-day formulation of
Periostat, which totaled $455,000 in 2001.
Clinical projects conducted during 2001 included the completion of several
Phase 3b studies for Periostat in various dental indications and the initiation
of clinical trials for Periostat in dermatological indications. Clinical project
costs incurred in 2001 were $230,000.
Other expenses incurred in 2001 included $400,000 in regulatory consulting
and filing fees under the Mutual Recognition Procedure in Europe and $535,000
for various regulatory costs, including annual FDA filing fees, legal, and
regulatory expenses in the United States related to obtaining FDA approval for
Periostat tablets. Additionally, we incurred $110,000 in ongoing manufacturing
support relating to our existing products and $194,000 in travel and other
office expenses.
Research and development expenses incurred in 2000 consisted of $375,000
in direct salaries and benefits, $324,000 in noncash compensation expense
related to the acceleration of the vesting of stock options for certain research
and development consultants, $255,000 in research grants to various academic
institutions for conducting research related to our core technology and $356,000
to SUNY under an agreement we executed in 1998 relating to the development of
our IMPACS technology. We also incurred $263,000 in contracted clinical and
development expenses related to Metastat and other IMPACs compounds.
Development projects contracted in 2000 also included $113,000 for
formulation development relating to Dentaplex.
Clinical projects conducted during 2000 included the initiation of several
Phase 3b studies for Periostat in various dental indications. Clinical project
costs incurred in 2000 were $250,000. These projects were completed in 2001.
Other research and development expenses incurred in 2000 include $600,000
for FDA filing fees, legal, and regulatory expenses in the United States
relating to Periostat capsules and our New Drug Application for Periostat
tablets. We also incurred $237,000 in regulatory consulting and filing fees
related to obtaining marketing approval for Periostat tablets in the United
Kingdom. Additionally, during 2000, we incurred $188,000 in ongoing
manufacturing support for Periostat capsules, stability studies and
manufacturing validation costs for Periostat tablets and $167,000 in travel and
other office expenses.
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Selling, General and Administrative
- ---------------------------------------------------------------------------------------------------------------------
Selling, General and Administrative 2001 Change 2000
(dollars in thousands) ---- ------ ----
- ---------------------------------------------------------------------------------------------------------------------
Selling, General and Administrative $ 34,010 32.1% $ 25,746
- ---------------------------------------------------------------------------------------------------------------------
Percentage of Total Revenue 96.5% 106.1%
- ---------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses consist primarily of
personnel salaries and benefits, direct marketing costs, professional, legal and
consulting fees, insurance and general office expenses.
Selling, general and administrative expenses increased to $34.0 million in
2001 from $25.7 million in 2000. Significant components of selling, general and
administrative expenses incurred in 2001 included $13.9 million in direct
selling and sales training expenses, $14.9 million in marketing expenses
(including Periostat DTC advertising expenditures, Atridox and Atrisorb FreeFlow
launch expenditures and co-promotion expenses relating to Vioxx) and $5.2
million in general and administrative expenses, which include business
development, finance and corporate activities. The increase in selling, general
and administrative expenses during 2001 was mainly due to the launch of our DTC
advertising campaign for Periostat; during 2001 we incurred $6.8 million on DTC
advertising compared to $1.2 million in 2000. Additionally, direct selling
expenses increased $1.3 million as a result of salary increases and higher
incentive compensation and sales training costs for our sales force. Corporate
administration expenses also increased $1.4 million during 2001, as we began to
develop our dermatological business, and our corporate and financial
infrastructure both domestically and abroad.
During 2000, we incurred $12.9 million in direct selling and sales
training expenses, $9.0 million in marketing expenses for Periostat and Vioxx,
and $3.8 million in general and administrative expenses.
Other Income/Expense
- ---------------------------------------------------------------------------------------------------------------------
2001 Change 2000
Other Income / Expense ---- ------ ----
- ---------------------------------------------------------------------------------------------------------------------
Interest Income $ 232,000 (62.2%) $ 613,000
- ---------------------------------------------------------------------------------------------------------------------
Interest Expense $ 17,000 13.3% $ 15,000
- ---------------------------------------------------------------------------------------------------------------------
Other Income $ 8,000 (11.1%) $ 9,000
- ---------------------------------------------------------------------------------------------------------------------
Interest income decreased to $232,000 for the year ended December 31, 2001
compared to $613,000 for the year ended December 31, 2000. This decrease was due
to lower average balances in cash and short-term investments and lower
investment yields during the year December 31, 2001. Interest expense for the
year ended December 31, 2001 was $17,000, compared to $15,000 for the year ended
December 31, 2000. Other income for the year ended December 31, 2002 was $8,000
compared to $9,000 for the year ended December 31, 2001. These amounts represent
foreign currency transaction gains and vary based on transaction volume.
-47-
Change in Accounting Principle
We recognized a $764,000 charge during the year ended December 31, 2000
from the cumulative effect of a change in accounting principle, effective as of
January 1, 2000, upon the adoption of SAB 101. This change in accounting
principle primarily reflected the deferral of up-front licensing revenues
recognized in prior years. Under SAB 101, up-front licensing fees must be
recognized over the expected performance period of the relevant agreements.
Accordingly, at December 31, 2000, we had recorded approximately $739,000 in
deferred revenue which will be recognized over the expected performance period
of each respective agreement. During 2001, we recognized $60,000 in revenue that
was deferred upon the adoption of SAB 101, and accordingly, at December 31, 2001
had approximately $677,000 in deferred revenue which is recognized over the
expected performance period of each respective agreement.
Preferred Stock Dividend
Preferred stock dividends were $1.7 million during each of the years ended
December 31, 2001 and December 31, 2000. Such preferred stock dividends, paid in
shares of our common stock, were the result of our obligations in connection
with the issuance of our Series D preferred stock in May 1999. Beginning in
mid-2002, as more fully set forth in the Amended Certificate of Designation,
Preferences and Rights of the Series D Cumulative Convertible preferred stock,
we began paying such dividends in cash, at a rate equal to 8% per annum.
Liquidity and Capital Resources
Since our origin in January 1992, we have financed our operations through
private placements of our preferred and common stock, an initial public offering
of 2,000,000 shares of common stock, which generated net proceeds to us of
approximately $18.0 million after underwriting fees and related expenses, and a
subsequent public offering of 1,000,000 shares of common stock, which generated
net proceeds to us of approximately $11.6 million after underwriting fees and
related expenses. On May 12, 1999, we consummated a $20.0 million financing
through the issuance of our Series D preferred stock, which generated net
proceeds to us of $18.5 million. The issuance of the Series D preferred stock
was approved by a majority of our stockholders at our Annual Meeting of
Stockholders on May 11, 1999. A portion of the proceeds of the Series D
preferred stock financing consummated in May 1999 were used to repay a $10.0
million senior secured convertible note provided by one of the investors on
March 19, 1999 in connection with such financing. The remaining proceeds have
been used for general working capital purposes.
The Series D preferred stock is convertible at any time into shares of our
common stock at a current conversion price of $9.89 per share, which conversion
price reflects a decrease from the initial conversion price of $11.00 per share
as a result of certain subsequent equity issuances by us. Such conversion price
is not subject to reset except in the event that we should fail to declare and
pay dividends when due or we should issue new equity securities or convertible
securities at a price per share or having a conversion price per share lower
than the then applicable conversion price of the Series D preferred stock.
During the first three years following issuance, holders of the Series D
preferred stock received dividends payable in shares
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of fully registered common stock at a rate of 8.4% per annum. Thereafter, and
beginning on May 12, 2002, we began paying such dividends in cash at a rate of
8.0% per annum.
All or a portion of the shares of Series D preferred stock shall, at our
option (as determined by our board of directors), automatically be converted
into fully paid, registered and non-assessable shares of common stock, if the
following two conditions are met: (i) the last sale price, or, in case no such
sale takes place on such day, the average of the closing bid and asked prices on
the Nasdaq National Market is at least 200% of the conversion price then in
effect (as of December 31, 2002, such conversion price was $9.89 per share) for
forty consecutive trading days; and (ii) a shelf registration statement is in
effect for the shares of common stock to be issued upon conversion of the Series
D preferred stock. Without written approval of a majority of the holders of
record of the Series D preferred stock, we, among other things, shall not: (i)
declare or pay any dividend or distribution on any shares of our capital stock
other than dividends on the Series D preferred stock; (ii) make any loans, incur
any indebtedness or guarantee any indebtedness, advance capital contributions
to, or investments in any person, issue or sell any securities or warrants or
other rights to acquire our debt securities, except that we may incur such
indebtedness in any amount not to exceed $10.0 million in the aggregate
outstanding at any time for working capital requirements in the ordinary course
of business; or (iii) make research and development expenditures in excess of
$7.0 million in any continuous twelve month period, unless we have reported
positive net income for four consecutive quarters immediately prior to such
twelve month period.
In April 1999, we received $219,000 in proceeds from our issuance of a
note payable. We used the proceeds of such note to fund the purchase of
equipment, fixtures and furniture for our corporate offices in Newtown,
Pennsylvania. The term of the note was three years at 9.54% per annum, with
monthly minimum payments of principal and interest. We repaid such note on May
1, 2002.
On March 12, 2001, we consummated a private equity offering of 1,500,000
shares of common stock for an aggregate purchase price of $7.5 million, which
generated net proceeds to us of approximately $6.8 million. We have used such
proceeds primarily for our DTC advertising campaign and for general working
capital purposes. In addition, the investors in such financing were also issued
an aggregate of 400,000 warrants which are exercisable for up to three years
from the date of such financing into 400,000 shares of our common stock at an
exercise price per share of $6.00. The consideration received for such warrants
is included in the aggregate proceeds received in such financing. We also issued
to our financial advisor in such financing warrants to purchase an aggregate of
150,000 shares of our common stock exercisable for up to three years at an
exercise price of $5.70 per share, as partial consideration for services
rendered in connection with the financing. Such warrants may be deemed
automatically exercised in certain circumstances based upon our stock price. In
connection with the March 2001 financing, we are obligated to maintain the
effectiveness of a shelf registration statement with respect to all such shares
of common stock issued and shares underlying all such warrants for a continuous
24 month period, or we will be required to issue to the investors and the
financial advisor an additional 27,500 shares of our common stock, in the
aggregate, for no additional consideration.
On March 19, 2001, we consummated a revolving credit facility with Silicon
Valley Bank, which was subsequently amended in March 2002. The credit facility,
as amended, extends
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through March 15, 2004. We may borrow up to the lesser of $4.0 million or 80% of
eligible accounts receivable, as defined under the credit facility. The amount
available to us is also reduced by outstanding letters of credit which may be
issued under the credit facility in amounts totaling up to $1.5 million. On
March 26, 2002, we initially secured our expected purchase order commitments for
Periostat from Pharmaceutical Manufacturing Research Services, Inc., a contract
manufacturing company, with a letter of credit under the credit facility for
approximately $1.3 million. This amount was reduced during the remainder of 2002
to $353,000. As we continue to pay down amounts under the letter of credit, the
amount available to us under the Facility will increase. We are not obligated to
draw amounts and any such borrowings bear interest, payable monthly, currently
at the prime rate plus 1.0% to 1.5% per annum and may be used only for working
capital purposes. Without the consent of the Silicon Valley Bank, we, among
other things, shall not (i) merge or consolidate with another entity; (ii)
acquire assets outside the ordinary course of business; or (iii) pay or declare
any cash dividends on our common stock. We must also maintain a certain tangible
net worth of $5.0 million, subject to certain upward adjustments as defined in
the amendment, as a result of profitable operations or additional debt or equity
financings and a minimum of $2.0 million in cash at Silicon Valley Bank, net of
borrowings under the credit facility which expires March 15, 2004. In addition,
we have secured our obligations under the credit facility through the granting
of a security interest in favor of the bank with respect to all of our assets,
including our intellectual property. As of December 31, 2002, we had no
borrowings outstanding against the credit facility.
On August 24, 2001, we signed a License and Marketing Agreement with Atrix
Laboratories, Inc. to market Atrix's proprietary dental products, Atridox,
Atrisorb FreeFlow and Atrisorb-D, to the United States dental market. Pursuant
to the terms of this agreement, among other things: (i) Atrix will manufacture
the dental products for us at an agreed upon transfer price and will receive
royalties on future net sales of the products each calendar year; (ii) we paid
to Atrix a $1.0 million licensing fee to market such products; (iii) we
committed to no less than $2.0 million in advertising and selling expenses
related to the Atrix products during the fiscal year beginning January 1, 2002
(which requirement we met during 2002); (iv) we have agreed to maintain, for a
period of 24 months, a force of no less than ninety full time dental consultants
and divisional and regional managers to make sales and product recommendation
calls on dental professionals; and (v) we agreed that the Atrix products would
be the subject of a specific number of detail calls in the United States during
2002, which we achieved. We are also required to make certain annual minimum
expenditures for advertising and promotional activities over the term of the
agreement beginning January 1, 2003, including: (i) the lesser of $4.0 million
or 30% of our contribution margin relating to a specific Atrix product that we
market, and (ii) the lesser of $2.0 million or 30% of our contribution margin
relating to a separate Atrix product that we market.
On February 14, 2002, we entered into an equity line arrangement under the
terms of a Common Stock Purchase Agreement with Kingsbridge Capital Limited.
Under the terms of the agreement, as amended, we committed to draw down on this
equity line, an amount aggregating at least $1.5 million in registered shares of
common stock prior to October 29, 2002, of which we had drawn down an aggregate
of $1.3 million as of such date. The equity line provided for the sale of up to
$8.5 million in registered shares of our common stock to Kingsbridge. The equity
line terminated pursuant to its terms on February 13, 2003, and prior to such
termination, we had
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drawn down and issued an aggregate of approximately $1.3 million in registered
shares of common stock under such equity line arrangement.
Additionally, in connection with the consummation of the equity line and
pursuant to the terms of a warrant agreement executed by us, we issued
Kingsbridge a warrant to purchase 40,000 shares of our common stock at an
exercise price of $9.38 per share. The conversion price of our Series D
preferred stock was not reduced as a result of such issuance. Such warrant
became exercisable as of August 14, 2002, and will expire on August 13, 2007. We
have registered the shares of our common stock which may be issued by us upon
any exercise of the warrant by Kingsbridge under a shelf registration statement
on Form S-3.
At December 31, 2002, we had cash and cash equivalents of approximately
$10.1 million, an increase of $3.9 million from the $6.2 million balance at
December 31, 2001. In accordance with investment guidelines approved by our
Board of Directors, cash balances in excess of those required to fund operations
have been invested in short-term United States Treasury securities and
commercial paper with a credit rating no lower than A1/P1. Our working capital
at December 31, 2002 was $6.6 million, an increase of $300,000 from $6.3 million
at December 31, 2001. During 2002 we generated $4.0 million in cash from
our operating activities principally from net income of $902,000 and
improvements in our accounts receivable collections and larger accruals. We
invested cash mainly to acquire the Altana license for $800,000 and various
capital equipment for $298,000. Our financing activities in 2002 included $1.3
million from the issuance of our common stock, primarily from our equity line
with Kingsbridge, and $218,000 in cash dividend payments to the holders of our
Series D preferred stock.
Prior to the third quarter of 2002, we historically have had negative cash
flows from operations and have used the net proceeds of public and private
placements of our equity to fund operations. We currently believe that projected
increases in sales of our United States marketed products in combination with
contract and license revenues, working capital at December 31, 2002 and
available cash inflows from our revolving credit facility with Silicon Valley
Bank will allow us to fund our operations, capital expenditures and preferred
stock dividend requirements into 2004. At this time, however, we cannot
accurately predict the effect of certain developments on future product sales
such as the degree of market acceptance of our products and technology,
competition, the effectiveness of our sales and marketing efforts and the
outcome of our research and development to demonstrate the utility of Periostat
in indications beyond those already included in the FDA approved label. Contract
and license revenues include receipts from co-promotion agreements and
performance milestones. The continuation of any of these agreements is subject
to the achievement of certain milestones and to periodic review by the parties
involved.
We believe that other key factors that could affect our internal and
external sources of cash are:
o Revenues and margins from sales of Periostat and other products and
contracted services;
o The success of our dermatology franchise;
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o The success of our pre-clinical, clinical and development programs;
o The receptivity of the capital markets to future financings;
o Our ability to enter into additional strategic collaborations and to
maintain existing and new collaborations and the success of such
collaborations; and
o Our ability to meet the covenant requirements under our revolving
credit facility.
Contractual Obligations
Our major outstanding contractual obligations relate to cash dividends on
our outstanding Series D preferred stock, operating leases for our office space
and other contractual commitments with our marketing partners for certain
selling and promotional expenses associated with the products we are currently
detailing. Additionally, we also expect to make certain inventory purchases from
our contract manufacturer of Periostat, guaranteed by our irrevocable Letter of
Credit with Silicon Valley Bank.
Below is a table which presents our contractual obligations and commercial
commitments as of December 31, 2002:
-------------------------------------------------------------------------------------------
Payments Due by Period
- ----------------------------------------------------------------------------------------------------------------------
Contractual Obligations Total 2003 2004 and 2005 2006 and 2007 2008 and after
- ----------------------------------------------------------------------------------------------------------------------
Operating Leases(1)...... $2,219,000 $327,000 $678,000 $684,000 $530,000
- ----------------------------------------------------------------------------------------------------------------------
Unconditional Purchase (3) (4)
Obligations........... $1,411,000 $1,411,000(2) (4) (4) (4)
- ----------------------------------------------------------------------------------------------------------------------
Cash Dividends on
Series D
Preferred Stock........ $8,000,000(5) $1,600,000(5) $3,200,000(5) $3,200,000(5) (5)
- ----------------------------------------------------------------------------------------------------------------------
Consulting Payments...... $ 649,000(6) $ 649,000(6)
- ----------------------------------------------------------------------------------------------------------------------
Total Contractual
Obligations........... $12,279,000 $3,338,000 $4,527,000 $3,884,000 $530,000
- ----------------------------------------------------------------------------------------------------------------------
(1) Such amounts primarily include minimum rental payments for our office
lease in Newtown, Pennsylvania.
(2) Such amount represents purchase order commitments for inventory purchases
with various suppliers.
(3) Under the terms of our Co-Promotion Agreement with Merck & Co., Inc. for
Vioxx, we are obligated to spend up to $1,000,000 annually for
promotional expenses, or such lesser amount as will be determined by
mutual agreement of the parties.
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(4) We will be required to make certain annual minimum expenditures for
advertising and promotional activities amounting to: (i) the lesser of
$4,000,000 or 30% of our contribution margin (as defined in the agreement)
relating to a specific Atrix product that we market, and (ii) the lesser
of $2,000,000 or 30% of our contribution margin (as defined in the
agreement) relating to a separate Atrix product that we market.
(5) Pursuant to the terms of our Series D Cumulative Convertible preferred
stock issued in May 1999, and unless earlier converted pursuant to its
terms, the holders of the Series D preferred stock are entitled to
dividends payable in cash at a rate of 8.0% per annum.
(6) Such amount represents consulting payments to be made to Brian M.
Gallagher, our chief executive officer and president, pursuant to the
terms of a consulting agreement executed March 18, 2003, upon his
separation from the Company.
Our Series D preferred stock paid dividends in common stock at a rate of
8.4% per annum from the date of issuance of such Series D preferred stock
through May 11, 2002. After May 11, 2002, the Series D preferred stock pays
dividends in cash at a rate of 8.0% per annum. The Series D preferred stock is
convertible into our common stock at a current conversion price of $9.89 per
share, subject to adjustment, at any time by the holder and under certain
conditions by us. The conversion price of the Series D preferred stock is
subject to adjustment in the event we fail to declare or pay dividends when due
or should we issue new equity securities or convertible securities at a price
per share or having a conversion price per share lower than the applicable
conversion price of the Series D preferred stock.
In May 1999, we entered into a lease agreement relating to our office
space in Newtown, Pennsylvania. The lease has an initial term of ten years. Rent
is expected to be approximately $318,000 per year and is subject to market
adjustments in 2004.
During 1999, we entered into a three-year co-promotion agreement with
Merck & Co., Inc. for Vioxx under which we are committed to spend up to $1.0
million annually for promotional expenses, unless the agreement is earlier
terminated. In September 2002, we amended this agreement and extended the term
thereof to December 31, 2003.
Pursuant to our License and Marketing Agreement with Atrix Laboratories,
we committed to: (i) expend no less than $2.0 million in advertising and selling
expenses related to the Atrix products during the fiscal year beginning January
1, 2002, which requirement we met during 2002; (ii) maintain, through 2003, a
force of no less than ninety full time dental consultants and divisional and
regional managers to make sales and product recommendation calls on dental
professionals; and (iii) make the Atrix products the subject of a specific
number of detail calls in the United States during 2002, which we achieved. We
will also be required to make certain minimum expenditures for advertising and
promotional activities after 2002, including: (i) the lesser of $4.0 million or
30% of our contribution margin, as defined in the agreement, relating to a
specific Atrix product that we market, and (ii) the lesser of $2.0 million or
30% of our contribution margin, as defined in the agreement, relating to a
separate Atrix product that we market.
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On February 11, 2002, we executed a Co-operation, Development and
Licensing Agreement pursuant to which we were granted an exclusive,
sublicenseable, transferable license with respect to the Restoraderm'TM' topical
drug delivery system which we intend to develop for dermatological applications.
Pursuant to the terms of such agreement, upon the occurrence of certain events,
we will be required to pay certain future consulting, royalty and milestone
payments in the aggregate amount of up to $3.8 million, and no more than $2.75
million and $1,037,000 of which shall be payable prior to January 1, 2004 and
January 1, 2005, respectively. We paid $330,000 under this agreement in 2002.
The term of such agreement is for the life of any patent that may be issued to
us for the first product we develop utilizing such technology, or, if we do not
acquire any patentable products, seven years.
On June 10, 2002, we executed a Development and Licensing Agreement with
Shire Laboratories, Inc. pursuant to which we were granted an exclusive
worldwide license (including the right to sublicense) to develop, make, have
made, use, supply, export, import, register and sell products for the treatment
of various inflammatory disorders. In addition, under the agreement, certain
product development functions shall be performed for us. Pursuant to the terms
of such agreement, we will pay to Shire a percentage of certain net sales of
products, if any, utilizing any part of Shire's technology. Also under the
agreement, we have committed to payments, in cash or at our option, a
combination of cash and our common stock, upon the achievement of certain
clinical and regulatory milestones in the event we pursue certain applications
of the technology which could total up to $8.2 million in the aggregate.
At December 31, 2002, we had approximately $62.0 million of Federal and
$33.0 million of state net operating loss carryforwards available to offset
future taxable income. The Federal and state net operating loss carryforwards
will begin expiring in 2008 and 2005, respectively, if not utilized. We also
have research and development tax credit carryforwards of approximately $900,000
available to reduce Federal income taxes which begin expiring in 2007. In
addition, we had approximately $2.3 million of foreign net operating loss
carryforwards with an indefinite expiration date.
Section 382 of the Internal Revenue Code of 1986 subjects the future
utilization of net operating losses and certain other tax attributes, such as
research and development credits, to an annual limitation in the event of an
ownership change, as defined. Due to our prior year equity transactions, a
portion of our net operating losses and tax credits are subject to an annual
limitation of approximately $3.8 million. To the extent that any single-year
limitation is not utilized to the full amount of the limitation, such unused
amounts are carried over to subsequent years until the earlier of its
utilization or the expiration of the relevant carryforward period. As of
December 31, 2002, assuming no future ownership changes, approximately $35.0
million is immediately available to offset future taxable income. In addition to
the section 382 limitation, the state net operating loss carryforwards are
subject to a $2.0 million annual limitation.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We had cash equivalents at December 31, 2002 which are exposed to the
impact of interest rate changes and our interest income fluctuates as our
interest rates change. Due to the short-term nature of our investments in money
market funds, the carrying values of our cash equivalents approximate their fair
value at December 31, 2002.
-54-
Item 8. Financial Statements and Supplementary Data.
The financial statements and supplementary data required to be filed
pursuant to this Item 8 are appended to this Annual Report on Form 10-K. A list
of the financial statements filed herewith is found at "Item 15. Exhibits,
Financial Statement Schedules, and Reports on Form 8-K."
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
-55-
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information relating to our directors, nominees for election as
directors and executive officers under the headings "Election of Directors",
"Executive Officers" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in our definitive proxy statement for the 2003 Annual Meeting of
Stockholders is incorporated herein by reference to such proxy statement.
Item 11. Executive Compensation.
The discussion under the heading "Executive Compensation" in our
definitive proxy statement for the 2003 Annual Meeting of Stockholders is
incorporated herein by reference to such proxy statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The discussion under the heading "Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters" in our definitive proxy
statement for the 2003 Annual Meeting of Stockholders is incorporated herein by
reference to such proxy statement.
Item 13. Certain Relationships and Related Transactions.
The discussion under the heading "Certain Relationships and Related
Transactions" in our definitive proxy statement for the 2003 Annual Meeting of
Stockholders is incorporated herein by reference to such proxy statement.
Item 14. Controls and Procedures.
(1) Evaluation of Disclosure Controls and Procedures. Based on their
evaluation of the Company's disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a
date within 90 days of the filing date of this Annual Report on Form 10-K, the
Company's chief executive officer and principal financial officer have concluded
that the Company's disclosure controls and procedures are designed to ensure
that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms and are
operating in an effective manner.
(2) Changes in Internal Controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their most recent evaluation.
-56-
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) Financial Statements.
Reference is made to the Index to Consolidated Financial Statements
and Schedule on Page F-1.
(2) Financial Statement Schedule.
Reference is made to the Index to Consolidated Financial Statements
and Schedule on Page F-1.
(3) Exhibits.
Reference is made to the Index to Exhibits on Page 62.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December
31, 2002.
-57-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 31st day of March,
2003.
COLLAGENEX PHARMACEUTICALS, INC.
By: /s/ Brian M. Gallagher
-------------------------------------
Brian M. Gallagher, Ph.D., Chairman
Chief Executive Officer and President
-58-
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Brian M. Gallagher Chairman of the Board, Chief Executive Officer, March 31, 2003
- -------------------------------- President and Director
Brian M. Gallagher, Ph.D. (Principal Executive Officer)
/s/ Nancy C. Broadbent Chief Financial Officer, March 31, 2003
- -------------------------------- Treasurer and Secretary
Nancy C. Broadbent (Principal Financial and Accounting Officer)
/s/ Peter R. Barnett. D.M.D. Director March 31, 2003
- --------------------------------
Peter R. Barnett, D.M.D.
/s/ Robert C. Black Director March 28, 2003
- --------------------------------
Robert C. Black
/s/ James E. Daverman Director March 31, 2003
- --------------------------------
James E. Daverman
/s/ Robert J. Easton Director March 31, 2003
--------------------------------
Robert J. Easton
/s/ Stephen A. Kaplan Director March 31, 2003
- --------------------------------
Stephen A. Kaplan
/s/ W. James O'Shea Director March 31, 2003
- --------------------------------
W. James O'Shea
-59-
CERTIFICATION
I, Brian M. Gallagher, Ph.D., Chief Executive Officer of CollaGenex
Pharmaceuticals, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of CollaGenex
Pharmaceuticals, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Brian M. Gallagher, Ph.D.
-----------------------------
Dated: March 31, 2003 Brian M. Gallagher, Ph.D.
Chief Executive Officer
-60-
CERTIFICATION
I, Nancy C. Broadbent, Chief Financial Officer of CollaGenex Pharmaceuticals,
Inc., certify that:
1. I have reviewed this annual report on Form 10-K of CollaGenex
Pharmaceuticals, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Nancy C. Broadbent
---------------------------
Dated: March 31, 2003 Nancy C. Broadbent
Chief Financial Officer
-61-
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
3.1(a) Amended and Restated Certificate of Incorporation.
3.2(v) Amended and Restated Bylaws.
3.3(m) Amended Certificate of Designation, Preferences and Rights
of the Series D Cumulative Convertible Preferred Stock of
CollaGenex Pharmaceuticals, Inc. dated as of October 15,
2001.
3.4(t) Amended Certificate of Designation of Series A Participating
Preferred Stock, as filed with the Secretary of State of the
State of Delaware on June 5, 2002.
4.1(a) Registration Rights Agreement dated September 29, 1995 by
and among the Company and certain investors, as
supplemented.
4.2(a) Fourth Investment Agreement as of September 29, 1995 by and
among the Company and certain Investors.
4.3(t) Amended and Restated Shareholder Protection Rights
Agreement, dated as of May 29, 2002, by and between
CollaGenex Pharmaceuticals, Inc. and American Stock Transfer
& Trust Company.
'D'10.1(a) Assignment of, Amendment to and Restatement of Agreement,
with all exhibits, as amended, and schedules, dated January
13, 1992 by and among the Company, Johnson & Johnson
Consumer Products, Inc. and Research Foundation of State
University of New York.
'D'10.2(a) Supply Agreement dated January 23, 1995 between the Company
and Hovione International Limited.
10.3(a) Form of Non-Disclosure Agreement executed by all Employees
as employed from time to time.
10.4(a)(b) Form of Non-Competition Agreement executed by each of Brian
M. Gallagher, Ph.D., Nancy C. Broadbent and Robert A.
Ashley.
10.5(a) Form of Mutual Non-Disclosure Agreement executed by certain
consultants and research collaborators as retained from time
to time.
10.6(a)(b) Form of Indemnification Agreement executed by each of the
Company's directors and officers.
10.7(a) Forms of Consulting Agreement executed by each of Lorne M.
Golub and Thomas F. McNamara.
-62-
Exhibit No. Description of Exhibit
----------- ----------------------
10.8(a) Form of Material Transfer Agreement between the Company and
Researchers.
10.9(a)(b) 1992 Stock Option Plan of the Company, as amended to date.
10.10(a)(b) 1996 Stock Plan of the Company.
10.11(a)(b) 1996 Non-Employee Director Stock Option Plan of the Company.
'D'10.12(c) License Agreement dated July 18, 1996 by and between the
Company and Boehringer Mannheim Italia.
'D'10.13(e) Distribution Services Agreement dated August 15, 1998
between Cord Logistics, Inc. and the Company.
10.14(f) Stock Purchase Agreement dated March 19, 1999, between the
Company, OCM Principal Opportunities Fund, L.P. and other
Purchasers set forth therein.
10.15(g) Lease Agreement dated March 15, 1999 between the Company and
Newton Venture IV Associates, effective May 15, 1999.
10.16(h) Stockholders and Registration Rights Agreement, dated March
19, 1999, by and among CollaGenex Pharmaceuticals, Inc., OCM
Principal Opportunities Fund, L.P. and the Purchasers set
forth therein.
10.17(i) Form of Common Stock Purchase Agreement, dated March 12,
2001, between the Company and the Investors set for therein,
together with form of Registration Rights Agreement as an
exhibit thereto and form of Warrant as an exhibit thereto.
10.18(j) Loan and Security Agreement dated March 19, 2001, between
the Company and Silicon Valley Bank.
'D'10.19(k) Services and Supply Agreement dated as of September 26, 2000
as amended by letter agreement dated as of December 1, 2000,
by and between the Company and Pharmaceutical Manufacturing
Research Services, Inc.
10.20(l) Letter Agreement dated as of June 26, 2001 by and between
the Company and Pharmaceutical Manufacturing Research
Services, Inc.
-63-
Exhibit No. Description of Exhibit
----------- ----------------------
10.21(m) Amendment No. 1 to Stockholders and Registration Rights
Agreement, dated March 19, 1999, by and among CollaGenex
Pharmaceuticals, Inc., OCM Principal Opportunities Fund,
L.P, and the Purchasers set forth therein.
10.22(m) Amendment No. 2 to Stockholders and Registration Rights
Agreement, dated March 19, 1999, by and among CollaGenex
Pharmaceuticals, Inc., OCM Principal Opportunities Fund,
L.P, and the Purchasers set forth therein.
'D'10.23(n) License Agreement dated August 24, 2001 by and between
CollaGenex Pharmaceuticals, Inc. and Atrix Laboratories,
Inc.
'D'10.24(n) Stock Purchase Agreement dated August 24, 2001 by and
between CollaGenex Pharmaceuticals, Inc. and Atrix
Laboratories, Inc.
'D'10.25(o) First Addendum December 10, 2001 to the Supply Agreement
dated January 23, 1995 by and between CollaGenex, Inc. and
Hovione International Limited.
10.26(p) Common Stock Purchase Agreement dated February 14, 2002 by
and between CollaGenex Pharmaceuticals, Inc. and Kingsbridge
Capital Limited.
10.27(p) Warrant dated February 14, 2002 issued to Kingsbridge
Capital Limited.
'D'10.28(r) Wholesale Service Agreement effective as of November 1,
2001, by and between CollaGenex Pharmaceuticals, Inc. and
National Specialty Services, Inc.
'D'10.29(r) First Amendment to Wholesale Service Agreement effective as
of November 12, 2001, by and between CollaGenex
Pharmaceuticals, Inc. and National Specialty Services, Inc.
'D'10.30(r) Exclusive Distribution Agreement dated as of March 1, 2002,
by and between CollaGenex Pharmaceuticals, Inc. and CORD
Logistics, Inc.
10.31(r) First Loan Modification Agreement dated as of March 22, 2002
by and between CollaGenex Pharmaceuticals, Inc. and Silicon
Valley Bank.
10.32(r) Second Loan Modification Agreement dated as of March 27,
2002 by and between CollaGenex Pharmaceuticals, Inc. and
Silicon Valley Bank.
-64-
Exhibit No. Description of Exhibit
----------- ----------------------
'D'10.33(u) Agreement by and between Altana Inc. and CollaGenex
Pharmaceuticals, Inc., dated May 24, 2002.
10.34(v) Form of Change of Control Agreement executed with each of
Brian Gallagher, Nancy C. Broadbent, Robert Ashley, David
Pfeiffer and Douglas Gehrig.
*#10.35 Letter Agreement dated as of September 12, 2002 by and
between the Company and Pharmaceutical Manufacturing
Research Services, Inc.
10.36(w) Transition Agreement and Release dated March 18, 2003 by and
between Brian Gallagher and CollaGenex Pharmaceuticals, Inc.
10.37(w) Consulting Agreement dated March 18, 2003 by and between
Brian Gallagher and CollaGenex Pharmaceuticals, Inc.
* 21 List of subsidiaries of the Registrant.
* 23.1 Consent of KPMG LLP.
* 99.1 Certification pursuant to 18 U.S.C. Section 1350.
* Filed herewith
# Confidential treatment has been requested for a portion of this Exhibit.
'D' Confidential treatment has been requested and granted for a portion of
this Exhibit.
(a) Incorporated by reference to the Company's Registration Statement on Form
S-1 (File Number 333-3582) which became effective on June 20, 1996.
(b) A management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
(c) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996 which was filed with the
Securities and Exchange Commission on October 29, 1996.
(d) Incorporated by reference to the Company's Current Report on Form 8-K,
dated September 16, 1997, which was filed with the Securities and Exchange
Commission on September 17, 1997.
(e) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998, which was filed with the
Securities and Exchange Commission on November 16, 1998.
(f) Incorporated by reference to the Company's Current Report on Form 8-K,
dated March 19, 1999 which was filed with the Securities and Exchange
Commission on March 25, 1999.
-65-
(g) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999, which was filed with the Securities
and Exchange Commission on May 7, 1999.
(h) Incorporated by reference to the Company's Current Report on Form 8-K,
dated May 12, 1999, which was filed with the Securities and Exchange
Commission on May 26, 1999.
(i) Incorporated by reference to the Company's Current Report on Form 8-K,
dated March 16, 2001, which was filed with the Securities and Exchange
Commission on March 16, 2001.
(j) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 2000, which was filed with the Securities and
Exchange Commission on March 26, 2001. The Company amended such Form 10-K
by filing a Form 10-K/A on January 2, 2002.
(k) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001, which was filed with the Securities
and Exchange Commission on May 15, 2001.
(l) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001, which was filed with the Securities
and Exchange Commission on August 14, 2001.
(m) Incorporated by reference to the Company's Current Report on Form 8-K,
dated October 15, 2001, which was filed with the Securities and Exchange
Commission on October 18, 2001.
(n) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001, which was filed with the
Securities and Exchange Commission on November 14, 2001. The Company
amended such Form 10-Q by filing a Form 10-Q/A on February 14, 2002.
(o) Incorporated by reference to the Company's Current Report on Form 8-K,
dated December 10, 2001, which was filed with the Securities and Exchange
Commission on December 10, 2001.
(p) Incorporated by reference to the Company's Current Report on Form 8-K,
dated February 14, 2002, which was filed with the Securities and Exchange
Commission on February 15, 2002.
(q) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001, which was filed with the
Securities and Exchange Commission on November 14, 2001. The Company
amended such Form 10-Q by filing a Form 10-Q/A on February 14, 2002.
(r) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2002, which was filed with the Securities
and Exchange Commission on May 15, 2002.
(s) Incorporated by reference to the Company's Current Report on Form 8-K,
dated May 15, 2002, which was filed with the Securities and Exchange
Commission on May 20, 2002.
-66-
(t) Incorporated by reference to the Company's Current Report on Form 8-K,
dated May 29, 2002, which was filed with the Securities and Exchange
Commission on June 5, 2002.
(u) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2002, which was filed with the Securities
and Exchange Commission on August 14, 2002.
(v) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002, which was filed with the
Securities and Exchange Commission on November 14, 2002.
(w) Incorporated by reference to the Company's Current Report on Form 8-K,
dated March 18, 2003, which was filed with the Securities and Exchange
Commission on March 19, 2003.
-67-
COLLAGENEX PHARMACEUTICALS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Page
----
Independent Auditors' Report.............................................................. F-2
Consolidated Balance Sheets as of December 31, 2002 and 2001.............................. F-3
Consolidated Statements of Operations for the years ended December 31, 2002,
2001, and 2000............................................................................ F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31,
2002, 2001 and 2000....................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001
and 2000.................................................................................. F-6
Notes to Consolidated Financial Statements................................................ F-7
Financial Statement Schedule - Valuation and Qualifying Accounts for the years
ended December 31, 2002, 2001 and 2000.................................................... F-30
F-1
Independent Auditors' Report
The Board of Directors and Stockholders
CollaGenex Pharmaceuticals, Inc.:
We have audited the consolidated financial statements of CollaGenex
Pharmaceuticals, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits, we also have audited the financial statement
schedule as listed in the accompanying index. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CollaGenex
Pharmaceuticals, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion the related financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects, the information set forth therein.
As discussed in note 9 to the consolidated financial statements, the Company
adopted the provisions of the Securities and Exchange Commission's Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements", in
2000.
/s/ KPMG LLP
Princeton, New Jersey
February 14, 2003, except as
to the first paragraph of note 15 which is
as of March 14, 2003 and the second
and third paragraphs of note 15, which
are as of March 18, 2003
F-2
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2002 and 2001
(Dollars in thousands, except per share data)
Assets 2002 2001
-------- --------
Current assets:
Cash and cash equivalents ......................................... $ 10,112 $ 6,171
Accounts receivable, net of allowance of $1,412 and $950 in 2002
and 2001, respectively ........................................ 2,142 4,478
Inventories ....................................................... 1,415 1,402
Prepaid expenses and other current assets ......................... 1,630 1,200
-------- --------
Total current assets .......................................... 15,299 13,251
Equipment and leasehold improvements, net .............................. 559 537
Deferred license fees .................................................. 1,749 883
Other assets ........................................................... 27 27
-------- --------
Total assets .................................................. $ 17,634 $ 14,698
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of note payable ................................... $ -- $ 35
Accounts payable .................................................. 3,616 3,769
Accrued expenses .................................................. 4,305 3,153
Preferred dividends payable ....................................... 800 --
-------- --------
Total current liabilities ............................ 8,721 6,957
-------- --------
Deferred revenue ....................................................... 561 614
-------- --------
Commitments and Contingencies -- --
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized,
200,000 shares of Series D cumulative convertible preferred
stock issued and outstanding in 2002 and 2001, (liquidation
value $20,000); 150,000 shares of Series A participating
preferred stock, $0.01 par value, designated and no shares
issued and outstanding in 2002 and 2001 ....................... 2 2
Common stock, $0.01 par value; 25,000,000 shares authorized,
11,377,631 and 10,999,573 shares issued and outstanding in 2002
and 2001, respectively ........................................ 114 110
Common stock to be issued (no shares and 103,196 shares in 2002 and
2001, respectively) ........................................... -- 840
Additional paid in capital ........................................ 82,917 80,129
Accumulated deficit ............................................... (74,681) (73,954)
-------- --------
Stockholders' equity .......................................... 8,352 7,127
-------- --------
Total liabilities and stockholders' equity .................... 17,634 $ 14,698
======== ========
See accompanying notes to consolidated financial statements.
F-3
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
2002 2001 2000
------------ ------------ ------------
Revenues:
Net product sales .................................. $ 42,111 $ 31,358 $ 20,501
Contract revenues .................................. 2,332 3,386 3,240
License revenues ................................... 176 488 530
------------ ------------ ------------
Total revenues ................................. 44,619 35,232 24,271
------------ ------------ ------------
Operating expenses:
Cost of product sales .............................. 6,713 5,825 4,070
Research and development ........................... 4,394 3,764 3,128
Selling, general and administrative ................ 32,699 34,010 25,746
------------ ------------ ------------
Total operating expenses ....................... 43,806 43,599 32,944
------------ ------------ ------------
Operating income (loss) ........................ 813 (8,367) (8,673)
Other income (expense):
Interest income .................................... 77 232 613
Interest expense ................................... (5) (17) (15)
Other income ....................................... 17 8 9
------------ ------------ ------------
Income (loss) before cumulative effect of
change in accounting principle ............ 902 (8,144) (8,066)
Cumulative effect of change in accounting principle ..... -- -- (764)
------------ ------------ ------------
Net income (loss) .............................. 902 (8,144) (8,830)
Preferred stock dividend ................................ 1,629 1,680 1,689
------------ ------------ ------------
Net loss allocable to common stockholders ............... $ (727) $ (9,824) $ (10,519)
============ ============ ============
Basic and diluted net loss per share allocable
to common stockholders before cumulative
effect of change in accounting principle ........... $ (0.06) $ (0.94) $ (1.12)
Cumulative effect of change in accounting
principle .......................................... -- -- (0.09)
------------ ------------ ------------
Basic and diluted net loss per share allocable
to common stockholders ............................. $ (0.06) $ (0.94) $ (1.21)
============ ============ ============
Weighted average shares used in computing per share
amounts:
Basic and diluted .................................. 11,234,652 10,413,663 8,711,668
============ ============ ============
Pro forma net loss assuming new accounting principle is
applied retroactively............................ $ (8,066)
============
Pro forma net loss allocable to common stockholders
assuming new accounting principle is applied
retroactively.................................... $ (9,755)
============
Pro forma basic and diluted net loss per share allocable
to common stockholders assuming new accounting
principle is applied retroactively............... $ (1.12)
============
See accompanying notes to consolidated financial statements.
F-4
COLLAGENEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2002, 2001 and 2000
(Dollars in thousands)
Series D
cumulative
convertible preferred
stock Common stock
---------------------- -----------------------
Common
Number of Number of stock to be
shares Par value shares Par value issued
--------- ---------- --------- ---------- -----------
Balance, December 31, 1999 ................... 200,000 $ 2 8,622,091 $ 86 $ 858
Exercise of common stock options ........... -- -- 21,325 -- 32
Common stock dividends issued on Series D
cumulative convertible preferred stock .. -- -- 131,760 2 (858)
Common stock dividends declared on Series D
cumulative convertible preferred stock .. -- -- -- -- 840
Compensation expense resulting from options
to non-employees ........................ -- -- -- -- --
Amortization of deferred compensation ...... -- -- -- -- --
Net loss ................................... -- -- -- -- --
------- ---------- --------- ---------- ----------
Balance, December 31, 2000 ................... 200,000 2 8,775,176 88 872
Issuance of common stock for common
stock options previously exercised ...... -- -- 16,000 -- (32)
Issuance of common stock, net of issuance
costs ................................... -- -- 1,830,556 18 --
Common stock dividends issued on Series D
cumulative convertible preferred stock .. -- -- 377,841 4 (840)
Common stock dividends declared on Series D
cumulative convertible preferred stock .. -- -- -- -- 840
Compensation expense resulting from
modifications of options ................ -- -- -- -- --
Amortization of deferred compensation ...... -- -- -- -- --
Net loss ................................... -- -- -- -- --
------- ---------- --------- ---------- ----------
Balance, December 31, 2001 ................... 200,000 2 10,999,573 110 840
Exercise of common stock options and
warrants ................................... -- -- 35,704 -- --
Issuance of common stock, net of issuance
cost ....................................... -- -- 151,522 2 --
Common stock dividends declared on Series D
cumulative convertible preferred stock ..... -- -- -- -- 611
Common stock dividends issued on Series D
cumulative convertible preferred
stock .................................. -- -- 190,832 2 (1,451)
Cash dividends paid on Series D cumulative
convertible preferred stock ................ -- -- -- -- --
Cash dividends declared on Series D cumulative
convertible preferred stock ................ -- -- -- -- --
Net income ................................... -- -- -- -- --
------- ---------- --------- ---------- ----------
Balance, December 31, 2002 ................... 200,000 $ 2 11,377,631 $ 114 $ --
======= ========== ========== ========== ==========
Additional Total
paid-in Deferred Accumulated stockholders'
capital compensation deficit equity
---------- ------------ ----------- -------------
Balance, December 31, 1999 ................... $ 66,348 $ (76) $ (53,611) $ 13,607
Exercise of common stock options ........... 84 -- -- 116
Common stock dividends issued on Series D
cumulative convertible preferred stock .. 1,705 -- (849) --
Common stock dividends declared on Series D
cumulative convertible preferred stock .. -- -- (840) --
Compensation expense resulting from options
to non-employees ........................ 324 -- -- 324
Amortization of deferred compensation ...... -- 47 -- 47
Net loss ................................... -- -- (8,830) (8,830)
---------- ---------- ---------- ----------
Balance, December 31, 2000 ................... 68,461 (29) (64,130) 5,264
Issuance of common stock for common
stock options previously exercised ...... 32 -- -- --
Issuance of common stock, net of issuance
costs ................................... 9,796 -- -- 9,814
Common stock dividends issued on Series D
cumulative convertible preferred stock .. 1,676 -- (840) --
Common stock dividends declared on Series D
cumulative convertible preferred stock .. -- -- (840) --
Compensation expense resulting from
modifications of options ................ 164 -- -- 164
Amortization of deferred compensation ...... -- 29 -- 29
Net loss ................................... -- -- (8,144) (8,144)
---------- ---------- ---------- ----------
Balance, December 31, 2001 ................... 80,129 -- (73,954) 7,127
Exercise of common stock options and
warrants ................................... 165 -- -- 165
Issuance of common stock, net of issuance
cost ....................................... 1,174 -- -- 1,176
Common stock dividends declared on Series D
cumulative convertible preferred stock ..... -- -- (611) --
Common stock dividends issued on Series D
cumulative convertible preferred
stock .................................. 1,449 -- -- --
Cash dividends paid on Series D cumulative
convertible preferred stock ................ -- -- (218) (218)
Cash dividends declared on Series D cumulative
convertible preferred stock ................ -- -- (800) (800)
Net income ................................... -- -- 902 902
---------- ---------- ---------- ----------
Balance, December 31, 2002 ................... $ 82,917 $ -- $ (74,681) $ 8,352
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
F-5
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2002, 2001 and 2000
(Dollars in thousands)
2002 2001 2000
-------- -------- --------
Cash flows from operating activities:
Net income (loss) ................................................ $ 902 $ (8,144) $ (8,830)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Noncash compensation expense ............................... -- 193 371
Depreciation and amortization expense ...................... 524 263 226
Accounts receivable provisions ............................. 462 569 (5)
Cumulative effect of change in accounting
principal ............................................. -- -- 764
Change in assets and liabilities:
Accounts receivable .................................... 1,874 (2,009) (883)
Inventories ............................................ (13) (1,125) 418
Prepaid expenses and other assets ...................... 156 (111) (342)
Accounts payable ....................................... (153) 1,904 (575)
Accrued expenses ....................................... 252 639 116
Deferred revenue ....................................... (53) (62) (25)
-------- -------- --------
Net cash provided by (used in) operating activities.. 3,951 (7,883) (8,765)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures ............................................. (298) (131) (169)
Acquisition of Atrix license ..................................... -- (1,000) --
Acquisition of Altana license .................................... (800) -- --
Proceeds from the sale of short-term investments ................. -- 2,035 6,871
Purchase of short-term investments ............................... -- (296) (2,224)
-------- -------- --------
Net cash provided by (used in) investing activities.. (1,098) 608 4,478
-------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock ....................... 1,341 9,814 84
Payment of preferred dividends ................................... (218) -- --
Repayment of long-term debt ...................................... (35) (77) (69)
-------- -------- --------
Net cash provided by financing activities ............ 1,088 9,737 15
-------- -------- --------
Net increase (decrease) in cash and cash equivalents.. 3,941 2,462 (4,272)
Cash and cash equivalents at beginning of year ........................ 6,171 3,709 7,981
-------- -------- --------
Cash and cash equivalents at end of year .............................. $ 10,112 $ 6,171 $ 3,709
======== ======== ========
Supplemental schedule of noncash investing and financing activities:
Common stock dividends issued or issuable on preferred stock ..... $ 1,451 $ 1,680 $ 1,689
======== ======== ========
Common stock to be issued on exercise of common stock options .... $ -- $ -- $ 32
======== ======== ========
Accrued liability for Altana license ............................. $ 900 $ -- $ --
======== ======== ========
Cash dividends declared .......................................... $ 800 $ -- $ --
======== ======== ========
Issuance of warrants to purchase common stock in connection
with equity line ............................................ $ 248 $ -- $ --
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest ........................... $ 5 $ 17 $ 6
======== ======== ========
See accompanying notes to consolidated financial statements.
F-6
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
(1) Business
CollaGenex Pharmaceuticals, Inc. and subsidiaries ("CollaGenex
Pharmaceutical" or the "Company") was incorporated in Delaware on January
10, 1992. The Company is a specialty pharmaceutical company focused on
providing innovative medical therapies to the dental and dermatology
markets. The Company, through its own sales and marketing group, is
currently marketing Periostat'r', the Company's lead drug for the
treatment of adult periodontal disease, Atridox, Atrisorb and Atrisorb-D
(the "Atrix Products") under an exclusive licensing and marketing
agreement with Atrix Laboratories, Inc. ("Atrix") and Pandel under a
sublicensing agreement with Altana, Inc. ("Altana"). The Company also
co-promotes VIOXX'r' with Merck and Co. ("Merck") and Denavir'r' with
Novartis Consumer Health, Inc. ("Novartis") to dental professionals on a
contract basis. The Company has other internally developed proprietary
compounds for cancer metastasis and a broad range of inflammatory diseases
that are currently in the research and development stage.
The accompanying consolidated financial statements include the results of
operations of the Company and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated in
consolidation.
(2) Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
All cash and cash equivalents are invested in obligations of the U.S.
government and in commercial paper.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
Acquired Product Rights
Product rights are stated at cost and are amortized over the estimated
useful life of the products using the straight-line method and have a
weighted average useful life of 6 years. Amortization of product rights is
charged to cost of product sales.
Equipment and Leasehold Improvements
Equipment and leasehold improvements, consisting of computer and office
equipment, exhibit equipment and leasehold improvements is recorded at
cost. Depreciation and amortization is provided using the straight-line
method over the estimated useful lives of
F-7
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
the assets or the related lease term, whichever is shorter, generally
three to ten years. Expenditures for repairs and maintenance are expensed
as incurred.
Segment Information
The Company is managed and operated as one business. The entire business
is managed by a single management team that reports to the chief executive
officer. The Company does not operate separate lines of business or
separate business entities with respect to any of its products or product
candidates. Accordingly, the Company does not prepare discrete financial
information with respect to separate product areas or by location and does
not have separately reportable segments.
Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate fair value because of
the short term nature of these instruments.
Net Product Sales
In September 1998 the Company received approval from the FDA to market
Periostat. In 2001, the Company entered into an exclusive licensing and
marketing agreement with Atrix for the Atrix products. In 2002, the
Company entered into a sublicense agreement with Altana to market and
distribute Pandel. The Company recognizes sales revenue for Periostat,
Pandel and the Atrix Products upon shipment. Sales are reported net of
allowances for discounts, rebates, wholesaler and distributor chargebacks
and product returns which are provided for at the time of the sale.
Contract Revenues
Contract revenues for Vioxx and Denavir are fee-based arrangements where
revenue is earned as prescriptions are written and recognized according to
the provisions of each collaborative agreement. The Company does not take
title to the products being promoted under these arrangements.
License Revenue
Milestone revenue from license arrangements is recognized upon completion
of the milestone event or requirement if it represents the achievement of
a significant step in the research and development or regulatory process.
Payments, if any, received in advance of performance under a contract are
deferred and recognized when earned. Upfront license fees where the
Company has continuing involvement, are deferred and recognized over the
estimated performance period of each individual licensing agreement in
accordance with the SEC's Staff Accounting Bulletin No. 101 (SAB 101).
F-8
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
Advertising Costs
The Company incurs advertising costs from print advertisements in various
periodicals and television advertisements. The Company records advertising
expense when incurred. Such amounts charged to the consolidated statements
of operations for 2002, 2001 and 2000 were $3,091, $6,190 and $2,089,
respectively.
Research and Development
Research and development expenses consist primarily of funds paid to third
parties for the provision of services and materials for drug development,
manufacturing and formulation enhancements, clinical trials, statistical
analysis and report writing and regulatory compliance costs. Research and
product development costs are expensed as incurred.
Accounting for Income Taxes
Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in
effect when such differences are expected to reverse. The measurement of
deferred tax assets is reduced, if necessary, by a valuation allowance for
any tax benefits which are not expected to be realized. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in the period that such tax rate changes are enacted.
Management Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
amount reported in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates.
Stock-Based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation," encourages but does not require
companies to record compensation cost for stock-based employee
compensation plans at fair value. Accordingly, compensation cost for stock
options issued to employees is measured as the excess, if any, of the
market price of the Company's stock at the date both the number of shares
and price per share are known (measurement date) over the exercise price.
Such amounts are amortized on a straight-line basis over the respective
vesting periods of the option grants. Transactions with nonemployees, in
which goods or services are the consideration received for the issuance of
equity instruments, are accounted for on a fair value basis in accordance
with SFAS 123 and related interpretations.
F-9
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
The Company has elected to account for stock-based compensation under APB
Opinion No. 25, "Accounting for Stock Issued to Employees." As set forth
below, the pro forma disclosures of net loss allocable to common
stockholders and loss per share allocable to common stockholders are as if
the Company had adopted the fair value based method of accounting in
accordance with SFAS No. 123, as amended by SFAS No. 148, which assumes
the fair value based method of accounting had been adopted using the
assumptions described in note 8:
2002 2001 2000
---------- ---------- ----------
Net loss allocable to common stockholders:
As reported ........................... $ (727) $ (9,824) $ (10,519)
Add: Stock-based employee compensation
expenses included in net loss allocable
to common stockholders reported........ -- 29 47
Less: Stock-based employee compensation
under fair value based method ......... (3,735) (3,898) (3,330)
---------- ---------- ----------
Pro forma ............................. $ (4,462) $ (13,693) $ (13,802)
========== ========== ==========
Basic and diluted net loss per share
allocable to common stockholders:
As reported ........................... $ (0.06) $ (0.94) $ (1.21)
========== ========== ==========
Pro forma ............................. $ (0.40) $ (1.31) $ (1.58)
========== ========== ==========
Concentration of Credit and Other Risks
The Company invests its excess cash in deposits with major U.S. financial
institutions, money market funds, U.S. Government obligations and
corporate debt securities. The Company has established guidelines relative
to diversification and maturities that maintain safety and liquidity.
The Company currently contracts with a single source for the domestic
manufacturing of Periostat capsules which are sold throughout the United
States exclusively to wholesale and retail distributors. In addition, the
Company has a supply agreement with a single company to supply the active
ingredient in Periostat'r'. A single company also provides all warehousing
and distribution services to the Company. During 2002, three customers
accounted for 32%, 24% and 19% of net product sales, respectively. During
2001, four
F-10
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
customers accounted for 28%, 15%, 13% and 10%, of net product sales,
respectively. During 2000, four customers accounted for 31%, 17%, 14% and
10%, of net product sales, respectively.
The Company's business of selling, marketing and developing pharmaceutical
products is subject to a number of significant risks, including risks
relating to the implementation of the Company's sales and marketing plans,
risks inherent in research and development activities, risks associated
with conducting business in a highly regulated environment and
uncertainties related to clinical trials of products under development.
Net Loss Per Share
Basic earnings per share (EPS) is calculated by dividing earnings (loss)
allocable to common stockholders by the weighted average shares of common
stock outstanding. Net loss allocable to common stockholders includes
dividends on the preferred stock. Diluted EPS would also include the
effect of dilution to earnings of convertible securities and stock options
and stock warrants. As of December 31, 2002 and December 31, 2001, the
Company has certain convertible preferred stock, stock options and stock
warrants which have not been included in the calculation of diluted net
loss per share allocable to common stockholders because to do so would be
anti-dilutive. As such, the numerator and denominator used in computing
both basic and diluted net loss per share allocable to common stockholders
are equal.
Reclassification
Certain amounts in the 2001 and 2000 consolidated financial statements
have been reclassified to the 2002 presentation.
(3) Composition of Certain Financial Statement Captions
Inventories
Inventories at December 31, 2002 and 2001 consists of the following:
2002 2001
------ ------
Raw materials .................... $ 233 $ 174
Work-in-process .................. 56 66
Finished goods ................... 1,126 1,162
------ ------
$1,415 $1,402
====== ======
F-11
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
Equipment and Leasehold Improvements
Equipment and leasehold improvements at December 31, 2002 and 2001 consist
of the following:
2002 2001 Useful Life
---------- ---------- -------------------
Computer and office equipment............ $ 1,203 $ 923 3-5 years
Exhibit equipment........................ 327 309 5 years
Leasehold improvements................... shorter of 10 years
45 45 or lease term
---------- ----------
1,575 1,277
Less accumulated depreciation
and amortization.................... (1,016) (740)
---------- ----------
$ 559 $ 537
========== ==========
Deferred Licensing Fees
Deferred licensing fees at December 31, 2002 and 2001 consist of the
following:
2002 2001
------- -------
Deferred licensing fees ................ $ 2,115 $ 900
Less: accumulated amortization ......... (366) (17)
------- -------
$ 1,749 $ 883
======= =======
F-12
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
The current portion of deferred licensing fees of $586 and $100 are
included in prepaid expenses and other current assets at December 31, 2002 and
2001, respectively. Amortization expense which is included in cost of product
sales was $366 and $17 in 2002 and 2001, respectively. Expected amortization of
deferred licensing fees over the next five years is as follows:
2003 ......................................... $586
2004 ......................................... $586
2005 ......................................... $586
2006 ......................................... $100
2007 ......................................... $100
Accrued Expenses
Accrued expenses at December 31, 2002 and 2001 consist of the following:
2002 2001
------ ------
Product licensing fees ................... $ 900 $ --
Contracted development and
manufacturing costs ................ 456 398
Sales and marketing costs ................ 255 210
Payroll and related costs ................ 1,479 1,563
Professional and consulting fees ......... 339 291
Royalties ................................ 553 434
Deferred revenue ......................... 59 63
Miscellaneous taxes ...................... 103 122
Other .................................... 161 72
------ ------
$4,305 $3,153
====== ======
(4) Note Payable
In April 1999, the Company received $219 in proceeds from the issuance of
a note payable. The proceeds of such note were used to fund the purchase
of equipment, fixtures and furniture for the Company's leased corporate
office in Newtown, Pennsylvania. The term of the note was three years with
interest at 9.54% per annum, with monthly minimum payments of principal
and interest. The Company repaid the note in 2002.
(5) Stockholders' Equity
The Company's Board of Directors may, without further action by the
Company's stockholders, from time to time, direct the issuance of shares
of preferred stock in series and may, at the time of issuance, determine
the rights, preferences and limitations of each
F-13
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
series. The holders of preferred stock would normally be entitled to
receive a preference payment in the event of any liquidation, dissolution
or winding-up of the Company before any payment is made to the holders of
the common stock.
On May 12, 1999, the Company consummated a $20,000 financing (the
Financing) through the issuance of 200,000 shares of its Series D
Cumulative Convertible preferred stock (the preferred stock), which
generated net proceeds to the Company of approximately $18,500. OCM
Principal Opportunities Fund, L.P. (OCM) led the investor group, which
also included certain current stockholders of the Company.
During the first three years following issuance, the preferred stock paid
dividends in common stock at a rate of 8.4% per annum. Thereafter, the
preferred stock pays dividends in cash at a rate of 8.0% per annum. The
preferred stock is convertible into common shares of the Company at an
initial conversion price of $11.00 per share, subject to adjustment (see
below and note 6), at any time by the holder and under certain conditions
by the Company. The conversion price is subject to adjustment in the event
the Company fails to declare or pay dividends when due or should the
Company issue new equity securities or convertible securities at a price
per share or having a conversion price per share lower than the applicable
conversion price of the preferred stock (see below and note 6). Dividends
totaling $1,629, $1,680 and $1,689 were declared in 2002, 2001 and 2000,
respectively. At December 31, 2001, declared dividends of 103,196 shares
of common stock have not been issued, and have accordingly been classified
as common stock to be issued in the accompanying consolidated balance
sheet.
The holders of the preferred stock are entitled to vote with the holders
of the Company's common stock on all matters to be voted on by the
Company's stockholders on an as converted to common stock basis, subject
to adjustment. The holders of the preferred stock are entitled to
liquidation preferences equal to the original purchase price plus
dividends accrued and unpaid plus other dividends in certain
circumstances. In connection with the issuance of the preferred stock, the
rights of the holders of the Company's common stock may be limited in
certain instances with respect to dividend rights, rights on liquidation,
winding up and dissolution of the Company, and the right to vote in
connection with certain matters submitted to the Company's stockholders.
Without written approval of a majority of the holders of record of the
preferred stock, the Company, among other things, shall not: (i) declare
or pay any dividend or distribution on any shares of capital stock of the
Company other than dividends on the preferred stock; (ii) make any loans,
incur any indebtedness or guarantee any indebtedness, advance capital
contributions to, or investments in any person, issue or sell any
securities or warrants or other rights to acquire debt securities of the
Company, except that the Company may incur such indebtedness in any amount
not to exceed $10,000 in the aggregate outstanding at any
F-14
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
time for working capital requirements in the ordinary course of business;
or (iii) make research and development expenditures in excess of $7,000 in
any continuous twelve month period, unless the Company has reported
positive net income for four consecutive quarters immediately prior to
such twelve month period.
On March 12, 2001, the Company consummated a private equity offering of
1,500,000 shares of common stock for an aggregate purchase price of
$7,500, which generated net proceeds to the Company of approximately
$6,800. In addition, the investors in this financing were also issued an
aggregate of 400,000 warrants which are exercisable for up to three years
into 400,000 shares of the Company's common stock at an exercise price per
share of $6.00. During 2002, 7,140 warrants were exercised into 4,654
shares of the Company's common stock in a cashless transaction.
Accordingly, 392,860 warrants remain outstanding at December 31, 2002. The
consideration received for such warrants is included in the aggregate
proceeds received in the financing. The Company also issued to its
financial advisor in this financing, warrants to purchase an aggregate of
150,000 shares of the Company's common stock, exercisable for up to three
years, at an exercise price of $5.70 per share. These warrants may be
deemed automatically exercised in certain circumstances based on the
Company's stock price. These options are all outstanding at December 31,
2002. The Company is obligated to file and maintain the effectiveness of a
shelf registration statement with respect to all such shares of common
stock issued and shares underlying all such warrants for a continuous
24-month period. Should the Company fail to maintain the effectiveness of
such registration statement, the investors and the financial advisor shall
receive an additional 27,500 shares of the Company's common stock, in the
aggregate, for no additional consideration. As a result of this financing,
the conversion price paid on the preferred stock has been reduced to $9.94
per share. Such conversion price was further reduced to $9.91 per share in
connection with the sale of shares of the Company's common stock to Atrix
(see note 6).
On February 14, 2002, the Company entered into an equity line arrangement
under the terms of a Common Stock Purchase Agreement with Kingsbridge
Capital Limited. Pursuant to this agreement, the Company was able, at its
sole discretion and from time to time through February 13, 2003, to sell
shares of its common stock to Kingsbridge at a discount to market price,
as determined prior to each such sale. The equity line provided for the
sale of up to $8,500 in registered shares of the Company's common stock to
Kingsbridge. The equity line terminated pursuant to its terms on February
13, 2003 and, prior to such termination, the Company issued an aggregate
of 151,522 shares of common stock for gross proceeds of $1,266.
In connection with the consummation of such equity line and pursuant to
the terms of a warrant agreement executed by the Company, the Company
issued Kingsbridge a warrant to purchase 40,000 shares of its common stock
at an exercise price of $9.38 per share. The
F-15
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
conversion price of the Company's Series D preferred stock was reduced to
$9.89 as a result of the issuance of shares under the equity line and the
issuance of such warrant. Such warrant is exercisable as of August 14,
2002, and will expire on August 13, 2007. The fair value of the warrants
issued in connection with the Equity Line of approximately $248 has no net
impact as the increase to additional paid in capital representing the
value of the warrants issued is offset by the decrease in additional paid
in capital representing a cost of the offering. No warrants have been
exercised and all 40,000 warrants are outstanding at December 31, 2002.
On May 29, 2002, the Company's Board of Directors approved an Amended and
Restated Shareholder Protection Rights Agreement (the "Rights Agreement").
The Rights Agreement amended and restated, in its entirety, the Company's
then existing Shareholder Protection Rights Agreement (the "Prior Rights
Agreement") dated September 15, 1997, as amended, by and between the
Company and American Stock Transfer & Trust Company, as rights agent
thereunder. American Stock Transfer & Trust Company remains as rights
agent under the Rights Agreement. Each right previously authorized and
distributed under the Prior Rights Agreement was deemed to constitute a
Right under the Rights Agreement effective May 29, 2002. The Board of
Directors further authorized the issuance of one Right for each share of
the Company's common stock issued between the date of the Rights Agreement
and the earlier of the Distribution Date or the Expiration Date, as
defined in the Rights Agreement.
Each Right, once exercisable, entitles the holder to purchase from the
Company one one-hundredth of a share of the Company's Series A
Participating preferred stock at an exercise price of $65. All Rights
expire on September 26, 2007 unless earlier redeemed. At December 31,
2002, the Rights were neither exercisable nor traded separately from the
Company's common stock, and become exercisable only if a person or a group
of affiliated or associated persons has acquired, or obtained the right to
acquire, beneficial ownership of 20% or more of the voting power of all
outstanding shares of the Company's common stock and in certain other
limited circumstances. Upon separation from the common stock, each Right
will entitle the holder, other than the acquiring person that has
triggered such separation, to effectively purchase certain shares of the
Company's common stock equal in market value to two times the then
applicable exercise price of the Right. If the Company is acquired in a
merger or other business combination transaction, or 50% or more of the
Company's assets or earning power are sold in one or more related
transactions, the Rights will entitle holders, upon exercise of the
Rights, to receive shares of common stock of the acquiring or surviving
company with a market value equal to twice the exercise price of each
Right.
F-16
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
(6) Licensing and Marketing Agreements
On August 24, 2001, the Company signed an exclusive License Agreement (the
"Atrix License Agreement") with Atrix to market Atrix's proprietary dental
products, Atridox'r', Atrisorb'r' FreeFlow and Atrisorb'r'-D, to the
United States dental markets. Pursuant to the terms of the Atrix License
Agreement, among other things, Atrix will manufacture the dental products
for the Company at an agreed upon transfer price and will receive
royalties on future net sales of the products each calendar year. The
Company paid a $1,000 licensing fee to Atrix in 2001 to market such
products in the United States. The Company has also committed to no less
than $2,000 in advertising and selling expenses related to the licensed
products during 2002, which was met for 2002, and on an annual basis
commencing with fiscal year 2003, the lesser of $4,000 or 30% of the
Company's contribution margin, as defined in the agreement, relating to a
specific Atrix product that the Company markets and the lesser of $2,000
or 30% of the Company's contribution margin, as defined in the agreement,
relating to a separate Atrix product that the Company markets.
Additionally, the Company must maintain a minimum amount of full time
sales professionals and make a specific amount of sales presentations over
the first twenty-four months of the agreement. The $1,000 license fee
payment has been capitalized and is being amortized to cost of product
sales over the ten year estimated term of the license on a straight-line
basis.
In addition, pursuant to the terms of a Stock Purchase Agreement dated
August 24, 2001 by and between the Company and Atrix, Atrix purchased
330,556 of unregistered shares of the Company's common stock for an
aggregate purchase price of approximately $3,000. As a result of the sale
of such shares to Atrix, the conversion price of the Company's Series D
preferred stock was reduced to $9.91 per share.
On May 24, 2002, the Company executed a Sublicense Agreement with Altana
Inc. ("Altana"), the United States subsidiary of Altana Pharma AG,
pursuant to which the Company was granted the exclusive right to create
improvements to, market, advertise, promote, distribute, offer for sale
and sell, in the United States and Puerto Rico, Pandel'r' Cream, a
mid-potency topical corticosteroid that is indicated for the relief of
mild-to-moderate inflammatory disorders of the skin, such as atopic
dermatitis and psoriasis. Altana currently licenses such rights from
Taisho Pharmaceutical Co., Ltd., a company organized and existing under
the laws of Japan. The Company will purchase from Altana all Pandel
products to be sold. Pursuant to the terms of such agreement, the Company
agreed to pay Altana an aggregate sublicense fee of $1,700, of which $800
was paid in September 2002 and $900 of which is due on May 31, 2003. The
sublicense fee has been capitalized and will be amortized to cost of
product sales over the estimated term of agreement. In addition, the
Company is required to pay a royalty fee equal to a percentage of the net
sales of the product, if any. The agreement may be terminate by the
Company;
F-17
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
(i) at any time, without cause, upon twelve months prior written notice;
(ii) if Altana shall commit any uncured, willful or material breach of the
provisions of the agreement; or (iii) if Altana shall cease to manufacture
or supply the product to the Company. Altana may terminate the agreement:
(i) at any time, without cause, upon twelve months written notice; (ii) if
the Company shall commit any uncured, willful or material breach of the
provisions of the agreement; (iii) if the Company shall cease to offer the
product for distribution to its customers; or (iv) if the Company fails to
make certain payments or fulfill certain invoicing obligations.
(7) Line of Credit
On March 19, 2001, the Company consummated a revolving credit facility
with Silicon Valley Bank, which was subsequently amended in March 2002.
The credit facility, as amended, extends through March 15, 2004. The
Company may borrow up to the lesser of $4,000 or 80% of eligible accounts
receivable, as defined under the credit facility. The amount available to
the Company is also reduced by outstanding letters of credit which may be
issued under the credit facility in amounts totaling up to $1,500. On
March 26, 2002, the Company initially secured its expected purchase order
commitments for Periostat from Pharmaceutical Manufacturing Research
Services, Inc., a contract manufacturing company, with a letter of credit
under the credit facility for approximately $1,343. This amount was
reduced during 2002 to $353 at December 31, 2002. As the Company continues
to pay down amounts under the letter of credit, the amount available to it
under the Facility will increase. The Company is not obligated to draw
amounts and any such borrowings bear interest, payable monthly, currently
at the prime rate plus 1.0% to 1.5% per annum and may be used only for
working capital purposes. Without the consent of the Silicon Valley Bank,
the Company, among other things, shall not (i) merge or consolidate with
another entity; (ii) acquire assets outside the ordinary course of
business; or (iii) pay or declare any cash dividends on the Company's
common stock. The Company must also maintain a certain tangible net worth
of $5,000, subject to certain upward adjustments as defined in the
amendment, as a result of profitable operations or additional debt or
equity financings and a minimum of $2,000 in cash at Silicon Valley Bank,
net of borrowings under the credit facility, which expires March 15, 2004.
In addition, the Company has secured its obligations under the credit
facility through the granting of a security interest in favor of the bank
with respect to all of its assets, including intellectual property. As of
December 31, 2002, the Company had no borrowings outstanding against the
credit facility.
(8) Stock Option Plans
The Company has three stock-based compensation plans (the Plans) and has
adopted the disclosure-only provisions of SFAS 123 and SFAS 148,
"Accounting For Stock Based
F-18
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
Compensation-Transition and Dislcosures and Amendment of SFAS 123". The
Company continues to apply APB Opinion No. 25 in accounting for its stock
option plans and, accordingly, no compensation expense has been recognized
in the consolidated financial statements for stock options issued to
employees at exercise prices equal to the market value on the measurement
date.
The 1992 Stock Option Plan, as amended, (the 1992 Plan) provided for the
granting of incentive and nonqualified options to directors, employees and
consultants to purchase up to 291,000 shares of the Company's common stock
at a price, for the incentive options, not less than the fair market value
on the measurement date. Such options are exercisable for a period of ten
years from the grant date and generally vest over a four year period. All
such 291,000 options available under the 1992 Plan were granted by March
31, 1996.
The 1996 Stock Option Plan (the 1996 Plan) provides for the granting of
incentive and nonqualified options to employees and consultants to
purchase up to 2,500,000 shares of the Company's common stock at a price,
for the incentive options, not less than the fair market value on the
measurement date. Incentive and nonqualified options granted to
individuals owning more than 10% of the voting power of all classes of
stock at the time of grant must have an exercise price no less than 110%
of the fair market value on the date of grant. Such options are
exercisable for a period of ten years from the grant date and generally
vest over a two to five year period, and may be accelerated for certain
grants in certain circumstances.
The Nonemployee Director Stock Option Plan (the Nonemployee Director Plan)
provides for the issuance of stock options to new nonemployee directors to
purchase up to 300,000 shares of common stock at an exercise price equal
to the fair market value on the date of grant. Such options vest 20% per
annum commencing one year from the grant date. During 2002, certain
existing members of the Board of Directors were granted 62,136 options at
a fair market value of $6.60 per share. These grants were issued under the
1996 Stock Option Plan. Such options vest 25% per annum, commencing one
year from the grant date.
During 2001, 360,000 options were granted to employees at fair market
value with an exercise price of $5.19 per share. During 2000, 237,750
options were granted to employees at fair market value with an exercise
price of $5.00 per share. These grants were not issued under the terms of
any of the above Plans. Such options are exercisable for a period of ten
years from the date of grant and generally vest over a two to five year
period.
At December 31, 2002, there were 630,209 shares available for grant under
the 1996 Plan and 100,000 under the Nonemployee Director Plan.
F-19
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
Deferred compensation had been recorded in years prior to 1998 for options
granted where the fair value of the Company's stock on the measurement
date exceeded the exercise price of such options. Deferred compensation
has been amortized to compensation expense in the accompanying
consolidated statements of operations over the respective vesting periods
of such grants $0, $29 and $47 in 2002, 2001 and 2000, respectively.
In 2001, the Company extended through the remaining contractual life the
exercisability of certain vested options for an ex-board member of the
Company. Accordingly, $164 was recognized as compensation expense in 2001,
based on the fair value of the options on the date the extension was
granted as determined using a Black-Scholes pricing model.
In 1999, the Company granted options to certain nonemployees to purchase
60,000 shares of common stock. Such options were originally scheduled to
vest over a four year period based upon future service requirements. In
accordance with EITF Issue 96-18, the amount of compensation expense to be
recorded in periods following the grant are subject to change each
reporting period based upon changes in the market value of the Company's
common stock, estimated volatility and risk free interest rates until the
nonemployee completed performance under the option agreement and the
options vest. The Company recorded total compensation expense of $305 in
1999, based on the fair value of the options at December 31, 1999 as
determined using a Black-Scholes option pricing model. In 2000, the
Company elected to accelerate the vesting on the remaining unvested
options. Accordingly, the Company recorded total compensation expense,
including that related to the accelerated vesting, of $324 in 2000, based
on the fair value of the options at the vesting dates in 2000 as
determined using the Black-Scholes option pricing model. No future
compensation expense will be recorded on these 60,000 options.
F-20
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
The following table summarizes stock option activity for 2000 through
2002:
Weighted average exercise
Options price per share
------------------- -----------------------------
Balance, December 31, 1999............ 1,437,904 $ 8.72
Granted.......................... 721,880 13.17
Exercised........................ (37,325) 3.11
Cancelled........................ (99,450) 12.97
------------------- -----------------------------
Balance, December 31, 2000............ 2,023,009 $ 10.20
Granted.......................... 570,100 5.85
Cancelled........................ (140,500) 10.87
------------------- -----------------------------
Balance, December 31, 2001............ 2,452,609 $ 9.15
Granted.......................... 616,086 7.91
Exercised........................ (31,050) 4.70
Cancelled........................ (82,475) 9.90
------------------- -----------------------------
Balance, December 31, 2002............ 2,955,170 $ 8.91
=================== =============================
F-21
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
As of December 31, 2002, the following options were outstanding and
exercisable by price range as follows:
Outstanding Exercisable
-------------------------------------------- ---------------------------
Weighted
average Weighted Weighted
remaining average average
Range of exercise Number of contractual exercise price Number of exercise price
prices options life per share options per share
----------------- ---------- ----------- -------------- --------- --------------
$ 0.20 - 2.00 184,954 2.7 years $ 0.92 184,954 $ 0.92
4.63 - 7.00 831,411 7.5 years 5.48 414,136 5.48
7.01 - 9.00 826,175 8.0 years 8.23 225,162 8.72
9.05 - 12.00 526,600 5.4 years 10.12 410,962 10.18
12.19 - 22.63 586,030 6.7 years 16.20 359,755 15.42
--------- --------- ----------- --------- -----------
2,955,170 6.8 years $ 8.91 1,594,969 $ 8.86
========= ========= =========== ========= ===========
The weighted average fair values of stock options granted to employees
during 2002, 2001 and 2000 were $6.07, $4.57 and $10.72 per share,
respectively, on the date of grant. The weighted average fair values of
stock options granted to nonemployees during 2000 was $9.21 per share on
the date of grant. Such fair values were determined using the
Black-Scholes option pricing model and are based on the following
assumptions:
2002 2001 2000
---------- --------------- -----------------
Expected life in years
Employees and directors............... 7 7 7
Non-employees......................... contractual contractual contractual
life life life
Risk-free interest rate................... 4.30% 4.88 % 6.20 %
Volatility................................ 83% 85 % 90 %
Expected dividend yield................... -- -- % -- %
On September 18, 2002, the Company executed agreements with each of five
officers of the Company that provided, among other things, for the
accelerated vesting of unvested options upon a change of control of the
Company. As of December 31, 2002, there were 688,000 options whose vesting
would have accelerated as a result of these agreements if a change of
control had occurred, and in this circumstance the Company would have
recorded compensation expense of $242 as measured by the difference in the
exercise price of the options with potentially accelerated vesting and the
fair market value of the Company's common stock on the date the agreements
were executed. A non-cash charge will be recorded in the future upon a
change in control for only those options which would
F-22
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
have otherwise expired unvested except for the resulting acceleration of
vesting as a result of these agreements.
(9) Change in Accounting Principle
In the fourth quarter of 2000, the Company adopted SAB 101, "Revenue
Recognition in Financial Statements", implementing a change in revenue
recognition policy for certain upfront payments received in international
licensing arrangements for Periostat'r'. Effective January 1, 2000,
upfront payments received from licensees, where the Company has continuing
involvement, are now being deferred and recognized as license revenue over
the estimated performance period of the individual license agreements. In
previous years, prior to the Company's adoption of SAB 101, the Company
recognized revenue when the upfront payments were received, generally upon
the execution of each agreement. During 2002, 2001 and 2000, respectively,
the Company recorded $59, $60 and $397 in license revenues which were
deferred upon the implementation of SAB 101 as of January 1, 2000 and
which were previously recognized as license revenues under the historical
revenue recognition policy prior to the adoption of SAB 101.
The consolidated statement of operations in 2000 has been presented in the
accompanying consolidated financial statements based on this newly adopted
revenue recognition policy. The change increased revenue and decreased net
loss by $25 during 2000, excluding the cumulative effect of the change.
During 2000, the Company recorded a $764 charge as a result of the
cumulative effect of the change in accounting principle for revenue
recognized prior to January 1, 2000. As of December 31, 2001, the Company
has approximately $677 recorded as deferred revenue, $63 of which has been
classified as a current liability in the accompanying consolidated balance
sheet as of December 31, 2001. As of December 31, 2002, the Company has
approximately $620 recorded as deferred revenue, $59 of which has been
classified as a current liability in the accompanying consolidated balance
sheet as of December 31, 2002.
(10) Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes in accordance with SFAS No. 109, "Accounting for Income
Taxes". Under the asset and liability method, deferred taxes are
determined based on the differences between the financial statement and
tax bases of assets and liabilities using currently enacted tax rates.
F-23
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liability at December
31, 2002 and 2001 are presented below:
2002 2001
-------- --------
Deferred tax assets:
Depreciation ........................... $ 16 $ --
Net operating loss carryforwards ....... 23,952 24,765
Tax credit carryforwards ............... 874 850
Accrued expenses ....................... 1,053 800
Deferred revenue ....................... 242 275
-------- --------
Total gross deferred tax assets ... 26,137 26,690
Less valuation allowance ............... (26,137) (26,681)
-------- --------
Total deferred tax assets ......... 0 9
Deferred tax liability:
Depreciation ........................... 0 (9)
-------- --------
Net deferred taxes ................ $ -- $ --
======== ========
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. In
assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which temporary differences are deductible
and carryforwards are available. Due to the uncertainty of the Company's
ability to realize the benefit of the deferred tax assets, the net
deferred tax assets are fully offset by a valuation allowance at December
31, 2002 and 2001.
The net change in the valuation allowance for the year ended December 31,
2002 was a decrease of approximately $544, related primarily to
utilization of net operating losses in 2002. The net change in the
valuation allowance for year ended December 31, 2001 was an increase of
approximately $1,851, related primarily to additional net operating losses
incurred by the Company.
At December 31, 2002, the Company had approximately $62,000 of Federal and
$33,000 of state net operating loss carryforwards available to offset
future taxable income. The Federal and state net operating loss
carryforwards will begin expiring in 2008 and 2005, respectively, if not
utilized. The Company also has research and development tax credit
carryforwards of approximately $874 available to reduce Federal income
taxes which begin
F-24
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
expiring in 2007. In addition, the Company had approximately $2,300 of
foreign net operating loss carryforwards with an indefinite expiration
date.
Section 382 of the Internal Revenue Code of 1986 subjects the future
utilization of net operating losses and certain other tax attributes, such
as research and development credits, to an annual limitation in the event
of an ownership change, as defined. Due to the Company's prior equity
transactions, a portion of the net operating losses and tax credits of the
Company are subject to an annual limitation of approximately $3,800. To
the extent that any single-year limitation is not utilized to the full
amount of the limitation, such unused amounts are carried over to
subsequent years until the earlier of its utilization or the expiration of
the relevant carryforward period. As of December 31, 2002, assuming no
future ownership changes, approximately $35,000 is immediately available
to offset future taxable income. In addition to the section 382
limitation, the state net operating loss carryforwards are subject to a
$2,000 annual limitation.
Reconciliations of the income tax expense (benefit) from the Federal
statutory rates for 2002, 2001 and 2000 are as follows:
Year ended December 31,
2002 2001 2000
---------------- ----------------------- ------------------
Statutory Federal income tax $ 307 34.0% (2,769) -34.0% (3,002) -34.0%
Adjustments resulting from:
State taxes, net of Federal benefit..... 16 1.8% (588) -7.2% (707) -8.0%
Permanent items and others.............. 221 24.5% 1,506 18.5% (52) -0.6%
Increase (decrease) in valuation
allowance............................. (544) -60.3% 1,851 22.7% 3,761 42.6%
------ ---- ------- ----- ------- -----
Total income tax expense (benefit)........ $ -- --% $ -- --% $ -- --%
(11) Technology License
At the time of its formation in 1992, the Company entered into an
agreement with SUNY whereby the Company received an option to acquire a
certain technology license. The Company's option to acquire the license
was exercised in 1995 and remains in effect for a period not to exceed
twenty years from the date of the first sale of product incorporating the
technology under license or the last to expire of the licensed patents in
each country. The Company is liable to SUNY for annual royalty fees based
on net Periostat sales, if any, as defined in the agreement. Legal costs
incurred by the Company in defending the patent
F-25
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
underlying the technology license, if any, are deducted from royalties
paid to SUNY (See Note 12). A minimum annual royalty of $50 per year is
required for the duration of the technology license. The Company incurred
royalty expense for this technology of $1,563, $1,348 and $940 in 2002,
2001 and 2000, respectively.
In addition, the Company is required to reimburse SUNY for certain patent
related costs, as well as to support certain additional research efforts.
(12) Commitments and Contingencies
The Company maintains various operating leases, primarily for office
space. As of December 31, 2002, future minimum rent payments under
noncancellable operating leases are as follows:
2003................... $ 327
2004................... 336
2005................... 342
2006................... 342
2007................... 342
Thereafter............. 530
---------
Total........... $ 2,219
=========
Rent expense for the years ended December 31, 2002, 2001 and 2000 totaled
$356, $337 and $326, respectively.
During 1999, the Company entered into a three-year co-promotion agreement
under which the Company is committed to spend up to $1,000 annually for
promotional expenses, as will be determined by mutual agreement of the
parties, unless the agreement is earlier terminated. In September 2002,
the Company amended this will be required to make certain annual minimum
expenditures for Agreement and extended the term to December 31, 2003.
Pursuant to the terms of the Atrix License Agreement (see note 6), the
Company will be required to make certain annual minimum expenditures for
the lesser of $4,000 or 30% of the Company's contribution margin, as
defined in the agreement, relating to a specific Atrix product that the
Company markets and the lesser of $2,000 or 30% of the Company's
contribution margin, as defined in the agreement, relating to a separate
Atrix product that the Company markets commencing with fiscal year 2003.
Additionally, the Company must maintain a minimum amount of full time
sales professionals and make a specific amount of
F-26
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
sales presentations over the first twenty-four (24) months of the
agreement. The Company met the required spending requirement in 2002
related to this Agreement.
On February 11, 2002, the Company executed a Co-operation, Development and
Licensing Agreement pursuant to which the Company was granted an
exclusive, sublicenseable, transferable license with respect to the
Restoraderm'TM' topical drug delivery system which the Company intends to
develop for dermatological applications. Pursuant to the terms of such
agreement, upon the occurrence of certain events, the Company will be
required to pay certain future consulting, royalty and milestone payments
in the aggregate amount of up to $3,800, and no more than $2,750 and
$1,037 of which shall be payable prior to January 1, 2004 and
January 1, 2005, respectively. The Company paid $330 under this Agreement
in 2002. The term of such agreement is for the life of any patent that may
be issued to the Company for the first product the Company develops
utilizing such technology, or, if the Company does not acquire any
patentable products, seven years.
On June 10, 2002, we executed a Development and Licensing Agreement
with Shire Laboratories, Inc. pursuant to which the Company was granted
an exclusive worldwide license (including the right to sublicense) to
develop, make, have made, use, supply, export, import, register and sell
products for the treatment of various inflammatory disorders. In addition,
under the agreement, certain product development functions shall be
performed for the Company. Also under the agreement, the Company has
committed to payments, in cash or at the Company's option, a combination
of cash and the Company's common stock, upon the achievement of certain
clinical and regulatory milestones in the event the Company pursues
certain applications of the technology which could total up to $8,200 in
the aggregate. Pursuant to the terms of such agreement, the Company shall
also pay a percentage of certain net sales of products, if any, utilizing
any part of the technology. The Company may terminate the agreement upon
sixty days notice.
During 2002, the Company entered into various obligations to purchase
$1,411 of inventory from various suppliers over the next twelve months.
On November 18, 2002, the Company filed a complaint and on February 2,
2003, the Company filed a preliminary injunction in the United States
District Court for the Eastern District of New York seeking to prevent
West-Ward Pharmaceutical Corporation from selling 20 mg. capsules of
doxycycline hyclate to treat periodontal disease, which the Company
believes infringe on patents covering the Company's Periostat product.
The Company's suit alleges infringement on patents to which it is the
exclusive licensee. The Company anticipates that its future legal costs in
this matter will be reimbursed by SUNY. During 2002, the Company incurred
$129 in legal defense costs, all of which were deducted from royalties
paid to SUNY.
F-27
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
(13) 401(k) Salary Reduction Plan
In January 1995, the Company adopted a 401(k) Salary Reduction Plan (the
401(k) Plan) available to all employees meeting certain eligibility
requirements. The 401(k) Plan permits participants to contribute up to 15%
of their annual salary, as defined, not to exceed the limits established
by the Internal Revenue Code. All contributions made by participants vest
immediately in the participant's account. During 2002, the Company made a
discretionary contribution of $100 to the Plan. The Company did not make
any contributions in 2001 or 2000.
(14) Quarterly Financial Data (Unaudited)
The tables below summarize the Company's unaudited quarterly operating
results for 2002 and 2001.
Three months ended
-------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
2002 2002 2002 2002
----------- ----------- ----------- ------------
Total revenues....................... $ 10,760 $ 10,967 $ 11,229 $ 11,662
Gross margin on product sales........ 8,301 8,779 9,054 9,263
Net income (loss).................... (557) (385) 756 1,088
Net income (loss) allocable to
common stockholders................ (977) (794) 356 688
Basic and diluted net loss per share
allocable to common stockholders... (0.09) (0.07) 0.03 0.06
F-28
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
Three months ended
-------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
2001 2001 2001 2001
----------- ----------- ----------- ------------
Total revenues.............................. $ 7,024 $ 8,711 $ 9,249 $ 10,248
Gross margin on product sales............... 4,747 5,751 7,046 7,989
Net loss.................................... (2,691) (2,681) (1,546) (1,226)
Net loss allocable to common stockholders... (3,111) (3,101) (1,966) (1,646)
Basic and diluted net loss per share
allocable to common stockholders.......... (0.33) (0.29) (0.18) (0.15)
(15) Subsequent Event
On March 14, 2003, the Company terminated its license agreement with Roche
S.P.A. As a result of the termination of the agreement, during the first
quarter of 2003, the Company will accelerate the recognition of the
remaining $220 of deferred revenue related to the $400 up-front payment
received in 1996.
On March 19, 2003, the Company announced that Brian M. Gallagher, PhD, the
Company's chairman, chief executive officer and president, will be leaving
the Company to pursue other interests. Dr. Gallagher has agreed to remain
in his current position until a successor is appointed, and will work as a
consultant for a period of time thereafter to ensure a smooth transition.
The Company has established a search committee of the board of directors
and has engaged an executive recruiting firm to help identify a successor
to Dr. Gallagher.
The Company has executed an agreement with Dr. Gallagher, pursuant to
which Dr. Gallagher will be compensated for, among other things, his
services during the transition period and to recognize his historical
contributions to the Company. As a result of this agreement, the Company
will recognize a non-cash compensation charge relating to certain
modifications of Dr. Gallagher's stock option agreements of approximately
$250 in the first quarter of 2003. The Company has also entered into a
consulting agreement with Dr. Gallagher pursuant to which he will provide
consulting services to CollaGenex for a period of 24 months following the
employment of a new chief executive officer.
F-29
COLLAGENEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE
Valuation and Qualifying Accounts
Years Ended December 31, 2002, 2001 and 2000
(in thousands)
- -------------------------------------------------------------------------------------------------------------------------------
Col A Col B Col C Col D Col E
- -------------------------------------------------------------------------------------------------------------------------------
Description Balance at the Additions Deductions Balance at the End
Beginning of Period of Period
- -------------------------------------------------------------------------------------------------------------------------------
Accounts Receivable Charged to Statement Other
Allowance: of Operations
- -------------------------------------------------------------------------------------------------------------------------------
2002 $ 950 $ 3,462 $ -- $ 3,000 $ 1,412
2001 $ 381 $ 1,906 $ -- $ 1,337 $ 950
2000 $ 386 $ 824 $ -- $ 829 $ 381
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F-30
STATEMENT OF DIFFERENCES
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The trademark symbol shall be expressed as............................. 'TM'
The registered trademark symbol shall be expressed as.................. 'r'
The dagger symbol shall be expressed as................................ 'D'