SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934, FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998.
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
Incorporation or Organization) Identification No.)
301 South State Street, Newtown, PA 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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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 the number of shares outstanding of each of the issuer's
classes of common stock as of June 30, 1998:
Class Number of Shares
--------------------------- ----------------
Common Stock $.01 par value 8,585,329
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 1997 and June 30, 1998
December 31, June 30,
1997 1998
----------- -----------
(unaudited)
(in thousands except
share amounts)
ASSETS
- ------
Current assets:
Cash and cash equivalents ............................................ $ 16,379 $ 14,620
Short-term investments ............................................... 6,392 3,496
Interest receivable .................................................. 88 66
Prepaid expenses ..................................................... 190 453
-------- --------
Total current assets ........................................... 23,049 18,635
Equipment, net ............................................................ 103 98
Other assets .............................................................. 13 13
-------- --------
Total assets ................................................... $ 23,165 $ 18,746
======== ========
LIABILITIES and STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable ..................................................... $ 551 $ 793
Accrued expenses ..................................................... 1,906 1,794
-------- --------
Total current liabilities ...................................... 2,457 2,587
-------- --------
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized; none issued and outstanding ............................ -- --
Common stock, $0.01 par value; 25,000,000 shares
authorized; 8,567,579 and 8,585,329 shares issued
and outstanding in 1997 and 1998, respectively ..................... 86 86
Additional paid-in capital ........................................... 47,298 47,313
Deferred compensation ................................................ (313) (252)
Deficit accumulated during the development stage ..................... (26,363) (30,988)
-------- --------
Stockholders' equity ........................................... 20,708 16,159
-------- --------
Commitments and contingencies
Total liabilities and stockholders' equity ..................... $ 23,165 $ 18,746
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
2
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Six Months Ended June 30, 1997 and 1998
and for the period from January 10, 1992 (inception) to June 30, 1998
(Unaudited)
For the Period
from 1/10/92
Three Months Ended June 30, Six Months Ended June 30, (inception) to
1997 1998 1997 1998 6/30/98
(in thousands, except share and per share amounts)
Revenues:
License revenues ......................... $ 300 $ -- $ 300 $ -- $ 725
Contract revenues ........................ -- 4 -- 7 16
--------- --------- --------- ---------- -------
Total revenues ........................ 300 4 300 7 741
--------- --------- --------- ---------- -------
Operating expenses incurred in the
development stage:
Research and development ............... 1,379 1,397 2,072 2,396 19,759
General and administrative ............. 1,385 1,397 2,353 2,811 14,602
--------- --------- --------- ---------- -------
Total operating expenses .......... 2,764 2,794 4,425 5,207 34,361
--------- --------- --------- ---------- -------
Loss from operations ......... 2,464 2,790 4,125 5,200 33,620
Other income (expense):
Interest income ........................ 382 271 618 574 2,776
Interest expense ....................... -- -- -- -- (144)
--------- --------- --------- ---------- -------
Net loss ......................... (2,082) (2,519) (3,507) (4,626) (30,988)
========= ========= ========= ========== =======
Accretion of undeclared dividends
attributable to mandatorily redeem-
able convertible preferred stock ........ -- -- -- -- 2,597
========= ========= ========= ========== =======
Net loss allocable to common
stockholders ............................ $ (2,082) $ (2,519) $ (3,507) $ (4,626) $(33,585)
========= ========= ========= ========== =======
Net loss per share allocable to common
stockholders:
Basic .................................. $ (0.24) $ (0.29) $ (0.44) $ (0.54)
Diluted ................................ (0.24) (0.29) (0.44) (0.54)
========= ========= ========= ==========
Shares used in computing net loss per share
allocable to common stockholders:
Basic .................................. 8,521,601 8,574,115 8,030,087 8,571,139
Diluted ................................ 8,521,601 8,574,115 8,030,087 8,571,139
========= ========= ========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
3
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1997 and 1998
and for the period from January 10, 1992 (inception) to June 30, 1998
(Unaudited)
For the Period from
Six Months Ended from 1/10/92
June 30, (inception) to
------------------------------- 6/30/98
1997 1998 -------------------
----------- -----------
(in thousands)
Cash flows from operating activities:
Net loss ...................................................... $ (3,507) $ (4,626) $ (30,988)
Adjustments to reconcile net loss to net cash used in operating
activities:
Non-cash research and development expense ................. -- -- 514
Non-cash compensation expense ............................. 49 61 358
Non-cash consulting expense ............................... -- -- 15
Depreciation and amortization expense ..................... 16 18 73
Change in assets and liabilities:
(Increase) decrease in interest receivable ............ (97) 22 (66)
Increase in prepaid expenses .......................... (24) (263) (453)
Increase in other assets .............................. -- -- (13)
Increase in accounts payable .......................... 421 242 793
Increase (decrease) in accrued expenses ............... 636 (112) 1,794
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Net cash used in operating activities ............................ (2,506) (4,658) (27,973)
---------- ---------- ----------
Cash flows from investing activities:
Organizational costs .......................................... -- -- (5)
Capital expenditures .......................................... (43) (13) (166)
Purchase of short-term investments (available for
sale) ....................................................... (15,587) (2,493) (38,210)
Proceeds from the sale of short-term investments
(available for sale) ........................................ 11,351 5,389 34,714
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Net cash provided by (used in) investing activities .............. (4,279) 2,883 (3,667)
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(Continued)
See accompanying notes to unaudited condensed consolidated financial statements.
4
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1997 and 1998
and for the period from January 10, 1992 (inception) to June 30, 1998
(Unaudited)
(Continued from preceding page)
For the Period from
Six Months Ended from 1/10/92
June 30, (inception) to
------------------------------- 6/30/98
1997 1998 -------------------
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(in thousands)
Cash flows from financing activities:
Proceeds from issuance of preferred stock.................... -- -- 13,508
Proceeds from issuance of common stock....................... 11,610 16 29,727
Proceeds from issuance of promissory notes................... -- -- 3,150
Repayment of promissory note................................. -- -- (125)
--------- --------- -----------
Net cash provided by financing activities....................... 11,610 16 46,260
--------- --------- -----------
Net increase (decrease) in cash and cash equivalents............ 4,825 (1,759) 14,620
Cash and cash equivalents at beginning of period................ 9,848 16,379 --
--------- --------- -----------
Cash and cash equivalents at end of period...................... $ 14,673 $ 14,620 $ 14,620
========= ========= ===========
Supplemental disclosure of cash flows information:
Cash paid for interest....................................... $ -- $ -- $ 23
========= ========= ===========
Supplemental schedule of non-cash financing activities:
Conversion of mandatorily redeemable convertible preferred
stock to common stock...................................... $ -- $ -- $ 19,628
========= ========= ===========
Accretion of undeclared dividends attributable
to mandatorily redeemable convertible preferred
stock...................................................... $ -- $ -- $ 2,597
========= ========= ===========
Conversion of promissory notes to preferred stock............... $ -- $ -- $ 2,904
========= ========= ===========
Deferred compensation........................................... $ -- $ -- $ 611
========= ========= ===========
Preferred stock issued in connection with technology license
agreements................................................... $ -- $ -- $ 498
========= ========= ===========
See accompanying notes to unaudited condensed consolidated financial statements.
5
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1998
(Unaudited)
(1) Basis of Presentation
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The unaudited condensed consolidated financial statements included
herein have been prepared by the Company, pursuant to the rules and regulations
of the Securities and Exchange Commission and in accordance with generally
accepted accounting principles. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. These unaudited condensed consolidated financial
statements should be read in conjunction with the Company's 1997 audited
consolidated financial statements and footnotes.
The accompanying unaudited condensed consolidated financial statements
include the results of the Company and its wholly-owned subsidiary (CollaGenex
International, Ltd.). All intercompany accounts and transactions have been
eliminated.
In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements have been prepared on a basis
substantially consistent with the audited consolidated financial statements and
contain adjustments, all of which are of a normal recurring nature, necessary to
present fairly the Company's financial position as of June 30, 1998, its results
of operations for the three and six months ended June 30, 1997 and 1998 and for
the period January 10, 1992 (inception) to June 30, 1998, and its cash flows for
the six months ended June 30, 1997 and 1998 and for the period January 10, 1992
(inception) to June 30, 1998. Interim results are not necessarily indicative of
results anticipated for the full fiscal year.
(2) New Accounting Pronouncements
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Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130"). SFAS
130 requires that all items defined as comprehensive income, including changes
in the amounts of certain items such as foreign currency translation adjustments
and gains and losses on certain securities, be shown as a component of
comprehensive income in a financial statement. The adoption of SFAS 130 had no
effect on the Company's unaudited condensed consolidated financial statements
contained herein, as the Company had no items of comprehensive income during any
period presented therein.
6
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1998
(Unaudited)
(Continued)
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS 128"), was adopted by the Company on December 31, 1997. In
accordance with SFAS 128, all earnings per share data for periods prior to
adoption should be restated to conform to the new standard. There was no change
in the previously reported net loss per share for the three months and six
months ended June 30, 1997 as computed under SFAS 128.
7
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
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The Company 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 general and
administrative areas, following regulatory approval of Periostat(R), the
Company's lead drug for the treatment of periodontal disease. There can be no
assurance, however, that the Company will obtain such regulatory approval on a
timely basis, if at all.
The Company has incurred losses each year since inception and had an
accumulated deficit of $31.0 million at June 30, 1998. 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 Quarterly
Report on Form 10-Q that are not based on historical fact are "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Forward-looking statements may be identified by the use of
forward-looking terminology such as "may," "will," "expect," "estimate,"
"anticipate," "continue," or similar terms, variations of such terms or the
negative of those terms. This Form 10-Q contains forward-looking statements that
involve risks and uncertainties. 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 United States Food & Drug Administration (the "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
discussed in the forward-looking statements contained herein.
8
Results of Operations
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From its founding through June 30, 1998, the Company had no revenues
from sales of its own products. Operating expenses consist of research and
development expenses and 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 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 $7,000 and $4,000 in contract revenues for the six
months and the three months ended June 30, 1998, respectively, and did not
recognize contract revenues in either of the comparable year earlier periods.
The Company earned no licensing revenue in either of the six month or three
month periods ending June 30, 1998, respectively, as compared to an aggregate of
$300,000 for the comparable year earlier periods. Licensing revenues achieved in
1997 were attributable to the Company's licensing arrangements with Boehringer
Mannheim Italia.
Research and development expenses increased $324,000, or 15.6%, and
$18,000, or 1.3%, respectively, for the six months and three months ended June
30, 1998, over the comparable year earlier periods. Such increases resulted
primarily from expenses relating to the initiation of certain pre-clinical
studies for Nephrostat(TM), the Company's compound for the treatment of diabetic
complications, additional costs associated with the Company's amendment to its
new drug application (the "NDA") for Periostat submitted to the FDA in March
1998 and a Phase 3b clinical trial initiated during the first quarter of 1998.
The Company anticipates that the results from such clinical trial, if favorable,
will be used to support marketing activities for Periostat following regulatory
approval. There can be no assurance that the Company will obtain such approval
on a timely basis, if at all.
General and administrative expenses increased $458,000, or 19.5%, and
$12,000, or 0.9%, respectively, for the six months and three months ended June
30, 1998, over the comparable year earlier periods. Such increases were
primarily due to the Company's pre-launch marketing activities related to
Periostat and sales and marketing efforts related to certain contractual
marketing arrangements entered into during 1997, offset in part by the reversal
of certain accruals for marketing expenses.
Interest income decreased $44,000, or 7.1%, and $111,000, or 29.1%,
respectively, for the six months and three months ended June 30, 1998, over the
comparable year earlier periods. Such decreases were due to lower balances in
cash and short-term investments as a result of normal operating activities since
the Company's follow-on public offering of Common Stock in April 1997.
9
Liquidity and Capital Resources
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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 June 30, 1998, the
Company had cash, cash equivalents and short-term investments of approximately
$18.1 million, a decrease of $4.7 million from the $22.8 million balance at
December 31, 1997. 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 of $16.0 million at June 30, 1998 reflected a decrease of $4.6 million
in working capital from December 31, 1997.
The Company had no debt or capital leases outstanding (other than
accounts payable and accrued expenses) at June 30, 1998. 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 June 30, 1998.
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.
10
PART II. OTHER INFORMATION
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Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ----------------------------------------------------
The Annual meeting of Shareholders of the Company (the "Meeting") was
held on May 11, 1998.
There were present at the Meeting in person or by proxy shareholders
holding an aggregate of 7,723,741 shares of Common Stock. The results of the
vote taken at such Meeting with respect to each nominee for director were as
follows:
Common Stock Nominees For Withheld
--------------------- --- --------
Helmer P.K. Agersborg, Ph.D. 6,920,016 Shares 803,725 Shares
Brian M. Gallagher, Ph.D. 6,920,016 Shares 803,725 Shares
Peter R. Barnett, D.M.D. 6,920,016 Shares 803,725 Shares
Robert J. Easton 6,920,016 Shares 803,725 Shares
James E. Daverman 6,920,016 Shares 803,725 Shares
Stephen W. Ritterbush, Ph.D. 6,920,016 Shares 803,725 Shares
Pieter J. Schiller 6,920,016 Shares 803,725 Shares
Terence E. Winters, Ph.D. 6,920,016 Shares 803,725 Shares
In addition, a vote of the shareholders was taken at the Meeting on the
proposal to ratify the appointment of KPMG Peat Marwick LLP as the independent
auditors of the Company for the fiscal year ending December 31, 1998. Of the
shares present at the meeting in person or by proxy, 7,715,441 shares of Common
Stock were voted in favor of such proposal, 4,250 shares of Common Stock were
voted against such proposal and 4,050 shares of Common Stock abstained from
voting.
Item 5. Other Information
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New Drug Application
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
scaling and root planing (SRP) trial. The FDA and the Company then agreed that
the Company would seek a claim for Periostat based on the submission of a NDA
amendment containing the results from this trial. On March 31, 1998, the Company
announced that it had completed its submission of such amendment to the FDA. The
FDA has committed to review the amendment within six months of such submission
and such review is ongoing. There can be no assurance that the Company's NDA
with respect to Periostat will be approved by the FDA on a timely basis, if at
all. Failure to obtain FDA approval of a NDA for
11
Periostat would have a material adverse effect on the Company's business,
financial condition and results of operations.
Research and Development Agreement
On April 28, 1998, the Company entered into a Research and Development
Agreement with Quintiles Scotland Ltd. ("Quintiles") pursuant to which Quintiles
will perform certain research and development activities in 1998 with respect to
Nephrostat(TM), the Company's compound for the treatment of diabetic
complications. The Company expects to incur approximately $1.0 million in
research and development expenses in connection with such agreement, which
expenses shall be incurred over the remainder of the 1998 fiscal year.
Evaluation Testing Agreement
On May 1, 1998, the Company entered into an Evaluation Testing
Agreement with the Research Foundation of the State University of New York
("SUNY") pursuant to which SUNY will, over the course of three years, evaluate
certain compounds supplied by the Company.
Item 6. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
(a) Exhibits
10.1 - Contract between Quintiles Scotland Ltd. and the Company,
dated April 28, 1998.
27 - Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter to which this
report on Form 10-Q relates.
12
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CollaGenex Pharmaceuticals, Inc.
Date: August 14, 1998 By:/s/ Brian M. Gallagher
-----------------------
Brian M. Gallagher, Ph.D.
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 1998 By:/s/ Nancy C. Broadbent
-----------------------
Nancy C. Broadbent
Chief Financial Officer (Principal
Financial and Accounting Officer)