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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File No.
December 31, 1995 0-18231
ATRIX LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1043826
- --------------------------- ------------------------
(State of Incorporation) (I.R.S. Employer
Identification Number)
2579 Midpoint Drive
Fort Collins, Colorado 80525
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(Address of principal (Zip Code)
executive offices)
Registrant's Telephone No., including Area Code: (970) 482-5868
Securities Registered pursuant to Section 12(b) of the Act: None
Securities Registered pursuant to Section 12(g) of the Act:
Common Stock $.001 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (___)
The aggregate market value of voting stock held by non-affiliates of
the Registrant as of March 1, 1996 was $67,786,088.
The number of shares of the Registrant's $.001 par value Common Stock
outstanding as of March 1, 1996 was 8,473,261.
DOCUMENTS INCORPORATED BY REFERENCE
Part III, Items 10, 11, 12 and 13 are incorporated by reference to the
definitive proxy statement for the Registrant's Annual Meeting of Shareholders
scheduled to be held on April 28, 1996.
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PART I
ITEM 1. BUSINESS
GENERAL
Atrix Laboratories, Inc. (the "Company"), originally named Vipont
Research Laboratories, Inc., was formed in August 1986 as a Delaware
corporation. The Company is engaged in the research and development of a broad
range of medical, dental and veterinary products based on its proprietary
biodegradable sustained release drug delivery system. This patented drug
delivery system, trade-named ATRIGEL(R), consists of biodegradable polymers
dissolved in biocompatible solvents that can be injected or inserted into the
target site as flowable compositions (e.g. solutions, gels, pastes, and
putties) and that solidify upon contact with body fluids to form an implant.
The ATRIGEL(R) drug delivery system can incorporate various pharmaceutical
compounds and is designed to release the compounds at targeted rates and over
predetermined periods of time. The Company believes that the ATRIGEL(R) drug
delivery system has the potential to enhance the therapeutic benefits of a
broad range of drugs through one or more of the following means: sustained
release of drug, ease of application, improved safety and efficacy, reduced
costs and greater patient compliance. The Company also believes that the
ATRIGEL(R) drug delivery system when used without the incorporation of a drug
affords the same benefits for a range of medical device applications.
The Company's drug delivery strategy is to combine the patented
ATRIGEL(R) drug delivery system with drugs whose therapeutic effectiveness may
be enhanced when administered in a sustained-release form or through increased
patient compliance. The Company conducts research activities on its own behalf
and performs contract research for third parties. The Company also conducts
research for the United States government and its agencies through government
grants. The Company has initiated early stage research programs with several
pharmaceutical companies and is evaluating the use of the ATRIGEL(R) drug
delivery system with drugs having various human and animal health applications.
In addition the Company is pursuing human medical device applications in
conjunction with other pharmaceutical and health care companies. There can be
no assurance that these programs will result in commercial products or that the
Company will ultimately enter into other funded research programs. In the past
the Company has been awarded government grants (including grants by the
Department of Defense and The National Institute of Health) to conduct research
utilizing the ATRIGEL(R) drug delivery system. Such research continues to be
directed toward the development of products in the orthopedic and periodontal
disease areas. See - "Company's Products."
The Company's products nearest to commercialization utilize the
ATRIGEL(R) drug delivery system and are designed to treat periodontal disease.
The Company's guided tissue regeneration product utilizing the ATRIGEL(R) drug
delivery system without an active agent, trade-named ATRISORB(R), is designed
to aid in the selective and enhanced regeneration of the periodontal tissue
following gum surgery. A perio product containing doxycycline is designed
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to provide localized sustained delivery of an active agent, to diseased
periodontal tissue (the "Perio Product").
CERTAIN RECENT DEVELOPMENTS
ATRISORB(R) GTR BARRIER 510(K) FILING. The Company completed human
clinical trials on the ATRISORB(R) GTR Barrier during 1995. On December 21,
1995, the Company filed a 510(k) notification with the U.S. Food and Drug
Administration (the "FDA") to market the ATRISORB(R) GTR Barrier in guided
tissue regeneration applications during periodontal surgery. See "Company's
Products- The ATRISORB(R) GTR Barrier."
PHASE III TRIALS. The Company commenced pivotal phase III trials on a
periodontal product containing doxycycline ("Perio Product-Doxycycline") in
January 1995. If the results of the clinical trials are favorable the Company
plans to file a New Drug Application ("NDA") with the FDA during the first
quarter of 1997. The pivotal phase III trials consist of two studies which are
being conducted at twenty sites and include approximately 800 patients. See
"Company's Products-The Perio Product."
PARTNERSHIP MERGER. The Company was the sole general partner of
Vipont Royalty Income Fund, Ltd., a Colorado limited partnership (the
"Partnership"). The primary asset of the Partnership was its right to receive
payments from the Company based on royalties and/or proceeds from the sale of
rights relating to the Perio Product, if any, pursuant to certain agreements
(the "Agreements") between the Company and the Partnership. On September 27,
1995, the limited partners (the "Limited Partners") of the Partnership approved
the merger (the "Merger"), of the Partnership with and into Atrix, L.P., a
Colorado limited partnership ("Atrix, L.P."). The Company was the sole limited
partner of Atrix, L.P. AtrixSub, a Colorado corporation and a wholly-owned
subsidiary of the Company, was the sole general partner of Atrix, L.P. The
Company issued 106.54498 shares of Common Stock for each outstanding
Partnership unit, for a total consideration of $3,524,000. Immediately
following the Merger, the Agreements were terminated and Atrix, L.P. and
AtrixSub were dissolved.
PERIODONTAL DISEASE
Periodontal disease is characterized by chronic infection and
inflammation of the gums and surrounding tissue, resulting in the formation of
periodontal pockets (spaces between the gum and tooth) resulting from loss of
the tooth's supporting structure (bone and periodontal ligament). It begins
when plaque builds up on teeth and gums causing inflammation. If left
untreated, the disease progresses and can lead to tooth loss. Periodontal
disease is not curable, but continuous maintenance can prevent and/or delay
flare-ups and further deterioration. The severity of the disease varies from
the mildest cases, clinically termed gingivitis (bleeding gums), to the more
severe cases, clinically termed periodontitis. When gingivitis is not
controlled, the condition can progress into periodontitis.
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Periodontal disease is most prevalent after the age of 35. It has
been reported by the American Dental Association that over 45 million people in
the United States currently have some form of the disease, and the Company
believes that only a small percentage are now being treated. Progression of
the disease is usually painless, allowing the condition to become advanced
before treatment is sought by the patient. Periodontal disease has no known
cure, and effective treatment is possible only through periodic professional
intervention to arrest further tissue deterioration. The most common
treatment, scaling and root planing, requires the dental professional to plane
away accumulated plaque and calculus above and below the gumline. For more
serious cases, various forms of gum surgery are the primary treatment. The
Company believes that many individuals diagnosed with the disease do not seek
treatment due to a number of factors, including cost, pain and potential
medical complications associated with currently available periodontal
treatment.
COMPANY'S PRODUCTS
ATRIGEL(R) DRUG DELIVERY SYSTEM. The ATRIGEL(R) drug delivery system
offers a unique approach to drug delivery. This patented drug delivery system
is comprised of a biodegradable polymer that is administered as flowable
compositions (e.g. solutions, gels, pastes, and putties), which then solidify
in situ upon contact with body fluids to form biodegradable implants. It is
designed to provide extended localized drug delivery in a single application,
without the need for surgical implantation or removal. Depending on the
intended use or the specific drug to be delivered via the ATRIGEL(R) drug
delivery system, the degradation rate of the system can be custom-tailored.
The Company believes that the unique properties of the drug delivery system
create the potential for a wide variety of medical and veterinary applications.
There can be no assurance, however, that the ATRIGEL(R) drug delivery system
will be successfully developed for commercial use.
The Company believes that the ATRIGEL(R) drug delivery system may
provide benefits over traditional methods of drug administration such as
capsules, injections and continuous infusion as a result of the following
properties:
* Versatility. The ATRIGEL(R) drug delivery system may be used
with a wide variety of pharmaceutical compounds.
* Ease of Application. The ATRIGEL(R) drug delivery system can
be injected or inserted as flowable compositions (e.g.
solutions, gels, pastes, and putties) by means of ordinary
cannulas and syringes, or can be sprayed or painted onto
tissues.
* Biodegradability. The ATRIGEL(R) drug delivery system will
biodegrade and thus is not expected to require removal when
the drug is depleted.
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* Site Specificity. The ATRIGEL(R) drug delivery system can be
delivered directly to the target area, thus potentially
achieving higher drug concentrations at the desired site of
action and minimizing systemic side effects.
* Systemic Drug Delivery. The ATRIGEL(R) drug delivery system
can be used to provide sustained drug release into the
systemic circulation in these applications where the entire
body requires treatment, and the drug is not active when taken
by mouth.
Protein/Peptide Stability. The Atrigel(R) drug delivery
system can be used to deliver proteins, peptides and other
compounds having formulation stability or short in-vivo half
lives.
* Customized Continuous Release. The ATRIGEL(R) drug delivery
system can be designed to provide continuous release of
incorporated pharmaceuticals over a targeted time period so as
to reduce the frequency of drug administration.
* Custom Designed Degradation Rates. The ATRIGEL(R) drug
delivery system has the ability to degrade over weeks, months,
or even one year.
* Low Cost and Ease of Manufacture. The ATRIGEL(R) drug
delivery system is manufactured using a simple and inexpensive
process relative to available sustained-release drug delivery
systems.
* Increased Patient Compliance. Because the drug is implanted
and released over time, patient compliance is virtually
assured.
* Safety. All current components of the ATRIGEL(R) drug
delivery system are biocompatible and have independently
established safety and toxicity profiles. In addition, the
polymers used in the system are members of a class of polymers
some of which have previously been approved by the FDA for
human use in other applications. The Company has also
conducted toxicological studies on the ATRIGEL(R) drug
delivery system to develop a safety and toxicological profile.
The Company believes that the ATRIGEL(R) drug delivery system without
a drug has potential uses as medical devices in which case the ATRIGEL(R) drug
delivery system has all of the properties described above except those
dependent on the release of a drug.
THE PERIO PRODUCT. The Perio Product combines the ATRIGEL(R) drug
delivery system and an antibiotic to form a product designed to control the
bacteria that cause periodontal disease. The Perio Product is intended to add
a new chemotherapeutic maintenance procedure to current periodontal treatment.
The Perio Product is administered by a periodontist or a general dentist by
inserting the Perio Product into the periodontal pocket through a cannula that
is similar in design to a periodontal probe. The Company has conducted
clinical trials which
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indicate that administration will be rapid, require a minimal amount of patient
chair time, and involve minimal discomfort compared to conventional methods of
therapy. The preliminary results from these clinical trials also suggest that
the clinical signs of periodontal disease such as pocket depth, bleeding on
probing and attachment level are improved significantly.
In January 1995 the Company commenced pivotal Phase III trials on the
Perio Product-Doxycycline. If the results are favorable the Company expects to
file an NDA with the FDA during the first quarter of 1997. The pivotal Phase
III trials consist of two studies which are being conducted at twenty sites and
include approximately 800 patients.
THE ATRISORB(R) GTR BARRIER. The ATRISORB(R) GTR Barrier is a
biodegradable, liquid polymer product that utilizes the ATRIGEL(R) drug
delivery system to aid in the regeneration of the tooth's support following
osseous flap surgery or other periodontal procedures. Osseous flap surgery, a
common treatment for severe cases of periodontal disease, involves reflecting
gum tissue to expose and debride areas not reachable by conventional scaling
and root planing procedures. The Company estimates that there are currently
over 3 million flap surgeries performed each year in the United States.
Published research has shown that to obtain optimal healing following flap
surgery, it is necessary to isolate the wound healing site from the adjacent
gum tissue. The placement of a barrier that isolates the surgical site from
the gum tissue has been shown to selectively facilitate growth of the
periodontal ligament cells, leading to connective tissue and bone regeneration
at the base of the periodontal defects.
The ATRISORB(R) GTR Barrier is formed outside of the mouth using a
sterile, single-use barrier forming kit. Once placed in the mouth over the
periodontal defect, the semi-solid ATRISORB(R) GTR Barrier further solidifies
upon contact with oral fluids to form a solid barrier that isolates the healing
site in order to promote guided tissue regeneration. Sutures are not required
to hold the barrier in place. For these reasons, the ATRISORB(R) GTR Barrier
can be placed in a shorter time relative to existing guided tissue regeneration
barrier products. In addition, the periodontists have the potential for
treatment of multiple diseased sites in one surgical session. Since the
ATRISORB(R) GTR Barrier is biodegradable, a second surgery to remove the
barrier is unnecessary. Results from pre-clinical and clinical trials have
been presented at a number of scientific meetings and published in a number of
referenced scientific journals.
The Company completed human clinical trials on the ATRISORB(R) GTR
Barrier during 1995 and filed a 510(k) notification with the FDA on December
21, 1995 to market the ATRISORB(R) GTR Barrier in guided tissue regeneration
applications during periodontal surgery.
As of December 31, 1995 the Company had received clearance to market
the ATRISORB(R) GTR Barrier in Denmark, France, Ireland, Spain and Switzerland.
Subsequent to year end the Company also received clearance to market the
ATRISORB(R) GTR Barrier in The Netherlands. The Company expects to market the
product in additional foreign countries; however, there can be no assurance
that additional regulatory approvals or clearance will be obtained.
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OTHER ATRIGEL(R) DRUG DELIVERY SYSTEM APPLICATIONS. The Company
continues to evaluate the ATRIGEL(R) drug delivery system for health care
applications other than periodontal disease. These include uses as medical
devices and drug delivery matrices. Some of these applications are funded by
joint development agreements with other pharmaceutical and health care
companies. The Company typically seeks to retain rights to any inventions,
discoveries, and technology that arise in connection with such joint
development projects.
In addition to joint development projects co-funded by other
companies, the Company conducts, at its own expense, programs to establish
proof-of-concepts for a number of medical products. The specific products
under development were selected from a list compiled by a marketing company
hired by the Company to determine the most appropriate product opportunities
for the ATRIGEL(R) drug delivery system. The Company hopes to enter into joint
development projects with other companies relating to such products; however,
no assurance can be given that any such development agreements can be
negotiated or that any of the products developed by the Company alone or in
joint development projects with other companies will be successfully developed
for commercial use.
The following is a discussion of research programs that were ongoing
or initiated during 1995 by the Company itself or jointly with other companies.
SURGICAL ADHESIONS. In 1993, the Company initiated a project to
develop a biodegradable polymer product that could be applied to surgical sites
to prevent the formation of fibrous adhesions and scarring during the healing
process. The ATRIGEL(R) drug delivery system was modified to a biodegradable
polymer material that could be applied as an aerosol spray to the tissues at
the surgical site and form a thin polymer film to serve as a barrier to
adhesion formation. During 1994, the Company continued research and
development activities on the aerosolized product to; (i) provide a more
uniform application to the tissues at the surgical site, (ii) better prevent
adhesions, and (iii) deliver the aerosolized product through a laparoscopic
procedure. The procedure has been shown to be effective in reducing
post-operative adhesions in various pre-clinical trials in accordance with the
protocol used for the studies. Although no further studies were undertaken
during 1995 with respect to this product, the Company is currently pursuing
potential partners for joint research and development activities and licenses.
GROWTH FACTORS. Since 1990, the Company has been pursuing the use of
its ATRIGEL(R) drug delivery system to deliver tissue growth factors for a
variety of product applications. These include the regeneration of tissue lost
as a result of periodontal disease, the healing of bone fractures and defects,
and the treatment of dermal ulcers and other soft tissue wounds. In 1994 and
1995, the Company continued to conduct pre-clinical trials which showed that a
combination of tissue growth factors could be incorporated into the ATRIGEL(R)
drug delivery system and released at controlled rates for extended times. When
the ATRIGEL(R) formulation was applied to a bone defect in a pre-clinical
study, the amount of new bone formed was increased significantly over that
obtained in a control group. Similarly, the ATRIGEL(R) drug delivery system
demonstrated that certain growth factors could be delivered during periodontal
osseous
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flap surgery to regenerate periodontal attachment in a manner superior to
controls. During 1995, the Company completed these trials which demonstrated
the effectiveness of the product and also indicated the need for further
development of the product in order to obtain the maximum benefit in
periodontal tissue regeneration. The Company also continued to evaluate a
number of different growth factors in its drug delivery system and to modify
the system for better efficacy. The Company expects to continue these pre-
clinical trials to select the best factors and matrix for periodontal tissue
regeneration as well as healing of bone fractures.
SOLID TUMORS. In 1995, the Company continued research on a project
initiated in 1993 to evaluate its ATRIGEL(R) drug delivery system to deliver
chemotherapeutic agents locally at the sites of solid tumors. The sustained
release of these agents at the tumor site is expected to provide higher
concentrations of the agent at the site of action and fewer side effects than
systemic administration of the same drug. Pre-clinical trials have shown that
a number of antitumor agents can be delivered from the ATRIGEL(R) drug delivery
system directly in a tumor site and cause a reduction in the rate of tumor
growth with a resultant increase in survival time. In 1994 preliminary trials
were conducted to test the biocompatibility of the ATRIGEL(R) drug delivery
system by direct injection into liver tissue with a view towards evaluating the
system to treat liver cancer. In addition, the Company evaluated the delivery
system for tissue biocompatibility by intraperitoneal injection with a view
toward evaluating the system to treat ovarian cancer. The pre-clinical results
from the biocompatibility trials were completed in 1995, and indicate that the
delivery system is compatible with both types of tissue.
In 1995 the Company conducted pharmacokinetic trials and a clinical
study in collaboration with the Colorado State University Veterinary School to
evaluate the efficacy of several ATRIGEL(R) drug delivery system formulations
containing an antitumor agent to treat osteosarcoma in dogs. The
pharmacokinetic trials showed that sustained release of cisplatin could be
obtained for 30 days with the ATRIGEL(R) drug delivery system. These trials
are still in progress to determine the maximum dose of drug that can be given
without toxic effects.
PAIN CONTROL. One of the first projects the Company initiated in 1993
with its own funding was the development of a product for the treatment of
post-operative pain. This product involves the site-specific delivery of a
local anesthetic from the ATRIGEL(R) drug delivery system to control pain
following surgery. Research on this project in 1994 showed that in
pre-clinical trials relief from pain could be achieved for about three days
with the delivery of the anesthetic from an ATRIGEL(R) formulation. Trials
were also conducted to optimize the quantity of drug incorporated in the
product and to evaluate the safety and stability of such formulations. No
further research on this project was performed during 1995. The Company may
pursue further development of this product application in collaboration with a
marketing partner or by itself, upon receipt of additional financing.
THE UPJOHN COMPANY. The Company has collaborated with The Upjohn
Company ("Upjohn") since 1991 to evaluate its ATRIGEL(R) drug delivery system
for the development of animal treatment products. During the past three years,
a number of different product applications have been studied, and in 1994,
Upjohn exercised its option for an exclusive license
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for the ATRIGEL(R) drug delivery system technology for the delivery of animal
vaccines. This decision was based upon the successful results of a number of
trials with the ATRIGEL(R) drug delivery system containing animal vaccines.
During 1995, Upjohn initiated a number of pivotal trials in animals to evaluate
the ATRIGEL(R) vaccine product for efficacy. The Company intends to continue
to work with Upjohn as needed to optimize these products and to obtain
regulatory approval for their use in animals.
ELI LILLY AND COMPANY. In 1994, the Company signed a research and
development agreement with Eli Lilly and Company ("Lilly") to evaluate the
potential use of the ATRIGEL(R) drug delivery system with an antipsychotic drug
under development by Lilly. Atrix completed the feasibility program in 1995
and Lilly is currently reviewing the status of the program. The Company is
currently awaiting notification regarding its level of interest in further
development of a delivery system using the ATRIGEL(R) drug delivery system.
GENSIA LABORATORIES, LTD. In 1995, the Company signed an exclusive
worldwide license agreement to develop a product to be sold by Gensia
Laboratories, Ltd ("Gensia") for the treatment of solid tumor cancers using the
ATRIGEL(R) drug delivery system. Under the terms of the license, the Company
initiated a feasibility study to characterize release rates of an existing
anti-cancer drug when incorporated into the ATRIGEL(R) drug delivery system.
The results of the early trials were encouraging and the program has moved to
the pre-clinical stage of development.
HESKA, INC. (FORMERLY PARAVAX, INC.) In 1995, the Company signed an
exclusive worldwide license agreement to develop a product to treat periodontal
disease in companion animals. Under the terms of the license, the Company will
develop a subgingival therapy for periodontal disease in dogs and cats,
comprised of the antibiotic doxycycline and the ATRIGEL(R) drug delivery
system.
RESEARCH AND DEVELOPMENT
The Company conducts the majority of its research and development
activities through its own staff and facilities. The Company's research and
development program encompasses the early stage of product development through
the receipt of FDA clearance or approval, and the expansion of new product uses
and applications. The Company has assembled a team of scientists, clinical,
regulatory and quality assurance personnel with a variety of complementary
skills and experiences, and conducts a broad-based research program in its
facilities. The Company also employs contract research organizations,
independent consultants and clinical research professionals to aid in the
product development process.
The Company anticipates incurring significant research and development
expenses in the coming years as the Company initiates commercial sales,
continues its efforts to develop its present technologies, begins to move other
products to the clinical testing stage and identifies future products for
development. The Company's aggregate research and development expenses totaled
approximately $5,854,000 for the fiscal year ended September 1993,
approximately
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$1,382,000 for the quarter ended December 31, 1993 and approximately $6,667,000
and $9,589,000 for calendar years 1994 and 1995, respectively. The Company
expects to continue to incur substantial research and development expenses in
future periods.
GOVERNMENT REGULATION
The research and development, manufacturing and marketing of the
Company's products are subject to regulation by the FDA in the United States
and by comparable authorities in other countries. These national authorities
and other federal, state and local entities regulate, among other things,
research and development activities and the testing, manufacture, safety,
effectiveness, labeling, storage, record keeping, approval, advertising and
promotion of the Company's products.
The Federal Food, Drug and Cosmetic Act (the "Act"), the Public Health
Services Act, the Controlled Substance Act and other Federal statutes and
regulations govern or influence all aspects of the Company's business.
Noncompliance with applicable requirements can result in fines, criminal
prosecution, recall, seizure of products, injunctions, total or partial
suspension of production and refusal of the government to approve product
license applications or to allow the Company to enter into supply contracts.
In addition, administrative remedies can involve the recall of products as well
as the refusal of the government to approve pending applications or supplements
to approved applications. The FDA also has the authority to withdraw approval
of drugs in accordance with statutory due process procedures.
In order to obtain FDA approval or clearance of a new product, the
Company must submit proof of safety and efficacy. In most cases, such proof
entails extensive pre-clinical, clinical and laboratory tests. The testing,
preparation of necessary applications and processing of those applications by
the FDA is expensive and may take several years to complete. There can be no
assurance that the FDA will act favorably or quickly in making such reviews,
and significant difficulties or costs may be encountered by the Company in its
efforts to obtain FDA approvals that could delay or preclude the Company from
marketing any products it may develop. There can also be no assurance that the
FDA will not request the development of additional safety data. With regard to
the development of efficacy data, the FDA may at any time request the
development of additional data. Based upon the data, the FDA may also limit
the scope of the labelling of the product or deny the NDA. With respect to
patented products or technologies, delays imposed by the governmental approval
process may materially reduce the period during which the Company will have the
exclusive right to exploit such patented products.
The Company's products, as presently anticipated, will be regulated as
either drugs or medical devices. Each type of product is regulated by
different provisions of the Act. The FDA's authority over medical devices
derives from the 1976 Medical Device Amendments, the Safe Medical Device Act of
1990 and the regulations promulgated thereunder. At least 90 days prior to
commencing commercial distribution, a pre-market notification under Section
510(k) of the law must be filed with the FDA with respect to a medical device
intended for commercial
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distribution. After receipt of the pre-market notification, the FDA will
determine whether the device is "substantially equivalent" to a device already
lawfully marketed and whether the device is otherwise subject to a pre-market
approval ("PMA") requirement. Devices for which pre-market notifications have
been filed may not be marketed until the FDA issues an order finding the device
to be substantially equivalent to an already legally marketed device which is
not otherwise subject to a requirement of pre-market approval under Section 515
of the Act. Devices which are found by the FDA to be not substantially
equivalent to a legally marketed device, and devices which are substantially
equivalent to a device that requires pre-market approval before marketing, must
submit and receive approval of a PMA before commercialization may commence.
Review of a PMA is complex, typically includes both animal and human trials and
may take several years to complete. Such trials must be conducted under an
Investigational Device Exemption and must be monitored by an Institutional
Review Board ("IRB").
If the FDA determines that the ATRISORB(R) GTR Barrier is safe and
"substantially equivalent" to an already legally marketed device for its
intended use, it will grant a 510(k) clearance which will allow the Company to
market the ATRISORB(R) GTR Barrier in the United States. The regulatory
requirements for marketing medical devices in the European Community (the "EC")
are currently in transition as the EC's new Medical Device Directive is being
implemented. Some countries do not currently require pre- market approval or
notification for this type of product, while other countries do not distinguish
between medical devices and drug products. The EC's Medical Device Directive
transition period will end in June 1998, after which time all medical devices
will require a Certification Equivalent (a "CE Mark") before they can be
marketed in any EC member states. Obtaining the CE Mark requires information
that is similar to that which is submitted to the FDA in the 510(k)
notification, plus additional manufacturing and quality assurance documentation
(and inspections) mandated by the International Standards Organization 9000
standards.
The Company expects to market the ATRISORB(R) GTR Barrier in the seven
European countries which currently require only import notification from local
authorities and subsequent export permission from the FDA. Of these European
countries, the Company has received clearance to market the ATRISORB(R) GTR
Barrier in Denmark, France, Ireland, The Netherlands, Spain and Switzerland.
The Company also is pursuing clearance to market the ATRISORB(R) GTR Barrier in
Italy. The Company plans to complete the additional work required to obtain
the CE Mark prior to expiration of the Medical Device Directive transition
period in June 1998 and upon obtaining a CE Mark to market the ATRISORB(R) GTR
Barrier in additional foreign countries.
Products such as the Company's drug delivery system are generally
regulated under the new drug and related provisions of the Act. The process
required by the FDA before a drug delivery system may be marketed in the United
States depends on whether the drug has existing approval for use in other
dosage forms. If the drug is a new chemical entity that has not been approved,
then the process includes (i) pre-clinical laboratory and animal tests, (ii) an
investigational new drug exemption which has become effective, (iii) adequate
and well
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controlled human clinical trials to establish the safety and efficacy of the
drug in its intended application and (iv) FDA approval of an NDA. If the drug
has been previously approved, then the approval process is similar, except that
certain toxicity tests normally required for the IND are frequently not
required.
Clinical trials are conducted in accordance with protocols that detail
the objectives of the study, the parameters to be used to monitor safety and
the efficacy criteria to be evaluated. Each protocol is submitted to the FDA
as part of the IND. Each clinical study is conducted under the auspices of an
independent IRB at the institution at which the study will be conducted. The
IRB will consider, among other things, ethical factors, the safety of human
subjects, the protection of patient confidentiality and the possible liability
of the institution.
Clinical trials are typically conducted in three sequential phases,
but these phases may overlap. During Phase I, the initial introduction of the
drug into healthy human subjects, the product is tested for safety, dosage
tolerance, absorption, distribution, metabolism and excretion. Phase II
involves trials in a limited patient population to (i) determine the efficacy
of the product for specific, target indications, (ii) determine dosage
tolerance and optimal dosage and (iii) identify possible adverse effects and
safety risks. If Phase II evaluations demonstrate that a drug has promising
therapeutic benefits and has an acceptable safety profile, Phase III trials are
undertaken to further evaluate clinical efficacy and to further test for safety
within an expanded patient population at geographically dispersed clinical
study sites. A clinical plan, or "protocol," must be submitted to the FDA
prior to the commencement of each clinical trial. All patients involved in the
clinical trials must provide informed consent prior to their participation.
The FDA may order the temporary or permanent discontinuation of a clinical
trial at any time. The results of the clinical trials are submitted to the FDA
as part of the NDA to establish the safety and effectiveness of the drug for
its intended indications. The FDA may order the temporary or permanent
discontinuation of clinical trials at any time if it believes that clinical
subjects are being exposed to an unacceptably high safety risk or the design of
the trial will not meet its stated objectives.
The results of product development, pre-clinical trials and clinical
trials are submitted to the FDA in an NDA for approval of the marketing and
commercial shipment of the product. Prosecution of an NDA can take several
years to complete.
The FDA may deny an NDA if applicable regulatory criteria, including
compliance with current Good Manufacturing Practices ("cGMP"), are not
satisfied. The FDA may require additional clinical testing or other types of
testing, or manufacturing or quality control changes. Even if such data are
submitted or such changes are made, the FDA may ultimately decide that the NDA
does not satisfy the criteria for approval. Following approval of an NDA, the
FDA may withhold authorization to commence marketing of the drug subject to FDA
inspection and clearance of records and manufacturing processes relating to the
production and laboratory testing of the finished drug product. Product
approvals may be withdrawn by the FDA if compliance with regulatory standards
is not maintained or if new evidence demonstrating that the drug is unsafe or
lacks efficacy for its intended uses becomes known after the product
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reaches the market. The FDA may require testing and surveillance programs to
monitor the effect of proprietary drug delivery systems which have been
commercialized, and has the power to prevent or limit further marketing of the
product based on the results of these post-marketing surveillance programs.
Each domestic drug product manufacturing establishment must be
registered with, and achieve a satisfactory inspection from, the FDA.
Establishments handling controlled substances must be licensed by the United
States Drug Enforcement Administration ("DEA"). Domestic manufacturing
establishments are routinely subject to inspection by the FDA prior to the
approval of an NDA and to biennial inspections by the FDA for cGMP compliance
after an NDA has been approved. The Prescription Drug User Fee Act of 1992,
enacted to expedite drug approval by providing the FDA with resources to hire
additional medical reviewers, imposes three kinds of user fees on manufacturers
of NDA-approved prescription drugs.
ADDITIONAL REGULATORY ISSUES
Under the Drug Price Competition and Patent Term Restoration Act of
1984, a patent which claims a product, use or method of manufacture covering
drugs and certain other products may be extended for up to five years to
compensate the patent holder for a portion of the time required for research
and FDA review of the product. This law also establishes a period of time
following approval of a drug during which the FDA may not accept or approve
applications for certain similar or identical drugs from other sponsors unless
those sponsors provide their own safety and effectiveness data. There can be
no assurance that the Company will be able to take advantage of either the
patent term extension or marketing exclusivity provisions of this law.
The National Institutes of Health has been requested by the Department
of Health and Human Services to submit proposals for addressing potential
conflicts of interest in the federally-funded biomedical research sector.
Although the proposal request is aimed at establishing rules to treat potential
abuses in the system without imposing unnecessary burdens and disincentives,
there can be no assurance that any rules adopted will not adversely affect the
Company's ability to obtain research grants. Various aspects of the Company's
business and operations are regulated by a number of other governmental
agencies including the Occupational Safety and Health Administration and the
Securities and Exchange Commission.
The FDA, under the U.S. Orphan Drug Act, may designate a drug as an
Orphan Drug for a particular use, in which event the developer of the drug may
request grants from the government to defray the costs of certain expenses
related to the clinical testing of such drug. Under the Orphan Drug Act, the
FDA may grant Orphan Drug status to therapeutic agents intended to treat a
"rare disease or condition" that affects populations of less than 200,000
individuals in the United States. This law provides for expanded direct
communication and advice from the FDA for program and study design; tax credits
for development expenditures; expedited review of data submissions, including
an NDA; and assurance of seven years of marketing exclusivity for the specific
product regardless of patent status.
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THIRD PARTY REIMBURSEMENT
The cost of a significant portion of medical care in the United States
is funded by government and private insurance programs, such as Medicare,
Medicaid, health maintenance organizations and private insurers, including Blue
Cross/Blue Shield plans. Governmental imposed limits on reimbursement of
hospitals and other health care providers (including dental practitioners) have
significantly impacted their spending budgets. Under certain government
insurance programs, a health care provider is reimbursed a fixed sum for
services rendered in treating a patient, regardless of the actual charge for
such treatment. Private third-party reimbursement plans are also developing
increasingly sophisticated methods of controlling health care costs through
redesign of benefits and exploration of more cost-effective methods of
delivering health care. In general, these government and private
cost-containment measures have caused health care providers to be more
selective in the purchase of medical products.
Significant uncertainty exists as to the reimbursement status of newly
approved health care products, and there can be no assurance that adequate
third-party coverage will be available. Limitations imposed by government and
private insurance programs and the failure of certain third-party payers to
fully or substantially reimburse health care providers for the use of the
products could have a material adverse effect on the Company.
COMPETITION
The biotechnology and pharmaceutical industries are characterized by
rapidly evolving technology and intense competition. The Company's competitors
include major pharmaceutical, chemical and specialized biotechnology companies,
many of which have financial, technical and marketing resources significantly
greater than those of the Company. In addition, many specialized biotechnology
companies have formed collaborations with large, established pharmaceutical
companies to support research, development and commercialization of products
that may be competitive with those of the Company. Moreover, from time to
time, there have been research reports from various sources describing other
sustained release drug delivery systems for use in treating periodontal
disease. Further, the Company is aware that other companies are developing
products that may compete with the Company's products. There can be no
assurance that product introductions or developments by others will not render
the Company's products or technologies obsolete or place them at a competitive
disadvantage.
Products utilizing the Company's proprietary drug delivery systems are
expected to compete with other products for specified indications, including
drugs marketed in conventional and alternative dosage forms. New drugs or
further developments in alternative drug delivery methods may provide greater
therapeutic benefits for a specific drug or indication, or may offer comparable
performance at lower cost, than those offered by the Company's drug delivery
systems. The Company expects proprietary products approved for sale to compete
primarily on the basis of product efficacy, safety, patient convenience,
reliability, availability, price and patent position. There can be no
assurance that product introductions or developments by others will not render
the Company's expected products or technologies noncompetitive or obsolete.
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MARKETING AND SALES
In 1995, the Company received clearance to market the ATRISORB(R) GTR
Barrier in five European countries and subsequent to year end received
clearance to market the ATRISORB(R) GTR Barrier in one additional European
country. The Company entered into an agreement with Parthold b.v. to manage
the Company's marketing and sales distribution efforts in Europe. On December
21, 1995 the Company submitted a 510(k) notification for the ATRISORB(R) GTR
Barrier and anticipates FDA clearance in mid-year 1996 to market the
ATRISORB(R) GTR Barrier in the United States ("U.S."). The Company intends to
establish a marketing and sales organization to market the ATRISORB(R) GTR
Barrier in the U.S. Also, the Company expects that certain other products in
development may be marketed in collaboration with a corporate partner. Such
collaborative arrangements, whether licenses, joint ventures, or otherwise,
could result in lower revenues than if the Company marketed product itself.
MANUFACTURING
The Company has no experience in manufacturing any of its products on
a commercial scale, although certain of its officers have had experience in
similar activities for other companies. The Company recently expanded and
upgraded its pilot manufacturing facility. In addition to producing supplies
at pilot scale for clinical trials, this facility is now capable of producing
the first commercial quantities of the Perio Product and the ATRISORB(R) GTR
Barrier.
In connection with its research and development activities, the
Company may seek to enter into collaborative arrangements with pharmaceutical
or biotechnology companies to assist in funding development costs. It is
anticipated that these collaborators are capable of and may also be responsible
for commercial scale manufacturing of certain potential products. In addition,
these arrangements may involve the grant by the Company of the exclusive or
semi-exclusive right to sell specific products to specified market segments in
particular geographic territories in exchange for up-front payments, royalties,
milestone payments or other financial arrangements. The Company believes that
these arrangements could be more effective in promoting and distributing
certain therapeutic products, due to the extensive marketing networks and large
advertising budgets of large pharmaceutical and biotechnology companies. The
Company may ultimately determine to establish its own manufacturing capability
for certain products, in which case it will require substantial additional
funds and personnel. As an alternative to establishing its own manufacturing
capabilities or entering into collaborative agreements, the Company may
contract its manufacturing to an independent third party. There can be no
assurance that the Company will be able to enter into any such arrangements
with a collaborative partner or independent third parties on favorable terms,
or at all.
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PATENTS AND TRADEMARKS
The Company considers patent protection and proprietary position to be
materially significant to its business. Since its formation, the Company has
submitted eighty-three patent applications, of which thirty-seven were filed in
the U.S. and forty-six were filed in foreign national or Patent Cooperation
Treaty ("PCT") countries. The Company maintains a total of eighteen patents
including ten U.S. patents and eight foreign national or PCT patents. In
addition, the Company currently has nineteen U.S. and thirty-three foreign
patent applications pending for various improvements and technologies.
Based on its own research, six of the submitted U.S. and six of the
foreign patent applications have been granted thus far. These issued patents
relate to the purification and use of benzophenanthridine alkaloids such as
sanguinarine, methods and compositions for treating periodontal diseases,
polymeric systems for use in guided tissue regeneration of periodontal tissues,
and the liquid polymeric delivery systems. These patents provide protection
for the Perio Product and the ATRISORB(R) GTR Barrier currently under
development.
In 1995, the Company had four new foreign national patents issued.
These patents relate to the biodegradable in situ forming implants and the
biodegradable system for regenerating the periodontium.
The Company also has exclusive rights, under Amendment No. 3 to the
Master Technology Transfer Agreement (the "Revised Agreement"), to patents
relating to benzophenanthridine alkaloid products, including sanguinarine, and
methods in all fields other than that of human oral care. These rights are
based upon thirteen U.S. and a number of foreign patents owned by Vipont
Pharmaceutical, Inc. ("VPI"). These patents relate to compositions that
include benzophenanthridine alkaloid and methods for potentially promoting oral
hygiene and tissue health as well as methods for preparation of
benzophenanthridine or sanguinaria extracts.
Notwithstanding the Company's pursuit of patent protection, there is
no assurance that others will not develop delivery systems, compositions and/or
methods that infringe the Company's patent rights resulting from outright
ownership or non-revocable exclusive licensure of patents which relate to the
Company's delivery systems, composition and/or methods. In that event, such
delivery systems, compositions and methods may compete with the Company's
systems, compositions and methods and may adversely affect the operations of
the Company. Further, there is no assurance that patent protection will afford
adequate protection against competitors with similar systems, composition or
methods, nor is there any assurance that the patents will not be infringed or
circumvented by others. Moreover, it may be costly to pursue and to prosecute
patent infringement actions against others, and such actions could hamper the
business of the Company. The Company also relies on its unpatented proprietary
know-how. No assurance can be given that others will not be able to develop
substantially equivalent proprietary know-how or otherwise obtain access to the
Company's know-how, or that the Company's rights under any patents will afford
sufficient protection.
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In previous years, the Company submitted Intent to Use ("ITU") U.S.
trademark applications for registration of fourteen marks which it planned to
use in designating its products and compositions. After careful review of
these trademark applications, the Company has decided to maintain two of these
for its future products including the ATRIGEL(R) drug delivery system and
ATRISORB(R) GTR Barrier. The trademarks were found to be registerable by the
U.S. Trademark Office and they were converted to actual registered trademarks
in 1995.
The Company has also submitted and maintains three ordinary U.S.
trademark and service applications for registrations of its name and logo. The
Company expects that the Trademark Office examinations of these applications
will be successful and registrations granted.
PRODUCT LIABILITY INSURANCE
The Company currently has in force general, product and professional
liability insurance with coverage limits of $3 million per year in the
aggregate and $1 million per occurrence. The Company's insurance policies
provide coverage on a claims made basis and are subject to annual renewal.
Such insurance may not be available in the future on acceptable terms or at
all. There can be no assurance that the coverage limits of such policies will
be adequate.
EMPLOYEES
As of December 31, 1995, the Company employed sixty-eight employees on
a full-time basis and one person on a part-time basis. Of the sixty-eight
full-time employees, fifty-nine are engaged in research and clinical testing
and the remaining nine are in administrative capacities. Six employees have
earned doctorate or advanced degrees. None of the Company's employees are
represented by a union or collective bargaining unit and management considers
relations with employees to be good.
ADDITIONAL INFORMATION
Compliance with federal, state and local law regarding the discharge
of materials into the environment or otherwise relating to the protection of
the environment has not had, and is not expected by the Company to have, any
adverse effect upon capital expenditures, earnings or the competitive position
of the Company. The Company is not presently a party to any litigation or
administrative proceeding with respect to its compliance with such
environmental standards. In addition, the Company does not anticipate being
required to expend any funds in the near future for environmental protection in
connection with its operations.
The Company does not believe that any aspect of its business is
significantly seasonal in nature.
No significant portion of the Company's business is subject to
renegotiation of profits or termination of contracts or subcontracts at the
election of the United States Government.
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The Company currently obtains supplies of the polymer used in the
polymer delivery system from two separate sources. Supplies of doxycycline are
obtained from both domestic and foreign sources. The Company believes that, in
the event that it should lose any of its suppliers of raw materials, it could
locate and obtain such raw materials from other available sources without
substantial adverse delay or increased expense.
ITEM 2. PROPERTIES.
The Company leases approximately 23,200 square feet of office and
research laboratory space located in Fort Collins, Colorado, pursuant to a
lease that expires on June 1, 1998. In addition, the Company leases an
additional 4,000 square feet of space at the same location for pre-clinical and
initial manufacturing activities, pursuant to a lease which expires on December
1, 1996. The Company owns substantially all of its laboratory and
manufacturing equipment, which it considers to be adequate for its research,
development and testing requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the Company's security holders
through the solicitation of proxies during the fourth quarter of the Company's
most recent fiscal year.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Common Stock is traded on The Nasdaq Stock Market under the symbol
"ATRX." The following table sets forth, for the fiscal periods indicated, the
range of high and low sales price per share of the Common Stock, as reported on
The Nasdaq Stock Market:
High Low
---- ---
1995:
First Quarter $7 $5 3/8
Second Quarter 8 1/8 6 3/8
Third Quarter 8 5 1/2
Fourth Quarter 7 3/4 4 7/8
1994:
First Quarter $9 1/4 $5 5/8
Second Quarter 7 1/4 5 7/8
Third Quarter 8 3/4 5 3/4
Fourth Quarter 6 5/8 5 1/4
As of March 1, 1996, there were approximately 3,780 holders of record of Common
Stock.
The Company has never paid cash dividends. The Company currently
anticipates that it will retain all available funds for use in the operation of
its business and does not anticipate paying any cash dividends in the
foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA.
The financial data presented below are derived from the financial statements
of the Company, which have been audited and reported upon by Deloitte & Touche
LLP, independent auditors. The selected financial information set forth in the
table below is not necessarily indicative of the results of future operations
of the Company and should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
financial statements, related notes and report of independent auditors,
included herein.
Three
Year Year Months Year Year Year
Ended Ended Ended Ended Ended Ended
Dec 31, Dec 31, Dec 31, Sept 30, Sept 30, Sept 30,
1995 1994 1993 1993 1992 1991
---------------------------------------------------------------------
(In thousands, except share data)
SUMMARY OF OPERATIONS:
Total Revenue $1,561 $1,815 $539 $3,092 $3,161 $2,429
Total Expenses 14,221 7,355 1,546 6,791 10,061 4,411
Net loss (12,658) (5,540) (1,007) (3,699) (6,900) (1,905)
Net loss per common share (1.58) (0.72) (0.1) (0.5) (0.94) (0.35)
Weighted Average shares 8,002 7,741 7,721 7,695 7,340 5,370
outstanding
BALANCE SHEET DATA: (In Thousands)
Working capital $10,913 $12,616 $13,478 $9,372 $17,779 $4,347
Total assets 14,894 22,006 27,912 29,074 36,515 6,440
Long-term obligations --- --- --- --- 4,000 4,000
Shareholders' equity 12,807 21,191 26,978 28,118 31,529 1,422
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
Since its inception, the Company has devoted its efforts and resources
primarily to the research and development of periodontal products. To date,
the Company has had no revenue from product sales. Substantially all of the
Company's revenue through September 30, 1991 was derived from a research
funding agreement with the Partnership. The Partnership's funds were exhausted
in 1991, and the Company's revenues since then have been derived from interest
income and payments from unaffiliated third parties for contract research.
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The Company commenced pivotal Phase III clinical trials on the Perio
Product-Doxycycline in January 1995. During 1995, the Company completed human
clinical trials on the ATRISORB(R) GTR Barrier and on December 21, 1995 filed a
510(k) notification with the FDA to market the ATRISORB(R) GTR Barrier in
guided tissue regeneration applications during periodontal surgery.
During 1993, the Company changed its year end from September 30 to a
year ending December 31.
RESULTS OF OPERATIONS (The following discussion should be read in conjunction
with the financial statements and related notes.)
YEAR ENDED DECEMBER 31, 1995 COMPARED TO
YEAR ENDED DECEMBER 31, 1994
Contract revenue represented revenue the Company received from grants
and from unaffiliated third parties for performing contract research and
development activities for the ATRIGEL(R) drug delivery system, and was
approximately $571,000 for the year ended December 31, 1995, compared to
approximately $701,000 for the year ended December 31, 1994. The decrease in
contract revenue was a result of the Company completing a number of contracts
that were in progress in the comparable period, while contracts initiated in
the current period have generated less revenue.
Interest income for the year ended December 31, 1995, was
approximately $987,000 compared to approximately $1,320,000 for the year ended
December 31, 1994. Interest income decreased due to a reduction in principal
balances of investments as a result of the funds being used in general
operations. The majority of the funds were invested in U.S. government bond
funds, long-term U.S. government and government agency investments. The
remaining cash and cash equivalents were invested in interest bearing accounts
to fund the Company's short-term operations.
A loss on sale of marketable securities for the year ended December
31, 1995, was approximately $5,000 compared to approximately $218,000 for the
year ended December 31, 1994. The current period loss was substantially less
than the comparable period due to improved market conditions at the time at
which the securities were sold. The prior period loss resulted from the sale
of securities, available-for-sale at a time when the bond market had
substantially declined compared to the period when the securities were
purchased. The proceeds from the sale of marketable securities were used to
fund normal operations.
Research expenses-Perio Product for the year ended December 31, 1995,
were approximately $5,684,000 compared to approximately $2,765,000 for the year
ended December 31, 1994. The increase was significant and resulted from the
continuation of two Phase III clinical trials which began in January 1995. The
studies involve more than 800 subjects being treated at 20 centers.
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Research and development expenses included activities for the
development of the ATRISORB(R) GTR Barrier and other research activities for
the Company's own benefit and were approximately $3,905,000 for the year ended
December 31, 1995, compared to approximately $3,902,000 for the year ended
December 31, 1994.
Administrative expenses increased to approximately $828,000 during the
year ended December 31, 1995, from approximately $688,000 for the year ended
December 31, 1994. The increase resulted primarily from expenses associated
with efforts to obtain a corporate marketing partner, legal fees and expenses
associated with the recruitment and hiring of new employees.
Acquisition of rights for approximately $3,802,000 for the year ended
December 31, 995 represented (i) the issuance of 550,868 shares of Common Stock
valued at approximately $6.40 per share in exchange for the Partnership units
in the Merger and (ii) approximately $287,000 in expenses related to the
Merger.
The Company recorded a net loss of approximately $12,658,000 for the
year ended December 31, 1995, compared to a net loss of approximately
$5,540,000 for the year ended December 31, 1994. The current period loss was
higher primarily due to a one-time charge of $3,802,000 associated with the
Merger. The current period loss was further increased due to decreased
revenues from research contracts, increased expenses associated with the
continuation of two, Phase III clinical trials for the Perio Product, and
additional research and development on the ATRISORB(R) GTR Barrier and the
ATRIGEL(R) drug delivery system.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO
FISCAL YEAR ENDED SEPTEMBER 30, 1993
Contract revenue represented revenue the Company received from grants
and from unaffiliated third parties for performing contract research and
development activities for the ATRIGEL(R) drug delivery system, and was
approximately $701,000 for the year ended December 31, 1994, compared to
approximately $1,037,000 for the year ended September 30, 1993. The decrease
in contract revenue was a result of the Company completing joint development
contracts that were in progress in the prior year.
Contract revenue from related parties represented the reimbursement
for joint development costs from Colgate from the ATRISORB(R) GTR Barrier and
from the Partnership for management fees. Revenue was approximately $12,000
for the year ended December 31, 1994 compared to approximately $342,000 for the
fiscal year ended September 30, 1993. The reason for the decrease was due to
the termination of the joint development agreement with Colgate in January
1993.
Interest income for the year ended December 31, 1994, was
approximately $1,320,000 compared to approximately $1,556,000 for the year
ended September 30, 1993. The majority of the funds were invested in U.S.
government bond funds, long-term U.S. government and government agency
investments. The remaining cash and cash equivalents were invested in
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interest bearing cash accounts to meet the Company's short-term operating
needs. There was a loss on sale of marketable securities of approximately
$218,000 in the year ended December 31, 1994, compared to a gain of
approximately $158,000 for the same period ended September 30, 1993. The
change resulted from the sale of available-for-sale securities at a time when
the marketable securities bond market had substantially declined compared to
the period when the securities were purchased. The proceeds from the sale were
used to fund normal operations.
Research expenses-Perio Product for the year ended December 31, 1994,
were approximately $2,765,000 compared to approximately $2,789,000 for the year
ended September 30, 1993. The slight decrease was due to the change in
activity in the clinical area, specifically the cost associated with completing
the clarifying study in the prior year compared to preparation to begin the
pivotal Phase III clinical trials in the current year. Research expenses are
anticipated to increase in subsequent quarters as additional clinical study
expenses are incurred.
Research and development expenses included activities for the
development of the ATRISORB(R) GTR Barrier and other development activities for
the Company's own benefit. Research and development expenses increased to
approximately $3,902,000 during the year ended December 31, 1994, from
approximately $3,065,000 for the year ended September 30, 1993. The primary
reasons for the increase were higher expenses as a result of conducting final
stage clinical trials on the ATRISORB(R) GTR Barrier and increased research and
development activities related to the ATRIGEL(R) drug delivery system.
Administrative expenses decreased to approximately $688,000 during the
year ended December 31, 1994, from approximately $937,000 for the year ended
September 30, 1993. The primary reasons for this decrease were the reduction
of expenses associated with the Company's accounting and administrative staff;
lower expenses related to shareholder reporting and no fiscal year relocation
expenses associated with the employment of the CEO. In addition, in the year
ended September 30, 1993, $50,000 was expensed for the "manufacture and
purchase option" as a result of Colgate terminating the joint development
contract in January 1993.
The Company recorded a net loss of approximately $5,540,000 for the
year ended December 31, 1994, compared to a net loss of approximately
$3,698,000 for the year ended September 30, 1993. The current period loss was
higher due to decreased revenues and increased expenses associated with
additional research on the ATRISORB(R) GTR Barrier, the ATRIGEL(R) drug
delivery system and training and preparation for the pivotal Phase III clinical
trials on the Perio Product-Doxycycline.
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THREE MONTHS ENDED DECEMBER 31, 1993
COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1992
Contract revenue-other projects represented revenue the Company
received from grants and from unaffiliated third parties for performing
contract research and development and activities, and was approximately
$162,000 for the three months ended December 31, 1993, compared to
approximately $241,000 for the three months ended December 31, 1992. The
decrease in contract revenue was a result of the Company completing projects in
progress in the prior year.
Contract revenue from related parties represented the reimbursement
for joint development costs from Colgate for the ATRISORB(R) GTR Barrier and
from the Partnership for management fees. Revenue was approximately $3,000 for
the three months ended December 31, 1993, and approximately $159,000 for the
three months ended December 31, 1992. The reason for the decrease was due to
the joint development contract with Colgate being completed in January 1993.
Interest income for the three months ended December 31, 1993, was
approximately $374,000 compared to approximately $392,000 for the three months
ended December 31, 1992. This decrease was due to a reduction in principal
investments as a result of the funds being used in general operations. The
majority of the funds were invested in mutual funds, long-term U.S. government
and government agency investments. The remaining cash and cash equivalents were
invested to meet the Company's short-term operating needs.
Research expenses-Perio Product for the three months ended December
31, 1993, were approximately $541,000 compared to approximately $648,000 for
the three months ended December 31, 1992. The decrease reflects the completion
of the clarifying study during the current quarter.
Research and development expenses included activities for the
development of the ATRISORB(R) GTR Barrier and all other research and
development activities for the Company's own benefit. Research and development
expenses increased to approximately $842,000 for the three months ended
December 31, 1993, from approximately $696,000 for the three months ended
December 31, 1992. The primary reasons for the increase were higher costs as a
result of conducting final stage clinical trials on the ATRISORB(R) GTR Barrier
and increased research and development activities related to the ATRIGEL(R)
drug delivery system.
Administrative expenses were $163,000 for the three months ended
December 31, 1993, compared to $227,000 for the three months ended December 31,
1992. The primary reason for this decrease was due to the Company's
maintaining a reduced accounting and administrative staff and lower expenses
related to shareholder reporting than incurred in the comparative quarter.
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The Company recorded a net loss of approximately $1,007,000 for the
three months ended December 31, 1993, compared to a net loss of approximately
$637,000 for the three months ended December 31, 1992. This increase in the
net loss was primarily the result of decreased revenues from contracts and
increased expenses associated with additional research on the ATRIGEL(R) drug
delivery system.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1995, the Company had cash and cash equivalents of
approximately $925,000, marketable securities available-for-sale of
approximately $10,997,000, and other current assets of approximately
$1,078,000, for total current assets of approximately $13,000,000. Current
liabilities were approximately $2,087,000, which resulted in working capital of
approximately $10,913,000.
The Company had funds available of approximately $11,922,000 to fund
working capital requirements and capital expenditures. This included
approximately $925,000 in cash and cash equivalents, and approximately
$10,997,000 of marketable securities available- for-sale. In 1995, the Company
re-classified all marketable securities from held to maturity to
available-for-sale.
During the year ended December 31, 1995, the Company used net cash
from operating activities of approximately $7,953,000. This was primarily a
result of a net loss of approximately $12,658,000, which was offset by a
one-time non-cash charge of $3,521,000 for the acquisition of Partnership units
for Common Stock. Adjustments in arriving at cash used in operating activities
include depreciation, amortization, and changes in other operating assets and
liabilities, including the effects of an increase in pre-paids of approximately
$454,000 due to payments for clinical trials, an increase in accounts payable
of approximately $1,382,000, and a decrease in cash for inventory of $202,000.
Net cash provided by investing activities was approximately $6,606,000
during the year ended December 31, 1995. The principal reason for the increase
was from the sale of marketable securities available-for-sale and the proceeds
from maturities of marketable securities to fund normal operating activities
during the current period.
Net cash provided from financing activities was approximately
$392,000. The increase was a result of the exercise of stock options by
certain directors and employees
The Company's long-term capital expenditure requirements will depend
on numerous factors, including the progress of the Company's research and
development programs, the time required to file and process regulatory approval
applications, the development of the Company's commercial manufacturing
facilities, the ability of the Company to obtain additional licensing
arrangements, and the demand for the Company's products, if and when approved.
The Company expended approximately $715,000 for property, equipment and
leasehold
24
26
improvements and approximately $167,000 for patent development in the year
ended December 31, 1995.
The Company expects to continue to incur substantial expenditures for
research and development, testing, regulatory compliance and to hire additional
management, scientific, manufacturing and administrative personnel. The
Company will also continue to expend a significant amount of funds in its
ongoing clinical studies. Further, the Company expects to continue to incur
substantial operating losses for the foreseeable future. Depending on the
results of the Company's research and development activities, the Company may
determine to accelerate or expand its efforts in one or more of its proposed
areas and may therefore require additional funds earlier than presently
anticipated. Further, the Company will require significant additional funds or
arrangements with third parties to commercialize its products. The Company
will also require substantial additional funds if it elects to manufacture and
market, any products on a commercial scale. Such funds will be needed to
construct additional facilities and to hire manufacturing and marketing
personnel. However, as discussed below, unless the Company is able to raise
additional financing the Company may not be able to carry out all of its
planned activities or otherwise implement its business plan.
Management believes that under the current operating plan its existing
capital resources will be sufficient to meet its operating expenses and capital
expenditure requirements through December 31, 1996. As a result the Company
expects to attempt to raise additional capital in 1996. Management currently
has no commitments for raising additional capital and there can be no assurance
that such funds will be available to the Company on favorable terms, if at all.
If the Company cannot raise additional capital, on terms acceptable to the
Company, the Company will be forced to, among other things, curtail its
research and development activities, delay or terminate activities with respect
to implementation of manufacturing, sales and marketing plans and reduce its
personnel levels.
The Company's long-term success depends on sales of products that must
undergo an extensive regulatory approval process. There can be no assurance
that regulatory agency approvals will be obtained for any products or drugs
developed or discovered by the Company, or that the Company will be successful
in developing any products or drugs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company required by Regulation S-X are
attached to this Report. Reference is made to Item 14 below for an index to
the financial statements.
25
27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information contained in the Company's definitive proxy statement
for the Company's Annual Meeting of Shareholders scheduled to be held on April
28,1996 regarding directors and officers of the Company and compliance with
Section 16(a) of the Exchange Act is incorporated herein by reference in
response to this item.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained in the Company's definitive proxy statement
for the Company's Annual Meeting of Shareholders scheduled to be held on April
28,1996 regarding executive compensation is incorporated herein by reference in
response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information in the Company's definitive proxy statement for the
Company's Annual Meeting of Shareholders scheduled to be held on April 28,1996
regarding security ownership of certain beneficial owners and management is
hereby incorporated herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information in the Company's definitive proxy statement for the
Company's Annual Meeting of Shareholders scheduled to be held on April 28,1996
regarding certain relationships and related transactions is hereby incorporated
herein by reference in response to this item.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents of the Company are filed as part of
this Report:
1. Financial Statements
Report of Independent Auditors
26
28
Balance Sheets - December 31, 1995 and December 31, 1994
Statements of Operations - Years Ended December 31,
1995 and 1994, Three Months Ended December 31, 1993
and Year Ended September 30, 1993.
Statements of Changes in Shareholders' Equity - Years
Ended December 31, 1995 and 1994, Three Months
Ended December 31, 1993 and Year Ended September
30, 1993.
Statements of Cash Flows - Years Ended December 31,
1995 and 1994, Three Months Ended December 31,
1993 and Year Ended September 30, 1993.
Notes to the Financial Statements
2. Financial Statement Schedules
Schedules for which provision is made in the
applicable regulations of the Securities and Exchange
Commission have been omitted because they are not required
under the related instructions or the information related is
contained elsewhere in the financial statements.
3. Exhibits
Exhibit No. Description
3.1 Amended and Restated Certificate of Incorporation(1)
3.2 Amended and Restated Bylaws(2)
4.1 Form of Common Stock Certificate(3)
10.1 Employment Agreement between Registrant and John E. Urheim dated June 4, 1993(3)
10.2 Amendment No. 3 and Restatement of Master Technology Transfer Agreement between Registrant and Vipont
Pharmaceutical, Inc.(2)
10.3 Incentive Stock Option Agreement(2)
10.4 Agreement between Registrant and Vipont Pharmaceutical, Inc.(2)
27
29
10.5 Termination Agreement dated September 27, 1995 between Registrant and Atrix, L.P.*
23 Consent of Deloitte & Touche LLP*
27 Financial Data Schedule*
___________________
(1) Incorporated by reference to Registrant's Current Report on Form 8-K, dated
December 1, 1989, as filed with the Securities and Exchange Commission on
December 15, 1989.
(2) Incorporated by reference to the Registrant's Registration Statement on
Form S-1, file number 33-34882.
(3) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended September 30, 1993 as filed with the Securities and
Exchange Commission.
* Filed herewith.
(b) Reports on Form 8-K:
1. A Current Report on Form 8-K, dated October 11, 1995,
was filed with the Securities and Exchange Commission
under Item 5 regarding the results of a one year
pivotal study.
No other reports on Form 8-K were filed during the period
ended December 31, 1995.
28
30
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ATRIX LABORATORIES, INC.
(Registrant)
March 7, 1996 By: /s/ John E. Urheim
----------------------------------------
John E. Urheim
Vice Chairman of the Board and Chief
Executive Officer
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.
/s/ David R. Bethune Director March 7, 1996
----------------------------------
David R. Bethune
/s/ H. Stuart Campbell Director March 7, 1996
----------------------------------
H. Stuart Campbell
/s/ Dr. D. Walter Cohen Director March 7, 1996
----------------------------------
Dr. D. Walter Cohen
/s/ C. Rodney O'Connor Director March 7, 1996
----------------------------------
C. Rodney O'Connor
/s/ Dr. Charles P. Cox Vice President-New Business March 7, 1996
---------------------------------- Development
Dr. Charles P. Cox
/s/ Michael R. Duncan Vice President-Manufacturing March 7, 1996
----------------------------------
Michael R. Duncan
/s/ Dr. Richard L. Dunn Vice President-Drug Delivery March 7, 1996
---------------------------------- Research
Dr. Richard L. Dunn
31
/s/ Dr. J. Steven Garrett Vice President-Dental Clinical March 7, 1996
---------------------------------- Research
Dr. J. Steven Garrett
/s/ Dr. Jere E. Goyan Director March 7, 1996
----------------------------------
Dr. Jere E. Goyan
/s/ Kimberly A. Marks Corporate Controller, Assistant March 7, 1996
---------------------------------- Secretary and Assistant Treasurer
Kimberly A. Marks
/s/ Dr. R. Bruce Merrifield Director March 7, 1996
----------------------------------
Dr. R. Bruce Merrifield
/s/ William C. O'Neil, Jr. Chairman of the Board of March 7, 1996
---------------------------------- Directors
William C. O'Neil, Jr.
/s/ Dr. G. Lee Southard President, Chief Scientific March 7, 1996
---------------------------------- Officer and Director
Dr. G. Lee Southard
/s/ John E. Urheim Vice Chairman of the Board of March 7, 1996
---------------------------------- Directors and Chief Executive
John E. Urheim Officer
32
ATRIX LABORATORIES, INC.
TABLE OF CONTENTS
Page
----
REPORT OF INDEPENDENT AUDITORS F-2
FINANCIAL STATEMENTS:
Balance Sheets - December 31, 1995 and 1994 F-3
Statements of Operations - Years Ended December 31, 1995 and 1994,
Three Months Ended December 31, 1993, and Year Ended
September 30, 1993 F-4
Statements of Changes in Shareholders' Equity - Years Ended
December 31, 1995 and 1994, Three Months Ended December 31, 1993,
and Year Ended September 30, 1993 F-5
Statements of Cash Flows - Years Ended December 31, 1995 and 1994,
Three Months Ended December 31, 1993, and Year Ended
September 30, 1993 F-6
NOTES TO FINANCIAL STATEMENTS F-7 - F-16
33
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Atrix Laboratories, Inc.
Fort Collins, Colorado
We have audited the accompanying balance sheets of Atrix Laboratories,
Inc. (the "Company") as of December 31, 1995 and December 31, 1994, and the
related statements of operations, changes in shareholders' equity and cash
flows for the years ended December 31, 1995 and 1994, the three months ended
December 31, 1993, and the year ended September 30, 1993. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, such financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1995
and December 31, 1994, and the results of its operations, and its cash flows
for the years ended December 31, 1995 and 1994, the three months ended December
31, 1993, and the year ended September 30, 1993, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Denver, Colorado
January 26, 1996
F-2
34
ATRIX LABORATORIES, INC.
BALANCE SHEETS
ASSETS
December 31, December 31,
1995 1994
-------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 925,487 $ 1,880,275
Marketable securities held to maturity, at cost (Note 2) --- 7,896,827
Marketable securities available-for-sale, at fair value (Note 2) 10,996,847 3,300,894
Accounts receivable 190,665 93,469
Interest receivable 112,303 140,848
Prepaid expenses and deposits 572,751 119,102
Inventories (Note 1) 202,264 ---
-------------------------------
Total current assets 13,000,317 13,431,415
-------------------------------
MARKETABLE SECURITIES HELD TO MATURITY, AT COST (Note 2) --- 7,172,095
-------------------------------
PROPERTY AND EQUIPMENT:
Equipment, furniture and fixtures 1,847,164 1,276,895
Leasehold improvements 506,190 368,851
-------------------------------
Total 2,353,354 1,645,746
Accumulated depreciation and amortization (1,133,864) (771,274)
-------------------------------
Property and equipment, net 1,219,490 874,472
-------------------------------
OTHER ASSETS:
Intangible assets, net of accumulated
amortization of $52,240 and $37,065 674,116 527,640
--------------------------------
TOTAL $14,893,923 $22,005,622
================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 1,862,850 $ 481,267
Accrued salaries and payroll taxes 72,199 63,000
Other accrued liabilities (Note 8) 152,108 195,815
Deferred revenue --- 75,000
------------- -------------
Total current liabilities 2,087,157 815,082
------------- -------------
SHAREHOLDERS' EQUITY: (Note 4)
Preferred stock $.001 par value; authorized 5,000,000
shares, none issued or outstanding
Common stock $.001 par value; authorized 25,000,000
shares; 8,433,296 and 7,743,078 shares
issued and outstanding 8,433 7,743
Unrealized holding loss on securities
available-for-sale (Note 2) (35,176) (396,965)
Additional paid-in capital 43,889,473 39,977,455
Accumulated deficit (31,055,964) (18,397,693)
---------- ----------
Total shareholders' equity 12,806,766 21,190,540
---------- ----------
TOTAL $14,893,923 $22,005,622
=========== ===========
See notes to financial statements
F-3
35
ATRIX LABORATORIES, INC.
STATEMENTS OF OPERATIONS
Three
Year Ended Year ended Months Ended Year Ended
December 31, December 31, December 31, September 30,
1995 1994 1993 1993
------------------------------------------------------------------
REVENUE:
Contract revenue (Note 6) $571,164 $701,112 $162,209 $1,036,514
Contract revenue from related party 9,000 12,000 3,000 341,924
(Notes 5 and 6)
Interest income 986,995 1,320,258 373,930 1,556,187
(Loss) gain on sale of securities (4,895) (218,043) --- 157,681
------------------------------------------------------------------
Total revenue 1,562,264 1,815,327 539,139 3,092,306
------------------------------------------------------------------
EXPENSES:
Research expenses-Perio Product 5,683,805 2,764,587 540,512 2,788,787
Research and development 3,904,730 3,902,480 841,849 3,064,702
Administrative expenses 829,509 688,122 163,416 937,035
Acquisition of rights (Note 3) 3,802,491 --- --- ---
------------------------------------------------------------------
Total expenses 14,220,535 7,355,189 1,545,777 6,790,524
------------------------------------------------------------------
NET LOSS $(12,658,271) $(5,539,862) $(1,006,638) $(3,698,218)
==================================================================
NET LOSS PER COMMON SHARE $(1.58) $(0.72) $(0.13) $(0.48)
==================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING
8,001,985 7,740,981 7,721,023 7,695,164
==================================================================
See notes to financial statements.
F-4
36
ATRIX LABORATORIES, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Common Stock Additional Unrealized Total
Paid-in Holding Accumulated Shareholders'
Shares Amount Capital Gain(Loss) Deficit Equity
--------------------------------------------------------------------------------------
BALANCE,
SEPTEMBER 30, 1992 7,627,256 $7,627 $39,673,890 $ $(8,152,975) $31,528,542
--------------------------------------------------------------------------------------
Exercise of employee stock options 89,917 90 209,113 --- --- 209,203
Issuance of Common Stock for warrants 3,850 4 19,245 --- --- 19,249
Unrealized holding gain --- --- --- 59,634 --- 59,634
Net loss for the year --- --- --- --- (3,698,218) (3,698,218)
--------------------------------------------------------------------------------------
BALANCE,
SEPTEMBER 30, 1993 7,721,023 $7,721 $39,902,248 $59,634 $(11,851,193) $28,118,410
--------------------------------------------------------------------------------------
Unrealized holding loss --- --- --- (133,637) --- (133,637)
Net Loss for the Period --- --- --- --- (1,006,638) (1,006,638)
--------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1993 7,721,023 $7,721 $39,902,248 $(74,003) $(12,857,831) $26,978,135
--------------------------------------------------------------------------------------
Exercise of employee stock options 14,080 14 35,340 --- --- 35,354
Issuance of Common Stock for warrants 7,975 8 39,867 --- --- 39,875
Unrealized holding loss --- --- --- (322,962) --- (322,962)
Net loss for the year --- --- --- --- (5,539,862) (5,539,862)
--------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1994 7,743,078 $7,743 $39,977,455 $(396,965) $(18,397,693) $21,190,540
--------------------------------------------------------------------------------------
Exercise of stock options 139,350 139 391,611 --- --- 391,750
Acquisition of rights 550,868 551 3,520,407 --- --- 3,520,958
Unrealized holding gain --- --- --- 361,789 --- 361,789
Net loss for the year --- --- --- --- (12,658,271) (12,658,271)
--------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1995 8,433,296 $8,433 $43,889,473 $(35,176) $(31,055,964) $12,806,766
======================================================================================
See notes to financial statements.
F-5
37
ATRIX LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
Year Year Three Year
Ended Ended Months Ended Ended
December 31, December 31, December 31, September 30,
1995 1994 1993 1993
----------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(12,658,271) $(5,539,862) $(1,006,638) $(3,698,218)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 369,663 277,075 61,187 215,825
Amortization of patents 15,175 13,632 1,890 6,896
Amortization of bond premiums 241,623 360,763 157,798 367,544
Loss (Gain) on sale of marketable securities 4,895 218,043 --- (157,681)
Write-off of obsolete patents 5,506 134,380 --- 69,038
Acquisition of rights through
issuance of Common Stock 3,520,958 --- --- ---
Net changes in current assets and liabilities:
Accounts receivable (97,196) (62,176) (11,598) ( 74,433)
Inventory (202,264) --- --- ---
Prepaid expenses and deposits (453,649) 43,199 (53,702) 72,205
Income tax refund receivable --- --- --- 112,492
Interest receivable 28,545 17,035 150,996 244,661
Accounts payable - trade 1,381,583 (18,134) 109,921 92,903
Accrued salaries and payroll taxes 9,199 10,412 355 8,116
Other accrued liabilities (43,707) (32,106) (6,335) 20,576
Deferred revenue (75,000) (79,357) (125,643) (151,865)
---------------------------------------------------------------
Net cash used in operating activities (7,952,940) (4,657,096) (721,769) (2,871,941)
---------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment, furniture and fixtures (577,342) (312,294) (43,053) (231,475)
Acquisition of leasehold improvements (137,339) (27,055) (2,983) ---
Investments in intangible assets (167,157) (157,829) (46,893) (184,291)
Proceeds from maturities of marketable securities 5,185,800 5,000,000 --- 12,934,404
Proceeds from sale of marketable securities
available-for-sale 2,533,283 4,848,194 --- 11,314,120
Investment in marketable securities (230,843) (3,478,191) (116,902) (19,522,350)
---------------------------------------------------------------
Net cash provided by (used in)
investing activities 6,606,402 5,872,825 (209,831) 4,310,408
---------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Prepayment of long-term borrowing from related party --- --- --- (3,586,272)
Proceeds from issuance of Common Stock and exercise of
stock options 391,750 75,229 --- 228,452
---------------------------------------------------------------
Net cash provided by (used in)
financing activities 391,750 75,229 --- (3,357,820)
---------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (954,788) 1,290,958 ( 931,600) (1,919,353)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 1,880,275 589,317 1,520,917 3,440,270
----------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 925,487 $1,880,275 $ 589,317 $1,520,917
================================================================
See notes to financial statements.
F-6
38
ATRIX LABORATORIES, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1995 AND 1994, THREE MONTHS ENDED
DECEMBER 31, 1993, AND YEAR ENDED SEPTEMBER 30, 1993
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Atrix Laboratories, Inc. (the "Company") was incorporated in 1986. Its
principal business is the research and development of a broad range of medical,
dental and veterinary products based upon a biodegradable release drug delivery
system. All of its products are in either the research, development, or
clinical stage.
CHANGE IN FISCAL YEAR END
Effective October 1, 1993, the Company changed its year end from September
30 to a calendar year ending December 31.
CASH AND CASH EQUIVALENTS
Cash equivalents include all highly liquid investments with an original
maturity of three months or less.
INVESTMENTS
Investments in marketable securities for which the Company has the ability
and intent to hold to maturity are carried at amortized cost. Other securities
are classified as available-for-sale and carried at fair value with the
unrealized holding gain or loss included in shareholders' equity. Premiums and
discounts associated with bonds are amortized using the effective interest rate
method.
INVENTORIES
Inventories are stated at the lower of cost, determined by the first-in,
first out (FIFO) method, or market. The components of inventories at December
31, 1995 are:
Raw Materials $ 155,632
Work In Progress 46,632
---------
$ 202,264
=========
F-7
39
ATRIX LABORATORIES, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1995 AND 1994, THREE MONTHS ENDED
DECEMBER 31, 1993, AND YEAR ENDED SEPTEMBER 30, 1993
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized
over the term of the related lease.
Betterments, renewals and extraordinary repairs that extend the life of an
asset are capitalized; other repairs and maintenance are expensed. Repairs and
maintenance expense was $83,106, $72,865, $14,696, and $66,375 for the years
ended December 31, 1995 and 1994, the three months ended December 31, 1993, and
the year ended September 30, 1993 respectively.
INTANGIBLE ASSETS
Certain technology rights acquired from the Company's former parent, Vipont
Pharmaceutical, Inc. ("VPI"), a wholly owned subsidiary of Colgate-Palmolive
Company ("Colgate"), were transferred at cost less accumulated amortization and
are being amortized on a straight-line basis over their estimated useful lives.
Also included in intangible assets are the legal costs incurred to obtain
patents. Upon receiving a determination that the Company's claims have been
approved, these costs are amortized over the patent's estimated useful life
commencing with the approval of the patent. Costs associated with patents are
expensed upon the determination that such costs are not recoverable.
REVENUE RECOGNITION
The Company recognizes revenue on research contracts as research work is
performed and costs are incurred. Deferred revenue is recorded with respect to
payments received that relate to research activities to be performed in
subsequent periods.
RESEARCH AND DEVELOPMENT
Costs incurred in connection with research and development activities are
expensed as incurred. These costs consist of direct and indirect costs
associated with specific projects as well as fees paid to various entities that
perform certain research on behalf of the Company.
LOSS PER COMMON SHARE
Net loss per common share is computed by dividing net loss by the weighted
average number of shares outstanding during the period. Fully diluted earnings
per share is the same as primary earnings per share.
F-8
40
ATRIX LABORATORIES, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1995 AND 1994, THREE MONTHS ENDED
DECEMBER 31, 1993, AND YEAR ENDED SEPTEMBER 30, 1993
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INCOME TAXES
Effective October 1, 1993, the Company changed its method of accounting for
income taxes to comply with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" (See Note 7).
2. MARKETABLE SECURITIES
At December 31, 1995 marketable securities balances are as follows:
Estimated
Number of shares/ Fair
Principal Amount Cost Value
---------------- ----------- ----------
Available-for-sale:
-------------------
U.S. Government and Agency
Bond Funds
Thornburg Fund 36,161 $ 458,151 $ 453,461
Pimco Fund 363,720 3,470,553 3,422,601
--------- ----------- -----------
Total 399,881 $ 3,928,704 $ 3,876,062
--------- ----------- -----------
U.S. Government and Agency Bonds 7,025,000 $ 7,103,319 $ 7,120,785
--------- ----------- -----------
Total 7,424,881 $11,032,023 $10,996,847
========= =========== ===========
F-9
41
ATRIX LABORATORIES, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1995 AND 1994, THREE MONTHS ENDED
DECEMBER 31, 1993, AND YEAR ENDED SEPTEMBER 30, 1993
At December 31, 1994 marketable securities balances are as follows:
Estimated
Number of shares/ Fair
Principal Amount Cost Value
---------------- ----------- ----------
Available-for-sale:
-------------------
U.S. Government and Agency
Bond Funds
Thornburg Fund 34,014 $ 431,770 $ 401,360
Pimco Fund 341,122 3,266,089 2,899,534
---------- ----------- ----------
Total 375,136 $3,697,859 $3,300,894
========== ========== ==========
Held-to-maturity - current:
---------------------------
U.S. Government and Agency
Bonds 4,570,000 $4,756,027 $4,619,995
Commercial paper 3,177,025 3,140,800 3,153,758
---------- ---------- ----------
7,747,025 $7,896,827 $7,773,753
========== ========== ==========
Held-to-maturity - non-current:
-------------------------------
U.S. Government and Agency Bonds 7,025,000 $7,172,095 $6,947,833
========== ========== ==========
The U.S. Government and Agency bonds mature in 1-3 years.
The Company adopted Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities" as of
September 30, 1993. This statement requires that marketable securities that
are available-for-sale be stated at fair value with the difference between cost
and fair value included as a component of shareholders' equity. In the fourth
quarter of 1995 the Company reassessed its classification of securities
pursuant to a recent interpretation of Financial Accounting Standards No. 115
and reclassified securities with a market value of $7,120,785 from
held-to-maturity to available-for-sale as of December 31, 1995 in accordance
with such interpretation. An unrealized holding gain of $17,466 was recorded
in shareholders' equity in connection with the transfer.
At December 31, 1995, gross unrealized gains and losses pertaining to
marketable securities were as follows:
Gains Losses
------- ------
Available-for-sale $32,689 $67,865
======= =======
F-10
42
ATRIX LABORATORIES, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1995 AND 1994, THREE MONTHS ENDED
DECEMBER 31, 1993, AND YEAR ENDED SEPTEMBER 30, 1993
3. VIPONT ROYALTY INCOME FUND, LTD.
The Company was the sole general partner of Vipont Royalty Income Fund,
Ltd., a Colorado limited partnership (the "Partnership"). The primary asset of
the Partnership was its right to receive payments from the Company based on
royalties and/or proceeds from the sale of rights relating to the Perio
Product, if any, pursuant to certain agreements (the "Agreements") between the
Company and the Partnership. On September 27, 1995, the limited partners (the
"Limited Partners") of the Partnership approved the merger (the "Merger"), of
the Partnership with and into Atrix, L.P., a Colorado limited partnership
("Atrix, L.P."). The Company was the sole limited partner of Atrix, L.P.
AtrixSub, a Colorado corporation and a wholly-owned subsidiary of the Company,
was the sole general partner of Atrix, L.P. The Company determined the value
of the Partnership using an income valuation approach based on projected
royalty payments from projected sales of the Perio Product. The Company issued
550,868 shares of common stock, valued at $6.40 per share for purposes of the
Merger, for a total consideration of $3,524,000. Additional expenses related
to the Merger of approximately $278,000 were paid by the Company. The total
cost of acquiring the Partnership rights of approximately $3,802,000 is
considered a research and development cost and accordingly, was expensed in
1995. Immediately following the Merger, the Agreements were terminated
pursuant to a Termination Agreement dated September 27, 1995 entered into
between the Company and Atrix, L.P. Subsequent to the Merger, Atrix, L.P. and
AtrixSub were dissolved.
F-11
43
ATRIX LABORATORIES, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1995 AND 1994, THREE MONTHS ENDED
DECEMBER 31, 1993, AND YEAR ENDED SEPTEMBER 30, 1993
4. SHAREHOLDERS' EQUITY
The Company has reserved 1,500,000 of its authorized but unissued
Common Stock for non-qualified stock option plans. Under the terms of the
plans, options are not exercisable for a period of one to three years from the
date of grant. The exercise price of all options is the closing bid price of
the stock on the date of grant. There are 265,967 shares which remain
available under the plan for future employee stock option grants.
Number Exercise
of Shares Price Per Share
---------- ---------------
Options outstanding September 30, 1992 556,450 $ .50 - 20.75
Options granted 383,655 6.63 - 9.88
Options canceled or expired (73,741) .50 - 20.75
Options exercised (89,917) .50 - 7.87
---------
Options outstanding September 30, 1993 776,447 $ .50 - 20.75
Options granted 69,345 5.88
--------
Options outstanding December 31, 1993 845,792 $ .50 - 20.75
Options granted 19,000 6.13 - 9.13
Options canceled or expired (58,850) 5.88 - 14.00
Options exercised (14,080) .50 - 3.75
---------
Options outstanding December 31, 1994 791,862 $ .50 - 20.75
Options granted 153,088 6.63 - 6.88
Options canceled or expired (45,345) 5.88 - 15.88
Options exercised (139,350) .50 - 5.88
----------
Options outstanding December 31, 1995 760,255 $ .50 - 20.75
==========
Options outstanding were available for exercise as follows:
Options Exercisable
-------------------
Currently Exercisable 501,350
1996 156,546
1997 54,263
1998 48,096
-----------
Total 760,255
===========
Non-qualified Stock Option Plan
During 1991, the Company reserved 50,000 of its authorized but unissued
Common Stock for stock options to be granted to outside consultants. The
Company granted 30,000 shares to a consultant at an exercise price equal to the
market price on the date of grant, which became
F-12
44
ATRIX LABORATORIES, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1995 AND 1994, THREE MONTHS ENDED
DECEMBER 31, 1993, AND YEAR ENDED SEPTEMBER 30, 1993
fully exercisable on November 12, 1993. In April 1994, the Company granted a
non-qualified option to purchase 7,500 shares to a consultant at an exercise
price equal to the market price on the date of grant, to vest over a period of
three years. In August, 1995, the Company granted a non-qualified option to
purchase of 7,000 shares to a consultant at an exercise price equal to the
market price on the date of grant. The option will vest based on performance
criteria. In September, 1995, the Company granted a non-qualified option to
purchase 3,360 shares to a consultant at an exercise price equal to the market
price on the date of grant which became fully exercisable as of December 31,
1995. In October, 1995, the Company amended its non-qualified stock option
plan on a registration statement S-8 to increase the number of shares available
from 50,000 to 100,000.
5. RELATED PARTY TRANSACTIONS
In 1992 and 1993, the Company received a total of $1,000,000 from Colgate
for funding of research and development of a biodegradable membrane for guided
tissue regeneration in periodontal flap surgery ("GTR Product"). The Research
and Development Agreement provided that in the event Colgate exercised its
right to terminate, which it did after the $1,000,000 expenditure, the Company
could supply the GTR Product to any third party. However, in such event the
Company agreed to reimburse Colgate for all actual out-of-pocket costs expended
by Colgate, the manner and period for such reimbursement to be mutually agreed
upon by the parties but in no event shall the full reimbursement to Colgate for
its expenditures extend for a period of more than two years after the effective
date of an executed agreement by the Company to supply the GTR Product to a
third party.
F-13
45
ATRIX LABORATORIES, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1995 AND 1994, THREE MONTHS ENDED
DECEMBER 31, 1993, AND YEAR ENDED SEPTEMBER 30, 1993
6. MAJOR CUSTOMERS
Contract revenue for two unrelated customers was $225,000 and $227,000 for
1995 and $210,000 and $335,357 for 1994, and for one unrelated customer was
$125,642 for the three months ended December 31, 1993. Contract revenue for
the year ended September 30, 1993 includes $341,924 from a related party and
$851,866 from an unrelated customer.
7. INCOME TAXES
Effective October 1, 1993, the Company prospectively adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No.
109), which requires an asset and liability approach to financial accounting
and reporting for income taxes. Deferred income tax assets and liabilities are
computed annually for differences between the financial statement basis and the
income tax basis of assets and liabilities that will result in taxable or
deductible amounts in the future. Such deferred income tax liability
computations are based on enacted tax laws and rates applicable to the years in
which the differences are expected to affect taxable income. A valuation
allowance is established when necessary to reduce deferred income tax assets to
the amounts expected to be realized. There was no cumulative effect on prior
years resulting from the adoption of SFAS No. 109 because, as of October 1,
1993, a valuation allowance was established equal to the net deferred tax
assets, due to uncertainties as to the ultimate realization of deferred tax
assets.
Net deferred tax assets and the valuation allowance at December 31, 1995 and
1994, consist of:
1995 1994
---- -----
Deferred tax assets (liabilities):
Net operating loss carry forwards $ 9,941,000 6,284,000
Amortization of intangibles 2,881,000 1,575,000
Available-for-sale securities 13,000 148,000
Depreciation 60,000 22,000
Investment in Partnership 85,000
Other items (50,000) (12,000)
------------ ----------
Net deferred tax assets 12,845,000 8,102,000
------------ ---------
Less valuation allowance (12,845,000) (8,102,000)
------------ -----------
Total $ 0 $ 0
============ ===========
At December 31, 1995 the Company has approximately $26,652,000 of federal
income tax net operating loss carry forwards which expire through 2010.
F-14
46
ATRIX LABORATORIES, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1995 AND 1994, THREE MONTHS ENDED
DECEMBER 31, 1993, AND YEAR ENDED SEPTEMBER 30, 1993
8. LEASE COMMITMENTS
As of December 31, 1995, minimum rental commitments under non-cancelable
operating leases of one year or more are as follows:
Year Ending
December 31,
------------
1996 $261,674
1997 240,337
1998 109,837
1999 13,170
2000 6,585
--------
Total $631,603
========
Other accrued liabilities includes deferred rent of $152,108 as of December
31, 1995 and $195,815 as of December 31, 1994. Rent expense was $202,503 for
1995, $179,204 for 1994, $43,911 for the three months ended December 31, 1993,
and $197,798 for the year ended September 30, 1993.
9. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective December 31, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 107, "Disclosures about Fair Value of
Financial Instruments." SFAS 107 requires, among other things, that the
Company disclose the fair value of financial instruments, and the methods and
significant assumptions used to estimate the fair value of financial
instruments. The estimated fair value amounts have been determined by the
Company using available market information.
F-15
47
ATRIX LABORATORIES, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1995 AND 1994, THREE MONTHS ENDED
DECEMBER 31, 1993, AND YEAR ENDED SEPTEMBER 30, 1993
The estimated fair values of the Company's financial instruments as of
December 31, 1995 are as follows:
Carrying Estimated
Amount Fair
Value
-----------------------------
Cash and cash equivalents $ 925,487 $ 925,487
Marketable Securities 10,996,847 10,996,847
available-for-sale
The following methods and assumptions were used to estimate the fair value of
financial instruments:
Cash and cash equivalents - The carrying amount is a reasonable estimate of
fair value.
Marketable Securities available-for-sale - The fair value is based on
quoted market prices or dealer quotes.
F-16
48
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation(1)
3.2 Amended and Restated Bylaws(2)
4.1 Form of Common Stock Certificate(3)
10.1 Employment Agreement between Registrant and John E. Urheim dated June 4, 1993(3)
10.2 Amendment No. 3 and Restatement of Master Technology Transfer Agreement between Registrant and
Vipont Pharmaceutical, Inc.(2)
10.3 Incentive Stock Option Agreement(2)
10.4 Agreement between Registrant and Vipont Pharmaceutical, Inc.(2)
10.5 Termination Agreement dated September 27, 1995 between Registrant and Atrix, L.P.*
23 Consent of Deloitte & Touche LLP*
27 Financial Data Schedule*
___________________
(1) Incorporated by reference to Registrant's Current Report on Form 8-K, dated
December 1, 1989, as filed with the Securities and Exchange Commission on
December 15, 1989.
(2) Incorporated by reference to the Registrant's Registration Statement on
Form S-1, file number 33-34882.
(3) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended September 30, 1993 as filed with the Securities and
Exchange Commission.
* Filed herewith.