SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-28308
COLLAGENEX PHARMACEUTICALS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-1758016
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
301 South State Street, Newtown, Pennsylvania 18940
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (215) 579-7388
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Each Exchange on Which Registered
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None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
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(Title of Class)
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
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Indicate by check mark 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. |_|
State the aggregate market value of the voting common stock held by
non-affiliates of the registrant: $53,547,369 at February 15, 1998 based on the
last sales price on that date.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of February 15, 1998:
Class Number of Shares
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Common Stock, $.01 par value 8,567,579
The following documents are incorporated by reference into the Annual
Report on Form 10-K: Portions of the registrant's definitive Proxy Statement for
its 1998 Annual Meeting of Stockholders are incorporated by reference into Part
III of this Report.
TABLE OF CONTENTS
Item Page
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PART I 1. Business.............................................. 1
2. Properties............................................ 18
3. Legal Proceedings..................................... 18
4. Submission of Matters to a Vote of Security Holders... 18
PART II 5. Market for the Company's Common Equity
and Related Stockholder Matters....................... 19
6. Selected Consolidated Financial Data.................. 20
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 22
8. Financial Statements and Supplementary Data........... 25
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................ 25
PART III 10. Directors and Executive Officers of the Company....... 26
11. Executive Compensation................................ 26
12. Security Ownership of Certain Beneficial
Owners and Management................................. 26
13. Certain Relationships and Related Transactions........ 26
PART IV 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K............................. 27
SIGNATURES.......................................................... 28
EXHIBIT INDEX....................................................... 30
FINANCIAL DATA AND SCHEDULES........................................ F-1
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PART I
ITEM 1. BUSINESS.
General
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CollaGenex Pharmaceuticals, Inc. ("CollaGenex Pharmaceuticals" or the
"Company") is engaged in the development and commercialization of innovative,
proprietary medical therapies for the treatment of periodontal disease and other
pathologies. The Company believes that its initial drug, Periostat(R), will be
the first orally administered, systemically delivered pharmaceutical to treat
periodontitis. Unlike existing treatments, which focus on the bacterial
infection associated with periodontitis, Periostat inhibits the chronic
progressive tissue degradation characteristic of the disease. The Company has
completed four Phase III clinical trials on Periostat. Based on these clinical
trials, the Company believes that Periostat is a safe, efficacious,
cost-effective therapy for the long-term treatment of periodontitis. The Company
submitted a new drug application ("NDA") for Periostat in August 1996. The NDA
was accepted for filing by the United States Food and Drug Administration (the
"FDA") in October 1996 and is presently under review by the FDA. There can be no
assurance that the Company's NDA with respect to Periostat will be approved by
the FDA on a timely basis, or at all. Failure to obtain FDA approval of a NDA
for Periostat would have a material adverse effect on the Company's business,
financial condition and results of operations. See "-- Periostat."
Existing therapies and those treatments known to be under development for
periodontitis are designed primarily to treat the bacterial infection associated
with periodontitis on a short-term, periodic basis. These treatments include
mechanical and surgical techniques, prophylactic approaches, such as
mouthwashes, and locally-delivered pharmaceutical therapies. The Company
believes, however, that periodic treatments designed solely to fight bacterial
infection are inadequate and that such treatments would be considerably more
effective if augmented by a long-term pharmaceutical therapy, such as Periostat,
which inhibits connective tissue destruction.
The Company's core technology is licensed on an exclusive basis from the
Research Foundation of the State University of New York at Stony Brook ("SUNY").
This technology involves inhibiting the activity of certain enzymes that destroy
the connective tissues of the body. Connective tissues are components of the
body that form the structural basis for skin, bone, cartilage and ligaments. In
addition to periodontal disease, this core technology may be applicable to other
diseases and conditions characterized by the progressive destruction of
connective tissues of the body, such as cancer metastasis, wounds,
osteoarthritis, osteoporosis, rheumatoid arthritis and diabetic nephropathy.
In late 1997, the National Cancer Institute ("NCI") filed an
investigational new drug application ("IND") with the FDA regarding
Metastat(TM), the Company's lead compound for the inhibition of cancer invasion
and metastasis. In animal studies involving a variety of human cancer cell
types, including prostate, breast, lung, colon and melanoma, Metastat and
related compounds developed by the Company exhibited an ability to inhibit
metastasis. Following
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FDA acceptance of the IND, several Phase I clinical trials on Metastat were
initiated in January 1998.
During 1997, the Company conducted preclinical studies on its lead
diabetes compound, Nephrostat(TM). These studies demonstrated that Nephrostat
was effective in treating certain complications of diabetes, including diabetic
nephropathy, tooth loss and delayed wound healing. Administration of Nephrostat
also increased the longevity of the severely hyperglycemic diabetic animals used
in the study. Based on these promising early results, the Company intends to
continue this preclinical work in 1998 with the goal of initiating human
clinical trials in 1999.
The Company was incorporated in Delaware in January 1992 under the name
Collagenex, Inc. The Company's name was changed to CollaGenex Pharmaceuticals,
Inc. in April 1996. The Company's executive offices are located at 301 South
State Street, Newtown, Pennsylvania 18940, and its telephone number is (215)
579-7388.
"Periostat(R)," "CollaGenex(TM)," "Metastat(TM)" and "Nephrostat(TM)" are
United States trademarks of the Company. All other trade names, trademarks or
service marks appearing in this Annual Report on Form 10-K are the property of
their respective owners and are not property of the Company.
Technology
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The Company's core technology involves the pharmaceutical modulation of
the activity of a broad class of enzymes known as matrix metalloproteinases
("MMPs"). MMPs are responsible for the normal turnover of collagen and other
proteins that are integral components of a variety of connective tissues such as
skin, bone, cartilage and ligaments.
Under normal physiological conditions, the natural breakdown of collagen
is regulated by the interaction between the degradative properties of MMPs and a
group of naturally occurring biomolecules called tissue inhibitors of
metalloproteinases ("TIMPs"), which modulate the level of MMP activity. In many
pathological conditions, however, the balance between collagen production and
degradation is disrupted resulting in the excessive loss of tissue collagen, a
process called collagenolysis. One such example is the progressive destruction
of the periodontal ligament and alveolar bone in periodontal disease. Similar
degradative activity is associated with other disorders and conditions such as
cancer metastasis, wounds, osteoarthritis, osteoporosis, rheumatoid arthritis
and diabetic nephropathy.
The Company's core technology is licensed on an exclusive basis from SUNY
and results from the research of Drs. Lorne M. Golub and Thomas F. McNamara and
their colleagues at SUNY. These researchers demonstrated that tetracyclines can
significantly reduce the pathologically excessive collagen degradation
associated with periodontal disease. They also were able to demonstrate that
this result was unrelated to the antibiotic properties of tetracyclines.
Furthermore, they demonstrated that the administration of doses of antibiotic
tetracyclines well below the dosage levels necessary to destroy microbes
(sub-antibiotic doses) was still effective in preventing the loss of connective
tissue in models of periodontal disease.
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Studies published in scientific journals support the hypothesis that the
mechanism of action for this activity is the result, in part, of the direct
binding of tetracyclines to certain metal binding sites associated with the MMP
structure.
Although commercially available antibiotic tetracyclines show effective
anti-collagenolytic potential, long-term administration of these compounds at
normal antibiotic doses can result in well-known complications of long-term
antibiotic therapy, such as gastrointestinal disturbance, overgrowth of yeast
and fungi, and the emergence of antibiotic-resistant bacteria. The Company's
Phase III clinical trials using Periostat demonstrated that the administration
of antimicrobial doses of doxycycline over a 12-month period exerted no
anti-microbial effects. Thus, the use of this dosage strength provides the
anti-collagenolytic effects without the complications of long-term antibiotic
therapies.
The Company's license from SUNY also covers a broad class of chemically
modified tetracyclines ("CMTs") that have been chemically modified to retain and
enhance their anti-collagenolytic properties but which have had the structural
elements responsible for their antibiotic activity removed. These compounds,
which lack any antibiotic activity, have shown potential in a number of
pre-clinical models of excessive connective tissue breakdown. The Company's
current research and development programs are focused on the use of CMTs in drug
therapies for potential applications where more potent doses of tetracyclines
may enhance the efficacy of the treatment. See "--Other Potential Applications."
Overview of Periodontal Disease
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Periodontitis is a chronic disease characterized by the progressive loss
of attachment between the periodontal ligament and the surrounding alveolar
bone, ultimately resulting in tooth loss. According to industry data, in the
United States alone, an estimated one-third of all adults, or 67 million people,
suffer from some form of periodontitis. The cost of treating periodontitis can
be considerable due to the frequent treatments required. Approximately 13
million people seek professional treatment annually for periodontal disease,
resulting in over 17 million periodontal procedures and annual expenditures of
approximately $6 billion.
The primary treatment for periodontal disease is mechanical intervention,
known as scaling and root planing ("SRP"), in which bacterial plaque is removed
from the supra-and sub-gingival tooth surfaces (above and below the gumline)
using a metal scraper or ultrasound scaling device. Alternatively, in more
severe periodontal disease, the gums are partially removed by a surgical
procedure to reduce pocket depth around the tooth and to improve the
effectiveness of home oral hygiene techniques. These treatments are designed to
treat bacterial infection associated with periodontitis on a short-term,
periodic basis and are performed by both periodontists and general dentists.
As a result of the chronic nature of periodontitis and the short-term
nature of existing therapies, patients require frequent treatments. In addition,
patients are commonly referred to a specialist for such treatments. Periodontal
disease is, therefore, among the more expensive dental pathologies to treat, and
the Company believes that the treatment of periodontitis will be
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increasingly important to dental health managed care organizations ("DHMOs") and
dental practitioners operating under capitated or fixed fee arrangements. The
Company also believes that Periostat is well positioned to meet the economic and
therapeutic requirements of such DHMOs and dental practitioners by providing a
cost-effective therapy for periodontal disease management.
Increased competition within the dental profession has created rapid
adoption of new technologies. The Company believes that a new safe, painless,
efficacious and cost-effective treatment will facilitate efforts by
periodontists and dentists to attract and retain patients with periodontal
disease.
Periostat
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The Company's primary focus to date has been on the development of
Periostat, which the Company believes will be the first orally administered,
systemically delivered pharmaceutical to treat adult periodontitis. Periostat, a
20mg dose of doxycycline, is a unique sub-antibiotic dosage strength that
inhibits the chronic progressive tissue degradation characteristic of
periodontal disease without exerting any anti-microbial effect. Periostat is
intended to be taken orally by the patient, on an extended basis, between dental
visits. Doxycycline is an active ingredient of several FDA approved drugs and
has been in use for approximately 30 years for the treatment of microbial
infections and, along with other tetracyclines, has a well established safety
record. The Company has completed three pivotal Phase III clinical trials on
Periostat. In addition, following the submission of its NDA, the Company
completed a fourth Phase III clinical trial which evaluated the efficacy of
Periostat administered in conjunction with SRP.
The Company's Phase III clinical trials supporting its NDA submission
consisted of three parallel, separate, multi-centered, placebo-controlled,
double-blinded clinical trials in patients with adult periodontal disease. A
total of 436 patients were enrolled in the three clinical trials at eleven
dental schools across the United States. These clinical trials were managed by
an independent contract research organization and were conducted over a 12-month
period. In each trial, patients were randomly assigned into groups that were
administered Periostat or placebo capsules. At the outset of these trials,
baseline measurements were taken of each of the clinical endpoints to be studied
and each patient received a supragingival sealing and dental prophylaxis.
Subsequent measurements were obtained at regular intervals and an additional
dental cleaning was carried out after six months. Data were analyzed using
conventional statistical techniques to establish whether significant differences
existed between the Periostat-dosed groups and those receiving placebo by
comparing data obtained at 12 months with baseline measurements. A confidence
level of not less than 95% was used to establish whether statistically
significant differences existed in clinical endpoints.
The primary clinical endpoint of the clinical trials was the measurement
of changes in clinical attachment level ("ALv"), a parameter defining the
integrity of the connective tissue that anchors the tooth to the alveolar bone.
This endpoint is the one most often recognized by the FDA to determine the
validity of a claim for therapy of periodontal disease. The Company utilized two
independent techniques in the clinical trials to measure ALv, manual probing and
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automated probing. Using the manual probing technique, ALv was measured at six
separate probing sites around each tooth, regardless of whether disease was
present or active. Therefore, in a typical mouth with 30 teeth, approximately
180 probing sites were measured. In contrast, using the automated probing
technique, ALv was measured at only a subset of probing sites that exhibited
active moderate-to-severe disease at the outset of the study.
Each of the Phase III clinical trials demonstrated statistically
significant improvements in ALv. The data observed using the manual probing
technique revealed that the Periostat group exhibited an average improvement in
ALv of 40% and 21% in probing sites with mild-to-moderate disease and severe
disease, respectively, when compared with the placebo group. Similarly, the data
from the subset of probing sites with active moderate-to-severe disease measured
with the automated probe revealed that the Periostat group exhibited a greater
than three-fold improvement in ALv when compared with the placebo group.
Another significant primary clinical endpoint, the percentage of all
probing sites that deteriorated by a clinically significant threshold of change,
was studied using only the manual probe. Periostat was found to reduce the
percentage of probing sites that deteriorated by a clinically significant
amount. In addition, in those probing sites with normal ALv, mild-to-moderate
periodontal disease and severe periodontal disease, Periostat reduced the
progression of the disease by 32%, 46% and 55%, respectively.
Several other secondary clinical endpoints were measured and analyzed
using the manual probing technique during the course of the Company's Phase III
clinical trials. These included probing pocket depth (the distance from the
gumline to the base of the periodontal pocket), the extent to which the gums
bled when the periodontal pocket was probed (a common screen for the severity of
periodontal disease) and the loss of alveolar bone (measured using a complex
x-ray technique known as digital subtraction radiography). All of these
secondary clinical endpoints generally exhibited statistically significant
improvements in each of the three clinical trials and in the combined data.
The Company's three pivotal Phase III clinical trials were completed in
December 1994. Based on these clinical trials, the Company believes that
Periostat is a safe, efficacious, cost-effective therapy for the long-term
treatment of periodontitis. The Company compiled the data, performed statistical
analysis and conducted certain additional testing necessary to complete its NDA
for Periostat, which it completed and submitted to the FDA in August 1996. The
NDA was accepted for filing by the FDA in October 1996.
During 1996, the Company initiated a fourth Phase III clinical trial to
evaluate the efficacy of Periostat as an adjunct to scaling and root planing,
the most prevalent therapy for moderate to severe periodontal disease. This
trial was completed and the data analyzed in late 1997. While the earlier
pivotal Phase III clinical trials were intended to evaluate the efficacy of
Periostat in conjunction with a routine dental scaling and prophylaxis, this
trial was the first to demonstrate that Periostat can significantly enhance the
efficacy of SRP.
In this study, 190 adult patients with periodontal disease were
administered SRP at the outset of a nine-month, double-blind, placebo-controlled
clinical trial at five university centers in
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the United States. Patients were then randomly assigned to take either Periostat
or placebo. Measurements of probing pocket depth and clinical attachment level
were made every three months using a periodontal probe. Results were compared
with measurements taken immediately prior to the course of SRP.
In the group receiving Periostat, statistically significant improvements
in probing pocket depth and clinical attachment level (compared with placebo)
were seen in all diseased sites as early as three months following SRP and at
all time points thereafter. As in the previous pivotal studies, the more
severely diseased sites improved the most, with improvements in probing pocket
depth and clinical attachment level of approximately 50% over SRP with placebo.
On September 2, 1997, the Company announced that it had received its first
action letter from the FDA regarding the NDA. In such letter and in a subsequent
discussion with the Company, the FDA indicated that additional information would
be needed to obtain marketing clearance, primarily clarification relating to the
statistical methodology used in the NDA. The Company subsequently met with the
FDA to discuss the issues raised in the action letter and to provide the
requested information. On January 28, 1998, the Company announced that it had
received its second action letter from the FDA regarding the NDA. In such
letter, and in subsequent discussions with the Company, the FDA raised new
issues about the NDA. At a meeting with the FDA in March 1998, the Company
addressed these issues and provided a review of summary clinical results from
its recently completed SRP trial. The FDA and the Company then agreed that the
Company would seek a claim based on the submission of an NDA amendment
containing the results from this trial. The Company expects to submit this
amendment by April 1998, and the FDA has committed to review the amendment
within six months of the Company's submission. There can be no assurance that
the Company's NDA with respect to Periostat will be approved by the FDA on a
timely basis, or at all. Failure to obtain FDA approval of a NDA for Periostat
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Cancer Metastasis
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Cancer metastasis is the spread of cancer cells from a diseased organ to
the lymphatic or circulatory system, where such cells then migrate throughout
the body causing cancer to develop in other organs. Tumor cell invasion is a
complex process that involves the destruction of the basement membrane, or
structural support tissue, of the lymphatic or circulatory system, and the
migration of tumor cells to secondary sites, followed by proliferation of these
cells. Data from pre-clinical studies sponsored by the Company at two major
universities suggest that several of the Company's CMT drug candidates have
potent activity in models of cancer invasion.
These studies also demonstrated that the inhibition of certain MMP
activity by conventional tetracyclines and CMTs results in a decreased ability
of tumor cells to invade the lung in models of metastasis. In addition, CMTs
have been shown to modulate the specific type of MMP isolated from human lung
cancer cells, the activity of which has been correlated with the metastatic
potential of tumors. In animal models involving a variety of human cancer cell
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types, including prostate, breast, lung, colon and melanoma, CMTs developed by
the Company exhibited an ability to inhibit metastasis.
In October 1996, the Company and the NCI executed a letter of intent to
formalize a collaborative research and development agreement pursuant to which
the NCI agreed to perform pharmacology, toxicology and Phase I clinical trials
using the Company's lead compound for the prevention of cancer metastasis,
Metastat.
In June 1997, the Company announced that it had formally extended its
collaboration agreement with the NCI with respect to the development of
Metastat. On December 5, 1997, the Company announced that the NCI had filed an
IND for Metastat. Clinical studies in patients with metastatic cancer were
initiated in January 1998.
In December 1996, the Company signed an agreement with Boehringer Mannheim
Italia ("BMI") under which BMI will conduct animal studies to evaluate the
potential of certain of the Company's compounds to treat metastatic cancer. The
results of these studies supported the earlier findings of the Company's
academic collaborators. However, BMI's recent merger with Hoffman LaRoche has
resulted in a cessation of all licensing discussions, and the Company is
evaluating various options for the development of Metastat.
Diabetic Nephropathy
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Diabetes is the fourth leading cause of death from disease in the United
States. Despite currently available therapies for the treatment of diabetes,
including diet restrictions, oral medications and insulin injections, the long
term complications of this disease continue to reduce the quality and longevity
of life for diabetic patients.
Nephropathy is one of the most serious complications of diabetes. This
condition results in the progressive loss of kidney function, requiring dialysis
or a kidney transplant to maintain survival, and frequently leads to end-stage
renal disease. The destruction observed in diabetic nephropathy is associated
with elevated levels of MMPs which degrade the basement membrane of the kidney,
causing it to lose its ability to effectively act as a filter. An early
indicator of kidney disease is proteinuria, which is the excretion of protein in
the urine. Animal model studies conducted on behalf of the Company by SUNY have
shown that the administration of CMTs significantly reduces the severity of
proteinuria as well as ocular manifestations of the disease. In addition, these
animal studies showed improvements in other complications of diabetes, including
tooth loss and delayed wound healing. Administration of Nephrostat also
increased the longevity of the severely hyperglycemic diabetic animals used in
the study. Based on these promising early results, the Company intends to
continue this preclinical work in 1998 with the goal of initiating human
clinical trials in 1999.
Other Potential Applications
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The Company's research and discoveries relating to CMTs have yielded other
potential therapeutic programs which the Company intends to develop and
commercialize, possibly
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through the establishment of corporate partnering arrangements. The Company
believes that its core technology may be utilized to develop therapies for other
diseases and conditions which, like periodontal disease, are characterized by
the progressive destruction of connective tissues of the body, such as cancer
metastasis (see above), wounds, osteoarthritis, osteoporosis, rheumatoid
arthritis and diabetic nephropathy (see above). In November 1997, the Company
announced that it had signed an agreement with Heska Corporation ("Heska")
pursuant to which Heska will develop certain of the Company's CMTs for use in
companion animal health applications, including osteoarthritis, periodontal
disease and cancer.
Wound Repair
The repair of the connective tissue in response to acute injury involves
the remodeling of collagen and related proteins. The Company has generated data
in pre-clinical studies conducted at SUNY which suggest the potential utility of
certain of its compounds in facilitating this process. To further explore this
application, the Company has entered into an evaluation agreement with Smith &
Nephew, pursuant to which Smith & Nephew will seek to validate the preliminary
efficacy data developed at SUNY in the field of wound repair. The Company has
granted to Smith & Nephew a right of first negotiation with respect to certain
compounds in the field of wound repair.
Osteoarthritis
Osteoarthritis is a progressive, degenerative joint disease involving the
breakdown of the synovial cartilage in the joint. Trauma, resulting in joint
instability, most often is the cause of this disease, which results in the
gradual destruction of bone and especially of collagen. Several pre-clinical
studies carried out by the Company in collaboration with a major teaching
hospital and other institutions have demonstrated that the use of the Company's
compounds inhibit the loss of synovial cartilage in the joint. In May 1996, the
Company entered into a research agreement with Istituto Gentili, an Italian
pharmaceutical company (now called Abiogen), to evaluate the application of the
Company's technology in the field of osteoarthritis.
Osteoporosis
Osteoporosis is characterized by reductions in both the amount and
strength of bone tissue due to the loss of calcium from the bone, resulting in
susceptibility to fracture. A pre-clinical study carried out by the Company in
collaboration with a major university demonstrated that many of the Company's
CMTs inhibit bone resorption, or the loss of bone tissue, in various
experimental models.
Rheumatoid Arthritis
Rheumatoid arthritis is a chronic inflammatory joint disease with many
pathophysiological similarities to periodontal disease. Substantial evidence
implicates collagenase, an MMP, as a cause of bone, joint and tissue destruction
in this disease. Several animal studies carried out by the Company and SUNY in
collaboration with a major teaching hospital have demonstrated that the use of
the Company's CMTs significantly reduced
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radiographic evidence of cartilage and bone destruction in the joint that
correlated with the normalization of MMP activity.
Marketing
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The Company plans to market Periostat following FDA approval to both
periodontists and general dentists in the United States through a direct sales
force of approximately 130 sales representatives. In February 1997, the Company
retained ICS, a sales and marketing organization focused on the dental industry,
to conduct certain prelaunch sales and marketing activities on behalf of the
Company. The Company subsequently terminated its relationship with ICS in
December 1997. In January 1998 the Company began contracting directly with
experienced dental salespersons to provide the nucleus for future expansion of
its sales force. In addition, the Company intends to establish a network of
sub-licensees or distributors to market and sell Periostat outside of the United
States. For example, in July 1996, the Company executed a marketing and
manufacturing agreement with BMI pursuant to which BMI has the exclusive right
to market Periostat in Italy, San Marino and The Vatican City. The agreement
provided for BMI to pay the Company a nonrefundable license fee upon signing and
additional fees upon the achievement of future milestones and royalties upon
future sales of Periostat in Italy, San Marino and The Vatican City. In July
1997, the Company announced that a Marketing Authorization for Approval had been
filed for Periostat by BMI with the Italian Ministry of Health.
In order to provide an integrated dental product line and leverage the
Company's sales and marketing organization, the Company is actively seeking to
in-license or acquire high-quality diagnostic and therapeutic dental products
complementary to Periostat. In May 1997, the Company announced that it had
signed an exclusive marketing agreement with the Parke-Davis Division
("Parke-Davis") of the Warner Lambert Company to promote the Parke-Davis
product, Ponstel(R) (Mefenamic Acid), to the professional dental community.
Ponstel is a nonsteriodal anti-inflammatory drug indicated for the relief of
moderate pain.
Further, in June 1997, the Company announced that it had signed a
marketing agreement with Advanced Clinical Technologies, Inc. pursuant to which
the Company promotes Periocheck(R) to the professional dental community.
Periocheck is an FDA-approved test for monitoring the periodontal disease
process in the dentist's office. Because Periocheck measures the level of
tissue-destructive enzymes in a patient's gingival fluid, it is a natural
complement to Periostat, which inhibits those enzymes.
In June 1997, the Company announced that it had hired a Vice President of
Marketing and a Vice President of Sales. The Company currently has approximately
20 sales representatives employed under contract and will recruit additional
sales representatives prior to FDA approval of Periostat. Initially, the Company
expects a significant portion of such additional representatives will be
retained through the services of an independent established contract sales
organization. There can be no assurance, however, that the Company will be able
to recruit and retain qualified sales and marketing personnel, additional
foreign sub-licensees or distributors or marketing partners or that the
Company's marketing and sales efforts will be successful.
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Research and Development
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The Company conducts a broad-based research and drug discovery program
through its collaborations with corporate partners, researchers, universities,
medical institutions and leading scientists. Pharmaceutical development
activities are carried out primarily by contract research organizations at the
direction of the Company. Historically, the Company's research has focused on
the inhibition of collagenolytic activity with particular emphasis on
periodontal disease. The Company maintains an ongoing research relationship with
SUNY and is currently funding a basic research effort relating to tetracyclines,
including CMTs, and their effect on connective tissue disorders. The Company
receives certain proprietary rights to inventions or discoveries that arise as a
result of this research. The Company's current research and development
objective is to develop additional products utilizing its CMT technology. See
"--Technology" and "-- Other Potential Applications."
The Company has entered an agreement with a contract research organization
pursuant to which such entity performs a majority of the Company's clinical
development, data management and regulatory affairs activities. Either party may
terminate such agreement on 90 days prior written notice. The Company's research
and development expenditures were approximately $3.6 million, $4.4 million and
$4.3 million, in 1995, 1996 and 1997, respectively. Of such amounts, $1,679,000,
$1,766,000 and $1,030,000 were incurred under this agreement for such periods.
Manufacturing and Suppliers
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The Company relies on third-party contract manufacturers to produce
doxycycline, the active drug ingredient in Periostat, and for the commercial
manufacturing of Periostat. The Company has entered into a manufacturing
agreement with Applied Analytical Industries, Inc. ("AAI"), in Wilmington, North
Carolina for the manufacture of Periostat. AAI supplied a portion of the
products used in the Company's Phase III clinical trials. This agreement, which
requires the Company to purchase minimum amounts of Periostat, terminates three
years from the date of the initial product launch and automatically extends for
consecutive one-year periods unless 12-month prior written notice is provided
before the expiration of the applicable term. AAI is required to comply with
good manufacturing practices ("GMP") requirements.
The Company has entered into a supply agreement with Hovione International
Limited ("Hovione") pursuant to which the active ingredient in Periostat,
doxycycline, is supplied by Hovione from its offshore facilities. Hovione
supplies a substantial portion of the doxycycline used in the United States from
two independent, FDA-registered and approved facilities, providing for a back-up
supply in the event that one facility is unable to manufacture. The supply
agreement is in effect until January 25, 2000 and will automatically renew for
successive two-year periods unless, 90 days prior to the expiration of any such
periods, either party gives the other party written notice of termination. In
addition, in the event of a default, uncured for 90 days, the non-defaulting
party can terminate the agreement effective immediately at the end of such
90-day period. The Company relies on Hovione as its sole supplier of
doxycycline.
10
There can be no assurance that the Company will be able to enter into or
maintain supply or manufacturing agreements on acceptable terms, if at all. In
the event that the Company is unable to obtain sufficient quantities of
doxycycline or Periostat on commercially reasonable terms, or in a timely
manner, or if the Company's suppliers fail to comply with GMP, the Company's
business, financial condition and results of operations would be materially
adversely affected. See "--Government Regulation."
Patents, Trade Secrets and Licenses
- -----------------------------------
The Company's success will depend in part on patent and trade secret
protection for its technologies, products and processes, and on its ability to
operate without infringement of proprietary rights of other parties both in the
United States and in foreign countries. Because of the substantial length of
time and expense associated with bringing new products through development to
the marketplace, the pharmaceutical industry places considerable importance on
obtaining and maintaining patent and trade secret protection for new
technologies, products and processes.
The Company depends on the license from the Research Foundation of the
State of New York at Stony Brook for all of its core technology (the "SUNY
License"). The SUNY License grants the Company an exclusive worldwide license to
make and sell products employing tetracyclines that are designed or utilized to
alter a biological process. Thirteen U.S. patents and ten U.S. patent
applications held by SUNY are licensed to the Company under the SUNY License.
One of the ten patent applications has been co-assigned to the University of
Miami, Florida, and another patent application has been co-assigned to
Washington University. The primary U.S. patent claims methods of use of
conventional tetracyclines to inhibit pathologically excessive collagenolytic
activity (the "Primary Patent"), while a related U.S. patent claims methods of
use of tetracyclines which have no antibiotic activity (the "Secondary Patent").
The eleven other U.S. patents relate to the compositions of certain CMTs with
anti-collagenolytic properties, methods of use of tetracyclines to reduce bone
loss and methods of use of tetracyclines to enhance bone growth and inhibit
protein glycosylation. SUNY did not apply in foreign countries for patents
corresponding to the Primary Patent but has obtained patents that correspond to
the Secondary Patent in Australia, Canada and certain European countries. A
patent application corresponding to the Secondary Patent is pending in Japan.
SUNY also has obtained patents in certain European countries, Canada and Japan
and has pending patent applications in certain other foreign countries which
correspond to its U.S. patents relating to methods of use of tetracyclines to
reduce bone loss. All of SUNY's U.S. and foreign patents expire between 2004 and
2016. The Company's rights under the SUNY License are subject to certain
statutory rights of the U.S. government resulting from federal support of
research activities at SUNY. The failure to obtain and maintain patent
protection may mean that the Company will face increased competition in the
United States and in foreign countries. The SUNY License is terminable by SUNY
on 90 days prior notice only upon the Company's failure to make timely payments,
reimbursements or reports, if the failure is not cured by the Company within 90
days. The termination of the SUNY License, or the failure to obtain and maintain
patent protection for the Company's technologies, would have a material adverse
effect on the Company's business, financial condition and results of operations.
11
One of the U.S. patents and a corresponding Japanese patent application
licensed to the Company under the SUNY License are owned jointly by SUNY and a
Japanese company. These patent rights, which expire in 2012, cover particular
CMTs (the "Jointly Owned CMTs") that were involved in research activities
between SUNY and the Japanese company. The Japanese company may have exclusive
rights to these Jointly Owned CMTs in Asia, Australia and New Zealand and may
have a non-exclusive right to exploit these Jointly Owned CMTs in other
territories. These Jointly Owned CMTs are not involved in the Company's
Periostat product but could, in the future, prove to be important for one or
more of the Company's other potential applications of its technology. If the
Company does incorporate the Jointly Owned CMTs in any future product, it may be
precluded from marketing these products in Asia, Australia and New Zealand and
could experience increased competition in other markets from the joint owner.
In consideration of the license granted to the Company, the Company: (i)
issued to SUNY 78,948 shares of Common Stock; and (ii) has agreed to pay SUNY
royalties on the net sales of products employing tetracyclines, with minimum
annual royalty payments per year. The term of the license is: (i) until the
expiration of the last to expire of the licensed patents in each country; or
(ii) until 20 years from the first commercial sale of any collagenase
inhibition-related product by the Company for know-how, at which time the
Company has a fully paid, non-exclusive license.
In addition to the patents which represent the core technology of the
Company, the Company also owns additional technology for which applications
for U.S. patents have been filed and have been allowed (but have not yet
issued). In this regard, the Company reports the existence of three U.S.
applications. These pending applications will soon be issued as U.S.
patents. The allowed U.S. patents generally cover technology as follows: (i)
composition for treating periodontis; (ii) composition and method for
treating H. Pylori; and (iii) toothpaste/mouthwash formulation for the
amelioration of dentin hypersensitivity.
The Company intends to enforce its patent rights against third-party
infringers. Due to the general availability of generic tetracyclines for use as
antibiotics, the Company could become involved in infringement actions, which
could entail substantial costs to the Company. Regardless of the outcome,
defense and prosecution of patent claims is expensive and time consuming, and
results in the diversion of substantial financial, management and other
resources from the Company's other activities.
The patent positions of pharmaceutical firms, including the Company, are
generally uncertain and involve complex legal and factual questions.
Consequently, as to the patent applications licensed to it, even though the
Company currently is prosecuting such patent applications with U.S. and foreign
patent offices, the Company does not know whether any of such applications will
result in the issuance of any additional patents or, if any additional patents
are issued, whether they will provide significant proprietary protection or will
be circumvented or invalidated. Since patent applications in the United States
are maintained in secrecy until patents issue, and since publication of
discoveries in the scientific and patent literature tends to lag behind actual
discoveries by several months, the Company cannot be certain that it was the
12
first creator of inventions covered by pending patent applications or that it
was the first to file patent applications for such inventions.
There can be no assurance that patent applications to which the Company
holds rights will result in the issuance of patents, that any patents issued or
licensed to the Company will not be challenged and held to be invalid, or that
any such patents will provide commercially significant protection to the
Company's technology, products and processes. In addition, there can be no
assurance that others will not independently develop substantially equivalent
proprietary information not covered by patents to which the Company owns rights
or obtain access to the Company's know-how, or that others will not be issued
patents which may prevent the sale of one or more of the Company's products, or
require licensing and the payment of significant fees or royalties by the
Company to third parties in order to enable the Company to conduct its business.
In the event that any relevant claims of third-party patents are upheld as valid
and enforceable, the Company could be prevented from selling its products or
could be required to obtain licenses from the owners of such patents. There can
be no assurance that such licenses would be available or, if available, would be
on terms acceptable to the Company. The Company's failure to obtain these
licenses would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's success also is dependent upon know-how, unpatentable trade
secrets, and the skills, knowledge and experience of its scientific and
technical personnel. The Company requires all employees to enter into
confidentiality agreements that prohibit the disclosure of confidential
information to anyone outside the Company and require disclosure and assignment
to the Company of their ideas, developments, discoveries and inventions. In
addition, the Company seeks to obtain such agreements from its consultants,
advisors and research collaborators. There can be no assurance that adequate
protection will be provided for the Company's trade secrets, know-how or other
proprietary information in the event of any unauthorized use or disclosure. The
Company occasionally provides information and chemical compounds to research
collaborators in academic institutions, and requests that the collaborators
conduct tests in order to investigate certain properties of the compounds. There
can be no assurance that the academic institutions will not assert intellectual
property rights in the results of the tests conducted by the research
collaborators, or that the academic institutions will grant licenses under such
intellectual property rights to the Company on acceptable terms. If the
assertion of intellectual property rights by an academic institution can be
substantiated, failure of the academic institution to grant intellectual
property rights to the Company could have a material adverse effect on the
Company's business, financial condition and results of operations.
Government Regulation
- ---------------------
The Company's activities and product candidates are subject to extensive
and rigorous regulation by a number of governmental entities in the United
States, primarily the FDA, and by comparable regulatory authorities in other
countries. These governmental entities regulate, among other things, research
and development activities including animal and human testing, manufacturing,
safety, effectiveness, labeling, storage, record keeping, approval, advertising,
promotion, distribution and sale of prescription drug products. Different types
of FDA
13
regulation apply to various drug products, depending upon whether they are
marketed only upon the order of a physician (prescription drugs) or
over-the-counter, are biological or antibiotic drugs or are controlled drugs,
such as narcotics. Product development and approval within this regulatory
framework takes a number of years, involves the expenditure of substantial
resources and approval is uncertain. Many products that initially appear
promising ultimately do not reach the market because they are not found to be
safe and effective, as demonstrated by testing required by government regulation
during the development process. In addition, there can be no assurance that this
regulatory framework will not change or that additional regulation will not
arise at any stage of the Company's product development that may affect
approval, delay an application or require additional expenditure by the Company.
Moreover, even if approval is obtained, failure to comply with present or future
regulatory requirements, or new information adversely reflecting on the safety
or effectiveness of the approved drug, can lead to FDA withdrawal of approval to
market the product. Failure to comply with applicable FDA and other regulatory
requirements can result in sanctions being imposed on the Company or the
manufacturers of its products, including warning letters, product recalls or
seizures, injunctions, refusals to permit products to be imported into or
exported out of the United States, refusals of the FDA to grant pre-market
approval of drugs or to allow the Company to enter into government supply
contracts, withdrawals of previously approved marketing applications and
criminal prosecutions.
The activities required before a new drug product may be marketed in the
United States begin primarily with pre-clinical testing. Pre-clinical tests
include laboratory evaluation of product chemistry and other characteristics and
animal studies to assess the potential safety and efficacy of the product as
formulated. Many pre-clinical (toxicology) studies are regulated by the FDA
under Good Laboratory Practice ("GLP") regulations. Violations of these
regulations can, in some cases, lead to invalidation of the studies, requiring
such studies to be repeated. The Company's pre-clinical studies were conducted
in accordance with GLP regulations.
The entire body of pre-clinical development work necessary to administer
investigational drugs to human volunteers or patients is provided in an IND
filed with the FDA. FDA regulations provide that human clinical trials may begin
30 days following receipt of an IND, unless the FDA advises otherwise or
requests additional information, clarification or additional time to review the
IND submission. There is no assurance that the submission of an IND will
eventually allow a company to commence clinical trials. Once trials have
commenced, the FDA may stop the trials, or particular types of trials, by
placing a "clinical hold" on such trials because of concerns about, for example,
the safety of the product being tested or the adequacy of the trial design. Such
holds can cause substantial delay and, in some cases, may require abandonment of
a product. Clinical testing involves the administration of the drug to healthy
human volunteers or to patients under the supervision of a qualified principal
investigator, usually a physician, pursuant to a FDA reviewed protocol. Each
clinical study is conducted under the auspices of independent Institutional
Review Boards ("IRBs") at the institutions at which the study will be conducted.
An IRB will consider, among other things, ethical factors, the safety of human
subjects and the possible liability of the institution. Human clinical trials
typically are conducted in three sequential phases, but the phases may overlap.
Phase I trials consist of testing the product in a small number of patients or
normal volunteers, primarily for safety and tolerance, in
14
one or more dosages, as well as characterization of a drug's pharmacokinetic
and/or pharmacodynamic profile. In Phase II, in addition to safety, the efficacy
of the product is evaluated in a patient population. Phase III trials typically
involve additional testing for safety and clinical efficacy with an expanded
population at geographically dispersed sites. A clinical plan, or "protocol,"
accompanied by the approval of an IRB, must be submitted to the FDA prior to
commencement of each clinical trial. All patients involved in the clinical trial
must provide informed consent prior to their participation.
A company seeking FDA approval to market a new drug must file a NDA with
the FDA pursuant to the Federal Food, Drug and Cosmetic Act. In addition to
reports of the pre-clinical and clinical trials conducted under the FDA-approved
IND, the NDA includes information pertaining to the preparation of the drug
substance, analytical methods, drug product formulation, details on the
manufacture of finished products as well as proposed product packaging and
labeling. Submission of a NDA does not assure FDA approval for marketing. The
application review process generally takes one to three years to complete,
although reviews of treatments for cancer and other rare or life-threatening
diseases may be accelerated or expedited. However, the process may take
substantially longer if, among other things, the FDA has questions or concerns
about the safety or efficacy of a product. In general, the FDA requires at least
two properly conducted, adequate and well-controlled clinical studies
demonstrating safety and efficacy with sufficient levels of statistical
assurance. However, additional information may be required. For example, the FDA
also may request long-term toxicity studies or other studies relating to product
safety or efficacy. Notwithstanding the submission of such data, the FDA
ultimately may decide that the application does not satisfy its regulatory
criteria for approval. Finally, the FDA may require additional clinical tests
following NDA approval to further delineate safety and efficacy (Phase IV
clinical trials).
In late 1995, the FDA requested that the Company conduct additional animal
studies regarding certain effects associated with the reproductive effects and
long-term dosing of doxycycline and that the data be included in the Company's
NDA submission. Such animal studies have been conducted and the results included
in the Company's NDA for Periostat. The FDA also requested that a post-approval,
post-marketing animal study related to long-term dosing and carcinogenicity be
conducted to satisfy the regulatory requirement for a chronically administered
drug. Such studies are currently underway.
The FDA may, in some circumstances, impose restrictions on the use of a
drug, compliance with which may be difficult and expensive. Product approvals
may be withdrawn if compliance with regulatory requirements is not maintained or
if problems occur after the product reaches the market. After a product is
approved for a given indication in a NDA, subsequent new indications or dosages
for the same product are reviewed by the FDA by the filing of a NDA supplement.
The NDA supplement is much more focused than the NDA and deals primarily with
safety and effectiveness data related to the indication or dosage, and labeling
information for the new indication. Finally, the FDA requires reporting of
certain information that becomes known to a manufacturer of an approved drug.
15
The FDA does not permit a manufacturer or distributor to market or promote
an approved drug product for an unapproved "off label" use or dosage level.
Therefore, any company that markets or promotes doxycycline for use in the
treatment of adult periodontitis in an unapproved dosage level (for example, a
50mg scored tablet) without first obtaining FDA approval for such use and dosage
would be subject to regulatory action. Generally, the FDA, under its "practice
of medicine" policy, does not prohibit a physician, dentist or other licensed
practitioner from prescribing an approved drug product for an unapproved use or
dosage. Nor does the FDA generally regulate the practice of pharmacy where the
pharmacist fills a prescription issued by a licensed practitioner for an
individual patient. There can be no assurance that the FDA or a state agency
regulating the practice of medicine would initiate regulatory action against a
licensed practitioner for prescribing doxycycline in the currently available
dosage for use in the treatment of adult periodontitis.
The Drug Price Competition and Patent Term Restoration Act of 1984
provides for abbreviated approval requirements for generic drugs, exclusivity
protection for innovative products that prevents FDA approval of generic
versions, and patent extension for a certain period of time that it takes to
obtain FDA approval. Periostat is being treated by the FDA as an "antibiotic"
and is being reviewed pursuant to Section 507 of the Federal Food, Drug and
Cosmetic Act. Therefore, the Company will have to rely solely on its patent
protection as Periostat will not be entitled to a three-year period of marketing
exclusivity before generic versions can be approved by the FDA for commercial
sale, and no patent-term extension will be available. In addition, the Company
will be subject to certain user fees that the FDA is authorized to collect under
the Prescription User Fees Act of 1992 for reviewing NDAs and other marketing
applications.
Among the requirements for product approval is the requirement that the
prospective manufacturer conform to GMP regulations. In complying with the GMP
regulations, manufacturers must continue to expend time, money and effort in
product, record-keeping and quality control to assure that the product meets
applicable specifications and other requirements. The FDA periodically inspects
manufacturing facilities in the United States in order to assure compliance with
applicable GMP requirements. Foreign manufacturers also are inspected by the FDA
if their drugs are marketed in the United States. Failure of the Company's
foreign supplier of the active ingredient used in the manufacture of the
Company's products or failure of the Company's manufacturer of its finished
dosage form products to comply with the GMP regulations or other FDA regulatory
requirements would have a material adverse effect on the Company's business,
financial condition or results of operations.
The product testing and approval process is likely to take a substantial
number of years and involves expenditure of substantial resources. On September
2, 1997, the Company announced that it had received its first action letter from
the FDA regarding the NDA. In such letter and in a subsequent discussion with
the Company, the FDA indicated that additional information would be needed to
obtain marketing clearance, primarily clarification relating to the statistical
methodology used in the NDA. The Company subsequently met with the FDA to
discuss the issues raised in the action letter and to provide the requested
information. On January 28, 1998, the Company announced that it had received its
second action letter from the FDA
16
regarding the NDA. In such letter, and in subsequent discussions with the
Company, the FDA raised new issues about the NDA. At a meeting with the FDA in
March 1998, the Company addressed these issues and provided a review of summary
clinical results from its recently completed SRP trial. The FDA and the Company
then agreed that the Company would seek a claim based on the submission of an
NDA amendment containing the results from this trial. The Company expects to
submit this amendment by April 1998, and the FDA has committed to review the
amendment within six months of the Company's submission. There can be no
assurance that the Company's NDA with respect to Periostat will be approved by
the FDA on a timely basis, or at all. Failure to obtain FDA approval of a NDA
for Periostat would have a material adverse effect on the Company's business,
financial condition and results of operations. The FDA also may require
post-marketing testing and will require surveillance to monitor the record of
the product and continued compliance with regulatory requirements. Upon
approval, a prescription drug may only be marketed for the approved indications
in the approved dosage forms and at the approved dosage. Adverse experiences
with the product must be reported to the FDA.
In addition to the applicable FDA requirements, the Company is subject to
foreign regulatory authorities governing clinical trials and drug sales. Whether
or not FDA approval has been obtained, approval of a pharmaceutical product by
the comparable regulatory authorities of foreign countries must be obtained
prior to the commencement of marketing of the product in those countries. The
approval process varies from country to country and the time required may be
longer or shorter than that required for FDA approval.
Competition
- -----------
The pharmaceutical industry is subject to intense competition as well as
rapid and significant technological change. While the Company believes that
there are no other products for the treatment of periodontal disease which
operate through systemic delivery of therapeutics designed to reduce connective
tissue destruction, the Company is aware of companies that have developed or are
developing products that may compete in the same market. The Company believes
that a significant competitive factor is the relative speed with which the
Company can complete the approval process and, if Periostat is approved, supply
commercial quantities of the product to the market. In addition, the Company
expects that competition in the periodontal area will be based on other factors,
including product efficacy, safety, cost-effectiveness, ease of use, patient
discomfort, availability, price and patent position.
Many of the Company's potential competitors have substantially greater
financial, technical and human resources than the Company and may be better
equipped to develop, manufacture and market products. These companies may
develop and introduce products and processes competitive with or superior to
those of the Company.
Employees
- ---------
The Company historically has relied upon consultants to perform many of
its operating activities and has outsourced its manufacturing, clinical trials,
NDA preparation and other
17
activities. As of December 31, 1997, the Company employed fourteen persons. Each
of its management personnel has had extensive prior experience with
pharmaceutical, biotechnology or medical products companies. The Company intends
to increase its sales and marketing staff as appropriate and to continue to
outsource many of the activities which it historically has outsourced. The
Company currently has approximately twenty part-time sales representatives
employed under contract and plans to recruit additional sales representatives
prior to FDA approval of Periostat. There can be no assurance, however, that the
Company will be able to recruit and retain qualified inside sales and marketing
personnel, additional foreign sub-licensees or distributors or marketing
partners or that the Company's marketing and sales efforts will be successful.
None of the Company's employees are covered by collective bargaining agreements.
In general, the Company's employees are covered by confidentiality agreements.
The Company considers relations with its employees to be excellent.
ITEM 2. PROPERTIES.
The Company owns no real property. The Company leases 3,500 square feet of
office space in Newtown, Pennsylvania under two leases. The Company's facility
contains all of its executive and administrative offices. The leases expire in
September of 1998 and December of 2000.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
18
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Prior to June 1996, there was no established market for the Company's
Common Stock. Since June 20, 1996, the Common Stock has traded on the Nasdaq
National Market ("NNM") under the symbol "CGPI."
The following table sets forth the high and low bid information for the
Common Stock for each of the quarters since the quarter ended June 30, 1996 as
reported on NNM. Such quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
Quarter Ended High Low
- -----------------------------------------------------------
June 30, 1996................ $ 10.25 $ 8.25
September 30, 1996........... $ 11.25 $ 6.125
December 31, 1996............ $ 11.75 $ 7.50
March 31, 1997............... $ 17.50 $ 8.00
June 30, 1997................ $ 14.50 $ 10.50
September 30, 1997........... $ 12.875 $ 9.75
December 31, 1997............ $ 16.625 $ 9.875
As of February 15, 1998, the approximate number of holders of record of
the Common Stock was 86 and the approximate number of beneficial holders of the
Common Stock was 1,700.
The Company has never declared or paid any cash dividends on its capital
stock. The Company intends to retain any earnings to fund future growth and the
operation of its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future.
19
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The selected consolidated financial data set forth below with respect to
the Company's statement of operations data for each of the years in the
three-year period ended December 31, 1997 and for the period January 10, 1992
(inception) to December 31, 1997, and with respect to the consolidated balance
sheet data at December 31, 1996 and 1997 are derived from and are qualified by
reference to the audited consolidated financial statements and the related notes
thereto of the Company found at "Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K". The consolidated statement of operations
data for the years ended December 31, 1993 and December 31, 1994 and with
respect to the consolidated balance sheet data as of December 31, 1993, 1994 and
1995 are derived from consolidated audited financial statements not included in
this Annual Report on Form 10-K. The selected consolidated financial data set
forth below should be read in conjunction with and is qualified in its entirety
by, the Company's audited consolidated financial statements and related notes
thereto found at "Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" which are included elsewhere in this Annual
Report on Form 10-K.
For the
Period
January 10,
1992
Years Ended December 31, (inception) to
-------------------------------------------------------- December 31,
1993 1994 1995 1996 1997 1997
-------- -------- -------- -------- -------- --------
Consolidated Statement of (in thousands except for per share data)
Operations Data: --------------------------------------------------------
Revenues:
Licensing revenues ............ $ -- $ -- $ -- $ 400 $ 325 $ 725
Contract revenue .............. -- -- -- -- 9 9
-------- -------- -------- -------- -------- --------
Total revenues ................ -- -- -- 400 334 734
Operating expenses:
Research and development ...... 1,913 1,928 3,635 4,436 4,319 17,362
General and administrative .... 613 793 1,548 2,527 5,977 11,791
-------- -------- -------- -------- -------- --------
Operating loss ................... (2,526) (2,721) (5,183) (6,563) (9,962) (28,419)
Net loss ......................... (2,483) (2,653) (5,269) (5,918) (8,624) (26,362)
Net loss allocable to common
stockholders ................... (2,834) (3,229) (6,028) (6,638) (8,624) (28,959)
Pro-forma(1):
Net loss per share:
Basic ......................... $ (1.57) $ (0.90) $ (1.04)
Diluted ....................... (1.52) (0.89) (1.04)
Shares used in computing pro
forma net loss per share:
Basic ......................... 3,354 6,572 8,291
Diluted ....................... 3,464 6,627 8,291
20
As of December 31,
--------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
Balance Sheet Data: (in thousands)
Cash, cash equivalents and
short-term investments .............. $ 3,369 $ 617 $ 5,806 $ 18,215 $ 22,771
Total assets ........................... 3,374 628 5,840 18,437 23,165
Mandatorily redeemable convertible
preferred stock ...................... 51 7,510 18,908 -- --
Deficit accumulated during the
development stage .................... (3,732) (6,552) (11,820) (17,739) (26,362)
Total stockholder's equity(deficit) .... 2,653 (7,581) (13,581) 17,592 20,708
(1) See Note 2 of Notes to Consolidated Financial Statements for information
concerning computation of pro-forma net loss per share.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
- --------
CollaGenex Pharmaceuticals, Inc. began operations in January 1992 and is
engaged in the development and commercialization of innovative, proprietary
medical therapies for the treatment of periodontal disease and other
pathologies. Since its origin, the Company has had no revenues from sales of its
own products and has funded its operations primarily from the proceeds of public
and private issuances of equity securities. Substantially all of the Company's
expenditures to date have been for pharmaceutical development activities and
general and administrative expenses.
Since inception, the Company has operated with a minimal number of
employees. Substantially all pharmaceutical development activities, including
clinical trials, have been contracted to independent contract research and other
organizations. The Company anticipates that it will significantly increase the
number of its employees over the next several years, primarily in the selling,
general and administrative areas, following regulatory approval of Periostat.
The Company has incurred losses each year since inception and had an
accumulated deficit of $26.4 million at December 31, 1997. The Company expects
to continue to incur losses in the foreseeable future from expenditures on drug
development, marketing, manufacturing and administrative activities.
Statements contained or incorporated by reference in this Annual Report on
Form 10-K that are not based on historical fact are "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. Forward-looking statements may be identified by the use of
forward-looking terminology such as "may," "will," "expect," "anticipate" or
similar terms, variations of such terms or the negative of those terms. This
Form 10-K contains forward-looking statements that involve risks and
uncertainties. The Company's business of developing pharmaceutical products is
subject to a number of significant risks, including risks inherent in research
and development activities and in conducting business in a highly regulated
environment. The success of the Company depends to a large degree upon obtaining
FDA and foreign regulatory approval to market products currently under
development. There can be no assurance that any of the Company's product
candidates will be approved by any regulatory authority for marketing in any
jurisdiction or, if approved, that any such products will be successfully
commercialized by the Company. The Company's actual results may differ
materially from the results in the forward-looking statements contained herein.
Results of Operations
- ---------------------
From its founding through December 31, 1997, the Company had no revenues
from sales of its own products. Operating expenses consist of research and
development expenses and
22
general and administrative expenses. Research and development expenses consist
primarily of funds paid to contract research organizations for the provision of
services and materials for drug development and clinical trials. General and
administrative expenses consist primarily of personnel salaries and benefits,
professional and consulting fees, insurance, facilities and general office
expenses. The Company anticipates that selling, general and administrative
expenses will increase during the next several years due to the expansion of its
commercial infrastructure, primarily in sales and marketing.
The Company earned $325,000 in licensing fee revenue during 1997 compared
to $400,000 during 1996. During 1996, the Company executed a licensing agreement
with BMI pursuant to which BMI will, following regulatory approval, distribute
and manufacture Periostat in Italy. The agreement provided for BMI to pay a
$400,000 license fee upon signing and additional fees upon the achievement of
future milestones and royalties upon future sales of Periostat in Italy, San
Marino and the Vatican City. During the second quarter of 1997, the Company
received a nonrefundable $300,000 licensing fee from BMI related to the
achievement of the first milestone under the agreement.
Years Ended December 31, 1997 and December 31, 1996
Research and development expenses decreased from $4.4 million in 1996 to
$4.3 million in 1997. This decrease resulted primarily from lower costs
associated with the NDA for Periostat, which was submitted in 1996. Research and
development expenses in 1997 related primarily to costs associated with
completing a Phase III scaling and root planing trial, validating Periostat
manufacturing processes and continuing certain toxicology studies.
General and administrative expenses increased from $2.5 million in 1996 to
$6.0 million in 1997. This increase was due primarily to higher marketing,
general and administrative expenses associated with the expansion of the
Company's commercial infrastructure.
Interest income increased from $0.6 million to $1.3 million in 1997. This
increase was due to higher balances in cash and short-term investments as a
result of the Company's follow-on public offering of Common Stock in 1997.
Years Ended December 31, 1996 and December 31, 1995
Research and development expenses increased from $3.6 million in 1995 to
$4.4 million in 1996. This increase resulted from higher contract costs
associated with preparing and submitting a new drug application for Periostat,
including data compilation, statistical analysis and validation of production
processes.
General and administrative expenses increased from $1.5 million in 1995 to
$2.5 million in 1996. This increase was due primarily to higher employee
compensation expense due to the hiring of additional staff in finance and
commercial development, including a non-cash compensation charge of
approximately $0.1 million resulting from the grant of certain employee stock
options, and higher insurance and professional fees associated with becoming a
public company.
23
Interest income increased from $0.1 million in 1995 to $0.6 million in
1996. This increase was due to higher balances in cash and short-term
investments as a result of the Company's initial public offering of Common Stock
in 1996.
Liquidity and Capital Resources
- -------------------------------
Since its origin in January 1992, the Company has financed its operations
through private placements of preferred stock and common stock, an initial
public offering of 2,000,000 shares of common stock, which generated net
proceeds to the Company of approximately $18.0 million after underwriting fees
and related expenses, and a subsequent public offering of 1,000,000 shares of
common stock, which generated net proceeds to the Company of approximately $11.6
million after underwriting fees and related expenses. At December 31, 1997 the
Company's cash, cash equivalents and short term investments totaled $22.8
million. In accordance with investment guidelines approved by the Company's
Board of Directors, cash balances in excess of those required to fund operations
have been invested in short-term U.S. Treasury securities and commercial paper
with a credit rating no lower than A1/P1. The Company's working capital at
December 31, 1997 was $20.6 million, an increase of $3.1 million from December
31, 1996. This increase was primarily attributable to the proceeds received from
the Company's follow-on public offering of common stock in 1997, which was
reduced by normal operating expenses incurred during 1997.
The Company had no debt or capital leases outstanding (other than accounts
payable and accrued expenses) at December 31, 1997. On June 26, 1997, the
Company entered into a credit arrangement consisting of a $5,000,000 line of
credit (the "LOC") to support the future working capital needs of the Company.
The LOC will be unsecured as long as the Company's cash and investment balances
maintained with the lender or an affiliate of the lender equal or exceed $10.0
million. At the Company's option, the LOC will bear interest at either the prime
rate charged by the lender or LIBOR plus 2.15%. The LOC is terminable by the
lender at any time. No balance was outstanding under the LOC at December 31,
1997.
The Company anticipates that its existing working capital will be
sufficient to fund the Company's operations through at least 1998. The Company's
future capital requirements and the adequacy of its available funds will depend
on many factors, including the timing of FDA approval, if any, of the Company's
NDA for Periostat, such NDA having been submitted to the FDA in August 1996, the
size and scope of the Company's sales and marketing effort, the terms of
agreements entered into with corporate partners, if any, and the results of
research and development and pre-clinical and clinical studies for other
applications of the Company's core technology. Over the long term, the Company's
liquidity is dependent on market acceptance of its products and technology.
As of December 31, 1997, the Company had available $23.2 million and $3.0
million in net operating carryforwards to offset future Federal and state
taxable income, if any, through the year 2012 and 2000, respectively. In
addition, the Company had research and experimentation tax credits of
approximately $200,000, which expire at various times through the year 2012. As
a result of past financings, including the Company's initial public offering in
June 1996 and the
24
Company's follow-on public offering in April 1997, the Company experienced
ownership changes as defined by rules enacted with the Tax Reform Act of 1986
(the "Reform Act"). Accordingly, the Company's ability to use its net operating
loss and research and experimentation credit carryforwards is subject to certain
limitations as defined by the Reform Act and may be limited.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required to be filed pursuant to this Item 8
are appended to this Annual Report on Form 10-K. A list of the financial
statements filed herewith is found at "Item 14. Exhibits, Financial
Statement Schedules, and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On January 19, 1996, the Company selected KPMG Peat Marwick LLP, to act as
independent accountants for the Company and informed the prior auditors, the
Company's independent accountants since January 1994, of its decision. The
former auditors' report on the Company's financial statements for the period
from January 10, 1992 (inception) to December 31, 1993 does not cover the
financial statements of the Company included in this Annual Report on Form 10-K.
In connection with its audit for the period from January 10, 1992 (inception) to
December 31, 1993, there were no disagreements with the prior auditors on any
matters of accounting principles or practices, financial statement disclosure,
or auditing scope or procedures. The prior auditors' report on the Company's
financial statements for the period from January 10, 1992 (inception) to
December 31, 1993 contained no adverse opinion or disclaimer of opinion and was
not modified or qualified as to uncertainty, audit scope, or accounting
principles. The decision to change accountants was approved by the Board of the
Directors of the Company. The prior auditors have furnished the Company with a
letter addressed to the Securities and Exchange Commission stating their
agreement with the above statements. Such letter appears in Exhibit 16 to this
Annual Report on Form 10-K.
25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information relating to the Company's directors, nominees for election
as directors and executive officers under the headings "Election of Directors"
and "Executive Officers" in the Company's definitive proxy statement for the
1998 Annual Meeting of Stockholders is incorporated herein by reference to such
proxy statement.
ITEM 11. EXECUTIVE COMPENSATION.
The discussion under the heading "Executive Compensation" in the Company's
definitive proxy statement for the 1998 Annual Meeting of Stockholders is
incorporated herein by reference to such proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The discussion under the heading "Security Ownership of Certain Beneficial
Owners and Management" in the Company's definitive proxy statement for the 1998
Annual Meeting of Stockholders is incorporated herein by reference to such proxy
statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The discussion under the heading "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for the 1998 Annual
Meeting of Stockholders is incorporated herein by reference to such proxy
statement.
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements.
Reference is made to the Index to Financial Statements and Schedules
on Page F-1.
(2) Financial Statement Schedules.
Reference is made to the Index to Financial Statements and Schedules
on Page F-1.
(3) Exhibits.
Reference is made to the Index to Exhibits on Page 30.
(b) Reports on Form 8-K.
No Reports on Form 8-K have been filed during the quarter ended
December 31, 1997.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 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 this 30th day of March,
1998.
COLLAGENEX PHARMACEUTICALS, INC.
By:/s/Brian M. Gallagher
---------------------
Brian M. Gallagher, Ph.D., President
and Chief Executive Officer
28
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- ------------------------------- -------------------------- --------------
/s/Brian M. Gallagher, Ph.D. President, Chief Executive March 30, 1998
- ------------------------------- Officer and Director
Brian M. Gallagher, Ph.D. (Principal Executive
Officer)
/s/Nancy C. Broadbent Chief Financial Officer, March 30, 1998
- ------------------------------- Treasurer and Secretary
Nancy C. Broadbent (Principal Financial and
Accounting Officer)
/s/Helmer P.K. Agersborg, Ph.D. Chairman of the Board and March 30, 1998
- ------------------------------- Director
Helmer P.K. Agersborg, Ph.D.
/s/James E. Daverman Director March 30, 1998
- -------------------------------
James E. Daverman
/s/Robert J. Easton Director March 30, 1998
- -------------------------------
Robert J. Easton
/s/Stephen W. Ritterbush, Ph.D. Director March 30, 1998
- -------------------------------
Stephen W. Ritterbush, Ph.D.
/s/Pieter J. Schiller Director March 30, 1998
- -------------------------------
Pieter J. Schiller
/s/Terence E. Winters, Ph.D. Director March 30, 1998
- -------------------------------
Terence E. Winters, Ph.D.
/s/Peter R. Barnett Director March 30, 1998
- -------------------------------
Peter R. Barnett
29
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
3.1(a) Amended and Restated Certificate of Incorporation.
3.2(a) Amended and Restated Bylaws.
4.1(a) Registration Rights Agreement dated September 29, 1995 by and among
the Company and certain investors, as supplemented.
4.2(a)(b) Letter dated December 16, 1993 re: certain rights of the Company
with respect to certain securities of the Company owned by Brian
M. Gallagher, Ph.D.
4.3(a) Fourth Investment Agreement as of September 29, 1995 by and among
the Company and certain Investors.
4.4(d) Shareholder Protection Rights Agreement, dated as of September 15,
1997, between the Company and American Stock Transfer & Trust
Company which includes (i) the Form of Rights Certificate and (ii)
the Certificate of Designation of Series A Participating Preferred
Stock of the Company.
+10.1(a) Assignment of, Amendment to and Restatement of Agreement, with all
exhibits, as amended, and schedules, dated January 13, 1992 by and
among the Company, Johnson & Johnson Consumer Products, Inc. and
Research Foundation of State University of New York.
+10.2(a) Supply Agreement dated January 23, 1995 between the Company and
Hovione International Limited.
+10.3(a) Manufacturing Agreement as of April 12, 1996 by and between the
Company and Applied Analytical Industries, Inc.
10.4(a) Form of Non-Disclosure Agreement executed by all Employees as
employed from time to time.
10.5(a)(b) Form of Non-Competition Agreement executed by each of Brian M.
Gallagher, Ph.D., Nancy C. Broadbent and Robert A. Ashley.
10.6(a) Form of Mutual Non-Disclosure Agreement executed by certain
consultants and research collaborators as retained from time to
time.
10.7(a)(b) Form of Indemnification Agreement executed by each of the
Company's directors and officers.
10.8(a) Forms of Consulting Agreement executed by each of Lorne M. Golub
and Thomas F. McNamara.
10.9(a) Form of Material Transfer Agreement between the Company and
Researchers.
30
Exhibit No. Description of Exhibit
- ----------- ----------------------
10.10 Lease Agreement dated September 5, 1995 between the Company and
Stocking Works Associates (incorporated by reference to the
Company's Registration Statement on Form S-1 (File Number
333-3582) which became effective on June 20, 1996), as amended
effective January 1, 1997 (such amendment is incorporated by
reference to the Company's Registration Statement on Form S-1
(File Number 333-24151) which became effective on April 2, 1997),
as amended effective January 1, 1998 (such Amendment is filed
herewith).
10.11(a) Master Consulting Agreement dated September 19, 1994 between the
Company and Quintiles, Inc.
10.12(a)(b) 1992 Stock Option Plan of the Company, as amended to date.
10.13(a)(b) 1996 Stock Plan of the Company.
10.14(a)(b) 1996 Non-Employee Director Stock Option Plan of the Company.
+10.15(c) License Agreement dated July 18, 1996 by and between the Company
and Boehringer Mannheim Italia.
10.16(e) Letter Agreement dated June 24, 1997 relating to CoreStates Bank
N.A. line of credit, together with Master Commercial Promissory
Note.
10.17(e) Consulting and Contract Service Agreement dated February 1, 1997 by
and between the Company and Innovative Customer Solutions, Ltd.
10.18 Lease Agreement dated August 22, 1997 between the Company and
Stocking Works Associates which became effective on September 1,
1997.
16(a) Letter re: Change in Certifying Accountants.
21(f) List of subsidiaries of the Registrant.
23 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedules for the years ended December 31, 1997,
1996 and 1995.
- ----------
+ Confidential treatment has been requested and granted for a portion of
this Exhibit.
(a) Incorporated by reference to the Company's Registration Statement on
Form S-1 (File Number 333-3582) which became effective on June 20, 1996.
(b) A management contract or compensatory plan or arrangement required to
be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
(c) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996 which was filed with the
Securities and Exchange Commission on October 29, 1996.
(d) Incorporated by reference to the Company's Current Report on Form 8-K,
dated September 16, 1997, which was filed with the Securities and Exchange
Commission on September 17, 1997.
(e) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997, which was filed with the Securities
and Exchange Commission on August 1, 1997.
(f) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, which was filed with the Securities and
Exchange Commission on March 28, 1997.
31
COLLAGENEX PHARMACEUTICALS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants....................................... F-2
Consolidated balance sheets as of December 31, 1996 and 1997............ F-3
Consolidated statements of operations for the years ended December
31, 1995, 1996, and 1997 and for the period from January 10, 1992
(inception) to December 31, 1997...................................... F-4
Consolidated statements of stockholders' equity (deficit)for
the period from January 10, 1992 (inception) to December 31, 1997..... F-5
Consolidated statements of cash flows for the years ended December
31, 1995, 1996, and 1997 and for the period from January 10, 1992
(inception) to December 31, 1997...................................... F-8
Notes to consolidated financial statements.............................. F-10
F-1
Independent Auditors' Report
The Board of Directors and Stockholders
CollaGenex Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of CollaGenex
Pharmaceuticals, Inc. and subsidiary (A Development Stage Enterprise) as of
December 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the years
in the three-year period ended December 31, 1997 and for the period from January
10, 1992 (inception) to December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CollaGenex
Pharmaceuticals, Inc. and subsidiary (A Development Stage Enterprise) as of
December 31, 1996 and 1997, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1997 and
for the period from January 10, 1992 (inception) to December 31, 1997, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Princeton, New Jersey
January 30, 1998
F-2
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Balance Sheets
December 31, 1996 and 1997
1996 1997
ASSETS ------------ ------------
Current assets:
Cash and cash equivalents .................................... $ 9,848,177 $ 16,379,324
Short-term investments ....................................... 8,366,736 6,391,680
Interest receivable .......................................... 65,534 87,573
Prepaid expenses ............................................. 88,443 189,905
------------ ------------
Total current assets ........................... 18,368,890 23,048,482
Equipment, net (note 3) ............................................ 56,496 103,307
Other assets ....................................................... 11,158 12,733
------------ ------------
Total assets .................................. $ 18,436,544 $ 23,164,522
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................. $ 45,434 $ 550,752
Accrued expenses (note 4) .................................... 798,925 1,905,980
------------ ------------
Total current liabilities ..................... 844,359 2,456,732
------------ ------------
Stockholders' equity (notes 7, 8 and 10):
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, no shares outstanding in 1996 and 1997 ........ -- --
Common stock, $0.01 par value; 25,000,000 shares
authorized, 7,535,533 and 8,567,579 shares issued
and outstanding in 1996 and 1997, respectively .......... 75,356 85,676
Additional paid-in capital ................................... 35,551,459 47,297,662
Deferred compensation (note 8) ............................... (295,825) (313,065)
Deficit accumulated during the development stage ............. (17,738,805) (26,362,483)
------------ ------------
Stockholders' equity ........................... 17,592,185 20,707,790
------------ ------------
Commitments and contingencies (notes 6, 10, 11 and 13)
Total liabilities and stockholders' equity ..... $ 18,436,544 $ 23,164,522
============ ============
See accompanying notes to consolidated financial statements.
F-3
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Operations
For the years ended December 31, 1995, 1996 and 1997
and for the period from January 10, 1992
(inception) to December 31, 1997
For the period
from January
Year ended December 31, 10, 1992
-------------------------------------------- (inception) to
Revenues: 1995 1996 1997 December 31, 1997
------------ ------------ ------------ -----------------
License revenues ....................... $ -- $ 400,000 $ 325,000 $ 725,000
Contract revenue ....................... -- -- 8,913 8,913
------------ ------------ ------------ ------------
Total revenues .............. -- 400,000 333,913 733,913
------------ ------------ ------------ ------------
Operating expenses incurred in
the development stage:
Research and development
(notes 10 and 13) ............. 3,635,374 4,436,296 4,318,551 17,362,542
General and administrative ...... 1,547,997 2,527,179 5,976,862 11,790,714
------------ ------------ ------------ ------------
Total operating expenses .... 5,183,371 6,963,475 10,295,413 29,153,256
------------ ------------ ------------ ------------
Loss from operations ........ (5,183,371) (6,563,475) (9,961,500) (28,419,343)
Other income (expense):
Interest income ............................ 58,917 645,157 1,337,822 2,200,968
Interest expense ........................... (144,108) -- -- (144,108)
------------ ------------ ------------ ------------
(85,191) 645,157 1,337,822 2,056,860
------------ ------------ ------------ ------------
Net loss .................... $ (5,268,562) $ (5,918,318) $ (8,623,678) $(26,362,483)
============ ============ ============ ============
Accretion of undeclared dividends
attributable to mandatorily
redeemable convertible
preferred stock .......................... 759,801 719,562 -- 2,596,708
============ ============ ============ ============
Net loss allocable to common
stockholders ............................. (6,028,363) (6,637,880) (8,623,678) (28,959,191)
============ ============ ============ ============
Pro-forma net loss per share
(notes 2 and 7):
Basic ........................... (1.57) (0.90) (1.04)
Diluted ......................... (1.52) (0.89) (1.04)
============ ============ ============
Shares used in computing pro-forma
net loss per share (notes 2 and 7):
Basic ........................... 3,354,371 6,572,104 8,291,167
Diluted ......................... 3,464,371 6,627,104 8,291,167
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity (Deficit)
For the period from January 10, 1992
(inception) to December 31, 1997
Deficit
accumulated
Common stock Additional during Total
------------------ paid-in Deferred the stockholders
Number of Par capital compensa- development equity
shares value (deficit) tion stage (deficit)
--------- ------- ------------ --------- ------------ ------------
Issuance of common stock in exchange for technology
license in January 1992 at inception ............... 54,552 $ 546 $ 10,364 $ -- $ -- $ 10,910
Issuance of common stock in exchange for consulting
services ........................................... 7,500 75 14,925 -- -- 15,000
Issuance of common stock in exchange for technology
license in November 1992 ........................... 24,396 244 4,635 -- -- 4,879
Accretion of undeclared dividends on mandatorily
redeemable convertible preferred stock (note 5) .... -- -- (190,903) -- -- (190,903)
Net loss ............................................. -- -- -- -- (1,415,703) (1,415,703)
--------- ------- ------------ --------- ------------ ------------
Balance, December 31, 1992 ........................... 86,448 865 (160,979) -- (1,415,703) (1,575,817)
Accretion of undeclared dividends on mandatorily
redeemable convertible preferred stock (note 5) .... -- -- (351,072) -- -- (351,072)
Net loss ............................................. -- -- -- -- (2,482,757) (2,482,757)
--------- ------- ------------ --------- ------------ ------------
See accompanying notes to consolidated financial statements.
F-5
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity (Deficit)
For the period from January 10, 1992
(inception) to December 31, 1997
Deficit
accumulated
Common stock Additional during Total
------------------ paid-in Deferred the stockholders
Number of Par capital compensa- development equity
shares value (deficit) tion stage (deficit)
--------- ------- ------------ --------- ------------ ------------
Continued from previous page
Balance, December 31, 1993 ........................... 86,448 865 (512,051) -- (3,898,460) (4,409,646)
Exercise of common stock options ($0.20 per share)
(note 8) ........................................... 75,969 760 14,771 -- -- 15,531
Issuance of common shares to an executive officer
at $0.335 per share in November 1994 ............... 125,000 1,250 40,625 -- -- 41,875
Accretion of undeclared dividends on mandatorily
redeemable convertible preferred stock (note 5) .... -- -- (575,370) -- -- (575,370)
Net loss ............................................. -- -- -- -- (2,653,465) (2,653,465)
--------- ------- ------------ --------- ------------ ------------
Balance, December 31, 1994 ........................... 287,417 2,875 (1,032,025) -- (6,551,925) (7,581,075)
Exercise of common stock options ($0.20 per share)
(note 8) ........................................... 25,242 252 5,471 -- -- 5,723
Deferred compensation resulting from grant of
options (note 8) ................................... -- -- 43,250 (43,250) -- --
Amortization of deferred compensation (note 8) ....... -- -- -- 23,067 -- 23,067
Accretion of undeclared dividends on mandatorily
redeemable convertible preferred stock (note 5) .... -- -- (759,801) -- -- (759,801)
Net loss ............................................. -- -- -- -- (5,268,562) (5,268,562)
--------- ------- ------------ --------- ------------ ------------
Balance, December 31, 1995 ........................... 312,659 3,127 (1,743,105) (20,183) (11,820,487) (13,580,648)
Exercise of common stock options ($0.20-
$0.335 per share) (note 8) ......................... 23,750 238 5,544 -- -- 5,782
Issuance of common stock at $10 per share in
conjunction with the Initial Public Offering, net
of issuance costs .................................. 2,000,000 20,000 18,006,905 -- -- 18,026,905
Accretion of undeclared dividends on mandatorily
redeemable convertible preferred stock (note 5) .... -- -- (719,562) -- -- (719,562)
Conversion of mandatorily redeemable convertible
preferred stock into common stock in conjunction
with the Initial Public Offering ................... 5,199,124 51,991 19,575,677 -- -- 19,627,668
See accompanying notes to consolidated financial statements.
F-6
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity (Deficit)
For the period from January 10, 1992
(inception) to December 31, 1997
Deficit
accumulated
Common stock Additional during Total
------------------ paid-in Deferred the stockholders
Number of Par capital compensa- development equity
shares value (deficit) tion stage (deficit)
--------- ------- ------------ --------- ------------ ------------
Continued from previous page
Deferred compensation resulting from grant of
options (note 8) .................................. -- -- 426,000 (426,000) -- --
Amortization of deferred compensation (note 8) ....... -- -- -- 150,358 -- 150,358
Net loss ............................................. -- -- -- -- (5,918,318) (5,918,318)
--------- ------- ------------ --------- ------------ ------------
Balance, December 31, 1996 ........................... 7,535,533 75,356 35,551,459 (295,825) (17,738,805) 17,592,185
Exercise of common stock options ($0.20-$2.00 per
share) (note 8) .................................... 32,046 320 52,042 -- -- 52,362
Issuance of common stock at $12.50 per share in
conjunction with follow-on Offering, net of
issuance costs (note 7) ............................ 1,000,000 10,000 11,552,411 -- -- 11,562,411
Deferred compensation resulting from grant of
options (note 8) ................................... -- -- 141,750 (141,750) -- --
Amortization of deferred compensation (note 8) ....... -- -- -- 124,510 -- 124,510
Net loss ............................................. -- -- -- -- (8,623,678) (8,623,678)
--------- ------- ------------ --------- ------------ ------------
Balance, December 31, 1997 ........................... 8,567,579 $85,676 $ 47,297,662 $(313,065) $(26,362,483) $ 20,707,790
========= ======= ============ ========= ============ ============
See accompanying notes to consolidated financial statements.
F-7
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
For the years ended December 31, 1995, 1996 and 1997
and for the period from January 10, 1992
(inception) to December 31, 1997
For the
period from
January 10, 1992
Years ended December 31, (inception) to
--------------------------------------------- December 31,
1995 1996 1997 1997
------------ ------------ ------------ ----------------
Cash flows from operating activities:
Net loss ................................................. $ (5,268,562) $ (5,918,318) $ (8,623,678) $(26,362,483)
Adjustments to reconcile net loss to net cash
used in operating activities:
Noncash research and development expense ........ -- -- -- 513,789
Noncash compensation expense .................... 23,067 150,358 124,510 297,935
Noncash consulting expense ...................... -- -- -- 15,000
Depreciation and amortization expense ........... 3,617 17,051 31,376 55,140
Change in assets and liabilities:
Increase in interest receivable ............ -- (65,534) (22,039) (87,573)
Increase in prepaid expenses ............... (7,282) (81,161) (101,462) (189,905)
Increase in other assets ................... (7,328) (770) (1,575) (12,734)
Increase (decrease) in accounts payable..... (514,602) 27,762 505,318 550,752
Increase in accrued expenses ............... 328,216 304,070 1,107,055 1,905,980
------------ ------------ ------------ ------------
Net cash used in operating activities ........... (5,442,874) (5,566,542) (6,980,495) (23,314,099)
Cash flows from investing activities:
Organizational costs ..................................... -- -- -- (5,000)
Capital expenditures ..................................... (11,758) (57,667) (78,187) (153,446)
Proceeds from the sale of short-term investments ......... -- 3,923,142 25,402,301 29,325,443
Purchase of short-term investments ....................... -- (12,289,878) (23,427,245) (35,717,123)
------------ ------------ ------------ ------------
Net cash used in investing activities ........... (11,758) (8,424,403) 1,896,869 (6,550,126)
Cash flows from financing activities:
Proceeds from issuance of common stock ................... 5,723 18,032,687 11,614,773 29,710,589
Proceeds from issuance of preferred stock ................ 7,613,273 -- -- 13,508,273
Proceeds from issuance of promissory notes ............... 3,149,687 -- -- 3,149,687
Repayment of promissory note ............................. (125,000) -- -- (125,000)
------------ ------------ ------------ ------------
Net cash provided by financing activities ....... 10,643,683 18,032,687 11,614,773 46,241,549
------------ ------------ ------------ ------------
Net increase in cash and cash equivalents ...................... 5,189,051 4,041,742 6,531,147 16,379,324
See accompanying notes to consolidated financial statements.
F-8
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
For the years ended December 31, 1995, 1996 and 1997
and for the period from January 10, 1992
(inception) to December 31, 1997
For the
period from
January 10, 1992
Years ended December 31, (inception) to
--------------------------------------------- December 31,
1995 1996 1997 1997
------------ ------------ ------------ ----------------
Continued from previous page
Cash and cash equivalents at beginning of period ............... 617,384 5,806,435 9,848,177 --
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period ..................... $ 5,806,435 $ 9,848,177 $ 16,379,324 $ 16,379,324
============ ============ ============ ============
Supplemental disclosure of cash flows information -
Cash paid for interest ................................... $ 22,921 $ -- $ -- $ 22,921
============ ============ ============ ============
Supplemental schedule of noncash financing activities:
Conversion of promissory notes to preferred stock......... $ 2,903,500 $ -- $ -- $ 2,903,500
Deferred compensation .................................... 43,250 426,000 141,750 611,000
Accretion of undeclared dividends
attributable to mandatorily redeemable
convertible preferred stock ......................... 759,801 719,562 -- 2,596,708
Conversion of mandatorily redeemable
convertible preferred stock to common
stock ............................................... -- 19,627,668 -- 19,627,668
Preferred stock issued in connection
with technology license agreements .................. -- -- -- 498,000
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-9
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1996 and 1997
(1) BUSINESS
CollaGenex Pharmaceuticals, Inc. ("CollaGenex Pharmaceuticals" or the
"Company") was incorporated in Delaware on January 10, 1992. The Company
is a development stage pharmaceutical enterprise engaged in the
development and commercialization of innovative, proprietary medical
therapies for the treatment of periodontal disease and other pathologies.
The Company has funded its operations primarily from the proceeds of
public and private placements of its equity securities.
The accompanying consolidated financial statements include the results of
operations of the Company and its wholly-owned subsidiary (CollaGenex
International, Ltd.) for the period from January 10, 1992 (inception) to
December 31, 1997. All intercompany accounts and transactions have been
eliminated in consolidation.
The Company's business of developing pharmaceutical products is subject to
a number of significant risks, including risks inherent in research and
development activities and in conducting business in a highly regulated
environment. The success of the Company depends to a large degree upon
obtaining FDA and foreign regulatory approval to market products currently
under development. There can be no assurance that any of the Company's
product candidates will be approved by any regulatory authority for
marketing in any jurisdiction. The Company has not generated any product
revenues and has not experienced positive cash flow from operations. The
Company's further development will require significant additional
financing. The Company's deficit accumulated during the development stage
aggregated $26,362,483 through December 31, 1997.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
All cash and cash equivalents are invested in obligations of the U.S.
Government and in commercial paper which bears minimal risk. The carrying
amount of cash and cash equivalents approximates its fair value due to its
short-term nature. To date, the Company has not experienced any
significant losses on its cash equivalents.
F-10
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONT.
Short-Term Investments
----------------------
Short-term investments consist of U.S. Government obligations and
corporate debt securities with original maturities greater than three
months. In accordance with Statement of Financial Accounting Standards No.
115 ("SFAS 115"), "Accounting for Certain Investments in Debt and Equity
Securities," the company classifies its short-term investments as
available for sale. Available for sale securities are recorded at the
approximate fair value of the investments based on quoted market prices at
December 31, 1997. The Company considers all of its current investments to
be available for sale.
Equipment
---------
Equipment, consisting of computer and office equipment, is recorded at
cost. Depreciation is provided using the straight-line method over the
estimated useful lives of the assets, generally three to five years.
Expenditures for repairs and maintenance are expensed as incurred.
Revenue Recognition
-------------------
Revenue from license agreements is recognized when the related milestones
are met by the Company and when all of the Company's significant
performance obligations under the terms of the license have been
satisfactorily completed. Contract revenues are recorded in accordance
with the contract provisions as the earnings process is completed.
Patent Costs
------------
Patent application and maintenance costs are expensed as incurred.
Licensed Technology
-------------------
Costs incurred in obtaining the license rights to technology in the
research and development stage are expensed as incurred.
Research and Development
------------------------
Research and product development costs are expensed as incurred.
F-11
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONT.
Accounting for Income Taxes
---------------------------
Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in
effect when such differences are expected to reverse. The measurement of
deferred tax assets is reduced, if necessary, by a valuation allowance for
any tax benefits which are not expected to be realized. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in the period that such tax rate changes are enacted.
Use of Estimates
----------------
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amount reported in the
consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
Stock-Based Compensation
------------------------
As described in note 8, Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," encourages but does not
require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to
account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of
the market price of the Company's stock at the date both the number of
shares and price per share are known (measurement date) over the amount an
individual must pay to acquire the stock. Such amounts are amortized over
the respective vesting periods of the option grant.
Equity Security Transactions
----------------------------
Prior to the Company's initial public offering consummated in June 1996
(the "IPO"), the Board of Directors had established the fair value of
common shares, Series A, B and C mandatorily redeemable convertible
preferred stock, and common stock options and warrants based upon facts
and circumstances existing at the dates such equity transactions
F-12
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONT.
occurred, including the price at which equity instruments were sold to
independent third parties. Subsequent to the IPO, fair market value is
determined based on the quoted market price of the Company's stock.
Concentration of Credit Risks
-----------------------------
The company invests its excess cash in deposits with major U.S. financial
institutions, money market funds, U.S. Government obligations and
corporate debt securities. The Company has established guidelines relative
to diversification and maturities that maintain safety and liquidity. To
date, the Company has not experienced any significant losses.
Pro-Forma Net Loss Per Share
----------------------------
For periods subsequent to the Company's IPO, pro-forma net loss per share
is calculated by dividing the net loss by the weighted average number of
common shares outstanding for the respective periods.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
("SAB") No. 98, issued in February 1998, for periods prior to the
Company's IPO, all common stock issued during the periods prior to the IPO
for nominal consideration are to be included in the calculation of
pro-forma basic net loss per share as if they were outstanding for all
periods presented. Similarly, common stock and potential common stock
issued during the periods prior to the IPO for nominal consideration have
been included in the calculation of pro-forma diluted net loss per share,
even though anti-dilutive, as if outstanding for all periods presented. In
accordance with the SAB, all prior year per share data has been restated
to reflect this new guidance. The calculation of shares used in computing
pro-forma basic and diluted net loss per share also included all series of
mandatorily redeemable convertible preferred stock, assuming conversion
into shares of common stock (using the if-converted method) from their
respective original dates of issuance.
F-13
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONT.
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS 128), was adopted by the Company on December 31, 1997. In accordance
with the pronouncement, all prior year earnings per share data has been
restated upon adoption to conform to the new standard. SFAS 128 simplifies
the calculation of earnings per share data by replacing primary and fully
diluted earnings per share with basic and diluted earnings per share,
respectively. Basic earnings per share excludes potentially dilutive
securities, including stock options, and is calculated by dividing income
(loss) available to common shareholders by the weighted average common
shares outstanding for the period. Diluted earnings per share, which is
generally consistent with the fully diluted calculation under present
accounting rules, reflects the dilution to earnings that would occur if
convertible securities, stock options and potentially dilutive securities
were converted into common stock resulting in the issuance of common
stock.
The following table sets forth the calculation of the total number of
shares used in the computation of pro-forma net loss per share, basic and
diluted for the years ended December 31, 1995, 1996 and 1997:
1995 1996 1997
---------- ---------- ---------
Pro-forma weighted average common
shares outstanding - shares used in
computing pro-forma basic net loss
per share ........................... 3,354,371 6,572,104 8,291,167
Shares assumed to be outstanding
related to stock options granted
for nominal consideration ........... 110,000 55,000 --
---------- ---------- ---------
Shares used in computing pro-forma
diluted net loss per share .......... 3,464,371 6,627,104 8,291,167
---------- ---------- ---------
Pro-forma net loss per share:
Basic ............................ $ (1.57) $ (0.90) $ (1.04)
========== ========== =========
Diluted .......................... $ (1.52) $ (0.89) $ (1.04)
========== ========== =========
Options to purchase 725,954 shares of common stock at prices ranging from
$0.20 to $13.50 per share were outstanding at December 31, 1997 but were
not included in the
F-14
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONT.
computation of pro-forma net loss per share because the effect would have
been antidilutive for the periods presented. These options expire through
2007.
New Accounting Pronouncement
----------------------------
Statement of Financial Accounting Standards No. 130, "Comprehensive
Income" (SFAS 130), was issued in June 1997. SFAS 130 becomes effective
for the Company's fiscal year 1998 and requires reclassification of
earlier financial statements for comparative purposes. SFAS 130 requires
that all items defined as comprehensive income, including changes in the
amounts of certain items, foreign currency translation adjustments and
gains and losses on certain securities, be shown in a financial statement.
SFAS 130 does not require a specific format for the financial statements
in which comprehensive income is reported, but does require that an amount
representing total comprehensive income be reported in that statement. The
Company believes the adoption of SFAS 130 will not have a material effect
on the consolidated financial statements.
(3) EQUIPMENT
Equipment consists of the following at December 31, 1996 and 1997:
1996 1997
-------- ---------
Computer and office equipment ..... $ 75,259 $ 153,446
Less accumulated depreciation ..... 18,763 50,139
-------- ---------
$ 56,496 $ 103,307
======== =========
F-15
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(4) ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 1996 and 1997:
1996 1997
---------- -----------
Contracted development costs ........ $ 376,151 $ 1,085,640
Professional and consulting fees .... 228,452 510,800
Payroll and related costs ........... 83,750 244,167
Miscellaneous taxes ................. 46,000 17,102
Royalties ........................... 12,500 12,500
Other ............................... 52,072 35,771
---------- -----------
$ 798,925 $ 1,905,980
========== ===========
(5) MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company completed the sale of its Series A, Series B and Series C
mandatorily redeemable convertible preferred stock ("Series A, Series B
and Series C", respectively) in 1992, 1993 and 1995 at per share prices of
$1.00, $1.675 and $2.00, respectively (see note 10 regarding certain
Series A shares issued in connection with the acquisition of certain
technology). Aggregate net cash proceeds from such equity transactions
totaled $13,508,273 ($16,532,960 after conversion of promissory notes and
accrued interest to preferred stock).
During 1995, the Company issued convertible promissory notes in the
principal amount of $3,028,500 to various Series A and Series B preferred
stockholders. The convertible promissory notes bore interest at 10% per
annum with maturity dates of February and July 1996. Principal plus
accrued interest on the convertible promissory notes totaling $3,024,687
were converted into 1,512,344 shares of Series C mandatorily redeemable
convertible preferred stock in September 1995 in accordance with the terms
of the financing agreement upon the closing of the Series C mandatorily
redeemable convertible preferred stock sale. One convertible promissory
note aggregating $131,952 (principal plus accrued interest) was repaid to
the note holder in September 1995.
F-16
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(5) MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK, CONT.
The holders of Series A, Series B and Series C were originally entitled to
cumulative dividends at a rate of 9% of the original purchase price per
share on the date of issuance, if and when declared. Such amounts have
been accreted in the accompanying consolidated financial statements for
the respective historical periods in which they accumulated. In June 1996,
upon the closing of the IPO, all issues of the mandatorily redeemable
convertible preferred stock were converted into 5,199,124 common shares,
and all undeclared dividends previously accreted were forfeited. All
rights with respect to the above noted securities ceased.
(6) LINE OF CREDIT
On June 26, 1997, the Company entered into a credit arrangement consisting
of a $5,000,000 line of credit (the "LOC") to support the future working
capital needs of the Company. The LOC will be unsecured as long as the
Company's cash and investment balances maintained with the lender or an
affiliate of the lender equals or exceeds $10,000,000, which was met at
December 31, 1997. At the Company's option, the LOC will bear interest at
either the prime rate charged by the lender or LIBOR plus 2.15%. The LOC
is terminable by the lender at any time. No balance was outstanding under
the LOC at December 31, 1997.
(7) STOCKHOLDERS' EQUITY
On April 10, 1996, the Company effected a one-for-two reverse stock split
of all outstanding shares of common stock including shares issuable under
any stock option plan. All common share, per share and pro-forma amounts
in the accompanying consolidated financial statements have been
retroactively restated to reflect this reverse stock split.
On June 20, 1996, the Company completed an initial public offering of
2,000,000 shares of its common stock at $10 per share. Net proceeds to the
Company after underwriting fees and all related expenses were $18,026,905.
On April 8, 1997, the Company completed a follow-on offering of 1,000,000
shares of its common stock at a price of $12.50 per share. The net
proceeds for the offering after underwriting fees and all related expenses
was $11,562,411.
F-17
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(8) STOCK OPTION PLANS
The Company has three stock-based compensation plans (the "Plans") and has
adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation". The Company continues to apply APB Opinion No. 25 in
accounting for its stock option plans and, accordingly, no compensation
expense has been recognized in the consolidated financial statements for
stock options issued at exercise prices equal to the fair market value on
the measurement date.
Deferred compensation of $43,250 and $426,000 was recorded in 1995 and
1996, respectively, for options granted prior to the Company's initial
public offering where the estimated fair market value of the Company's
stock on the measurement date exceeded the exercise price of such options.
Such deferred compensation ($23,067 in 1995 and $150,358 in 1996) is being
amortized to compensation expense in the accompanying consolidated
statements of operations over the respective vesting periods of such
grants.
The 1992 Stock Option Plan, as amended, (the "1992 Plan") provided for the
granting of incentive and nonstatutory options to directors, employees and
consultants to purchase up to 121,228 shares, which was increased to
300,000 and 425,000 in 1993 and 1995, respectively, and reduced to 291,000
in 1996, of the Company's common stock at a price, for the incentive
options, not less than the fair market value on the measurement date. Such
options are exercisable for a period of 10 years and generally vest over a
four year period. All such 291,000 options available under the 1992 Plan
were granted by March 31, 1996.
The 1996 Stock Option Plan (the "1996 Plan") provides for the granting of
incentive and nonstatutory options to employees and consultants to
purchase up to 750,000 options of the Company's common stock at a price,
for the incentive options, not less than the fair market value on the
measurement date. Incentive and nonstatutory options granted to
individuals owning more than 10% of the voting power of all classes of
stock at the time of grant must have an exercise price no less than 110%
of the fair market value on the date of grant. Such options are
exercisable for a period of 10 years and generally vest over a four year
period, which may be accelerated for certain grants in certain
circumstances.
F-18
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(8) STOCK OPTION PLANS, CONT.
In March 1996, the Board of Directors approved a nonqualified plan for the
issuance of stock options to non-employee directors under the Non-Employee
Director Stock Option Plan (the "Non-Employee Director Plan"). Under this
plan, 109,000 shares, which was increased to 300,000 on May 8, 1997, of
common stock are reserved for issuance at an exercise price equal to the
fair market value on the date of grant. Such options vest 20% per annum
commencing one year from the grant date. During 1996, total options
granted exceeded the shares available for grant. The fair market value of
the Company's stock on the date of shareholder approval exceeded the
exercise price of such options on the date of grant and, accordingly,
deferred compensation of $141,750 was recorded in 1997. Such deferred
compensation is being amortized to compensation expense in the
accompanying consolidated statements of operations over the respective
vesting period of the grants.
In May and June of 1996, 11,000 options were granted to employees at an
exercise price of $2.00 per share. These grants were not issued under the
terms of any of the above Plans. All options granted to employees
subsequent to the IPO were granted under the 1996 Plan.
At December 31, 1997, there were 421,750 shares available for grant under
the 1996 Plan and 150,000 under the Non-Employee Director Plan.
Had the Company determined compensation cost for options granted during
1995, 1996 and 1997 under SFAS 123 based on the fair value at the
measurement date, the Company's net loss would have been increased to the
pro-forma amounts shown below:
1995 1996 1997
----------- ----------- -----------
Net loss:
As reported ............ $ 5,268,562 $ 5,918,318 $ 8,623,678
Pro-forma .............. 5,279,737 6,009,817 9,267,320
Net loss per basic share:
As reported ............ $ 1.57 $ 0.90 $ 1.04
Pro-forma .............. 1.57 0.91 1.12
Net loss per diluted share:
As reported ............ $ 1.52 $ 0.89 $ 1.04
Pro-forma .............. 1.52 0.91 1.12
F-19
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(8) STOCK OPTION PLANS, CONT.
Pro-forma net loss reflects only options granted in 1995, 1996 and 1997.
Consequently, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro-forma net loss
amounts presented above because compensation cost is incurred under SFAS
123 over the respective vesting period of such options, and options
granted by the Company prior to January 1, 1995 are not reflected in the
pro-forma net loss figures above.
The following is a summary of the activity in the Company's stock option
plans:
Exercise price
Shares per share
-------- --------------
January 10, 1992 (inception) ....... -- $ --
Granted ......................... 63,125 0.20
--------
Balance, December 31, 1992 ......... 63,125 0.20
Granted ......................... 36,836 0.20
--------
Balance, December 31, 1993 ......... 99,961 0.20
Granted ......................... 56,750 0.20-0.335
Exercised ....................... (75,969) 0.20
--------
Balance, December 31, 1994 ......... 80,742 0.20-0.335
Granted ......................... 178,000 0.335-1.20
Exercised ....................... (25,242) 0.20
--------
Balance, December 31, 1995 ......... 233,500 0.20-1.20
Granted ......................... 200,500 2.00-10.00
Exercised ....................... (23,750) 0.20-0.335
--------
Balance, December 31, 1996 ......... 410,250 0.20-10.00
Granted ......................... 348,750 9.00-13.50
Exercised ....................... (32,046) 0.20-2.00
Cancelled ....................... (1,000) 0.335-1.20
--------
Balance, December 31, 1997 ......... 725,954 $ 0.20-13.50
========
F-20
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(8) STOCK OPTION PLANS, CONT.
As of December 31, 1997, the Plans had the following options outstanding
and exercisable by price range as follows:
Outstanding Exercisable
-------------------------------- ---------------------
Weighted Weighted Weighted
average average average
Range of remaining exercise exercise
exercise Number of contractual price per Number of price per
prices shares life share shares share
------------ -------- ----------- ---------- --------- ----------
$0.20 - 2.00 247,704 7.66 years $ 1.01 128,299 $ 0.68
9.00 -13.50 478,250 9.19 years 10.17 62,875 10.06
The weighted average fair values of stock options granted during 1995,
1996 and 1997 were $0.79, $7.00 and $5.93 per share, respectively, on the
date of grant. Such fair values were determined using the Black-Scholes
option pricing model and are based on the following assumptions:
1995 1996 1997
---- ---- ----
Expected life in years ....... 7 7 5
Risk-free interest rate ...... 6.5% 7.5% 6.25%
Volatility ................... 60% 60% 60%
Dividend yield ............... 0% 0% 0%
(9) INCOME TAXES
At December 31, 1997, the Company had available net operating loss ("NOL")
carryforwards of approximately $23,200,000 and $3,000,000 for Federal and
state income tax reporting purposes, respectively, which are available to
offset future Federal and state taxable income, if any, through 2012 and
2000, respectively. The Company also has research and development tax
credit carryforwards of approximately $206,000 for Federal income tax
reporting purposes which are available to reduce Federal income taxes, if
any, through 2012.
F-21
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(9) INCOME TAXES, CONT.
The Tax Reform Act of 1986 (the "Act") provides for a limitation on the
annual use of NOL and research and development tax credit carryforwards
(following certain ownership changes, as defined by the Act) that could
significantly limit the Company's ability to utilize these carryforwards.
The Company has experienced various ownership changes, as defined by the
Act, as a result of past financings and the IPO. Accordingly, the
Company's ability to utilize the aforementioned carryforwards may be
limited. Additionally, because U.S. tax laws limit the time during which
these carryforwards may be applied against future taxes, the Company may
not be able to take full advantage of these attributes for Federal income
tax purposes.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liability at December
31, 1996 and 1997 are presented below:
1996 1997
----------- -----------
Deferred tax assets:
Capitalized start-up costs .............. $ 1,557,864 $ 931,440
Net operating loss carryforwards ........ 5,669,500 8,077,526
Tax credit carryforward ................. 130,771 206,309
Accrued expenses ........................ 151,743 170,149
----------- -----------
Total gross deferred tax assets .... 7,509,878 $ 9,385,424
Less valuation allowance ................ (7,505,124) (9,383,480)
----------- -----------
Total deferred tax assets ...... $ 4,754 1,944
Deferred tax liability:
Depreciation ............................ (4,754) (1,944)
----------- -----------
Total gross deferred tax liability.. (4,754) (1,944)
----------- -----------
Net deferred taxes ................. $ -- $ --
=========== ===========
The net change in the total valuation allowance for the years ended
December 31, 1996 and 1997 were increases of approximately $2,963,000 and
$1,878,000 respectively, related primarily to additional net operating
losses incurred by the Company.
F-22
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(10) TECHNOLOGY LICENSE
At the time of its formation in 1992, the Company entered into an
agreement with the Research Foundation of the State University of New York
- Stony Brook ("SUNY") whereby the Company received an option to acquire a
certain technology license. In return for this option, the Company issued
to another party (which had previously licensed the technology from SUNY)
498,000 shares of Series A mandatorily redeemable convertible preferred
stock at an issuance price of $1.00 per share and issued SUNY 54,552
shares of common stock. In November 1992, the Company issued an additional
24,396 shares of common stock to SUNY in accordance with the terms of the
technology license in order to maintain SUNY's ownership at 5% (which
requirement ceased upon the Company having raised $3,000,000 of
financing). The Company recorded a $513,789 charge to research and
development expense in the 1992 consolidated statement of operations in
connection with these common and preferred stock issuances.
The Company's option to acquire the license was exercised in 1995 and
remains in effect for a period not to exceed 20 years from the date of the
first sale of product incorporating the technology under license or the
last to expire of the licensed patents in each country. The Company is
liable to SUNY for annual royalty fees based on net sales, if any, as
defined in the agreement. A minimum annual royalty is required for the
duration of the technology license. The Company paid annual royalties of
$50,000 in 1995, 1996 and 1997.
In addition, the Company is required to reimburse SUNY for certain patent
related costs and to support certain additional research efforts.
(11) COMMITMENTS AND CONTINGENCIES
In January 1995, the Company entered into an exclusive supply agreement
with a vendor to purchase a principal raw material component required for
its product that is currently under development. This supply agreement
expires in January 2000 with automatic two-year renewal periods. There are
no minimum purchase commitments applicable to such agreement.
In April 1995, the Company entered into a manufacturing agreement for the
manufacture of Periostat(R). Under the terms of this agreement, the
Company is obligated to annual minimum purchase commitments with such
vendor for three years following the date of initial product launch, as
defined.
F-23
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(11) COMMITMENTS AND CONTINGENCIES, CONT.
The Company maintains various operating leases, primarily for office
space. As of December 31, 1997, future minimum rent payments under
noncancellable leases are as follows:
1998...... $ 57,672
1999...... 48,672
2000...... 48,672
---------
Total..... $ 155,016
=========
Rent expense for the years ended December 31, 1995, 1996 and 1997 totaled
$58,259, $63,368 and $69,828, respectively.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity.
(12) 401(K) SALARY REDUCTION PLAN
In January 1995, the Company adopted a 401(k) Salary Reduction Plan (the
"401(k) Plan") available to all employees meeting certain eligibility
requirements. The 401(k) Plan permits participants to contribute up to 15%
of their annual salary not to exceed the limits established by the
Internal Revenue Code. All contributions made by participants vest
immediately in the participant's account. The Company did not make any
"matching contributions" in 1995, 1996 or 1997 in accordance with the
terms of the 401(k) Plan.
(13) CONTRACT RESEARCH AGREEMENT
In September 1994, the Company entered into a contract research agreement
with another research company to provide certain clinical monitoring, data
management, statistical analysis and regulatory services on behalf of the
Company. The Company is billed by the research company as research
services are performed. Costs incurred under this agreement aggregated
approximately $1,679,000, $1,766,000, $1,030,000 and $5,104,000 for the
years ended December 31, 1995, 1996, 1997 and the period from January 10,
1992 (inception) to December 31, 1997, respectively.
F-24