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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ______ to ________
Commission File Number 0-18231
ATRIX LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1043826
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2579 MIDPOINT DRIVE FORT COLLINS, COLORADO 80525
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (970) 482-5868
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.001 par value
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(Title of Class)
Series A Preferred Stock Purchase Rights
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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
--- ---
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. |X|
The aggregate market value of voting stock held by non-affiliates of
the Registrant as of March 26, 2002 was $446,922,463.
The number of shares of the Registrant's common stock outstanding as of
March 26, 2002 was 20,101,315.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report is incorporated by
reference to the Registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders scheduled to be held on May 5, 2002.
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FORWARD-LOOKING INFORMATION
Statements in this Report that are not descriptions of historical facts
are forward-looking statements provided under the "safe harbor" protection of
the Private Securities Litigation Reform Act of 1995. These statements are made
to enable a better understanding of our business, but because these
forward-looking statements are subject to many risks, uncertainties, future
developments and changes over time, actual results may differ materially from
those expressed or implied by such forward-looking statements. Examples of
forward-looking statements are statements about anticipated financial or
operating results, financial projections, business prospects, future product
performance, future research and development results, anticipated regulatory
filings and approvals, and other matters that are not historical facts. Such
statements often include words such as "believes," "expects," "anticipates,"
"intends," "plans," "estimates" or similar expressions.
These forward-looking statements are based on the information that was
currently available to us, and the expectations and assumptions that were deemed
reasonable by us, at the time the statements were made. We do not undertake any
obligation to update any forward-looking statements in this Report or in any of
our other communications, except as required by law, and all such
forward-looking statements should be read as of the time the statements were
made, and with the recognition that these forward-looking statements may not be
complete or accurate at a later date.
Many factors may cause or contribute to actual results or events being
materially different from those expressed or implied by forward-looking
statements. Although it is not possible to predict or identify all such factors,
they include those set forth under "Factors Affecting Our Business and
Prospects" below. These risk factors include, but are not limited to, the
results of research and development efforts, the results of preclinical and
clinical testing, the effect of regulation by the U.S. Food and Drug
Administration, or FDA, and other agencies, the impact of competitive products,
product development, commercialization and technology difficulties, the results
of financing efforts, the effect of our accounting policies and other risks
detailed in our filings with the Securities and Exchange Commission.
PART I
ITEM 1. BUSINESS.
OVERVIEW
We are an emerging specialty pharmaceutical company focused on advanced
drug delivery. With five unique, patented, drug delivery technologies, we are
currently developing a diverse portfolio of products, including proprietary
oncology, pain management, growth hormone releasing peptide-1, oral interferon
and dermatology products. We also form strategic alliances with large
pharmaceutical and biotechnology companies utilizing our various drug delivery
systems. We have significant strategic alliances with Pfizer Inc.,
Sanofi-Synthelabo Inc., MediGene AG, Fujisawa Healthcare, Inc., Elan
International Services, Ltd., Geneva Pharmaceuticals, Inc. and CollaGenex
Pharmaceuticals, Inc.
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Atrix Laboratories, Inc. was incorporated in Delaware in August 1986.
In November 1998, we acquired ViroTex Corporation. In June 1999, we organized
our wholly owned registered subsidiary Atrix Laboratories Limited, which is
based in London, England. In February 2000, we organized our wholly owned
registered subsidiary Atrix Laboratories GmbH, which is based in Frankfurt,
Germany, to conduct our European operations. In June 2000, we entered into a
research joint venture, Transmucosal Technologies, Limited with Elan
International, which is a wholly owned subsidiary of Elan Corporation, plc.
OUR STRATEGY
Our primary objective is to be a leading specialty pharmaceutical
company focused on advanced drug delivery to improve the effectiveness of
existing pharmaceuticals and new chemical entities, particularly proteins,
peptides and vaccines. Key elements to our strategy include:
o Expanding our portfolio of products through internal development.
We intend to develop our own pharmaceutical product candidates and
undertake late stage human clinical development ourselves. We are
applying our drug delivery technologies to novel applications and
formulations of approved pharmaceutical products to improve their
delivery and effectiveness.
o Maximizing the value of products by entering into late stage
collaborative relationships. We believe that advancing our
products through late stage development before seeking
commercialization partners allows us to license our products on
more favorable terms than would be available earlier in the
development cycle.
o Licensing our technologies to major pharmaceutical and
biotechnology companies. We are focused on developing partnerships
with pharmaceutical and biotechnology companies to utilize our
drug delivery systems for new chemical entities and life cycle
management products. We also have preclinical feasibility studies
with various companies for proteins, peptides and monoclonal
antibodies.
o Pursuing acquisitions of complementary drug delivery technologies.
We are pursuing opportunities that further strengthen our delivery
technologies. We believe that if we are able to increase the
number of delivery systems in our portfolio, we can increase our
attractiveness as a product development partner with other
pharmaceutical and biotechnology companies. In addition, we
believe that pursuit of this strategy will strengthen our internal
product development efforts.
o Acquiring or in-licensing proprietary compounds. To expand our
pipeline, we seek to identify drug candidates that may benefit
from the application of our drug delivery technologies. These
compounds generally have entered or are about to enter human
clinical trials.
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RECENT DEVELOPMENTS
The following discussion highlights significant events for our company
during the year ended December 31, 2001.
SIGNIFICANT 2001 EVENTS WITH COLLABORATIVE PARTNERS
Sanofi-Synthelabo, Inc.
Under the terms of our agreement with Sanofi-Synthelabo, we received a
$3.0 million milestone payment in June 2001 upon the FDA acceptance of our March
2001 filing of a New Drug Application, or NDA, for our Eligard(TM) 7.5-mg
one-month product, formerly known as Leuprogel One-Month Depot. We received FDA
approval to market our Eligard 7.5-mg one-month product in January 2002 and
expect to commence our marketing launch of Eligard 7.5-mg in the third quarter
of 2002.
We submitted an NDA to the FDA in September 2001 for our Eligard
22.5-mg three-month product and in December 2001, we received an additional $3.0
million milestone payment from Sanofi-Synthelabo upon the FDA acceptance of this
filing. The combined $6.0 million milestone payments from Sanofi will be
recognized as revenue over the remaining term of the agreement using the
straight-line method.
MediGene AG
In April 2001, we entered into an agreement with MediGene to market our
Eligard products in Europe. Under the terms of the MediGene agreement, we
received an up-front licensing fee of $2.0 million and we may receive future
additional licensing fees and milestone payments for certain clinical,
regulatory and sales milestones upon approval for marketing by the European
Medicine Evaluation Agency, or other competent authority. The $2.0 million
licensing fee from MediGene will be recognized as revenue over the term of the
agreement using the straight-line method. Additionally, MediGene purchased
233,918 shares of our common stock for approximately $3.8 million as part of the
agreement and will provide funding to conduct clinical research and regulatory
activities associated with seeking European marketing approvals.
In December 2001, MediGene submitted a Marketing Authorization
Application, or MAA, for our Eligard 7.5-mg one month product to the German
regulatory authority, Bundesinstitut fur Arzneimittel und Medizinprodukte, or
BfArM, as a reference member state under a mutual recognition process.
Fujisawa Healthcare, Inc.
In October 2001, we entered into a collaboration, license and supply
agreement with Fujisawa Healthcare for the exclusive North American marketing
and distribution rights of our Atrisone(R) acne treatment product. The Fujisawa
agreement provides up to $25.0 million for an up-front licensing fee and certain
milestone payments. Additionally, we may receive a
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royalty on sales of the Atrisone product and a manufacturing margin. In October
2001, we received a $2.0 million up-front licensing fee from Fujisawa
Healthcare, which will be recognized as revenue over the term of the agreement
using the straight-line method.
Elan International Services, Ltd.
In March 2001, BEMA(TM)-Ondansetron, an anti-emetic product using our
BEMA drug delivery system, was selected as the second compound under development
in the joint venture. BEMA-Ondansetron, which is for the treatment of nausea and
vomiting associated with cancer chemotherapy, is currently in preclinical
studies.
After we submitted an Investigational New Drug Application, or IND, to
the FDA in November 2001 for BEMA-Fentanyl, this product for the treatment of
chronic and breakthrough cancer pain advanced from preclinical stage of
development to Phase I clinical studies.
Geneva Pharmaceuticals, Inc.
In December 2001 and January 2002, we submitted Abbreviated New Drug
Applications, or ANDAs, to the FDA for approvals of two separate generic
dermatology products.
Block Drug Termination Agreement
Under the terms of an August 2001 amendment to our agreement with Block
Drug Corporation, we reacquired the marketing rights for our dental products for
$7.0 million, of which $3.3 million was paid upon execution of the amendment.
The balance of $3.7 million will generally be payable over a four-year period
based upon future net sales of the dental products and/or receipt of licensing
fees for our dental products. In conjunction with the amendment to the Block
agreement, Block paid us $3.0 million owed for the September 2000 FDA approval
and Block's first commercial sale obligation of Atrisorb(R) FreeFlow with
Doxycycline, or Atrisorb-D, a periodontal barrier product with the antibiotic
doxycycline for gingival surgery. Finally, under the August 2001 amendment, each
party agreed to terminate all legal proceedings against the other party relating
to the agreement.
CollaGenex Pharmaceuticals, Inc.
We licensed the exclusive U.S. marketing rights for Atridox(R),
Atrisorb FreeFlow GTR Barrier and Atrisorb-D GTR Barrier to CollaGenex following
the reacquisition of the sales and marketing rights from Block. Under the terms
of the CollaGenex agreement, we received an up-front licensing fee of $1.0
million. Additionally, we will receive a royalty on net sales of the dental
products and a manufacturing margin. As part of the transaction, we purchased
330,556 shares of CollaGenex's common stock for $3.0 million, the proceeds of
which will primarily fund a revitalized marketing campaign by CollaGenex for
Atridox and the Atrisorb Barrier products. CollaGenex commenced U.S. marketing
of Atridox and Atrisorb FreeFlow in November 2001 and Atrisorb-D in January
2002.
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Other Collaborations
In August 2001, we entered into a marketing agreement with F.H.
Faulding & Co. Limited, ABN, trading as Faulding Pharmaceuticals, to market our
Eligard products in Australia and New Zealand. The agreement includes an
up-front licensing fee, certain milestone payments, royalty payments on net
sales, and a manufacturing margin for the Eligard products upon approval for
marketing by the Therapeutic Goods Administration of Australia and/or other
competent authorities in Australia and New Zealand. Additionally, Faulding will
be responsible for regulatory submissions and any studies that may be necessary
to gain approval with the Australian and New Zealand authorities.
In August 2001, we entered into a feasibility study agreement with
Human Genome Sciences, Inc., a pioneer in the discovery and development of
genomics-based drugs, to develop a sustained-release formulation of a Human
Genome Sciences new proprietary protein utilizing our Atrigel(R) drug delivery
system. Under the terms of the agreement, Human Genome Sciences will provide
funding for the development of this product.
In December 2001, we signed an exclusive marketing agreement with
PharmaScience, Inc., for the marketing and distribution of our dental products
in Canada.
ACQUIRED LICENSED PRODUCTS IN 2001
In January 2001, we purchased an exclusive option from Tulane
University Health Science Center to license a patented human growth hormone
releasing peptide-1 compound, or GHRP-1. We exercised this option in September
2001 and paid Tulane $2.5 million. Possible applications of GHRP-1 include
treatment of patients with AIDS or cancer, promotion of growth in children with
short stature, and prevention of muscle wasting and frailty in aged individuals.
Our intent is to deliver GHRP-1 for an extended period of time using our
patented Atrigel drug delivery system. Additionally, under the terms of the
Tulane agreement, we will pay Tulane a royalty on sales of any GHRP-1 product
that may be developed and subsequently marketed. We will fund the research and
development and perform most of the development effort.
We signed a licensing agreement for an oral interferon product with
Amarillo Biosciences in September 2001 for $0.5 million. We are currently
developing this product for the treatment of oral warts caused by human
papilloma virus in HIV-infected patients and for the treatment of Behcet's
disease. Behcet's disease is an autoimmune disorder that is characterized by
mouth ulcers and generally two additional "hallmark" symptoms. The FDA granted
the oral interferon product orphan drug status for both indications in January
2000. In November 2001, we submitted an IND to the FDA to proceed into human
clinical studies for the treatment of oral warts and we commenced a Phase II
clinical study for this product in the first quarter of 2002.
SIGNIFICANT CAPITAL FUNDING EVENTS IN 2001
During the year ended December 31, 2001, we sold 3,565,000 shares of
our common stock at a price of $23.00 per share under our shelf registration
statement in two underwritten public offerings. The underwriters exercised their
option to purchase 534,750 additional shares of our common stock in connection
with our public offerings. We received net proceeds of
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$87.7 million from our public offerings and the over-allotment exercises, net of
issuance costs of $6.6 million. We anticipate using the net proceeds from the
offerings to broaden and strengthen our technologies, supplement our product
pipeline, and further product development efforts.
Effective September 17, 2001, our Board of Directors approved a new
stock repurchase program to acquire up to $5.0 million of our common stock. The
stock repurchase program expires in May 2002. During the year ended December 31,
2001, we repurchased a total of 77,500 shares of our common stock in the open
market for $1.6 million, or an average share price of $20.11.
During the year ended December 31, 2001, we completed a series of
private transactions involving the exchange of 1,725,735 shares of our common
stock for $31.0 million of our 7% Convertible Subordinated Notes.
OUR MARKETED PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
The following table details certain information about our
pharmaceutical products and products under development:
PHARMACEUTICAL PRODUCT CANDIDATES
DELIVERY
PHARMACEUTICAL PRODUCT CANDIDATES SYSTEM INDICATION STATUS COLLABORATIVE PARTNER(S)
--------------------------------- -------- ---------- ------ ------------------------
Eligard 7.5-mg one-month............... Atrigel Prostate cancer FDA approved Sanofi-Synthelabo,
Jan. 2002; MediGene, Faulding
Germany MAA
submitted to
BfArM Dec. 2001
Eligard 22.5-mg three-month............ Atrigel Prostate cancer NDA submitted to Sanofi-Synthelabo,
FDA Sept. 2001 MediGene, Faulding
Eligard 30-mg four-month............... Atrigel Prostate cancer Phase III Sanofi-Synthelabo,
MediGene, Faulding
Eligard unique dosage formulation...... Atrigel Prostate cancer Preclinical Sanofi-Synthelabo
Atrisone............................... SMP(TM) Moderate to severe acne Phase III Fujisawa Healthcare
Treatment for burn itch Phase II None
Treatment of atopic IND Submitted None
dermatitis
Growth hormone releasing peptide-1..... Atrigel Growth promotion and Preclinical Tulane University Health
cacexia (muscle wasting) Science Center
HGSI proprietary protein............... Atrigel Undisclosed compound Preclinical Human Genome Sciences
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DELIVERY
PHARMACEUTICAL PRODUCT CANDIDATES SYSTEM INDICATION STATUS COLLABORATIVE PARTNER(S)
--------------------------------- -------- ---------- ------ ------------------------
BEMA-Fentanyl.......................... BEMA(TM) Chronic and breakthrough Phase I Amarillo Biosciences
cancer pain Orphan drug
status
BEMA-Ondanestron....................... BEMA Emesis (nausea) Preclinical Elan
BEMA-Hydrocodone....................... BEMA Mild to moderate pain Preclinical None
BEMA-Migraine.......................... BEMA Migraine Preclinical None
Oral interferon........................ Lozenge Behcet's disease Preclinical Amarillo Biosciences
Oral papillomavirus warts Phase II
Orphan drug
status for both
We currently market two dental drug products, two medical device dental
products and two over-the-counter, or OTC, drug products. The following table
provides a summary of our marketed dental and OTC products and products under
development:
DELIVERY
DENTAL/OTC PRODUCTS SYSTEM INDICATION STATUS COLLABORATIVE PARTNER(S)
------------------- -------- ---------- ------ ------------------------
Atridox............................... Atrigel Antibiotic therapy for Marketed CollaGenex, Sidus,
chronic periodontitis Launched 1998 PharmaScience, Genmedix
Atrisorb-Doxycycline FreeFlow GTR Atrigel Tissue regeneration and Marketed CollaGenex, Pharmascience
Barrier............................. infection reduction Launched Jan.
following periodontal 2002
surgery
Atrisorb FreeFlow GTR Barrier......... Atrigel Tissue regeneration Marketed CollaGenex, Pharmascience
following periodontal Launched 1998
surgery
Atrisorb GTR Barrier.................. Atrigel Tissue regeneration Marketed Product being phased out
following periodontal Launched 1996
surgery
Doxirobe(R)Gel......................... Atrigel Periodontitis in Marketed Pharmacia & Upjohn
companion animals Launched 1997 Animal Health
BCP topical antibiotic and wound wash. BCP(TM) Infection protection and Future OTC None
minor cuts and abrasions products
Viractin(R)cream and gel............... Other Cold sores and fever Marketed OTC J.B. Williams Company
blisters product
Orajel-Ultra(R)........................ MCA(TM) Canker sores Marketed OTC Del Pharmaceuticals
product
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PHARMACEUTICAL PRODUCT CANDIDATES
Eligard Products
We are developing our proprietary Eligard products for prostate cancer
incorporating a leutinizing hormone-releasing hormone, or LHRH, agonist with our
proprietary Atrigel drug delivery system. The Atrigel technology allows for
sustained delivery of leuprolide acetate for periods ranging from one month to
approximately six months.
Numerous clinical trials have demonstrated that the sustained release
of a LHRH agonist decreases testosterone levels to suppress tumor growth in
patients with hormone-responsive prostate cancer. The Eligard 7.5-mg one-month
and the Eligard 22.5-mg three-month Phase III results revealed low testosterone
levels with 100% of patients achieving and maintaining castrate suppression by
the conclusion of the studies.
Our Eligard products are injected subcutaneously as a liquid with a
small gauge needle. The polymers precipitate after injection, forming a solid
implant in the body that slowly releases the leuprolide as the implant is
bioabsorbed. We believe our Eligard products are safe and effective in treating
prostate cancer and offer advantages to the patient, including a smaller needle
and subcutaneous, rather than the more painful intramuscular, injection
delivery.
According to the American Cancer Society, prostate cancer is the most
common cancer, excluding skin cancers, in American men. It is estimated that
during the year 2002, approximately 189,000 new cases of prostate cancer will be
diagnosed in the United States and an estimated 30,200 men will die of the
disease. Approximately one man in six will be diagnosed with prostate cancer
during his lifetime.
Eligard 7.5-mg One-Month Product
We received FDA approval of Eligard 7.5-mg one-month product in January
2002. FDA approval of our Eligard 7.5-mg one-month marketing materials,
including labeling, will need to be obtained before Sanofi-Synthelabo commences
marketing this product in the United States. We anticipate that the Eligard
7.5-mg one-month marketing launch will commence in the third quarter of 2002.
In December 2001, MediGene submitted an MAA, for our Eligard 7.5-mg
one-month product to the German regulatory authority, BfArM, as a reference
member state under a mutual recognition process. If approval is obtained in the
Reference State, MediGene intends to submit a modified MAA to specific concerned
member states in the European Union for marketing approval in other key
countries.
Eligard 22.5-mg Three-Month Product
We submitted an NDA for Eligard 22.5-mg three-month product to the FDA
in September 2001. Once the submission is accepted by the FDA for filing, the
FDA begins an in-
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depth review of the NDA. Under the Food, Drug and Cosmetic Act, and User Fee
legislation, the FDA has up to twelve months in which to review the NDA and
respond to the applicant.
Eligard 30-mg Four-Month Product
In March 2001, we completed enrollment for a Phase III clinical trial
of our Eligard 30-mg four-month product. The Phase III clinical trial is being
conducted at 22 centers with each of the 90 patients receiving an Eligard 30-mg
injection every four months over an eight-month period. We expect to submit an
NDA for the Eligard 30-mg product in the second quarter of 2002.
Eligard Unique Dosage Formulation Product
Our Eligard unique dosage formulation product for prostate cancer is
currently in preclinical development. If these experiments demonstrate that
leuprolide acetate is delivered safely and effectively over an approximately
six-month period, we expect to enter Phase III clinical trials in the third
quarter of 2002.
Atrisone
We are currently developing Atrisone, our proprietary product for the
treatment of acne and the itching associated with healing burn wounds. Atrisone
incorporates dapsone, an anti-inflammatory and antimicrobial drug, with our
proprietary SMP drug delivery system. Dapsone is a potent antibiotic with a
separate anti-inflammatory activity, which reduces inflammation associated with
acne. The goal for Atrisone is topical application to the acne lesion so as to
reduce any potential side effects, such as anemia. After topical application,
the blood levels of dapsone are 500 to 1,000 times less than found when the
compound is administered orally, thus significantly reducing the potential for
systemic side effects.
Enrollment for the first of two Atrisone Phase III clinical trials was
completed in October 2001. The first Phase III clinical trial consisted of 500
patients at 19 centers comparing 5% dapsone applied twice a day to a vehicle
control. In the first quarter of 2002, we received positive clinical data from
the first Phase III clinical trail for Atrisone and we expect to commence a
second Phase III clinical trial in the second quarter of 2002.
According to IMS data, the U.S. market for topical products to treat
acne was $600 million in 2000, with the combined oral and topical market at more
than $1 billion.
Additional indications of Atrisone include treatment of chronic itch
associated with healed and healing burn wounds and atopic dermatitis. Positive
pilot data for use in burn itch was reported in October 2001 and is currently in
Phase II clinical trials. In May 2001, we submitted an IND to the FDA for the
use of Atrisone in the treatment of atopic dermatitis. Atopic dermatitis is a
common chronic skin condition in children and adults and is characterized by
dryness, erythema and extreme itch.
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Growth Hormone Releasing Peptide-1
We are developing a sustained release GHRP-1 product utilizing our
Atrigel drug delivery system. This proprietary compound promotes the pulsatile
release of the body's own growth hormone from the pituitary gland. GHRP-1
represents the first of a new class of small synthetic peptides, and we believe
the pulsatile delivery of growth hormone produced by GHRP-1 offers advantages
over current methods of administration of growth hormone because pulsatile
delivery more closely mirrors the natural physiological mechanism. We have begun
preclinical studies for the GHRP-1 product. Applications for human growth
hormones and/or promoting compounds include inhibition of cachexia (extensive
muscle and tissue wasting) in patients whose immune systems are compromised,
such as patients with AIDS or other immune system disorders, or patients
receiving cancer treatments, promotion of growth in children of short stature,
and possibly prevention of muscle wasting and frailty in aged individuals. We
exercised an option to license GHRP-1 from Tulane University Health Sciences
Center in September 2001. GHRP-1 is currently in the preclinical stage of
research and development and will utilize our Atrigel delivery technology. We
anticipate submitting an IND to the FDA for this product and commencing a Phase
I clinical safety study in the second quarter of 2002.
HGSI Proprietary Protein
We have entered into a feasibility study agreement with Human Genome
Sciences, a pioneer in the discovery and development of genomics-based drugs, to
develop a sustained-release formulation of a Human Genome Sciences new
proprietary protein utilizing our Atrigel drug delivery system. Under the terms
of the agreement, Human Genome Sciences will provide funding for the project.
BEMA-Fentanyl
Through our joint venture with Elan, we are developing BEMA-Fentanyl,
which uses our proprietary BEMA drug delivery system with fentanyl, an opiate
analgesic, for breakthrough cancer pain and potentially the management of
chronic pain. The BEMA delivery system is a polymer-based system designed to
deliver systemic levels of drugs rapidly across oral or vaginal mucosal tissues.
The system consists of a thin, semi-soft bioerodible multi-layer disc of various
polymers which adheres readily to the mucosal tissues. The BEMA disc softens
upon contact with moisture and erodes away over approximately 10 to 20 minutes
as it delivers the drug. In November 2001, we submitted an IND to the FDA and
commenced a Phase I clinical safety study for BEMA-Fentanyl.
BEMA-Ondansetron
Through our joint venture with Elan, we are also developing an
anti-emetic product using the BEMA system, for the prevention of nausea and
vomiting associated with cancer chemotherapy. Preclinical studies have shown
that the BEMA technology rapidly delivers the drug to the systemic circulation
with sustained levels to six hours. The levels achieved in these preclinical
studies were significantly higher and provided a more extended release profile
than the oral dosage form.
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BEMA-Hydrocodone
We are developing a BEMA-Hydrocodone product using our BEMA system with
hydrocodone bitartrate, a narcotic analgesic used for the treatment of mild to
moderate pain. In combination with acetaminophen or ibuprofen, products
containing hydrocodone were the most prescribed generic oral drug products in
2000. These products are oral tablets requiring at least one hour or more to
achieve efficacious blood levels after administration. We believe that a
non-injectible drug product containing hydrocodone with a rapid onset of action
would have definite advantages over these current oral products. Preclinical
results with BEMA discs containing hydrocodone bitartrate have shown rapid
absorption of the drug with efficacious blood levels in 15 minutes. We
anticipate submitting an IND to the FDA for this product and commencing a Phase
I clinical safety study in the second quarter of 2002.
BEMA-Migraine
We are exploring the development of a migraine product utilizing the
BEMA drug delivery system with various migraine treatment compounds to provide
rapid relief for migraine headaches, with a rapid onset comparable to that of
injections. Imitrex (Sumatriptan) dominates the U.S. market for migraine
products with sales of $1.0 billion, according to IMS Health. A significant
problem with Imitrex and other triptans on the market is their inability to
provide pain relief as quickly as desired. Intramuscular injection provides
rapid relief, but many patients do not favor this painful method of
administration. Preclinical studies with the BEMA delivery system and a number
of migraine treatment compounds have shown the potential for rapid absorption
and improved bioavailability compared to oral administration. We anticipate
submitting an IND to the FDA for this product and commencing a Phase I clinical
safety study in the second quarter of 2002.
Oral Interferon
We are currently developing an oral interferon product for the
treatment of oral warts caused by human papilloma virus in HIV-infected patients
and for the treatment of Behcet's disease. Behcet's disease is an autoimmune
disorder that is characterized by mouth ulcers and generally two additional
"hallmark" symptoms. Low-dose orally administered interferon is administered as
a lozenge, which dissolves slowly in the mouth. The FDA granted the oral
interferon product orphan drug status for both indications in January 2000. We
signed a licensing agreement for the oral interferon product with Amarillo
Biosciences in September 2001. In November 2001, we submitted an IND to the FDA
to proceed into human clinical studies for the treatment of oral warts and we
commenced a Phase II clinical study in the first quarter of 2002.
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DENTAL AND OVER-THE-COUNTER PRODUCTS
Dental Products
We have a number of approved products that target the dental market.
Atridox, which combines the Atrigel system and the antibiotic doxycycline, is a
minimally invasive treatment intended to control the bacteria that causes
periodontal disease. Atridox was awarded the American Dental Association Seal of
Acceptance which is an important symbol to dentists and consumers that signifies
a dental product's safety, effectiveness and the scientific validity of its
health benefits.
Our Atrisorb-D product also uses the Atrigel system with the antibiotic
doxycycline to address infections following periodontal surgery and thereby
improve healing. Atrisorb-D is a biodegradable polymer that utilizes the Atrigel
system to aid in the guided tissue regeneration of a tooth's support following
osseous flap surgery or other periodontal procedures.
In addition to these dental products, Pharmacia & Upjohn Company
currently has the worldwide marketing right of our Doxirobe Gel product, a
periodontal disease treatment for companion animals, which is comprised of the
antibiotic doxycycline and the Atrigel system.
Net sales and royalties for our dental products in the years ended
December 31, 2001, 2000 and 1999 were approximately $2.4 million, $4.7 million,
and $4.1 million, respectively.
Over-The-Counter Products
Over-the-counter products which are currently being marketed include
Viractin Cold Sore & Fever Blister Medicine and Orajel-Ultra Mouth Sore
Medicine, which utilizes our proprietary MCA drug delivery system. Viractin is
marketed by J.B. Williams Company and Orajel-Ultra is marketed by Del
Pharmaceuticals. We receive royalties on the sales of these two products.
The BCP delivery system, composed of polymers, solvents and active
agents carefully selected for their low toxicity to skin cells, can be
formulated as either film-forming gels or liquids for topical applications. BCP
gels are non-greasy, non-staining formulations that can be applied to wounded or
denuded skin to deliver a drug, such as an antibiotic, and then dry to form a
non-constricting, protective film over the wound. The gels have the unique
property of maintaining an ideal wound-healing environment by removing excess
moisture from exudative wounds and transferring moisture from the gel into the
wounds that are too dry. Liquid BCP formulations are designed to provide
effective cleansing of topical wounds or denuded skin without causing further
trauma to the skin, thereby promoting faster healing with minimal scarring. The
first two products in development utilizing the BCP technology are a topical
antibiotic preparation (with and without local anesthetic) for superficial wound
healing and a wound-washing solution for cleansing dirty wounds.
13
OUR DRUG DELIVERY TECHNOLOGIES
The following chart provides a brief description of our drug delivery
systems:
Technology Description Application
---------- ----------- -----------
Atrigel System Biodegradable sustained release in Delivery of drugs from weeks to
situ implant for local or systemic months
delivery
Bioerodible Mucoadhesive Film System Pre-formed bioerodible film for Transmucosal delivery of drugs from
(BEMA) fast-acting local or systemic minutes to hours
delivery
Solvent Microparticle System (SMP) Topical gel providing two-stage Dermal delivery of water insoluble
dermal delivery drugs
Mucocutaneous Absorption System (MCA) Water resistant topical gel Film for either wet or dry surfaces
providing sustained delivery
Biocompatible Polymer System (BCP) Non-cytotoxic gel/liquid for topical Protective gel film for wound
delivery healing and liquid formulation for
wound washing
ATRIGEL SYSTEM
The Atrigel drug delivery system consists of biodegradable polymers,
similar to those used in biodegradable sutures, dissolved in biocompatible
carriers. Pharmaceuticals may be blended into this liquid delivery system at the
time of manufacturing or, depending upon the product, may be added later by the
physician at the time of use. When the liquid product is injected subcutaneously
or intramuscularly through a small gauge needle or placed into accessible tissue
sites through a cannula, displacement of the carrier with water in the tissue
fluids causes the polymer to precipitate to form a solid film or implant. The
drug encapsulated within the implant is then released in a controlled manner as
the polymer matrix biodegrades with time. Depending upon the patient's medical
needs, the Atrigel system can deliver small molecules, peptides, or proteins
over a period ranging from days to months.
We believe that the Atrigel system addresses many of the limitations
associated with traditional drug delivery technologies. Most drugs are
administered orally or by injection at intermittent and frequent doses. These
routes of administration are not optimal for several reasons, including:
o destruction of the compound in the gastrointestinal system,
o difficulty in maintaining uniform drug levels over time,
o problems with toxicity and side effects,
o high costs due to frequent administration, and
o poor patient compliance.
Furthermore, innovations in biotechnology have led to an increase in
the number of protein and peptide drugs under development. These therapeutics,
because of their larger molecular size and susceptibility to degradation in the
gastrointestinal tract, often are required to
14
be administered by multiple injections, usually in a hospital or other clinical
setting. We cannot provide assurance that future products using the Atrigel
system will be successfully developed and approved by the FDA or cleared for
commercial use.
We believe that the Atrigel system may provide benefits over
traditional methods of drug administration such as tablets or capsules,
injections and continuous infusion as a result of the following properties:
o Broad Applicability - The Atrigel system is compatible with a
broad range of pharmaceutical compounds, including water soluble
and insoluble compounds and high and low molecular weight
compounds, including peptides and proteins.
o Site Specific Drug Delivery - The Atrigel system can be delivered
directly to a target area, thus potentially achieving higher drug
concentrations at the desired site of action to minimize systemic
side effects.
o Systemic Drug Delivery - The Atrigel system can also be used to
provide sustained drug release into the systemic circulation.
o Customized Continuous Release and Degradation Rates - The Atrigel
system can be designed to provide continuous release of
incorporated pharmaceuticals over a targeted time period so as to
reduce the frequency of drug administration.
o Biodegradability - The Atrigel system will biodegrade and does not
require removal when the drug is depleted.
o Ease of Application - The Atrigel system can be injected or
inserted as flowable compositions, such as solutions, gels,
pastes, and putties, by means of ordinary needles and syringes, or
can be sprayed or painted onto tissues.
o Safety - All current components of the Atrigel system are
biocompatible and have independently established safety and
toxicity profiles. The polymers used in the system are members of
a class of polymers, some of which have previously been approved
by the FDA for human use in other applications.
BIOERODIBLE MUCOADHESIVE SYSTEM
The Bioerodible Mucoadhesive, or BEMA, system is a proprietary
polymer-based system designed to deliver systemic levels of drugs rapidly across
oral or vaginal mucosal tissues. The semi-soft BEMA disc adheres readily to the
mucosa, where it softens further on contact with moisture, rapidly becoming
unnoticeable as it delivers the drug and erodes away in approximately 10 to 20
minutes. The BEMA system is versatile and can incorporate a wide variety of
drugs, including proteins and peptides. The compound can be loaded into the
mucoadhesive layer for delivery into the mucosal tissue, while minimizing drug
release into surrounding tissues or cavities. The drug may also be loaded into
the backing layer to provide more controlled release into the oral or vaginal
cavity.
15
Various properties of the BEMA products, such as residence time,
bioerosion kinetics, taste, shape and thickness can be modified to the desired
level to customize drug delivery to the medical need and patient needs. The BEMA
technology has potential applications in pain management, anti-migraine
compounds and anti-emetics, all of which require rapid onset of action and
avoidance of first-pass metabolism.
SOLVENT/MICROPARTICLE SYSTEM
The Solvent/Microparticle, or SMP, technology consists of a two-stage
system designed to provide topical delivery of highly water-insoluble drugs to
the skin. The combination of dissolved drug with a microparticle suspension of
the drug in a single formulation allows a controlled amount of the dissolved
drug to permeate into the epidermal layer of the skin, while a high level of the
microparticle drug is maintained just above the outermost layer of the skin for
later delivery. The consistent microparticle size and distribution maximize drug
delivery while minimizing crystal growth over the shelf life of the product.
MUCOCUTANEOUS ABSORPTION SYSTEM
The Mucocutaneous Absorption, or MCA, delivery system can be formulated
as either alcohol-based gels or as aerosols for the localized delivery of drugs
to the skin or mucosal tissues. The MCA formulations can be applied to dry, damp
or even wet skin or mucosal surfaces. Because of the novel blend of cellulose
polymers dissolved in alcohol, they quickly dry to form moisture-resistant films
that can deliver drugs and/or promote healing. Depending on the desired
application, the MCA products can be formulated to form opaque films to
highlight the area of treatment, or to transparent films that are more
cosmetically acceptable. The MCA formulations can be easily flavored to mask the
taste of active ingredients for oral products and are compatible with liquid
spray applicators.
BIOCOMPATIBLE POLYMER SYSTEM
The Biocompatible Polymer, or BCP system, composed of polymers,
solvents and actives carefully selected for their low toxicity to skin cells,
can be formulated as either film-forming gels or liquids for topical
applications. The BCP gels are non-greasy, non-staining formulations that can be
applied to wounded or denuded skin to deliver a drug, such as an antibiotic, and
then dry to form a non-constricting, protective film over the wound. We believe
the gels have the unique property of maintaining an ideal wound-healing
environment by removing excess moisture from exudative wounds and transferring
moisture from the gel into wounds that are too dry. The liquid BCP formulations
are designed to provide effective cleansing of topical wounds or denuded skin
without causing further trauma to the skin, thereby promoting faster healing
with minimal scarring.
RESEARCH AND DEVELOPMENT
Our strategic goal is to devote substantial resources to our medical
research and development efforts with the expectation of quickly moving products
from the development
16
stage to commercialization. During the year ended December 31, 2001, we
continued to devote significant resources to the research and development of our
Eligard and Atrisone products. Currently, we have multiple compounds in various
stages of preclinical development, a number of which are being developed through
partnerships with a variety of external companies. For example, we have multiple
undisclosed compounds in preclinical development with Pfizer. Most of these
projects are preliminary in nature and we cannot predict whether any of them
will be commercialized.
We submitted an NDA to the FDA in March 2001 for the Eligard 7.5-mg
one-month product and we received FDA approval to market this product in January
2002. In September 2001, we submitted an NDA for the Eligard 22.5-mg three-month
product and in March 2001, we completed patient enrollment in the Eligard 30-mg
four-month product Phase III clinical trials.
GHRP-1 is currently in the preclinical stage of research and
development and will utilize our Atrigel delivery technology. GHRP-1 is the
first of a new class of small synthetic peptides that promotes release of the
patient's own growth hormone.
Atrisone for the treatment of acne is in Phase III clinical studies. In
the first quarter of 2002, we received positive clinical data from the first
Phase III clinical trial and we expect to commence a second Phase III clinical
trial in the second quarter of 2002. We are currently in Phase II for the use of
Atrisone for the treatment of chronic itch associated with healed and healing
burn wounds and reported positive pilot data for use in burn itch in October
2001. In May 2001, we submitted an IND to the FDA for the use of Atrisone in the
treatment of atopic dermatitis.
Through our joint venture with Elan, we are researching and developing
BEMA-Fentanyl using our BEMA drug delivery system. In November 2001, we
submitted an IND to the FDA for BEMA-Fentanyl and commenced a Phase I clinical
safety study for BEMA-Fentanyl. Also through our joint venture with Elan, we are
developing BEMA-Ondansetron, which is currently in preclinical studies.
We are developing a BEMA-Hydrocodone product using our BEMA system with
hydrocodone bitartrate. Preclinical results with BEMA discs containing
hydrocodone bitartrate have shown rapid absorption of the drug with efficacious
blood levels in 15 minutes. We anticipate submitting an IND to the FDA for this
product and commencing a Phase I clinical safety study in the second quarter of
2002.
We are exploring the development of a migraine product utilizing the
BEMA drug delivery system with various migraine treatment compounds. Preclinical
studies with the BEMA delivery system and a number of migraine treatment
compounds have shown the potential for rapid absorption and improved
bioavailability compared to oral administration. We anticipate submitting an IND
to the FDA for this product and commencing a Phase I clinical safety study in
the second quarter of 2002.
A low-dose oral interferon product for the treatment of oral warts
caused by human papilloma virus in HIV-infected patients is in Phase II clinical
studies, and as a treatment for Behcet's disease, it is in the preclinical stage
of research and development.
17
We are also developing a targeted set of generic topical dermatology
products with Geneva. We have completed several formulations and, in December
2001 and January 2002, we submitted ANDAs to the FDA for approvals of two
separate generic dermatology products.
Our research and development expenses, including licensing fees of $3.0
million in 2001 for GHRP-1 and oral interferon, were $28.6 million, $16.7
million and $15.6 million for the years ended December 31, 2001, 2000 and 1999,
respectively.
COLLABORATIVE ARRANGEMENTS
We form strategic alliances with major pharmaceutical and biotechnology
companies utilizing our various drug delivery systems. Our significant strategic
alliances include Pfizer, Sanofi-Synthelabo, MediGene, Fujisawa Healthcare,
Elan, Geneva and CollaGenex.
Pfizer, Inc.
In August 2000, we executed a non-exclusive comprehensive research and
worldwide licensing agreement with Pfizer to provide broad-based access to our
proprietary drug delivery systems in the development of new products. Pfizer
will provide funding to develop and commercialize selected compounds developed
by Pfizer using our patented drug delivery technologies. We retained
co-manufacturing rights and will receive royalties on the sales of products that
are successfully developed and commercialized under this agreement. Pfizer
purchased 447,550 shares of our common stock for $5.0 million as part of the
agreement. As of December 31, 2001, all products under the Pfizer agreement were
in preclinical stages of development.
Sanofi-Synthelabo, Inc.
In December 2000, we entered into an exclusive North American marketing
agreement with Sanofi-Synthelabo, for our Eligard one-, three-, and four-month
prostate cancer treatment products. Under the terms of the agreement, we will
manufacture the Eligard products and receive an agreed upon transfer price from
Sanofi-Synthelabo as well as royalties from sales. In addition, we received an
up-front licensing fee of $8.0 million and will receive research and development
support if Sanofi-Synthelabo exercises its option with respect to additional
indications of the Eligard products. As part of the agreement, Sanofi purchased
824,572 shares of our common stock for $15.0 million. Total proceeds under the
Sanofi agreement provides for payments of up to $60.0 million, including the
purchase of our common stock, the licensing fees and payments for clinical,
regulatory and sales milestones for the Eligard products upon approval for
marketing by the FDA. For the year ended December 31, 2001, we received $6.0
million from Sanofi for milestone payments upon FDA acceptance of our Eligard
7.5-mg one-month and Eligard 22.5-mg three-month NDA filings. In January 2002,
Sanofi exercised its option to develop an Eligard unique dosage formulation
product.
18
MediGene AG
In April 2001, we entered into an exclusive European marketing
agreement with MediGene AG, a German biotechnology company, to market our
Eligard one-month, three-month and four-month products. MediGene also has the
right to develop the Eligard unique dosage formulation product. Under the terms
of the agreement, we will manufacture the Eligard products and we will receive
additional payments for certain clinical, regulatory and sales milestones and
royalties from sales. Pursuant to the agreement, we received an up-front
licensing fee of $2.0 million. MediGene purchased 233,918 shares of our common
stock for $3.8 million. Additionally, MediGene will provide funding to conduct
clinical, research and regulatory activities associated with seeking European
marketing approvals. The MediGene agreement provides for payments of up to $16.0
million including MediGene's purchase of our common stock, the licensing fee and
payments for certain clinical, regulatory and sales milestones. In December
2001, MediGene submitted an MAA, for our Eligard 7.5-mg one-month product to the
German regulatory authority, BfArM, as a reference member state under a mutual
recognition process.
Fujisawa Healthcare, Inc.
In October 2001, we entered into a collaboration, license and supply
agreement with Fujisawa, for the exclusive North American marketing and
distribution rights of our Atrisone acne treatment product. The Fujisawa
agreement provides for payments of up to $25 million for an up-front licensing
fee and certain milestone payments. Additionally, we will receive a royalty on
net sales of the Atrisone product and a manufacturing margin. In October 2001,
we received a $2.0 million up-front licensing fee from Fujisawa.
Elan International Services, Ltd.
In July 2000, we formed a joint venture with Elan International
Services, Ltd., a wholly owned subsidiary of Elan Corporation, plc, for the
purpose of developing and commercializing oncology and pain management products.
This joint venture, Transmucosal Technologies, Ltd., will use our patented BEMA
and Atrigel drug delivery systems to deliver compounds targeted for major unmet
medical needs in oncology and pain management. As a part of this agreement, we
granted the joint venture an exclusive license to use our BEMA technology in
these fields. The first compound selected was the opiate analgesic, fentanyl,
using our BEMA drug delivery system for breakthrough cancer pain and management
of chronic pain. Currently, BEMA-Fentanyl is in Phase I clinical studies. In
March 2001, BEMA-Ondansetron, an anti-emetic product, was selected as the second
compound under development in the joint venture. The BEMA-Ondansetron product is
for the prevention of nausea and vomiting associated with cancer chemotherapy
and is currently in preclinical studies. As part of our agreement, Elan may
provide funding to develop this and any future selected compounds. Initially, we
are the majority-owner of this joint venture.
In connection with the formation of the joint venture, Elan purchased
12,015 shares of our Series A Convertible Exchangeable Preferred Stock for $12.0
million and 442,478 shares of our common stock for $5.0 million, and received a
five-year warrant to purchase up to one
19
million shares of our common stock at an exercise price of $18 per share. The
Series A Convertible Exchangeable Preferred Stock is convertible at any time
after July 2002, at Elan's option, into shares of our common stock at a price
equivalent to $18 per share. In the event of a merger or the sale of our common
stock in an underwritten public offering, we have the option to convert the
Series A Convertible Exchangeable Preferred Stock into shares of our common
stock. Alternatively, Elan has the option to exchange this preferred stock for a
30.1% interest in the joint venture. This exchange option will terminate if the
preferred stock is converted into our common stock unless we cause the
conversion. We must redeem this preferred stock in July 2006 for either cash or
shares of our common stock, at our option, in an amount or value equal to the
liquidation preference.
As part of our agreement, Elan may loan us up to $8.0 million to
support our share of the joint venture's research and development costs pursuant
to a convertible promissory note we issued to Elan. The convertible promissory
note has a maximum principal amount of $8.0 million and is due in July 2006. The
note is convertible into shares of our common stock at a conversion price of
$14.60 per share, subject to adjustment as provided in the note agreement. As of
December 31, 2001, we have not drawn any amounts under the convertible
promissory note and we do not expect to draw down any amounts under this note.
Our revenues from the joint venture were $4.1 million, $0.3 million and
$0 for the years ended December 31, 2001, 2000 and 1999, respectively.
Geneva Pharmaceuticals, Inc.
In August 2000, we entered into a collaboration, development and supply
agreement with Geneva Pharmaceuticals, Inc., a subsidiary of Novartis, to
conduct research and development activities on a collaborative basis to develop
designated generic topical prescription dermatology products. Under the
agreement, we will be responsible for validation, formulation, development and
required clinical studies of selected products. This collaboration extends to
the United States, although additional territories may be added at a later date.
Geneva will be responsible for market research and commercialization of the
products. Geneva will reimburse us for 50% of the research and development
expenses we incur and both parties will share equally in the net profits from
the sale of the products. In December 2001 and January 2002, we submitted ANDAs
to the FDA for approvals of two separate generic dermatology products.
CollaGenex Pharmaceuticals, Inc.
In August 2001, we licensed the exclusive U.S. marketing rights of our
dental products to CollaGenex, following the reacquisition of the sales and
marketing rights from Block. Under the terms of the CollaGenex agreement, we
received $1.0 million for an up-front licensing fee. Additionally, we will
receive a royalty on product sales and a manufacturing margin. As part of the
transaction, we purchased 330,556 shares of CollaGenex's common stock for $3.0
million, the proceeds of which CollaGenex will use primarily to fund a
revitalized marketing campaign for the dental products. CollaGenex commenced
U.S. marketing of Atridox and Atrisorb FreeFlow in November 2001 and Atrisorb-D
marketing in January 2002.
20
INTERNATIONAL OPERATIONS
In February 2000, our wholly owned registered subsidiary, Atrix
Laboratories GmbH, based in Frankfurt, Germany, commenced operations. Atrix
Laboratories GmbH was organized to conduct our European dental operations.
Currently, the subsidiary has three employees whose objective is to establish
business relations with international distributors for the sale of Atridox upon
mutual recognition of the product in key countries. Atrix Laboratories Limited,
our wholly owned registered subsidiary, is based in London, England, and was
organized in June 1999. Atrix Laboratories Limited, currently holds the
marketing authorization for international sales of Atridox. To date, we have
received individual marketing authorizations in fourteen European countries. Our
German subsidiary commenced Atridox European sales in October 2000.
In December 2001, we signed an exclusive marketing agreement with
PharmaScience, Inc., for the marketing and distribution of our dental products
in Canada.
MediGene submitted an MAA, for our Eligard 7.5-mg one-month product to
the German regulatory authority, BfArM, as a reference member state under a
mutual recognition process in December 2001. If approval is obtained in the
reference member state, MediGene will submit a modified MAA to specific
concerned member states in the European Union for marketing approval in other
key countries.
Our revenues from foreign sources, including the joint venture with
Elan, were $5.5 million, $1.2 and $0.8 million for the fiscal years ended
December 31, 2001, 2000 and 1999, respectively.
PATENTS AND TRADEMARKS
We consider patent protection and proprietary position to be
significant to our business. As of December 31, 2001, we maintained 46 United
States patents and 63 foreign patents, and 28 United States and 59 foreign
patent applications are pending. A number of the claims contained in these
patents and pending patent applications cover certain aspects of our drug
delivery technologies, including the Atrigel, BEMA, SMP, MCA and BCP drug
delivery technologies, and products based upon these technologies, including the
Eligard, Atrisone, Atridox, Atrisorb-D, Atrisorb FreeFlow and Atrisorb GTR
Barrier products.
Notwithstanding our pursuit of patent protection, others may develop
delivery systems, compositions and/or methods that infringe our patent rights
resulting from outright ownership or non-revocable exclusive licensure of
patents which relate to our delivery systems, composition and/or methods. In
that event, such delivery systems, compositions and methods may compete with our
systems, compositions and methods and may adversely affect our operations.
Furthermore, patent protection may not afford adequate protection against
competitors with similar systems, composition or methods, and our patents may be
infringed or circumvented by others. Moreover, it may be costly to pursue and to
prosecute patent infringement actions against others, and such actions could
hamper our business. We also rely on our unpatented proprietary knowledge.
Others may be able to develop substantially equivalent proprietary
21
knowledge or otherwise obtain access to our knowledge, and our rights under any
patents may not afford sufficient protection.
Our patents expire at various times between 2008 and 2019. The
following table sets forth the number of patents expiring in each year:
YEAR EXPIRING U.S. PATENTS FOREIGN PATENTS TOTAL PATENTS
------------- ------------ --------------- -------------
2008 7 -- 7
2009 2 23 25
2010 -- 17 17
2011 7 -- 7
2012 -- 14 14
2013 3 -- 3
2014 6 1 7
2015 8 4 12
2016 4 1 5
2017 2 2 4
2018 6 -- 6
2019 1 1 2
---------- ---------- ----------
TOTAL 46 63 109
========== ========== ==========
In addition to patents, we also maintain several United States and
numerous foreign trademark and service mark applications for registrations of
our name, logo, drug delivery systems and products. These include eight U.S. and
38 foreign issued trademarks, with seven U.S. and 24 foreign applications
pending.
DRUG DELIVERY INDUSTRY
Drug delivery companies apply proprietary technologies for the improved
administration of therapeutic compounds. These products could potentially
provide various benefits, including better control of drug concentration in the
blood, improved safety and efficacy, improved patient compliance, and ease of
use. Additionally, alternative drug delivery technologies can be utilized to
extend existing patent franchises, to expand markets for existing products, as
well as to develop new products. The increasing need to deliver medication to
patients efficiently and with fewer side effects has accelerated the pace of
competition within the drug delivery industry.
We believe focusing on drug delivery for existing drugs is less risky
than attempting to discover new drugs. Drug discovery is more costly and more
time consuming in comparison with drug delivery of existing drugs. For instance,
our clinical trials need only to demonstrate that our carrier technology
delivers the drug without harming the patient or changing the clinical
attributes of the drug.
In addition, focusing on drug delivery compared to drug discovery
allows us to form a number of collaborations to deliver a wide variety of
medicines without limiting our proprietary technology rights.
22
CUSTOMERS
Our customers include such companies as Pfizer, Sanofi, Fujisawa and
Geneva. During 2001, Transmucosal Technologies and Block accounted for 26%
and 22%, respectively, of our total revenues. The distribution network for
pharmaceutical products is subject to increasing consolidation. As a result, a
few large distributors control a significant share of the market. In addition,
the number of independent drug stores and small chains has decreased as retail
consolidation has occurred. Further consolidation among, or any financial
difficulties of, distributors or retailers could result in the combination or
elimination of warehouses, which may result in reductions in purchases of our
products, returns of our products, or cause a reduction in the inventory levels
of distributors and retailers, any of which could have a material adverse impact
on our business. If we lose any of these customer accounts, or if our
relationships with them deteriorate, our business could also be materially and
adversely affected.
COMPETITION
The biotechnology and pharmaceutical industries are subject to rapid
and substantial technological change. We face, and will continue to face,
intense competition in the development, manufacturing, marketing and
commercialization of our products and product candidates. Products utilizing our
proprietary drug delivery systems are expected to compete with other products
for specified indications, including drugs marketed in conventional and
alternative dosage forms. New drugs or further developments in alternative drug
delivery methods may provide greater therapeutic benefits for a specific drug or
indication, or may offer comparable performance at lower cost, than those
offered by our drug delivery systems. We expect proprietary products approved
for sale to compete primarily on the basis of product safety, efficacy, patient
convenience, reliability, availability and price.
Our competitors include academic institutions, government agencies,
research institutions, biotechnology and pharmaceutical companies, including our
collaborators, and drug delivery companies. Several companies have drug delivery
technologies that compete with our technologies, including Alkermes, Inc.,
Emisphere Technologies, Inc., Cima Labs, Inc., and ALZA Corporation. Competitors
of our Eligard prostate cancer treatment products include AstraZeneca's
Zoladex(TM) product, Pharmacia & Upjohn Co.'s Trelstar(TM) product and TAP
Pharmaceuticals, Inc.'s Lupron(TM) product. Competitors of our dental products
include OraPharma, Inc., whose Arestin(TM) product is used for the treatment of
periodontal disease.
Many specialized biotechnology companies have formed collaborative
arrangements with large, established pharmaceutical companies to support
research, development and commercialization of products that may be competitive
with our products. Developments by others may render our products, product
candidates or technologies obsolete or noncompetitive, and our collaborators may
choose to use competing drug delivery methods.
Many of our competitors and potential competitors have substantially
greater capital resources, manufacturing and marketing experience, research and
development resources and
23
production facilities than we do. Many of these competitors also have
significantly greater experience than we do in undertaking preclinical testing
and clinical trials of new pharmaceutical products and obtaining FDA and other
regulatory approvals.
GOVERNMENT REGULATION
The research and development, preclinical studies and clinical trials,
and ultimately, the manufacturing, marketing and labeling of our products, are
subject to extensive regulation by the FDA and other regulatory authorities in
the United States and other countries. The United States Food, Drug and Cosmetic
Act and the regulations promulgated thereunder govern, among other things, the
testing, manufacturing, safety, efficacy, labeling, storage, record keeping,
approval, clearance, advertising and promotion of our products. Preclinical
studies, clinical trials and the regulatory approval process typically take
years and require the expenditure of substantial resources. Additional
government regulation may be established that could prevent or delay regulatory
approval or clearance of our products. Delays or rejections in obtaining
regulatory approvals or clearances would adversely affect our ability to
commercialize any product we develop and our ability to receive product
revenues. If regulatory approval or clearance of a product is granted, the
approval or clearance may include significant limitations on the indicated uses
for which the product may be marketed.
FDA REGULATION -- APPROVAL OF THERAPEUTIC PRODUCTS
Our Eligard, Atrisone, BEMA-Fentanyl, BEMA-Ondansetron,
BEMA-Hydrocodon, BEMA-Migraine, GHRP-1, Atridox and Doxirobe Gel products are
regulated in the United States as drugs. The steps ordinarily required before a
drug may be marketed in the United States include:
o preclinical and clinical studies,
o the submission to the FDA of an IND, which must become effective
before human clinical trials may commence,
o adequate and well-controlled human clinical trials to establish
the safety and efficacy of the drug,
o the submission of an NDA to the FDA, and
o FDA approval of the application, including approval of all
labeling.
Preclinical tests include laboratory evaluation of product chemistry
and formulation, as well as animal studies to assess the potential safety and
efficacy of the product. Preclinical tests must be conducted in compliance with
good laboratory practice regulations. The results of preclinical testing are
submitted as part of an IND to the FDA. A 30-day waiting period after the filing
of each IND is required prior to the commencement of clinical testing in humans.
In addition, the FDA may, at any time during this 30-day period, or anytime
thereafter, impose a
24
clinical hold on proposed or ongoing clinical trials. If the FDA imposes a
clinical hold, clinical trials cannot commence or recommence without FDA
authorization.
Clinical trials to support NDAs are typically conducted in three
sequential phases, but the phases may overlap. In Phase I, the initial
introduction of the drug into healthy human subjects or patients, the drug is
tested to assess metabolism, pharmacokinetics and pharmacology and safety,
including side effects associated with increasing doses. Phase II usually
involves studies in a limited patient population to:
o assess the efficacy of the drug in specific, targeted indications,
o assess dosage tolerance and optimal dosage, and
o identify possible adverse effects and safety risks.
If a compound is found to be potentially effective and to have an
acceptable safety profile in Phase II evaluations, Phase III trials are
undertaken to further demonstrate clinical efficacy and to further test for
safety within an expanded patient population at several study sites. Phase I,
Phase II or Phase III clinical studies may not be completed successfully within
any specified time period, if at all, with respect to any of our products
subject to such testing.
After successful completion of the required clinical testing, generally
an NDA is submitted. Once the submission is accepted for filing, the FDA begins
an in-depth review of the NDA. Under the Food, Drug and Cosmetic Act, and User
Fee legislation, the FDA has up to twelve months in which to review the NDA and
respond to the applicant. The FDA may refer the application to an appropriate
advisory committee, typically a panel of clinicians, for review, evaluation and
a recommendation as to whether the application should be approved. The FDA is
not bound by the recommendation of an advisory committee. If the FDA evaluations
of the NDA and the manufacturing facilities are favorable, the FDA may issue
either an approval letter or an approvable letter. The approvable letter usually
contains a number of conditions that must be met to secure final FDA approval of
the NDA. When, and if, those conditions have been met to the FDA's satisfaction,
the FDA will issue an approval letter. If the FDA's evaluation of the NDA or
manufacturing facility is not favorable, the FDA may refuse to approve the NDA
or issue a non-approvable letter which often requires additional testing or
information. Even if regulatory approval is obtained, a marketed product and its
manufacturing facilities are subject to continual review and periodic
inspections. In addition, identification of certain side effects after a drug is
on the market or the occurrence of manufacturing problems could cause subsequent
withdrawal of approval, reformulation of the drug, additional preclinical
testing or clinical trials and changes in labeling.
Failure to comply with the FDA or other applicable regulatory
requirements may subject a company to administrative sanctions or judicially
imposed sanctions such as civil penalties, criminal prosecution, injunctions,
product seizure or detention, product recalls, or total or partial suspension of
production. In addition, noncompliance may result in the FDA's refusal to
approve pending NDAs or supplements to approved NDAs, pre-market approval
application, or PMA, or PMA supplements and the FDA's refusal to clear 510(k)s.
25
FDA REGULATION -- APPROVAL OF MEDICAL DEVICES
Our Atrisorb GTR Barrier products are regulated in the United States as
medical devices. New medical devices are generally introduced to the market
based on a pre-market notification or 510(k) submission to the FDA. Under a
510(k) submission, the sponsor establishes that the proposed device is
"substantially equivalent" to a legally marketed Class I or Class II medical
device or to a Class III device for which the FDA has not required pre-market
approval. If the sponsor cannot demonstrate substantial equivalence, the sponsor
will be required to submit a PMA, which generally requires preclinical and
clinical trial data, to prove the safety and effectiveness of the device.
FDA REGULATION -- POST-APPROVAL REQUIREMENTS
Even if regulatory clearances or approvals for our products are
obtained, our products and the facilities manufacturing our products are subject
to continued review and periodic inspections by the FDA. Each United States drug
and device-manufacturing establishment must be registered with the FDA. Domestic
manufacturing establishments are subject to biennial inspections by the FDA and
must comply with the FDA's current good manufacturing practices, or cGMP, if the
facility manufactures drugs, and quality system regulations, or QSRs, if the
facility manufactures devices. In complying with cGMP and QSRs, manufacturers
must expend funds, time and effort in the area of production and quality control
to ensure full technical compliance. The FDA stringently applies regulatory
standards for manufacturing.
The FDA also regulates labeling and promotional activities. Further, we
must report certain adverse events involving our drugs and devices to the FDA
under regulations issued by the FDA.
EUROPEAN REGULATION -- APPROVAL OF MEDICINAL PRODUCTS
Our Eligard and Atridox products are regulated in Europe as medicinal
products. In 1993, legislation was adopted which established a new and amended
system for the registration of medicinal products in the European Union, or EU.
The objective of this system is to prevent the existence of separate national
approval systems that have been a major obstacle to harmonization. One of the
most significant features of this new system is the establishment of a new
European Agency for the Evaluation of Medicinal Products. Under this new system,
marketing authorization may be submitted at either a centralized or
decentralized level.
The centralized procedure is administered by the European Agency for
the Evaluation of Medicinal Products. This procedure is mandatory for the
approval of biotechnology products and is available at the applicant's option
for other innovative products. The centralized procedure provides, for the first
time in the EU, for the granting of a single marketing authorization that is
valid in all EU member states.
A mutual recognition procedure is available at the request of the
applicant for all medicinal products that are not subject to the centralized
procedure, under a decentralized
26
procedure. The decentralized procedure creates a new system for mutual
recognition of national approvals and establishes procedures for coordinated EU
action on product suspensions and withdrawals. Under this procedure, the holder
of a national marketing authorization for which mutual recognition is sought may
submit an application to one or more member states, certifying that identical
dossiers are being submitted to all member states for which recognition is
sought. Within 90 days of receiving the application and assessment report, each
member state must decide whether or not to recognize the approval. The procedure
encourages member states to work with applicants and other regulatory
authorities to resolve disputes concerning mutual recognition. If such disputes
cannot be resolved within the 90-day period provided for review, the application
will be subject to a binding arbitration procedure at the request of the
applicant. Alternatively, the application may be withdrawn.
EUROPEAN REGULATION -- APPROVAL OF MEDICAL DEVICES
Our Atrisorb GTR Barrier products are regulated in Europe as medical
devices. The EU has promulgated rules that require medical devices to affix the
CE Mark, an international symbol of adherence to quality assurance standards and
compliance with applicable European medical device directives. Failure to
receive the right to affix the CE Mark prohibits a company from selling products
in member states of the EU.
REGULATORY CONSIDERATION FOR ORPHAN DRUG PRODUCTS
If a developer obtains designation by the FDA of a drug as an "orphan"
drug for a particular use, the developer may request small grants from the
federal government to help defray the costs of qualified testing expenses in
connection with the development of such drug. Orphan drug designation may be
granted to drugs for rare diseases, typically defined as a disease or condition
that affects populations of fewer than 200,000 individuals in the United States,
and includes many genetic diseases. The first applicant who has obtained
designation of a drug for a particular use as an orphan drug and then obtains
approval of a marketing application for such drug for the particular use is
entitled to marketing exclusivity for a period of seven years, subject to
certain limitations.
Orphan drug designation does not convey any advantage in, or shorten
the duration of, the regulatory approval process. Although obtaining FDA
approval to market a product with an orphan drug designation can be
advantageous, there can be no assurance that the scope of protection or the
level of marketing exclusivity that is currently afforded by orphan drug
designation will remain in effect in the future.
REGULATORY CONSIDERATIONS FOR OTC DRUG PRODUCTS
An OTC drug may be lawfully marketed in one of three ways:
o the drug is generally recognized as safe and effective, or GRAS/E,
o the drug is the subject of an approved NDA, or
27
o the drug complies with a tentative final or final monograph
published by the FDA as part of the OTC review.
Prior FDA approval is required only if an NDA is submitted. A company
makes the determination as to which route to market is the most appropriate. If
a company determines that the drug product is GRAS/E or is covered in a
monograph, it is the company's responsibility to substantiate the safety and
efficacy of the formulation and that the dosage form and claims are applicable
under GRAS/E or monograph status. Most OTC drug products are marketed pursuant
to an FDA monograph.
There are several other regulatory requirements applicable to all OTC
drug products. These requirements pertain to labeling, drug registration and
listing, and manufacturing. With regard to labeling, the regulations require
certain language for statement of identity, net contents, adequate directions
for use, and name and address of the manufacturer, and their placement on the
finished package, as well as additional warning statements when relevant to the
product. All OTC manufacturers must register their establishments with the FDA
and submit to the FDA a list of products made within five days after beginning
operations, as well as submit a list of products in commercial distribution. All
registered establishments must be inspected by the FDA at least every two years
and OTC drug products must be manufactured in accordance with cGMP regulations.
If the FDA finds a violation of cGMPs, it may enjoin a company's operations,
seize product, or criminally prosecute the manufacturer.
ABBREVIATED NEW DRUG APPLICATIONS
Any products emanating from our generic topical dermatological business
are subject to the ANDA approval process. The Food, Drug and Cosmetic Act, as
amended in 1984, established a statutory procedure to permit the marketing
approval for duplicate and related versions of previously approved pioneer drug
products. The procedure provides for approval of these "duplicate" or generic
drugs through the ANDA. The process provides for approval for duplicate or
related versions of approved drugs whose patents have expired, and that have
been shown through the ANDA requirements to be as safe and effective as their
brand name counterparts, but without the submission of duplicative safety and
efficacy data. Therefore, the process is intended to encourage competition by
decreasing the time and expense of bringing generic drugs to market.
Generic drug products are required to be shown as bioequivalent to the
pioneer drug product via an in vivo bioavailability study. In addition, the ANDA
must contain information on the production, analytical testing of the drug
product, and a certification regarding patent status of the pioneer drug. To
obtain approval, the ANDA must verify that the generic drug product is
bioequivalent to the pioneer drug product, that the necessary procedures and
controls are in place to produce the generic product under cGMPs, and that the
applicant has complied with the patent requirements of the Act.
The innovator company holding patents for the pioneer drug product may
challenge an ANDA on the basis of alleged patent infringement. Such a legal
challenge can delay the
28
approval of an ANDA for up to 30 months. Post approval, generic drug products
are subject to labeling, promotional, and cGMP compliance requirements.
ADDITIONAL REGULATORY ISSUES
Under the Drug Price Competition and Patent Term Restoration Act of
1984, a patent which claims a product, use or method of manufacture covering
drugs and certain other products may be extended for up to five years to
compensate the patent holder for a portion of the time required for research and
FDA review of the product. This law also establishes a period of time following
approval of a drug during which the FDA may not accept or approve applications
for certain similar or identical drugs from other sponsors unless those sponsors
provide their own safety and effectiveness data. We cannot provide assurance
that we will be able to take advantage of either the patent term extension or
marketing exclusivity provisions of this law.
The Department of Health and Human Services requested the National
Institute of Health to submit proposals for addressing potential conflicts of
interest in the biomedical research sector. Although the proposal request is
aimed at establishing rules to treat potential abuses in the system without
imposing unnecessary burdens and disincentives, we cannot assure that any rules
adopted will not adversely affect our ability to obtain research grants. Various
aspects of our business and operations are regulated by a number of other
governmental agencies including the Occupational Safety and Health
Administration and the Securities and Exchange Commission.
THIRD-PARTY REIMBURSEMENT
Government and private insurance programs, such as Medicare, Medicaid,
health maintenance organizations and private insurers, fund the cost of a
significant portion of medical care in the United States. Governmental imposed
limits on reimbursement of hospitals and other health care providers, including
dental practitioners, have significantly impacted their spending budgets. Under
certain government insurance programs, a health care provider is reimbursed a
fixed sum for services rendered in treating a patient, regardless of the actual
charge for such treatment. Private third-party reimbursement plans are also
developing increasingly sophisticated methods of controlling health care costs
through redesign of benefits and exploration of more cost-effective methods of
delivering health care. In general, these government and private measures have
caused health care providers to be more selective in the purchase of medical
products.
Significant uncertainty exists as to the reimbursement status of newly
approved health care products, and we cannot provide assurance that adequate
third-party coverage will be available. Limitations imposed by government and
private insurance programs and the failure of certain third-party payers to
fully or substantially reimburse health care providers for the use of the
products could seriously harm our business.
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EMPLOYEES
As of February 19, 2002, we employed 148 employees on a full-time
basis. Of the 148 full-time employees, 126 are engaged in production, research
and clinical testing and the remaining 22 are in administrative capacities. A
total of 35 employees have earned doctorate or advanced degrees. None of our
employees are represented by a union or collective bargaining unit and
management considers relations with employees to be good.
ADDITIONAL INFORMATION
Compliance with federal, state and local laws regarding the discharge
of materials into the environment or otherwise relating to the protection of the
environment has not had, and is not expected to have, any adverse effect upon
our capital expenditures, earnings or our competitive position. We are not
presently a party to any litigation or administrative proceeding with respect to
our compliance with such environmental standards. In addition, we do not
anticipate being required to expend any funds in the near future for
environmental protection in connection with our operations.
We do not believe that any aspect of our business is significantly
seasonal in nature, and no significant portion of our business is subject to
renegotiation of profits or termination of contracts or subcontracts at the
election of the United States Government.
We currently obtain supplies of the polymer used in our polymer
delivery systems from Birmingham Polymers in Alabama, Boehringer Ingelheim in
Germany and Purac in Holland. Supplies of doxycycline, used in our Atridox,
Atrisorb-D and Doxirobe Gel periodontal disease treatment products, are obtained
from Hovione in Portugal and Macau. Supplies of leuprolide acetate, used in our
Eligard prostate cancer products, are primarily obtained from Bachem in
Switzerland, PolyPeptide Laboratories in California and, to a lesser extent,
Mallinckrodt in Missouri. A solvent used in the Eligard products is obtained
from International Specialty Products in Texas. We have qualified multiple
vendors for the majority of our raw materials. These alternative vendors were
used in our clinical trials, filed in our FDA applications and are in an
"approved status." If we should lose any of our suppliers of raw materials, we
believe that we could locate and obtain such raw materials from other available
sources without substantial adverse delay or increased expense. We did not
experience any serious shortages or delays in obtaining raw materials in 2001.
FACTORS AFFECTING OUR BUSINESS AND PROSPECTS
There are many factors that affect our business and results of
operations, some of which are beyond our control. The following is a description
of some of the important factors that may cause the actual results of our
operations in future periods to differ materially from those currently expected
or desired.
We have a history of operating losses and anticipate future losses.
Since our inception, we have invested a significant amount of time and money in
research and development of new products. Our research and development expenses
were $25.6 million, $16.7 million and $15.6
30
million for the years ended December 31, 2001, 2000 and 1999, respectively,
exceeding our total revenue of $15.8, $10.0 million, $5.6 million, respectively,
in such years. Because of our time and financial commitments to our new
products, we have operated at a loss for the previous five years under revenue
recognition policies as currently applied. Our accumulated deficit at December
31, 2001 was $132.2 million. We expect that our research and development
activities will result in additional operating losses for the foreseeable
future. If we do not ultimately achieve and maintain profitability, our stock
price may decline.
We must obtain domestic and foreign regulatory approval of our product
candidates, which requires a significant amount of time and money. The research
and development, preclinical studies and clinical trials, and ultimately, the
manufacturing, marketing and labeling of our products, are subject to extensive
regulation by the FDA and other regulatory authorities in the United States and
other countries. We currently have six products for which we have submitted an
application to the FDA or appropriate foreign governmental authority and are
involved in the regulatory approval process. These products include three
Eligard products, Atrisone, BEMA-Fentanyl and oral interferon. FDA approval can
be delayed, limited or denied for many reasons, including:
o a product candidate may be found to be unsafe or ineffective,
o the FDA may interpret data from preclinical testing and clinical
trials differently and less favorably than the way we interpret
it,
o the FDA might not approve our manufacturing processes or
facilities,
o the FDA may change its approval policies or adopt new regulations
that may negatively affect or delay our ability to bring a product
to market, and
o a product candidate may not be approved for all the indications we
requested and thus our markets may be limited.
The process of obtaining approvals in foreign countries is also subject
to delay and failure for similar reasons. Delays in obtaining approval may
result in our needing to make significant expenditures of additional time and
money to bring a new product to market. If we do not obtain approval for any
particular product, we will have spent a significant amount of time and money in
the approval process and will be unable to market the product to generate
revenue.
We are also required to comply with the FDA's cGMPs with respect to the
manufacture of our drugs, and quality system regulations, or QSRs, with respect
to the manufacture of our medical devices. cGMPs and QSRs include requirements
relating to quality control, quality assurance and maintenance of records and
documentation. Manufacturing facilities are subject to biennial inspections by
the FDA and must be approved before we can use them in the commercial
manufacturing of our products. If our contract manufacturers or we are unable to
comply with the applicable cGMPs, QSRs and other regulatory requirements, the
FDA may seek sanctions and/or remedies against us, including suspension of our
manufacturing operations,
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issue us warning letters, force us to recall or withdraw our product(s) from the
market and possibly issue civil and/or criminal penalties in extreme cases.
Clinical trials are expensive and their outcome is uncertain. Before
obtaining regulatory approvals for the commercial sale of any products, our
partners or we must demonstrate through preclinical testing and clinical trials
that our product candidates are safe and effective for use in humans. We have
multiple compounds in various stages of preclinical development, a number of
which are being developed through partnerships with a variety of other
pharmaceutical companies. We spend and will continue to spend a significant
amount of financial resources conducting preclinical testing and clinical
trials.
Clinical trials are expensive and may take several years or more and
the length of time can vary substantially. Our initiation and rate of completion
of clinical trials may be delayed by many factors, including:
o our inability to recruit patients at a sufficient rate,
o the failure of clinical trials to demonstrate a product
candidate's efficacy,
o our inability to follow patients adequately after treatment,
o our inability to predict unforeseen safety issues,
o our inability to manufacture sufficient quantities of materials
for clinical trials,
o the potential for unforeseen governmental or regulatory delays,
o lack of sufficient financial resources, and
o inability to satisfy FDA requirements which may result in the
clinical trials being repeated.
We have not experienced any significant delays in our clinical trials
or received notice by the FDA to halt any of our clinical trials.
In addition, the results from preclinical testing and early clinical
trials do not always predict results of later clinical trials. A number of new
drugs have shown encouraging results in early clinical trials, but subsequently
failed to establish sufficient safety and efficacy data to obtain necessary
regulatory approvals. If a product candidate fails to demonstrate safety and
efficacy in clinical trials, this failure may delay development of other product
candidates and hinder our ability to conduct related preclinical testing and
clinical trials. As a result of these potential failures, we may also be unable
to find additional collaborators or to obtain additional financing. Delays in
our clinical trials may require us to expend significant additional amounts of
time and money, and termination of our clinical trials may prevent us from
generating any revenue from the product candidate at issue.
32
Furthermore, to market our products outside the United States, our
products are subject to additional clinical trials and approvals even though the
products have been approved in the United States. To meet any additional
requirements that might be imposed by foreign governments, we may incur
additional costs that may impact our profitability. If the approvals are not
obtained or will be too expensive to obtain, foreign distribution may not be
feasible, which could harm our business.
Our future profitability depends on the development of new products. We
currently have a variety of new products in various stages of research and
development and are working on possible improvements, extensions or
reformulations of some existing products. These research and development
activities, as well as the clinical testing and regulatory approval process,
which must be completed before commercial quantities of these products can be
sold, will require significant commitments of personnel and financial resources.
Delays in the research, development, testing and approval processes will cause a
corresponding delay in revenue generation from those products. Regardless of
whether they are ever released to the market, the expense of such processes will
have already been incurred.
We reevaluate our research and development efforts regularly to assess
whether our efforts to develop a particular product or technology are
progressing at the rate that justifies our continued expenditures. On the basis
of these reevaluations, we have abandoned in the past, and may abandon in the
future, our efforts on a particular product or technology. If we fail to take a
product or technology from the development stage to market on a timely basis, we
may incur significant expenses without a near-term financial return.
We market our products through arrangements with third parties, and if
we fail to maintain such arrangements our business could be harmed. We form
strategic relationships with collaborators to help us commercialize and market
our products. These relationships are critical to the success of our products on
the market. We expect that most of our future revenue will be obtained from
royalty payments from sales or a percentage of profits of products licensed to
our collaborators. Failure to make or maintain these arrangements, failure to
form new arrangements or a delay in a collaborator's performance could reduce
our revenue and may require us to expend significant amounts of time and money
to find new collaborators and structure alternative arrangements.
Disputes with a collaborator could delay the program on which we are
working with the collaborator and could result in expensive arbitration or
litigation, which may not be resolved in our favor. For example, Block had
exclusive rights to market and distribute our Atridox, Atrisorb-FreeFlow GTR
Barrier and Atrisorb-D GTR Barrier products in North America. We had disputes
with Block relating to product pricing and the payments due to us upon
achievement of milestones under our commercialization agreement with Block and
were involved in arbitration and litigation proceedings with them until final
settlement of all disputes in September 2001. We then entered into a new
arrangement for the marketing and distribution of these products in the United
States with CollaGenex. Our legal dispute with Block and the transition to
CollaGenex as our new marketing partner for these products were the primary
33
factors causing our 39% decrease in product net sales and royalty revenue
between our 2000 and 2001 fiscal years and part of the reason for our 28%
increase in administrative and marketing expenses between such years.
In addition, our collaborators could merge with or be acquired by
another company or experience financial or other setbacks unrelated to our
collaboration that could impair their ability to market and sell our products
and cause a decrease in our revenue. For example, GlaxoSmithKline acquired our
North American dental products' marketing partner, Block, and subsequently
discontinued marketing our dental products under the terms of our August 2001
termination agreement. The transition phase of the U.S. marketing rights from
Block to CollaGenex and the Canada marketing rights to PharmaScience resulted in
a decrease in our dental product net sales revenue for the fourth quarter of
2001.
We have limited experience in marketing and selling our products. Our
Atridox and Atrisorb-FreeFlow GTR Barrier products, sales of which accounted for
approximately 64% of our net sales and royalty revenue in the fiscal year ended
December 31, 2001, have been marketed by our partners and have been on the
market for only three and a half years. To achieve commercial success for any
products, we must either develop a marketing and sales force or contract with
another party to perform these services for us. In either case, we are competing
with companies that have experienced and well-funded marketing and sales
operations. We have historically relied upon arrangements with third parties to
market and sell our products. If we do not maintain good relationships with
these third parties, we may not be able to make alternative arrangements on
acceptable terms and our product sales may decline. To the extent we undertake
to market or co-market our own products, however, we will require additional
expenditures and management resources.
If our products do not achieve market acceptance, our revenue will be
reduced. Our products may not gain market acceptance among physicians, patients,
third-party payors and the medical community. Under Block's marketing of our
dental products in North America, our dental products have been slow in
achieving market acceptance within the dental community. We expect dental
product market acceptance to increase in the United States under CollaGenex's
marketing leadership. Additionally, we expect an increase in market acceptance
for our dental products in foreign countries as we establish marketing
authorizations and commence marketing within these countries. In the fiscal year
ended December 31, 2001, we generated $3.8 million, or 24% of our $15.8 million
total revenue, from net sales and royalties.
The degree of market acceptance of any of our products and product
candidates depends on a number of factors, including:
o demonstration of their clinical efficacy and safety,
o their cost-effectiveness,
o their potential advantage over alternative existing and newly
developed treatment methods,
34
o the marketing and distribution support they receive, and
o reimbursement policies of government and third-party payors.
Our products and product candidates, if successfully developed, will
compete with a number of drugs and therapies currently manufactured and marketed
by major pharmaceutical and other biotechnology companies. Our products may also
compete with new products currently under development by others or with products
which may cost less than our products. Physicians, patients, third-party payors
and the medical community may not accept or utilize our products. If our
products do not achieve significant market acceptance, we may not generate
enough revenue to offset our research and development expenses incurred in
obtaining the required regulatory approvals and, therefore, we may not realize
profitability.
We generate a majority of our revenue from our contract research and
development activities, and any adverse effect on our relationships with these
customers could cause a decrease in our revenue. To support our research and
development of certain product candidates, we rely on agreements with
collaborators, licensors and others that provide financial and clinical support.
Our contract research and development revenue of $8.2 million for the fiscal
year ended December 31, 2001 represented 52% of our $15.8 million total revenue.
If any of our research and development agreements were terminated or
substantially modified, or if our relationships with any of these collaborators
deteriorated, our revenue may decrease and our ability to develop and
commercialize our technologies would be hindered. Approximately 50% of our 2001
contract research and development revenue, and 26% of our total 2001 revenue,
was attributable to our research and development activities for Transmucosal
Technologies. If this joint venture was terminated or if our relationship with
Elan deteriorated, our revenue would likely decrease significantly.
We conduct operations in foreign countries which are subject to risks
and our plans for international expansion may not succeed, which would harm our
revenue and profitability. We conduct our European operations through our wholly
owned subsidiaries, Atrix Laboratories GmbH, in Frankfurt, Germany, and Atrix
Laboratories Limited, in London, England. Revenue from export sales to customers
outside of North America amounted to $1.1 million, or 7% of our total revenue,
for the fiscal year ended December 31, 2001.
We face foreign exchange rate fluctuations, primarily with respect to
the British Pound and the Euro, because we translate the financial results of
our foreign subsidiaries into U.S. dollars for consolidation and because we
translate the financial results of our transactions with our foreign marketing
partners. As exchange rates vary, our results, when translated, may vary from
expectations and may result in a decrease in our revenue.
One of our strategies for increasing our revenue depends on expansion
into international markets. Our international operations may not succeed for a
number of reasons, including:
o difficulties in managing foreign operations or obtaining the
required regulatory approvals from foreign governmental
authorities,
35
o fluctuations in currency exchange rates or imposition of currency
exchange controls,
o competition from local and foreign-based companies,
o issues relating to uncertainties of laws and enforcement relating
to the protection of intellectual property,
o unexpected changes in trading policies and regulatory
requirements,
o duties and taxation issues,
o language and cultural differences,
o general political and economic trends, and
o expropriation of assets, including bank accounts, intellectual
property and physical assets by foreign governments.
Accordingly, we may not be able to successfully execute our business
plan in foreign markets. If we are unable to achieve anticipated levels of
revenue from our international operations, our revenue and profitability may
decline.
Our inability to protect our intellectual property and defend ourselves
from intellectual property suits could harm our competitive position and our
financial performance. We rely heavily on our proprietary information in
developing and manufacturing our products. Notwithstanding our pursuit of patent
protection, other companies may develop delivery systems, compositions and
methods that infringe our patent rights resulting from outright ownership or
non-revocable exclusive licensure of patents that relate to our delivery
systems, composition and/or methods. In that event, such delivery systems,
compositions and methods may compete with our systems, compositions and methods
and may reduce sales of our products. Our patents may not afford adequate
protection against competitors with similar systems, composition or methods, and
other companies may circumvent our patents.
In addition to patents, we also maintain several U.S. and numerous
foreign trademark and service mark applications for registrations of our name,
logo, drug delivery systems and products. If other companies infringe on our
trademarks and service marks, we may not be able to market our products as
effectively and our brand recognition may decline.
We also rely on our unpatented proprietary knowledge. Despite our
efforts to protect our proprietary rights from unauthorized use or disclosure,
parties, including former employees or our consultants, may attempt to disclose,
obtain or use our proprietary information or technologies. Other companies may
also develop substantially equivalent proprietary knowledge. The steps we have
taken may not prevent misappropriation of our proprietary information and
technologies, particularly in foreign countries where laws or law enforcement
practices may not protect our proprietary rights as fully as in the United
States. If other
36
companies obtain our proprietary knowledge or develop substantially equivalent
knowledge, they may develop products that compete against ours and adversely
affect our product sales.
Intellectual property claims brought against us, regardless of their
merit, could result in costly litigation and the diversion of our financial
resources and technical and management personnel. Further, if such claims are
proven valid, through litigation or otherwise, we may be required to change our
trademarks and service marks, stop using our technologies and pay financial
damages, which could harm our profitability and financial performance.
If we engage in acquisitions, we will incur a variety of costs, and we
may not be able to realize the anticipated benefits. From time to time, we
engage in preliminary discussions with third parties concerning potential
acquisitions of products, technologies and businesses. Acquisitions involve a
number of risks, including:
o difficulties in and costs associated with the assimilation of the
operations, technologies, personnel and products of the acquired
companies,
o assumption of known or unknown liabilities or other unanticipated
events or circumstances,
o risks of entering markets in which we have limited or no
experience, and
o potential loss of key employees.
Any of these risks could harm our ability to achieve levels of
profitability of acquired operations or to realize other anticipated benefits of
an acquisition.
We may seek to raise additional funds, and additional funding may be
dilutive to stockholders or impose operational restrictions. Any additional
equity financing may be dilutive to our stockholders and debt financing, if
available, may involve restrictive covenants, which may limit our operating
flexibility with respect to certain business matters. If additional funds are
raised through the issuance of equity securities, the percentage ownership of
our stockholders will be reduced. These stockholders may experience additional
dilution in net book value per share and any additional equity securities may
have rights, preferences and privileges senior to those of the holders of our
common stock.
Our future performance depends on our ability to attract and retain key
personnel. Our success depends in part on our ability to attract and retain
highly qualified management and scientific personnel. If key employees terminate
their employment with us, our business relationships may be adversely affected,
and management's attention may be diverted from our operations to focusing on
transition matters and identifying a suitable replacement. If any of our key
research and development employees terminate their employment, our research and
development efforts may be hindered, adversely affecting our ability to bring
new products to market. Because competition for personnel in our industry is
intense, we may not be able to locate suitable replacements for any key
employees that leave the company, and we may not be able to offer employment to
them on reasonable terms.
37
We are subject to environmental compliance risks. Our research,
development and manufacturing areas involve the controlled use of hazardous
chemicals, primarily flammable solvents, corrosives, and toxins. The biologic
materials include microbiological cultures, animal tissue and serum samples.
Some experimental and clinical materials include human source tissue or fluid
samples. We are not licensed to receive or handle radioactive materials. We are
also subject to federal, state and local government regulation in the conduct of
our business, including regulations on employee safety and our handling and
disposal of hazardous and radioactive materials. Any new regulation or change to
an existing regulation could require us to implement costly capital or operating
improvements for which we have not budgeted. If we do not comply with these
regulations, we may be subject to fines and other liabilities.
Our industry is characterized by intense competition and rapid
technological change, which may limit our commercial opportunities, render our
products obsolete and reduce our revenue. The pharmaceutical and biotechnology
industries are highly competitive. We face intense competition from academic
institutions, government agencies, research institutions and other biotechnology
and pharmaceutical companies, including other drug delivery companies. Some of
these competitors are also our collaborators. Our competitors are working to
develop and market other drug delivery systems, vaccines, antibody therapies and
other methods of preventing or reducing disease, and new small-molecule and
other classes of drugs that can be used without a drug delivery system.
Many of our competitors have much greater capital resources,
manufacturing and marketing experience, research and development resources and
production facilities than we do. Many of them also have much more experience
than we do in preclinical testing and clinical trials of new drugs and in
obtaining FDA and foreign approvals. In addition, they may succeed in obtaining
patents that would make it difficult or impossible for us to compete with their
products.
Because major technological changes can happen quickly in the
biotechnology and pharmaceutical industries, the development by competitors of
technologically improved or different products may make our products or product
candidates obsolete or noncompetitive.
If third-party payors will not provide coverage or reimburse patients
for the use of our products, our revenue will suffer. The commercial success of
our products is substantially dependent on whether third-party reimbursement is
available for the use of our products by the medical and dental professions.
Medicare, Medicaid, health maintenance organizations and other third-party
payors may not authorize or otherwise budget for the reimbursement of our
products. In addition, they may not view our products as cost-effective and
reimbursement may not be available to consumers or may not be sufficient to
allow our products to be marketed on a competitive basis. Likewise, legislative
proposals to reform health care or reduce government programs could result in
lower prices or rejection of our products. Changes in reimbursement policies or
health care cost containment initiatives that limit or restrict reimbursement
for our products may cause our revenue to decline.
38
If product liability lawsuits are brought against us, we may incur
substantial costs. Our industry faces an inherent risk of product liability
claims from allegations that our products resulted in adverse effects to the
patient and others. These risks exist even with respect to those products that
are approved for commercial sale by the FDA and manufactured in facilities
licensed and regulated by the FDA. We maintain worldwide product liability
insurance in the amount of $10 million with a $10,000 deductible per occurrence
and an aggregate deductible of $100,000. Our insurance may not provide adequate
coverage against potential product liability claims or losses. In the future we
may not be able to obtain adequate insurance coverage on reasonable terms and
insurance premiums and deductibles may increase. Even if we were ultimately
successful in product liability litigation, the litigation would consume
substantial amounts of our financial and managerial resources and may create
adverse publicity, all of which would impair our ability to generate sales. If
we were found liable for any product liability claims in excess of our insurance
coverage or outside our coverage, the cost and expense of such liability could
severely damage our business and profitability.
Our stock price is volatile and the value of your investment may be
subject to sudden decreases. The price of our stock has been and may continue to
be volatile. The price of our stock during the last two years has ranged from a
low of $5.0625 per share to a high of $29.18 per share. Our stock price may
fluctuate due to a variety of factors, including:
o announcements of developments related to our business or our
competitors' businesses,
o fluctuations in our operating results,
o sales of our common stock in the marketplace,
o failure to meet, or changes in, analysts' expectations,
o general conditions in the biotechnology and pharmaceutical
industries or the worldwide economy,
o announcements of innovations, new products or product enhancements
by us or by our competitors,
o developments in patents or other intellectual property rights or
any litigation relating to these rights, and
o developments in our relationships with our customers, suppliers
and collaborators.
Decreases in our stock price may adversely affect the trading market for our
stock and may cause you to lose all or a portion of your investment.
39
ITEM 2. PROPERTIES.
We lease a total of 30,092 square feet of office and research
laboratory space located in Fort Collins, Colorado, pursuant to a lease that
expires in June 2006. In October 2001, we entered into a lease extension
agreement of our office and research laboratory space, which extended our lease
expiration date from June 2003 to June 2006. Additionally, we increased our
lease space from 24,580 square feet to 30,092 square feet as part of the October
2001 lease extension agreement. In April 2001, we entered into a two-year lease
agreement for 4,800 square feet warehouse space, located in Fort Collins.
Additionally, we own a 26,437 square foot manufacturing facility in Fort Collins
that we acquired in July 1996. As part of the building acquisition, we acquired
two acres of vacant land, directly adjacent to the building. In August 1997, we
acquired an additional 2.7 acres for possible future development or expansion.
We also lease 367 square feet of office space located in Frankfurt,
Germany, pursuant to a lease that expires in June 2004. This office space is
used for the operation of our wholly owned subsidiary Atrix Laboratories GmbH.
We own substantially all of our laboratory and manufacturing equipment,
which we consider to be adequate for our research, development and testing
requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of our security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of our 2001
fiscal year.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET INFORMATION
Our common stock is traded on The Nasdaq National Market under the
symbol "ATRX". The following table sets forth, for the fiscal periods indicated,
the range of high and low sales price per share of our common stock, as reported
on The Nasdaq National Market:
40
2001: High Low
------------ ------------
Fourth Quarter $ 29.1800 $ 18.5800
Third Quarter 28.4000 17.3500
Second Quarter 24.7600 9.6250
First Quarter 25.0000 13.3750
2002:
Fourth Quarter $ 19.8125 $ 12.1250
Third Quarter 16.1875 8.8750
Second Quarter 11.0625 6.8750
First Quarter 16.5625 5.0625
HOLDERS
As of March 26, 2002, there were 2,313 holders of record of our common
stock.
DIVIDENDS
To date, we have not declared or paid cash dividends to shareholders.
We currently anticipate that we will retain all available funds for use in the
operation of our business and do not anticipate paying any cash dividends in the
foreseeable future. As of December 31, 2001, we issued 856 shares of Series A
Convertible Exchangeable Preferred Stock to Elan for accrued preferred stock
dividends. Additionally, 454 shares of Series A Convertible Exchangeable
Preferred Stock is expected to be issued to Elan in the first quarter of 2002
for accrued preferred stock dividends from July 19, 2001 through December 31,
2001.
ISSUED UNREGISTERED SECURITIES
In April 2001, we entered into a collaboration, license and supply
agreement with MediGene under which MediGene was granted the exclusive right to
market our Eligard products in Europe. In connection with the transaction,
MediGene purchased 233,918 shares of our common stock for $3.8 million at a
premium to market, pursuant to a Stock Purchase Agreement. The sale of our
common stock in connection with this transaction was made in reliance on the
exemption from the registration requirement of the Securities Act of 1933
provided by Section 4(2) of the Securities Act.
Throughout the year ended December 31, 2001, we completed a series of
transactions involving the exchange of 1,725,735 shares of our common stock for
$31.0 million of our 7% Convertible Subordinated Notes. These transactions were
made in reliance on the exemption from the registration requirements of the
Securities Act of 1933 provided by Section 3(a)(9) of the Securities Act. Each
transaction was privately negotiated and we made no public solicitation in the
placement of these securities.
41
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The selected consolidated financial data presented below is derived
from our consolidated financial statements, which have been audited and reported
upon by Deloitte & Touche LLP, our independent auditors. The selected
consolidated financial data set forth in the table below is not necessarily
indicative of our results of future operations and should be read in conjunction
with "Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Consolidated Operations" and the consolidated financial
statements and related notes included herein.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(In thousands, except per share data)
SUMMARY OF CONSOLIDATED
OPERATIONS:
Total revenues ........................... $ 15,811 $ 10,043 $ 5,635 $ 21,073 $ 9,849
Total expenses ........................... (37,880) (23,766) (21,830) (19,996) (15,105)
Other income (expense) ................... (3,145) (12,773) (350) 404 1,389
Income tax expense ....................... -- -- -- (48) --
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary .......... (25,214) (26,496) (16,545) 1,433 (3,867)
item and cumulative effect of
change in accounting principle
Extraordinary gain (loss) on
extinguished debt ........................ (319) 80 3,275 257 --
Cumulative effect of change in
accounting principle ..................... -- (20,612) -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) before preferred .......... $ (25,533) $ (47,028) $ (13,270) $ 1,690 $ (3,867)
stock dividends
Accretion of dividends on
preferred stock .......................... (1,171) (383) -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) applicable to
common stock ............................. $ (26,704) $ (47,411) $ (13,270) $ 1,690 $ (3,867)
=========== =========== =========== =========== ===========
Basic and diluted earnings per common share:
Income (loss) before extraordinary
item and cumulative effect of
change in accounting principle ........... $ (1.54) $ (2.23) $ (1.46) $ 0.13 $ (0.35)
Extraordinary item .......................... (0.02) -- 0.29 0.02 --
Cumulative effect of change in
accounting principle ..................... -- (1.73) -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) before preferred .......... $ (1.56) $ (3.96) $ (1.17) $ 0.15 $ (0.35)
stock dividends
Accretion of dividends on
preferred stock .......................... (0.07) (0.03) -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) applicable to ............. $ (1.63) $ (3.99) $ (1.17) $ 0.15 $ (0.35)
common stock
=========== =========== =========== =========== ===========
Basic and diluted weighted average
shares outstanding ....................... 16,348 11,884 11,327 11,270 11,134
=========== =========== =========== =========== ===========
CONSOLIDATED BALANCE SHEET DATA:
Working capital .......................... $ 135,219 $ 56,549 $ 38,646 $ 63,121 $ 67,229
Total assets ............................. 157,493 74,172 54,659 79,480 78,294
Long-term obligations .................... 33,579 60,408 36,690 48,500 50,000
Shareholders' equity ..................... 112,728 7,809 14,670 28,422 26,703
----------
Note: In 2000, we changed the accounting method for licensing, marketing rights
and milestone revenue to conform to Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements." See further discussion in Note 1 to the
consolidated financial statements.
42
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS.
The following Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Consolidated Operations, as well as
information contained elsewhere in this Report, contain statements that
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934.
These statements include statements regarding the intent, belief or current
expectations of us, our directors or our officers with respect to, among other
things: (1) whether we will receive, and the timing of, regulatory approvals or
clearances to market potential products; (2) the results of current and future
clinical trials; (3) the time and expenses associated with the regulatory
approval process for products; (4) the safety and effectiveness of our products
and technologies; (5) the timing of new product launches; and (6) expected
future additional equity losses for Transmucosal Technologies. The success of
our business operations is dependent on factors such as the receipt and timing
of regulatory approvals or clearances for potential products, the effectiveness
of our marketing strategies to market our current and any future products, our
ability to manufacture products on a commercial scale, the appeal of our mix of
products, our success at entering into and collaborating with others to conduct
effective strategic alliances and joint ventures, general competitive conditions
within the biotechnology and drug delivery industry and general economic
conditions. Forward-looking statements are not guarantees of future performance
and involve risks and uncertainties. Actual results may differ materially from
those projected in the forward-looking statements as a result of various
factors, including those described under "Item 1. Business - Factors Affecting
Our Business and Prospects."
OVERVIEW
We are an emerging specialty pharmaceutical company focused on advanced
drug delivery. With five unique patented drug delivery technologies, we are
currently developing a diverse portfolio of products, including proprietary
oncology, pain management, growth hormone releasing peptide-1, or GHRP-1, oral
interferon and dermatology products. We also form strategic alliances with large
pharmaceutical and biotechnology companies utilizing our various drug delivery
systems. These strategic alliances include Pfizer, Sanofi-Synthelabo, MediGene,
Fujisawa, Elan, Geneva and CollaGenex. See "Item 1. Business - Collaborative
Arrangements."
Our drug delivery systems deliver controlled amounts of drugs in time
frames ranging from minutes to months to address a range of therapeutic and
patient needs. Atrigel is our original proprietary sustained release
biodegradable polymer drug delivery system. The Atrigel system may provide
benefits over traditional methods of drug administration such as, safety and
effectiveness, wide array and ease of applications, site-specific or systemic
delivery, customized release rates and biodegradability. With the acquisition of
ViroTex in November 1998, we added four additional drug delivery systems: BEMA,
SMP, MCA and BCP.
43
CRITICAL ACCOUNTING POLICIES
Our established accounting policies are outlined in the notes to the
Consolidated Financial Statements entitled "Organization and Summary of
Significant Accounting Policies." As part of its oversight responsibilities, our
management continually evaluates the propriety of its accounting methods as new
events occur. We have chosen to highlight certain policies that we consider
critical to the operations of the business and understanding of our consolidated
financial statements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Atrix
Laboratories, Inc. and its wholly owned subsidiaries Atrix Laboratories, Limited
and Atrix Laboratories, GmbH. All significant intercompany transactions and
balances have been eliminated. While the Company initially owns 80.1% of
Transmucosal Technologies' outstanding common stock, Elan and its subsidiaries
have retained significant minority investor rights that are considered
"participating rights" as defined in Emerging Issues Task Force Consensus 96-16,
"Investor's Accounting for an Investee When the Investor Has a Majority of the
Voting Interest, but the Minority Shareholder or Shareholders Have Certain
Approval or Veto Rights." Elan's significant rights in Transmucosal Technologies
that are considered participating rights include equal representation in the
management of the joint venture and development of its business plan and
approval rights on the board of directors as it relates to the business plan.
Accordingly, we account for our investment in Transmucosal Technologies under
the equity method of accounting.
REVENUE RECOGNITION
We recognize revenue on product sales and contract manufacturing at the
time of shipment when title to the product transfers and the customer bears risk
of loss. Product sales revenue is recorded net of estimated returns and
allowances. The estimation process is based upon the professional knowledge and
experience of our management.
All contract research and development is performed on a best effort
basis under signed contracts. Revenue under contracts with a fixed price is
recognized over the term of the agreement on a straight-line basis, which is
consistent with the pattern of work performed. Billings are made in accordance
with schedules as specified in each agreement, which generally include an
up-front payment as well as periodic payments. Advance payments are recorded as
deferred revenue. Revenue under other contracts is recognized based on terms as
specified in the contracts, including billings for time incurred at rates as
specified in the contracts and as reimbursable expenses are incurred. Such
arrangements are regularly evaluated on an individual basis.
Nonrefundable licensing fees, marketing rights and milestone payments
received under contractual arrangements are deferred and recognized over the
remaining contractual term using the straight-line method.
44
RESEARCH AND DEVELOPMENT
Costs incurred in connection with research and development activities
are expensed as incurred. These costs consist of direct and indirect costs
associated with specific projects, as well as fees paid to various entities that
perform certain research on our behalf. Additionally, licensing fees paid by us
to acquire technology are expensed as incurred if no alternative future use
exists. A portion of overhead costs is allocated to research and development
costs on a weighted-average percentage basis among all projects under
development. We consider that regulatory and other uncertainties inherent in the
development of new products preclude it from capitalizing development costs.
This treatment includes upfront and milestone payments made to third parties in
connection with research and development activities.
With respect to the previously described critical accounting policies,
our management believes that the application of judgments and assessments is
consistently applied and produces financial information which fairly depicts the
results of operations for all years presented.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001 AND 2000
Total revenues for the year ended December 31, 2001 were $15.8 million
compared to $10.0 million for the year ended December 31, 2000, representing a
58% increase.
Net sales and royalty revenue were $3.8 million for the year ended
December 31, 2001 compared to $6.2 million for the year ended December 31, 2000,
representing a 39% decrease. The decrease of $2.4 million was primarily related
to our legal dispute with Block that was settled in August, 2001 and the
transition of dental product licensing rights to CollaGenex as our new U.S.
marketing partner. As a result of the legal settlement, we paid Block $0.7
million for the return of dental products. We subsequently licensed the U.S.
marketing rights of our dental products to CollaGenex in August 2001. CollaGenex
commenced U.S. marketing of Atridox and Atrisorb FreeFlow in November 2001. In
2001, $0.8 million of net sales were to Block and $0.5 million of net sales were
to CollaGenex, compared to $2.8 million of net sales to Block in 2000. We
anticipate that sales and royalty revenues will increase in 2002 as CollaGenex
ramps up its sales efforts under our U.S. marketing agreement. Additionally,
sales of our Doxirobe Gel periodontal disease treatment product for companion
animals decreased by $0.7 million as a result of a large product shipment to
Pharmacia in late 2000, resulting in an inventory level to sustain Pharmacia's
2001 Doxirobe sales. We also expect sales and royalty revenues to increase in
2002 as a result of the commencement of our anticipated third quarter 2002
marketing launch of our Eligard 7.5-mg one-month product and possibly our
Eligard 22.5-mg three-month product, if the FDA approves the NDA for this
product.
Contract research and development revenue represents revenue we earned
from unaffiliated third parties and from our joint venture with Elan for
performing contract research and development activities using our various
patented drug delivery technologies. Contract research and development revenue
was $8.2 million for the year ended December 31, 2001 compared to $2.0 million
for the year ended December 31, 2000, representing a 310% increase. This
increase is primarily related to the recognition of $4.1 million in revenue for
the year ended
45
December 31, 2001 compared to $0.3 million in revenue for the comparable period
for oncology and pain management research activities associated with our joint
venture, Transmucosal Technologies. We commenced research and development
activities for Transmucosal Technologies in October 2000. Additionally, research
activities funded by our collaborative partners, including Pfizer, Fujisawa and
Geneva, increased by $2.3 million. We expect contract research and development
revenue to increase in 2002 as a result of Fujisawa's partial funding of
Atrisone costs over the full year in 2002 compared to six months in 2001.
Additionally, as Pfizer and Geneva products advance in development, research and
development costs are expected to increase for 2002, hence, the funding we
receive for these product costs should increase as well.
Licensing, marketing rights and milestone revenue for the year ended
December 31, 2001 was $3.8 million compared to $1.9 million for the year ended
December 31, 2000, representing a 100% increase. This increase is primarily
related to the recognition of $1.2 million in licensing fee and milestone
revenue for our Eligard products under the Sanofi-Synthelabo and MediGene
agreements for the year ended December 31, 2001. Recognition of licensing
revenue commenced in January 2001 for Sanofi and in April 2001 for MediGene.
Additionally, milestone revenue recognition from Sanofi for FDA acceptance of
our NDA filings of Eligard 7.5-mg one-month and Eligard 22.5-mg three-month
commenced in May 2001 and in November 2001, respectively. Additional revenue of
$0.7 million was recognized for the year ended December 31, 2001 due to the net
effects related to the amendment of the Block agreement and the subsequent
CollaGenex agreement. The net effects of the amendment of the Block agreement
will be recognized as revenue over the term of the amended agreement and the
transfer of marketing rights to CollaGenex will be recognized as revenue over
the term of the agreement using the straight-line method. We expect licensing,
marketing and milestone revenue to increase in 2002 as a result of the combined
$10.0 million for 2001 licensing and milestone payments received from Sanofi,
MediGene and Fujisawa being recognized over a full year in 2002 compared to a
partial year of recognition in 2001. Additionally, licensing, marketing and
milestone revenue is expected to increase in 2002 as a result of a full year of
accelerated revenue recognition of the net effects related to the Block
agreement in 2002 compared to four months of increased revenue recognition in
2001. Potential 2002 marketing and milestone payments from Sanofi include FDA
acceptance of Eligard 30-mg four-month, first commercial sales of Eligard 7.5-mg
one-month and potentially first commercial sales of Eligard 22.5-mg three-month
upon FDA approval. These potential marketing and milestone payments from Sanofi
will be recognized as revenue over the remaining term of the agreement using the
straight-line method should we reach these marketing and milestone events and
receive the related payments.
Cost of goods sold was $1.7 million for the year ended December 31,
2001 compared to $2.6 million for the year ended December 31, 2000, representing
a 35% decrease. This decrease in cost of goods sold correlates to the decline in
product sales. We expect that cost of goods sold will increase in the future
proportionately to our increases in sales, including the commencement of Eligard
7.5-mg one-month sales and possibly the commencement of Eligard 22.5-mg
three-month sales, if the FDA approves the NDA for the Eligard 22.5-mg
three-month product.
Research and development expenses for the year ended December 31, 2001
were $25.6 million compared to $16.7 million for the year ended December 31,
2000 representing a 53%
46
increase. An increase of $3.0 million was due to the rapid progress in the
development of our Eligard for prostate cancer treatment products and the NDA
filings of our Eligard 7.5-mg one-month and 22.5-mg three-month products. An
increase of $2.0 million was related to oncology and pain management research
activities with our joint venture, Transmucosal Technologies, which commenced
research and development activities in October 2000. Additionally, $3.9 million
of the increase was related to our research and development activities for
Atrisone, various dermatology products under the Geneva Pharmaceuticals
agreement and GHRP-1. Our strategic goal is to devote substantial resources to
our medical research and development efforts with the expectation of expediting
products from the development stages through to commercialization. We expect
that our partner funded research and development expenses will increase for the
foreseeable future as we continue to develop the products that we currently have
under collaborative agreements, as new products are developed and as new
agreements are entered. Additionally, we expect our research and development
expenses for our internally funded activities will continue to increase for the
foreseeable future as we continue to develop our current products, as well as
continue to engage in new product discovery and development activities.
Research and development - licensing fees for the year ended December
31, 2001 was $3.0 million. This expense represents licensing fees paid by us of
$2.5 million to Tulane University for GHRP-1 and $0.5 million to Amarillo
BioSciences for oral low-dose interferon. These fees were expensed as incurred,
as the technology licensed was for research and development purposes with no
future alternative uses. We did not incur any licensing fees in 2000 or 1999. We
may, in the future, incur additional costs for the acquisition of licenses;
however, we cannot predict if or when that may happen or what the cost may be.
Administrative and marketing expenses for the year ended December 31,
2001 were $5.5 million compared to $4.3 million for the year ended December 31,
2000, representing a 28% increase. The increase was primarily related to an
increase in legal expenses associated with general business planning and
activities, including fees for patent/trademark searches and the dispute with
Block. The increase also represents personnel additions in business development
and accounting. We expect that our administrative and marketing expenses will
increase for the foreseeable future as we continue to grow and additional
support is required.
Administrative - stock option compensation for the year ended December
31, 2001 was $2.1 million, as compared to $0.1 million for the year ended
December 31, 2000. The increase was primarily due to a $2.0 million
non-qualified stock option grant to our chief executive officer in August 2001.
The non-qualified stock options were fully vested on the date of the grant and
expire in August 2011. The remaining increase was for non-qualified stock
options granted to non-employees for services rendered. We may incur additional
stock-based compensation and the amount may be material, however, we cannot
predict the future timing of those charges.
We recognized a loss of $3.3 million for our 80.1% equity share in the
loss of Transmucosal Technologies, of $3.3 million during 2001 as compared to
$12.2 million in 2000, representing a 73% decrease. The joint venture was
established in July 2000 and recorded a one-time, non-cash charge of $15.0
million in July 2000, for an exclusive license to use Elan's nanoparticulate
drug
47
delivery technology. This licensing fee was recorded as a charge to research and
development expense by Transmucosal Technologies as it was acquired for research
and development with no future alternative use. We do not expect that
Transmucosal Technologies will incur additional licensing fees in the future.
The loss in 2001 represents our share of the joint venture's net loss which was
generated primarily through research and development activities. Further, we
expect to record additional equity losses, consistent with those realized during
2001, as we progress in our research and development activities for the
BEMA-Fentanyl and BEMA-Ondansetron products.
Investment income for the year ended December 31, 2001 was $3.1 million
compared to $2.0 million for the year ended December 31, 2000, representing a
55% increase. The increase was primarily the result of an increase in our
average cash and cash equivalents and our marketable securities for the year
ended December 31, 2001 compared to the average balances for the year ended
December 31, 2000. The increase in our average cash and investment balances in
2001 was primarily due to two underwritten public common stock offerings,
licensing fees and milestone payments under our agreements with Sanofi, MediGene
and Fujisawa. The increase was offset partially by lower interest rates on
investments in 2001 as compared to 2000. In 2001, the average rate earned on our
portfolio was 4.1% compared to 5.8% in 2000. Additionally, we recorded an
impairment charge of $0.8 million on our $1.0 million Enron corporate notes
during 2001. We expect that our investment income will increase in 2002 as we
expect our average cash and investment balances to be greater than 2001 balances
and we expect the rates earned on our investments to be consistent with the
prior year.
Interest expense for the year ended December 31, 2001 was $0.8 million
compared to $2.6 million for the year ended December 31, 2000, representing a
69% decrease. The reduction in interest expense was primarily the result of a
series of private transactions involving the exchange of shares of our common
stock for $31.0 million in principal amount of our 7% Convertible Subordinated
Notes throughout the year ended December 31, 2001. We expect our interest
expense in 2002 to decrease from 2001 due to the conversions in 2001 as well as
conversions that have occurred in 2002.
During the year ended December 31, 2001, we exchanged 1,725,735 shares
of our common stock to extinguish $31.0 million of our 7% Convertible
Subordinated Notes. As a result of these exchanges, we recognized non-cash
charges for debt conversion expense of $2.2 million and $0.3 million for
extraordinary loss on extinguished debt in 2001.
Effective in the fiscal fourth quarter of 2000, we changed our method
of accounting for nonrefundable technology access fees and milestone payments to
recognize such payments as revenue over the term of the related agreements. The
change in accounting principle is based on guidance provided in SAB No. 101.
Prior to the year 2000, we recognized $24.1 million for nonrefundable technology
access fees and milestone payments as revenue when received and when we
fulfilled all contractual obligations relating to the fees and milestone
payments. We recorded $20.6 million cumulative effect for this change in
accounting principle that was reported as a charge in the first quarter of 2000.
We issued shares of our Series A Convertible Exchangeable Preferred
Stock to Elan in July 2000 in connection with the formation of Transmucosal
Technologies. Related to this issuance, we recognized $0.9 million for accretion
of dividends on the Series A Preferred Stock and a beneficial conversion charge
of $0.3 million for the year ended December 31, 2001 compared to $0.4 million
for accretion of dividends for the year ended December 31, 2000, representing a
200% increase. We expect that this charge will increase in the future as the
48
amount of our preferred stock increases as a result of issuing preferred stock
for accretion of dividends.
For the reasons described above, we recorded a consolidated net loss
applicable to common stock of $26.7 million, or $1.63 per share, for the year
ended December 31, 2001 compared to a consolidated net loss applicable to common
stock of $47.4 million, or $3.99 per share, for the year ended December 31,
2000. The $12.2 million equity in loss of our joint venture and the $20.6
million cumulative effect from a change in accounting principle during 2000 were
the primary factors attributable to the change in consolidated net loss
applicable to common stock between periods.
YEARS ENDED DECEMBER 31, 2000 AND 1999
Effective in the fourth quarter of 2000, we changed our method of
accounting for nonrefundable technology access fees and milestone payments to
recognize such payments as revenue over the term of the related agreements. The
change in accounting principle is based on guidance provided in the Securities
and Exchange Commission's Staff Accounting Bulletin No. 101 - Revenue
Recognition in Financial Statements. Previously, we recognized $24.1 million for
nonrefundable technology access fees and milestone payments as revenue when
received and when we fulfilled all contractual obligations relating to the fees
and milestone payments. There was a $20.6 million cumulative effect for this
change in accounting principle that was reported as a charge in the year ended
December 31, 2000. The cumulative effect was recorded as deferred revenue that
will be recognized as revenue over the remaining contractual terms for each of
the specific agreements. During the year ended December 31, 2000, the impact of
the change in accounting principle increased net loss by $18.7 million, or $1.58
per share. This amount is comprised of $20.6 million, or $1.73 per share,
cumulative effect of the change as described above, net of $1.9 million, or
$0.16 per share, recognized as revenue during the year.
Total revenues for the year ended December 31, 2000 were $10.0 million
compared to $5.6 million for the year ended December 31, 1999, representing a
79% increase.
Net sales and royalty revenue were $6.2 million for the year ended
December 31, 2000 compared to $4.5 million for the year ended December 31, 1999,
representing a 38% increase. An increase of $1.7 million in our contract
manufacturing business with unaffiliated third parties was the significant
factor for the increase in net sales revenue. Additionally, $2.8 million of net
sales were made to Block in 2001 compared to $3.8 million of net sales to Block
in 1999.
During the fourth quarter of 1999, we incurred a charge of $0.7 million
for a change in estimate for revenues from sales of Atridox, Atrisorb FreeFlow
GTR Barrier and Atrisorb GTR Barrier. This change resulted when Block provided
updated information indicating the actual net selling price of these products
was less than the estimated net selling price previously provided by Block. Our
revenue is based on a set percentage of Block's actual net sales. We recorded
this adjustment in the fourth quarter ended December 31, 1999 as a change in
estimate at the
49
time it became known. Furthermore, we reduced the rate at which we recognized
revenue under the Block agreement during 2000 to reflect these lower selling
prices.
Contract research and development revenue represents revenue we earned
from third parties and from federal grants for performing contract research and
development activities using our various patented drug delivery technologies.
Contract research and development revenue was $2.0 million for the year ended
December 31, 2000 compared to $1.1 million for the year ended December 31, 1999,
representing an 82% increase. Of this increase, $1.3 million was related to work
on five research projects with third parties. Additionally, contract research
and development revenue earned from our joint venture with Elan, Transmucosal
Technologies, was $0.3 million for the year ended December 31, 2000. We
commenced research and development activities for Transmucosal Technologies in
October 2000.
Licensing, marketing rights and milestone revenue for the year ended
December 31, 2000 was $1.9 million, primarily for the Block milestone payments
received in 1997 and 1998, in accordance with SAB 101. There was no such revenue
recognized in 1999 as we changed our method of recognizing licensing, marketing
rights and milestone revenues in 2000 as discussed above.
The Block agreement provided for potential milestone payments totaling
up to $50.0 million to us over a three-to-five year period, as well as a
manufacturing margin and royalties on sales. Prior to 2000, we had recognized
$24.1 million in milestone payments from Block. No additional Block milestone
payments were received in 2000.
Cost of goods sold was $2.6 million for the year ended December 31,
2000 compared to $2.0 million for the year ended December 31, 1999, representing
a 30% increase. This increase in cost of goods sold is primarily related to the
38% increase in product net sales.
Research and development expenses were $16.7 million for the year ended
December 31, 2000 compared to $15.6 million for the year ended December 31, 1999
representing a 7% increase. This increase reflects a shift in our research and
development focus from dental to medical products in 2000. Research and
development costs for the year ended December 31, 2000 decreased $3.2 million
for our dental products, increased $3.5 million for our Eligard products and
increased $0.8 million for our Atrisone product. Our strategic goal is to devote
substantial resources to our medical research and development efforts with the
expectation of expediting products from the development stages through to
commercialization.
Administrative and marketing expenses were $4.4 million for the year
ended December 31, 2000 compared to $4.3 million for the year ended December 31,
1999.
We recognized a loss of $12.2 million for the year ended December 31,
2000 for our 80.1% equity share in the loss of Transmucosal Technologies, our
joint venture with Elan. The joint venture's loss for this period included a
one-time, non-cash charge of $15.0 million in July 2000 for an exclusive license
to use Elan's nanoparticulate drug delivery technology. This licensing fee was
recorded as a charge to research and development expense by Transmucosal
Technologies as it was acquired for research and development with no future
alternative use.
50
Investment income for the year ended December 31, 2000 was $2.0 million
compared to $2.7 million for the year ended December 31, 1999, representing a
26% decrease. The decrease was primarily the result of a reduction in average
cash and investment balances from 1999 to 2000.
Interest expense for the year ended December 31, 2000 was $2.6 million
compared to $3.1 million for the year ended December 31, 1999 representing a 16%
decrease. The reduction in interest expense was primarily the result of our
repurchase and subsequent retirement of $6.8 million of our 7% Convertible
Subordinated Notes since October 1999.
During the year ended December 31, 2000, we repurchased a total of $0.5
million of our 7% Convertible Subordinated Notes for $0.4 million, which
included approximately $7,000 for accrued interest paid. As a result, we
recognized an extraordinary gain of approximately $80,000, net of deferred
finance charges of approximately $12,000. As of December 31, 2000, the notes
payable balance was $36.2 million.
We issued Series A convertible exchangeable preferred stock to Elan in
July 2000 in connection with the formation of our joint venture with Elan.
Related to this issuance, we recognized $0.4 million for accretion of dividends
on preferred stock during the year ended December 31, 2000.
For the reasons described above, we recorded a consolidated net loss
applicable to common stock of $47.4 million, or $3.99 per share, for the year
ended December 31, 2000 compared to a consolidated net loss applicable to common
stock of $13.3 million, or $1.17 per share, for the year ended December 31,
1999. The $12.2 million equity in loss of our joint venture and the $20.6
million cumulative effect from a change in accounting principle were the primary
factors causing the increase in consolidated net loss applicable to common stock
between periods.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2001, we had cash and cash equivalents of $50.1
million, marketable securities (at fair market value) of $87.9 million, net
accounts receivable of $3.5 million, inventories of $3.3 million and other
current assets of $1.6 million, for total current assets of $146.4 million. We
had accounts payable of $3.1 million, short-term deferred revenue of $7.5
million and other current liabilities of $0.6 million, for total current
liabilities of $11.2 million, which resulted in working capital of approximately
$135.2 million.
In November 1997, we issued $50.0 million in principal amount of our 7%
Convertible Subordinated Notes. Interest is payable semi-annually and the Notes
mature on December 1, 2004. The Notes are convertible, at the option of the
holder, into common stock at a conversion price of $19.00 a share, subject to
adjustment in certain events. The Notes are redeemable, in whole or in part, at
our option at any time on or after December 5, 2000. During the year ended
December 31, 2001, we completed a series of private transactions involving the
exchange of 1,725,735 shares of our common stock for $31.0 million of the 7%
Convertible Subordinated
51
Notes. Of the 1,725,735 shares issued, 1,630,726 shares were valued at the
conversion price of $19.00 per share and the remaining 95,009 shares were valued
at the closing market price as of the various exchange dates. During the year
ended December 31, 2000, we repurchased a total of $0.5 million of the Notes for
$0.4 million, which included approximately $7,000 for accrued interest paid. As
a result, we recognized an extraordinary gain of approximately $80,000, net of
deferred finance charges. As of December 31, 2001 and December 31, 2000, the 7%
Convertible Subordinated Notes payable balance was $5.2 million and $36.2
million, respectively.
In July 2000, we formed Transmucosal Technologies, a joint venture,
with Elan to develop and commercialize oncology and pain management products.
Subject to the satisfaction of certain conditions, Elan has agreed to loan us up
to $8.0 million under a convertible promissory note agreement in support of our
80.1% share of the joint venture's research and development costs. The note has
a six-year term, will accrue interest at 7% per annum, compounded semi-annually
and added to principal, and is convertible at Elan's option into our common
stock at a $14.60 conversion price. As of December 31, 2001, we had not drawn
any amounts under the note. We are required to fund our 80.1% share of the joint
venture's obligations. This funding totaled $2.7 million in 2001. Our future
funding obligations are expected to be consistent with the funding in 2001.
During the year ended December 31, 2001, net cash provided by operating
activities was $0.7 million. This was a result of the net loss applicable to
common stock for the period of $26.7 million, which is offset by certain
non-cash expenses, and changes in other operating assets and liabilities,
primarily deferred revenue and note receivable for licensing fees, as set forth
in the consolidated statements of cash flows. We received an $8.0 million
licensing fee from Sanofi-Synthelabo in January 2001 for payment of the December
2000 note receivable - licensing fee. Additionally, we recognized non-cash
charges for debt conversion expense of $2.2 million and $0.3 million as an
extraordinary loss on extinguished debt during the year ended December 31, 2001
as a result of exchanging our common stock for our convertible notes. A non-cash
charge of $2.0 million was recognized in the third quarter of 2001 for a
non-qualified stock option grant to our chief executive officer. The increase of
$8.6 million for deferred revenue included $1.0 million from Block for an
Atridox sales milestone, $6.0 million from Sanofi-Synthelabo for FDA acceptance
of our Eligard one-month and three-month NDA filings, $2.0 million from MediGene
for exclusive marketing rights in Europe of our Eligard products and $1.0
million by Sanofi as an advanced research and development payment for our
Eligard unique dosage formulation product.
Net cash used by investing activities was $64.7 million during the year
ended December 31, 2001, primarily as a result of $82.7 million used for the
purchase of 13 U.S. Government bonds, 41 U.S. corporate notes, 330,556 shares of
CollaGenex common stock, 348,852 shares of a U.S. Government bond mutual fund
and 289,226 shares of a diversified bond mutual fund. This was offset by
proceeds of $23.2 million for eight called or matured U.S. Government bond and
note investments and one matured corporate note investment.
Net cash provided by financing activities was $109.7 million during the
year ended December 31, 2001. This increase was primarily the result of our two
underwritten public stock offerings that resulted in a net increase in financing
funds of $87.7 million. Additionally, we
52
received $15.0 million from Sanofi-Synthelabo in January 2001 for the issuance
of common stock in conjunction with the December 2000 collaboration, license and
supply agreement. We received $3.8 million from MediGene for the issuance of our
common stock in conjunction with the stock purchase agreement in April 2001. In
September 2001, our Board of Directors approved a new stock repurchase program
to acquire up to $5.0 million of our common stock. For the year ended December
31, 2001, we repurchased a total of 77,500 shares of our common stock in the
open market. The average price per share was $20.11 for total stock repurchases
valued at $1.6 million. We received $4.1 million for the issuance of common
stock related to employee stock options.
During the year ended December 31, 2001, we sold 3,565,000 shares of
our common stock at a price of $23.00 per share under our shelf registration
statement in two underwritten public offerings. The underwriters exercised their
option to purchase 534,750 additional shares of our common stock in connection
with our public offerings. We received net proceeds of $87.7 million from our
public offerings and the over-allotment exercises, net of issuance costs of $6.6
million.
At December 31, 2001 we had available for Federal income tax purposes,
net operating loss carryforwards of $83.3 million and $2.9 million in research
and development tax credits, which expire through 2021. Our ability to utilize
our purchased net operating loss acquired with the acquisition of ViroTex,
alternative minimum tax, and research and development credit carryforwards is
subject to an annual limitation in future periods. This is pursuant to the
"change in ownership" rules under Section 382 of the Internal Revenue Code of
1986, as amended. At December 31, 2001, we recorded a full valuation allowance
against our net deferred taxes of $50.9 million due to uncertainties related to
their future realization.
We have historically funded our operations through debt and equity
offerings, payments received for licenses, milestones and research and
development support under contractual arrangements and, to a lesser extent,
product sales and royalties. Additionally, we have historically incurred
operating losses and expect to continue to incur operating losses for the
foreseeable future. At December 31, 2001, we had $50.1 million of cash and cash
equivalent investments and $87.9 million of available-for-sale marketable
securities (at fair value) to fund future operations and capital
requirements. Our available-for-sale marketable securities are primarily in
investment grade corporate notes and U.S. government bonds and bond funds. Our
portfolio of corporate notes is diversified and, under our policy, we only
invest in investment grade corporate notes. We recorded an impairment charge of
$0.8 million on our $1.0 million Enron corporate notes during 2001. However, we
believe that the quality of the notes we hold and the diversity of our portfolio
significantly mitigates our market risk. We believe that we have adequate
liquidity and capital resources to fund our operations and capital requirements
for the foreseeable future. However, we believe we will have to raise additional
funds to complete the development of our technologies as discussed below.
53
FUTURE CAPITAL REQUIREMENTS
Our long-term capital expenditure requirements will depend on numerous
factors, including:
o the progress of our research and development programs,
o the time required to file and process regulatory approval and
applications,
o the development of our commercial manufacturing facilities,
o our ability to obtain additional licensing arrangements, and
o the demand for our products.
We expect to continue to incur substantial expenditures for research
and development, testing, regulatory compliance, market development in European
countries, possible repurchases of our notes or common stock and to hire
additional management, scientific, manufacturing and administrative personnel.
We will also continue to expend a significant amount of funds in our ongoing
clinical studies. Depending on the results of our research and development
activities, we may determine to accelerate or expand our efforts in one or more
proposed areas and may, therefore, require additional funds earlier than
previously anticipated. We believe that the existing cash and cash equivalent
assets with our marketable security investments will be sufficient to fund our
operations for the foreseeable future. However, we cannot assure you that
underlying assumed levels of revenue and expense will prove accurate.
The following table summarizes research and development activities
funded by our collaborators, as well as, research and development activities
funded by us for the years ended December 31, including research and development
costs inception-to-date and estimated completion dates and costs (in thousands):
Anticipated
Funded Anticipated Costs to
Expenses Expenses Expenses Expenses Expenses Completion Completion
Technology 1999 2000 2001 Inception-to-Date Inception-to-Date (to market) (to market)
-------------- ---------- ---------- ---------- ----------------- ----------------- ------------- -------------
Atrigel $ 10,716 $ 11,110 $ 14,338 $ 96,926 $ 7,257 2002-2006 $ 45,000
SMP 2,328 3,090 4,604 10,021 978 2004-2005 20,000
BEMA 553 260 2,430 3,243 4,387 2006-2008 10,000
Other 1,958 2,275 4,263 20,534 3,966 2003-2008 25,000
---------- ---------- ---------- -------------- -------------- ------------- -------------
Total $ 15,555 $ 16,735 $ 25,635 $ 130,724 $ 16,588 2002-2008 $ 100,000
========== ========== ========== ============== ============== ============= =============
Funded $ 2,429 $ 1,921 $ 10,626
Not Funded 13,126 14,814 15,009
---------- ---------- ----------
Total $ 15,555 $ 16,735 $ 25,635
========== ========== ==========
The predominate product lines included under the Atrigel technology are
the Eligard and dental products which comprise 26% and 68%, respectively, of the
expenses incurred to date. Recently, however, the Eligard products comprised
more of the research and development effort with 36%, 66% and 72% of the 1999,
2000, and 2001 Atrigel expenses, respectively. As dental products have moved
into market, expenses to support them have stabilized and comprised 55%, 24% and
11% of the 1999, 2000, and 2001 Atrigel expenses, respectively. Of the expenses
funded by third parties, 36% of funds received were to support the dental
products, 10% of funds have come recently to support the Eligard products
domestically as well as
54
internationally, and 53% of funds have come from direct support of research
contracts with various companies.
The Atrisone acne product represents 100% of expenses and funding under
the SMP technology.
Under the BEMA technology, approximately 71% of expenses incurred to
date relate to the development of two products through our joint venture with
Elan and approximately 99% of funding for BEMA research and development has come
from the joint venture.
Other research and development expenses incurred to date represent
efforts to introduce additional products into our pipeline. Expenses related to
develop generic dermatology products are also included in this category and
represents 16% of expenses incurred to date and 28% of funding.
The following table summarizes our future contractual commitments,
which consist of operating leases. At December 31, 2001, our future payments
under our non-cancelable operating leases are as follows (amounts in thousands):
Year Ending Minimum Rental
December 31, Commitments
------------ ---------------
2002 $ 461
2003 408
2004 339
2005 311
2006 128
------------
Total $ 1,647
------------
In 2001, we approved up to a $5.0 million stock repurchase program.
During 2001, we repurchased 77,500 shares for a total of $1.6 million. This
program expires on December 31, 2002. We will repurchase stock under this
program at times and prices as management determines are most advantageous to
us. We cannot predict if, or when, we will repurchase the remaining amounts
available under the program.
We believe that it is advisable to augment our cash to fund all of our
activities, including potential product acquisitions. Therefore, we will
consider raising cash whenever market conditions are favorable. Such capital may
be raised through additional public or private financing, as well as
collaborative relationships, borrowings and other available sources. In
addition, in the course of our business, we evaluate products and technologies
held by third parties which, if acquired, could result in our development of
product candidates or which complement technologies that we are currently
developing. We expect, from time to time, to be involved in discussions with
other entities concerning our potential acquisition of rights to additional
pharmaceutical and/or biotechnology products. If we acquire such products or
third-party technologies, we may find it necessary or advisable to obtain
additional funding.
55
IMPACT OF INFLATION
Although it is difficult to predict the impact of inflation on our
costs and revenues in connection with our products, we do not anticipate that
inflation will materially impact our costs of operation or the profitability of
our products when marketed.
RECENT ACCOUNTING PRONOUNCEMENTS
On June 29, 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. We adopted SFAS No. 141 on July 1, 2001. The adoption of
this statement did not have a material impact on our financial position or
results of operations.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets"
was issued by the FASB. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Goodwill and certain
intangible assets will remain on the balance sheet and not be amortized. On an
annual basis, and when there is reason to suspect that their values have been
diminished or impaired, these assets must be tested for impairment, and
write-downs may be necessary. We are required to implement SFAS No. 142 on
January 1, 2002 and it has been determined that this statement will not have a
material impact on our financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 provided new guidance
on the recognition of impairment losses on long-lived assets to be held and used
or to be disposed of and also broadens the definition of what constitutes a
discontinued operation and how the results of a discontinued operation are to be
measured and presented. SFAS No. 144 is effective for our fiscal year beginning
2002, but is not expected to have a material impact on our financial statements.
FACTORS AFFECTING OUR BUSINESS AND PROSPECTS
There are numerous factors that affect our business and results of
operations. These factors include risks associated with regulatory submissions
and product approvals, product demand, pricing, market acceptance of our current
and proposed products, changing economic conditions, risks in product and
technology development, the effect of our accounting policies and other risk
factors discussed in more detail under "Item 1. Business-Factors Affecting Our
Business and Prospects" in this Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES CONCERNING MARKET RISKS.
We own financial instruments that are sensitive to market risks as part
of our investment portfolio of cash equivalents and marketable securities. The
investment portfolio is primarily used to preserve our capital until it is
required to fund operations, including our research and development activities.
None of these market-risk sensitive instruments are held for trading purposes.
We do not own derivative financial instruments in our portfolio. Due to the
nature of
56
our investment portfolio, the investment portfolio contains instruments that
are primarily subject to interest rate risk. Our equity investment in CollaGenex
is subject to equity price risks. Additionally, our 7% Convertible Subordinated
Notes are also subject to interest rate and equity price risks.
We invested $2.0 million in a diversified mutual fund during the year
2001. This mutual fund invests in corporate bonds and Treasuries with remaining
maturities, estimated remaining average lives, or durations of five years or
less. Additionally, this mutual fund may invest in foreign securities, which may
be unfavorably affected by interest-rate and currency-exchange-rate changes as
well as by market, economic, and political conditions of the countries where
investments are made. The portfolio may invest in mortgage-backed securities,
which are subject to unique interest and maturity risks. When interest rates
fall, mortgages may be paid early through refinancing, which may shorten the
expected maturity of these securities. Alternatively, when interest rates rise,
mortgages are not likely to be paid early, which may lengthen the expected
maturity of these securities. Therefore, during times of fluctuating interest
rates, these factors may cause the value of mortgage-backed securities to
increase or decrease more than those of other fixed-income securities.
INTEREST RATE RISK
Our investment portfolio includes fixed rate debt instruments that are
primarily United States Government and Agency bonds and notes and corporate
bonds and notes with maturity dates ranging from one to sixteen years. To
mitigate the impact of fluctuations in cash flow, we maintain substantially all
of our debt instruments as fixed rate. The market value of these bonds and notes
are subject to interest rate risk, and could decline in value if interest rates
increase. The portion maintained as fixed rate is dependent on many factors
including judgments as to future trends in interest rates.
Our investment portfolio also includes equity interests in U.S.
Government and Agency bond mutual funds. The value of these equity interests is
also subject to interest rate risk.
We regularly assess the above described market risks and have
established policies and business practices to protect against the adverse
effects of these and other potential exposures. Our investment policy restricts
investments to U.S. Government or Government-backed securities, investment grade
corporate notes, high rated commercial paper and other high rated investments
only. As a result, we do not anticipate any material losses in these
investments.
For disclosure purposes, we use sensitivity analysis to determine the
impacts that market risk exposures may have on the fair values of our debt and
financial instruments. The financial instruments included in the sensitivity
analysis consist of our cash equivalents, short-term and long-term debt
instruments.
To perform sensitivity analysis, we assess the loss risk in fair values
from the impact of hypothetical changes in interest rates on market sensitive
instruments. The fair values are computed based on the present value of future
cash flows as impacted by the changes in the rates attributable to the market
risk being measured. The discount rates used for the present value
57
computations were selected based on market interest rates in effect at December
31, 2001. The fair values that result from these computations are compared with
the fair values of these financial instruments at December 31, 2001. The
differences in this comparison are the hypothetical gains or losses associated
with each type of risk. The results of the sensitivity analysis at December 31,
2001 are as follows:
Interest Rate Sensitivity: A 10% decrease in the levels of interest
rates, with all other variables held constant, would result in an increase in
the fair value of our financial instruments by $0.5 million. A 10% increase in
the levels of interest rates, with all other variables held constant, would
result in a decrease in the fair value of our financial instruments by $0.5
million per year. We maintain a portion of our financial instruments, including
debt instruments of $13.4 million at December 31, 2001, at variable interest
rates. If interest rates were to increase or decrease 10%, the impact of such
instruments on cash flows or earnings would not be material.
The use of a 10% estimate is strictly for estimation and evaluation
purposes only. The value of our assets may rise or fall by a greater amount
depending on actual general market performances and the value of the individual
securities we own.
The market price of our 7% Convertible Subordinated Notes generally
changes in parallel with the market price of our common stock. When our stock
price increases or decreases, the price of these notes generally increases or
decreases proportionally. Fair market price of our notes can be determined from
quoted market prices, where available. The fair value of our long-term debt was
estimated to be $6.0 million at December 31, 2001 and is higher than the
carrying value by $0.8 million. Market risk was estimated as the potential
decrease in fair value resulting from a hypothetical 1% increase in our weighted
average long-term borrowing rate and a 1% decrease in quoted market prices, or
$0.1 million.
EXCHANGE RATE RISK
We face foreign exchange rate fluctuations, primarily with respect to
the British Pound and the Euro, as the financial results of our foreign
subsidiaries are translated into U.S. dollars for consolidation. As exchange
rates vary, these results, when translated may vary from expectations and
adversely impact net income (loss) and overall profitability. The effect of
foreign exchange rate fluctuation for the year ended December 31, 2001 was not
material. Based on our overall foreign currency rate exposure at December 31,
2001, we do not believe that a hypothetical 10% change in foreign currency rates
would materially affect our financial position.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our consolidated financial statements required by Regulation S-X are
attached to this Report. Reference is made to Item 14(a) and Page F-1 of this
Report for an index to the consolidated financial statements.
58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information contained in our definitive proxy statement for our
annual shareholders meeting, scheduled to be held on May 5, 2002, regarding our
directors and officers and compliance with Section 16(a) of the Exchange Act is
incorporated herein by reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained in our definitive proxy statement for our
annual shareholders meeting, scheduled to be held on May 5, 2002, regarding
executive compensation is incorporated herein by reference in response to this
item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained in our definitive proxy statement for our
annual shareholders meeting, scheduled to be held on May 5, 2002, regarding
security ownership of certain beneficial owners and management is incorporated
herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained in our definitive proxy statement for our
annual shareholders meeting, scheduled to be held on May 5, 2002, regarding
certain relationships and related transactions is incorporated herein by
reference in response to this item.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) Our following documents are filed as part of this Report:
1. Consolidated Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 2001 and
2000
Consolidated Statements of Operations -
Years Ended December 31, 2001, 2000, and 1999
Consolidated Statements of Changes in Shareholders'
Equity - Years Ended December 31, 2001, 2000, and
1999
Consolidated Statements of Cash Flows -
Years Ended December 31, 2001, 2000, and 1999
Notes to the Consolidated Financial Statements
2. Consolidated Financial Statement Schedules
59
Schedules for which provision is made in the applicable regulations of
the Securities and Exchange Commission have been omitted because they are not
required under the related instructions or the information related is contained
elsewhere in the consolidated financial statements.
3. Exhibits
The exhibits are set forth in the Exhibit Index.
(b) Reports on Form 8-K: We filed the following Current Reports on
Form 8-K during the quarter ended December 31, 2001:
o Current Report on Form 8-K dated October 15, 2001,
filed with the Securities and Exchange Commission on
October 17, 2001, under Item 5. Other Events, and Item
7. Exhibits.
o Current Report on Form 8-K dated November 16, 2001,
filed with the Securities and Exchange Commission on
November 27, 2001, under Item 5. Other Events, and Item
7. Exhibits.
o Current Report on Form 8-K dated December 7, 2001,
filed with the Securities and Exchange Commission on
December 10, 2001, under Item 5. Other Events, and Item
7. Exhibits.
60
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ATRIX LABORATORIES, INC.
(Registrant)
Date: March 29, 2002 By: /s/ David R. Bethune
-----------------------------------------
David R. Bethune
Chairman of the Board of Directors and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ David R. Bethune Chairman of the Board and Chief Executive March 29, 2002
------------------------------------ Officer (Principal Executive Officer)
David R. Bethune
/s/ Brian G. Richmond Chief Financial Officer and Assistant Secretary March 29, 2002
------------------------------------ (Principal Financial and Accounting Officer)
Brian G. Richmond
/s/ Nicholas G. Bazan Director March 29, 2002
------------------------------------
Nicolas G. Bazan
/s/ H. Stuart Campbell Director March 29, 2002
------------------------------------
H. Stuart Campbell
/s/ Dr. D. Walter Cohen Director March 29, 2002
------------------------------------
Dr. D. Walter Cohen
/s/ Sander A. Flaum Director March 29, 2002
------------------------------------
Sander A. Flaum
/s/ C. Rodney O'Connor Director March 29, 2002
------------------------------------
C. Rodney O'Connor
/s/ Warren L. Troupe Director March 29, 2002
------------------------------------
Warren L. Troupe
/s/ George J. Vuturo Director March 29, 2002
------------------------------------
George J. Vuturo
61
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page
----
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets - December 31, 2001 and 2000 F-3
Consolidated Statements of Operations -
Years Ended December 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Changes in Shareholders' Equity -
Years Ended December 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Cash Flows -
Years Ended December 31, 2001, 2000 and 1999 F-7
Notes to the Consolidated Financial Statements F-8
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Atrix Laboratories, Inc. and Subsidiaries
Fort Collins, Colorado
We have audited the accompanying consolidated balance sheets of Atrix
Laboratories, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of December
31, 2001 and 2000, and the results of its operations and cash flows for each of
the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for revenue recognition in 2000.
DELOITTE & TOUCHE LLP
Denver, Colorado
March 11, 2002
F-2
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents ...................................................... $ 50,058 $ 4,484
Marketable securities available-for-sale, at fair value ........................ 87,910 28,911
Notes receivable - stock subscription and licensing fee ........................ -- 23,000
Accounts receivable, net of allowance for doubtful accounts of $5 and $210 ..... 3,522 2,611
Interest receivable ............................................................ 995 472
Inventories .................................................................... 3,314 1,941
Prepaid expenses and deposits .................................................. 606 1,085
------------ ------------
Total current assets ......................................................... 146,405 62,504
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET ................................................ 7,557 6,818
------------ ------------
OTHER ASSETS:
Intangible assets, net of accumulated amortization of $3,421 and $2,399 ....... 3,446 4,049
Deferred finance costs, net of accumulated amortization of $121 and $628 ....... 85 801
------------ ------------
Other assets, net ............................................................ 3,531 4,850
------------ ------------
TOTAL ASSETS ............................................................... $ 157,493 $ 74,172
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade ....................................................... $ 3,108 $ 2,198
Accrued expenses and other ..................................................... 611 760
Deferred revenue ............................................................... 7,467 2,997
------------ ------------
Total current liabilities .................................................... 11,186 5,955
------------ ------------
DEFERRED REVENUE .................................................................. 28,373 24,218
CONVERTIBLE SUBORDINATED NOTES PAYABLE ............................................ 5,206 36,190
COMMITMENTS AND CONTINGENCIES (SEE NOTES 4 AND 9)
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value; 5,000,000 shares authorized
Series A preferred stock, $.001 par value, 200,000 shares authorized and
no shares issued or outstanding ............................................ -- --
Series A convertible exchangeable preferred stock, $.001 par value, 20,000
shares authorized; 12,871 and 12,015 shares issued and outstanding.
Liquidation preference $13,281 and $12,398 ................................. -- --
Common stock, $.001 par value; 45,000,000 shares authorized; 19,859,807 and
13,341,681 shares issued; 19,782,307 and 13,341,681 shares outstanding ...... 20 13
Additional paid-in capital ..................................................... 246,471 113,764
Treasury stock, 77,500 and -0- shares, at cost ................................. (1,558) --
Accumulated other, comprehensive loss .......................................... (4) (471)
Accumulated deficit ............................................................ (132,201) (105,497)
------------ ------------
Total shareholders' equity ................................................... 112,728 7,809
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................. $ 157,493 $ 74,172
============ ============
See notes to the consolidated financial statements.
F-3
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- ----------------- -----------------
REVENUE:
Net sales and royalties ............................................. $ 3,818 $ 6,156 $ 4,542
Contract research and development revenue ........................... 8,178 2,009 1,093
Licensing, marketing rights and milestone revenue ................... 3,815 1,878 --
---------------- ---------------- ----------------
Total revenue ............................................ 15,811 10,043 5,635
---------------- ---------------- ----------------
OPERATING EXPENSE:
Cost of sales ....................................................... 1,693 2,644 1,974
Research and development ............................................ 25,635 16,735 15,555
Research and development - licensing fees ........................... 2,985 -- --
Administrative and marketing ........................................ 5,450 4,262 3,992
Administrative - stock option compensation .......................... 2,117 125 309
---------------- ---------------- ----------------
Total operating expense ...................................... 37,880 23,766 21,830
---------------- ---------------- ----------------
LOSS FROM OPERATIONS ................................................ (22,069) (13,723) (16,195)
OTHER INCOME (EXPENSE):
Equity in loss of joint venture ..................................... (3,285) (12,239) --
Investment income ................................................... 3,134 1,959 2,720
Interest expense .................................................... (780) (2,582) (3,062)
Debt conversion expense ............................................. (2,194) -- --
Other ............................................................... (20) 89 (8)
---------------- ---------------- ----------------
Net other expense ............................................ (3,145) (12,773) (350)
---------------- ---------------- ----------------
LOSS BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE ...................................... (25,214) (26,496) (16,545)
Extraordinary gain (loss) on extinguished debt ...................... (319) 80 3,275
Cumulative effect of change in accounting principle ................. -- (20,612) --
---------------- ---------------- ----------------
NET LOSS BEFORE PREFERRED STOCK DIVIDENDS ........................... $ (25,533) $ (47,028) $ (13,270)
Accretion of dividends on preferred stock ........................... (1,171) (383) --
---------------- ---------------- ----------------
NET LOSS APPLICABLE TO COMMON STOCK ................................. $ (26,704) $ (47,411) $ (13,270)
================ ================ ================
Basic and diluted loss per common share:
Loss before extraordinary item and cumulative effect of
change in accounting principle ................................... $ (1.54) $ (2.23) $ (1.46)
Extraordinary gain (loss) on extinguished debt ...................... (.02) -- .29
Cumulative effect of change in accounting principle ................. -- (1.73) --
---------------- ---------------- ----------------
Net loss before preferred stock dividends ........................... $ (1.56) $ (3.96) $ (1.17)
Accretion of dividends on preferred stock ........................... (.07) (.03) --
---------------- ---------------- ----------------
Net loss applicable to common stock ................................. $ (1.63) $ (3.99) $ (1.17)
================ ================ ================
Basic and diluted weighted average common shares outstanding ........ 16,348,365 11,883,712 11,327,213
================ ================ ================
Proforma amounts assuming the change in revenue recognition method
is applied retroactively:
Net loss before extraordinary item .................................. $ (25,214) $ (26,496) $ (14,671)
================ ================ ================
Net loss applicable to common stock ................................. $ (26,704) $ (26,799) $ (11,396)
================ ================ ================
Basic and diluted earnings per common share:
Net loss before extraordinary item .................................. $ (1.54) $ (2.23) $ (1.30)
================ ================ ================
Net loss applicable to common stock ................................. $ (1.63) $ (2.26) $ (1.01)
================ ================ ================
See notes to the consolidated financial statements.
F-4
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------ -------------------------- PAID-IN TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK
---------- ---------- ---------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1998 -- $ -- 11,203,672 $ 11 $ 74,823 $ (1,651)
Comprehensive loss:
Net loss -- -- -- -- -- --
Other comprehensive loss:
- Cumulative foreign currency -- -- -- -- -- --
translation adjustments
- Unrealized loss on
investments -- -- -- -- -- --
Net comprehensive loss
Exercise of stock options and
issuance for employee stock
purchase plan -- -- 125,032 -- (759) 1,149
Issuance of restricted stock -- -- 80,000 -- 237 421
Issuance for earn-out distribution -- -- 18,850 -- 195 --
---------- ---------- ---------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1999 -- $ -- 11,427,554 $ 11 $ 74,496 $ (81)
Comprehensive loss:
Net loss -- -- -- -- -- --
Other comprehensive gain:
- Cumulative foreign currency
translation adjustments -- -- -- -- -- --
- Unrealized gain on
investments -- -- -- -- -- --
Net comprehensive loss
Issuance of preferred stock to Elan 12,015 -- -- -- 12,015 --
Accretion of dividends on preferred
stock -- -- -- -- 382 --
Issuance of common stock and
warrants to Elan -- -- 442,478 -- 5,000 --
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE ACCUMULATED SHAREHOLDERS'
LOSS DEFICIT EQUITY
------------- ------------- -------------
BALANCE, DECEMBER 31, 1998 $ (96) $ (44,665) $ 28,422
Comprehensive loss:
Net loss -- (13,270) (13,270)
Other comprehensive loss:
- Cumulative foreign currency (1) -- (1)
translation adjustments
- Unrealized loss on
investments (1,599) -- (1,599)
-------------
Net comprehensive loss (14,870)
Exercise of stock options and
issuance for employee stock
purchase plan -- (34) 356
Issuance of restricted stock -- (91) 567
Issuance for earn-out distribution -- -- 195
------------- ------------- -------------
BALANCE, DECEMBER 31, 1999 $ (1,696) $ (58,060) $ 14,670
Comprehensive loss:
Net loss -- (47,411) (47,411)
Other comprehensive gain:
- Cumulative foreign currency
translation adjustments 14 -- 14
- Unrealized gain on
investments 1,211 -- 1,211
-------------
Net comprehensive loss (46,186)
Issuance of preferred stock to Elan -- -- 12,015
Accretion of dividends on preferred
stock -- -- 382
Issuance of common stock and
warrants to Elan -- -- 5,000
See notes to the consolidated financial statements.
F-5
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------ -------------------------- PAID-IN TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK
---------- ---------- ---------- ------------- ------------- -------------
Issuance of common stock to Pfizer -- -- 447,550 1 4,999 --
Issuance of common stock to -- -- 824,572 1 14,999 --
Sanofi-Synthelabo
Exercise of stock options and
issuance for employee stock
purchase plan -- -- 148,539 -- 1,248 81
Issuance of restricted stock -- -- 42,702 -- 500 --
Issuance for earn-out distribution -- -- 8,286 -- 125 --
----------- ----------- ----------- ----------- ------------- -------------
BALANCE, DECEMBER 31, 2000 12,015 $ -- 13,341,681 $ 13 $ 113,764 $ --
Comprehensive loss:
Net loss -- -- -- -- -- --
Other comprehensive gain (loss):
- Cumulative foreign currency
translation adjustments -- -- -- -- -- --
- Unrealized gain on
investments -- -- -- -- -- --
Net comprehensive loss
Accretion of dividends on preferred
stock -- -- -- -- 1,171 --
Issuance of preferred stock to Elan
for accrued dividends 856 -- -- -- -- --
Issuance of common stock to
extinguish debt -- -- 1,725,735 2 33,177 --
Issuance of common stock to
MediGene -- -- 233,918 -- 3,780 --
Non-qualified stock compensation -- -- -- -- 2,117 --
Exercise of stock option and
issuance of employee stock
purchase plan -- -- 419,692 1 4,181 --
Issuance of restricted stock -- -- 39,031 -- 565 --
Purchase of treasury stock -- -- (77,500) -- -- (1,558)
Offering of common stock, net of
offering costs of $6,574 -- -- 4,099,750 4 87,716 --
----------- ----------- ----------- ----------- ------------- -------------
BALANCE, DECEMBER 31, 2001 12,871 $ -- 19,782,307 $ 20 $ 246,471 $ (1,558)
=========== =========== =========== =========== ============= =============
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE ACCUMULATED SHAREHOLDERS'
LOSS DEFICIT EQUITY
------------- ------------- -------------
Issuance of common stock to Pfizer -- -- 5,000
Issuance of common stock to -- -- 15,000
Sanofi-Synthelabo
Exercise of stock options and
issuance for employee stock
purchase plan -- (26) 1,303
Issuance of restricted stock -- -- 500
Issuance for earn-out distribution -- -- 125
------------- ------------- -------------
BALANCE, DECEMBER 31, 2000 $ (471) $ (105,497) $ 7,809
Comprehensive loss:
Net loss -- (26,704) (26,704)
Other comprehensive gain (loss):
- Cumulative foreign currency
translation adjustments (29) -- (29)
- Unrealized loss on
investments 496 -- 496
-------------
Net comprehensive loss (26,237)
Accretion of dividends on preferred
stock -- -- 1,171
Issuance of preferred stock to Elan
for accrued dividends -- -- --
Issuance of common stock to
extinguish debt -- -- 33,179
Issuance of common stock to
MediGene -- -- 3,780
Non-qualified stock compensation -- -- 2,117
Exercise of stock option and
issuance of employee stock
purchase plan -- -- 4,182
Issuance of restricted stock -- -- 565
Purchase of treasury stock -- -- (1,558)
Offering of common stock, net of
offering costs of $6,574 -- -- 87,720
------------- ------------- -------------
BALANCE, DECEMBER 31, 2001 $ (4) $ (132,201) $ 112,728
============= ============= =============
See notes to the consolidated financial statements.
F-6
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER,31, DECEMBER 31, DECEMBER 31,
2001 2000 1999
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss applicable to common stock .................................... $ (26,704) $ (47,411) $ (13,270)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Accretion of dividends on preferred stock ........................ 1,171 382 --
Depreciation and amortization .................................... 2,480 2,190 1,777
Equity in loss of joint venture .................................. 3,285 12,239 --
Loss on sale and write-downs of marketable securities ............ 831 172 140
Stock plan compensation .......................................... 2,117 125 309
Debt conversion expense .......................................... 2,194 -- --
Interest expense converted to equity ............................. 345 -- --
Extraordinary (gain) loss on extinguished debt ................... 319 (80) (3,275)
Cumulative effect of change in accounting principle .............. -- 20,612 --
Other non-cash items ............................................. 25 (5) 140
Net changes in operating assets and liabilities:
Accounts receivable .............................................. (925) (1,397) 4,714
Note receivable - licensing fee .................................. 8,000 -- --
Interest receivable .............................................. (523) 90 102
Inventories ...................................................... (1,387) (75) 701
Prepaid expenses and deposits .................................... 479 (666) 435
Other assets ..................................................... -- -- 475
Accounts payable ................................................. 481 (424) 805
Accrued expenses and other ....................................... (144) 75 (69)
Deferred revenue ................................................. 8,625 (1,557) 6
------------- ------------- -------------
Net cash provided by (used in) operating activities ........... 669 (15,730) (7,010)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment ..................... (2,069) (775) (1,165)
Investment in intangible assets .................................. (419) (246) (291)
Proceeds from maturity and sale of marketable
securities ..................................................... 23,245 7,402 20,063
Investment in marketable securities .............................. (82,683) (422) (19,571)
Investment in joint venture ...................................... (2,746) -- --
------------- ------------- -------------
Net cash provided by (used in) investing activities ........... (64,672) 5,959 (964)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of equity securities, net of
issuance costs ................................................. 96,247 11,678 613
Payments to acquire treasury stock ............................... (1,558) -- --
Note receivable - stock subscription ............................. 15,000 -- --
Extinguished convertible long-term debt .......................... -- (408) (8,173)
------------- ------------- -------------
Net cash provided by (used in) financing activities ........... 109,689 11,270 (7,560)
------------- ------------- -------------
NET EFFECT OF EXCHANGE RATE ON CASH .................................... (112) (37) (1)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................... 45,574 1,462 (15,535)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ........................... 4,484 3,022 18,557
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR ................................. $ 50,058 $ 4,484 $ 3,022
============= ============= =============
Supplemental cash flow information:
Cash paid for interest .................................... $ 614 $ 2,568 $ 3,110
============= ============= =============
Non-cash investing and
financing activities:
2001
----
Issued preferred stock valued at $883,000 to Elan for
accreted dividends.
Issued common stock valued at $33,177,000 in exchange for
$30,984,000 of 7% Convertible Subordinated Notes.
2000
----
Issued common stock valued at $15,000,000 in exchange for a
note receivable to Sanofi-Synthelabo in connection with the
marketing agreement
Issued preferred stock valued at $12,015,000 in exchange for
an 80.1% initial interest in the joint venture with Elan
Issued common stock valued at $125,000 in connection with
the November 2000 earn-out payments relating to the ViroTex
acquisition
1999
----
Issued common stock valued at $195,000 in connection with
the May 1999 earn-out payments relating to the ViroTex
acquisition
See notes to the consolidated financial statements.
F-7
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Atrix Laboratories, Inc. was formed in August 1986 as a Delaware
corporation. In November 1998, the Company acquired ViroTex Corporation. In June
1999, the Company organized its wholly owned subsidiary Atrix Laboratories
Limited, which is based in London, England. In February 2000, the Company
organized its wholly owned subsidiary Atrix Laboratories GmbH, which is based in
Frankfurt, Germany, to conduct its European operations. Collectively, Atrix
Laboratories and its subsidiaries are referred to as Atrix or the Company. In
June 2000, the Company entered into a research joint venture, Transmucosal
Technologies, with Elan, a wholly owned subsidiary of Elan Corporation, plc.
The Company is an emerging specialty pharmaceutical company focused on
advanced drug delivery. With five unique patented drug delivery technologies,
the Company is currently developing a diverse portfolio of products, including
proprietary oncology, pain management, growth hormone releasing peptide-1, oral
interferon and dermatology products. The Company also partners with large
pharmaceutical and biotechnology companies to apply its proprietary technologies
to new chemical entities or to extend the patent life of existing products. The
Company has strategic alliances with several pharmaceutical companies to use its
drug delivery technologies and expertise in the development of new products.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of Atrix Laboratories, Inc. and its wholly owned subsidiaries Atrix Laboratories
Limited and Atrix Laboratories, GmbH. All significant intercompany transactions
and balances have been eliminated. While the Company initially owns 80.1% of
Transmucosal Technologies' outstanding common stock, Elan and its subsidiaries
have retained significant minority investor rights that are considered
"participating rights" as defined in Emerging Issues Task Force Consensus 96-16,
"Investor's Accounting for an Investee When the Investor Has a Majority of the
Voting Interest, but the Minority Shareholder or Shareholders Have Certain
Approval or Veto Rights." Elan's significant rights in Transmucosal Technologies
that are considered participating rights include equal representation in the
management of the joint venture and development of its business plan and
approval rights on the board of directors as it relates to the business plan.
Accordingly, the Company accounts for its investment in Transmucosal
Technologies under the equity method of accounting.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
F-8
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash equivalents include highly liquid investments with an original
maturity of three months or less.
MARKETABLE SECURITIES
Marketable securities are classified as available-for-sale and are
carried at fair market value with the unrealized holding gain or loss included
in shareholders' equity as a component of other comprehensive loss. Fair market
value is based on quoted market prices or dealer quotes. Premiums and discounts
associated with bonds are amortized using the effective interest rate method.
The investment portfolio includes fixed rate debt instruments that are primarily
U.S. Government and Agency bonds and notes and corporate bonds and notes. The
maturity dates for these securities range from one to sixteen years. If a
decline in market value is other than temporary, a charge is taken to
operations.
STOCK SUBSCRIPTIONS
The note receivable for stock subscriptions is shown as a current asset
to the extent collected before the consolidated financial statements are
published.
INVENTORIES
Inventories are stated at the lower of cost, determined by the
first-in, first-out (FIFO) method, or market. The components of inventories are
as follows as of December 31 (amounts in thousands):
2001 2000
------------ ------------
Raw materials $ 2,399 $ 1,617
Work in progress 201 145
Finished goods 714 179
------------ ------------
Total inventories $ 3,314 $ 1,941
============ ============
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, which range from three to
forty years. Leasehold improvements and capital additions to the Company's
building are amortized over the remaining term of the related lease and
estimated useful life respectively. The components of net property, plant and
equipment are as follows as of December 31 (amounts in thousands):
F-9
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2001 2000
---------- ----------
Land ........................................ $ 1,071 $ 1,071
Building .................................... 3,868 3,610
Leasehold improvements ...................... 618 470
Furniture & fixtures ........................ 615 440
Machinery ................................... 6,004 5,039
Office equipment ............................ 1,243 813
---------- ----------
Total property, plant and equipment ... 13,419 11,443
Accumulated depreciation and amortization ... (5,862) (4,625)
---------- ----------
Property, plant and equipment, net .... $ 7,557 $ 6,818
========== ==========
INTANGIBLE ASSETS
Intangible assets consist of patents, purchased technology, purchased
royalty rights, and goodwill. Patents are stated at the legal cost incurred to
obtain the patents. Upon approval, patent costs are amortized, using the
straight-line method, over their estimated useful life ranging from ten to
twenty years. The values assigned to the purchased technology, purchased royalty
rights, and goodwill arising from the ViroTex acquisition are being amortized
using the straight-line method over the period of expected benefit of four to
five years.
VALUATION OF LONG-LIVED ASSETS
The Company reviews its long-lived assets, including identified
intangibles and goodwill, for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If this review indicates that these assets will not be recoverable,
based on the forecasted non-discounted future operating cash flows expected to
result from the use of these assets and their eventual disposition, the carrying
value of these assets is reduced to fair value. Management does not believe
current events or circumstances indicate that long-lived assets, including
goodwill, are impaired as of December 31, 2001.
DEFERRED FINANCE COSTs
Costs associated with the issuance of the Company's 7% Convertible
Subordinated Notes were deferred and are being amortized on a straight-line
basis over the seven-year term of the notes. As convertible notes are
repurchased and subsequently extinguished or exchanged for the Company's common
stock, the pro-rata portion of unamortized deferred finance costs is written
off.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Unless otherwise stated herein, the fair value of the Company's
financial instruments approximate their carrying value due to the relatively
short periods to maturity of the instruments and/or variable rates of the
instruments, which approximate current interest rates.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which possibly expose the Company to
concentration of credit risk, consist primarily of cash and cash equivalents,
marketable equity securities and accounts receivable. The Company's cash
equivalents are placed with major financial institutions and are primarily
invested
F-10
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
in investment grade commercial paper with an average original maturity of three
months or less and in money market accounts, which, at times, may exceed
federally insured limits. The Company has not experienced any losses on such
accounts. The Company's marketable securities consist primarily of U.S.
Government or Government-backed securities, investment grade corporate notes,
and various equity securities. During 2001, the Company recorded a write-down of
$831,000 for its investment in Enron corporate notes. Management believes that
the diversity of the Company's portfolio combined with the credit worthiness of
the companies in which it invests mitigates the Company's exposure to credit
risk.
Revenues from net sales and royalties, contract research and
development, and licensing, marketing rights and milestone revenues are
primarily derived from major pharmaceutical companies. However, the Company's
revenues could be materially impacted by the loss of one or more of its
contractual relationships or due to disputes with a collaborative partner. In
2001, the Company's revenues were materially impacted due to disputes with Block
Drug Company, see Note 5. The Company performs ongoing credit evaluations of its
customers' financial conditions and requires no collateral to secure accounts
receivable. The Company maintains an allowance for doubtful accounts based on an
assessment of the collection probability of delinquent accounts.
REVENUE RECOGNITION
The Company recognizes revenue on net sales, royalties on third-party
sales of Atrix's products, contract manufacturing, contract research and
development and for nonrefundable licensing fees, marketing rights and milestone
payments earned under contractual arrangements.
The Company recognizes revenue on product sales and contract
manufacturing at the time of shipment when title to the product transfers and
the customer bears risk of loss. Product sales revenue is recorded net of
estimated returns and allowances. Royalty revenue is recorded when product is
shipped by licensees based on the invoiced amount by the licensee and royalty
rates as specified in the agreement with the licensee.
All contract research and development is performed on a best effort
basis under signed contracts. Revenue under contracts with a fixed price is
recognized over the term of the agreement on a straight-line basis, which is
consistent with the pattern of work performed. Billings are made in accordance
with schedules as specified in each agreement, which generally include an
up-front payment as well as periodic payments. Advance payments are recorded as
deferred revenue. Revenue under other contracts is recognized based on terms as
specified in the contracts, including billings for time incurred at rates as
specified in the contracts and as reimbursable expenses are incurred. Billings
under the contracts are made either monthly or quarterly, depending on the terms
of the contract.
Nonrefundable licensing fees, marketing rights and milestone payments
received under contractual arrangements are deferred and recognized over the
remaining contractual term using the straight-line method. Prior to the fourth
quarter of 2000, the Company recognized these payments as revenue when received
and the Company had fulfilled all contractual obligations relating to the
payments. Effective in the fourth quarter of 2000, the Company changed its
method of accounting for nonrefundable licensing fees, marketing and milestone
payments to recognize such payments over the remaining contractual term using
the straight-line method in accordance with the Securities and Exchange
Commission's Staff Accounting Bulletin No. 101 - "Revenue Recognition in
Financial
F-11
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Statements," (SAB 101). The Company recorded a $20,612,000 adjustment, as of
January 1, 2000, for the cumulative effect of a change in accounting principle
upon adoption of SAB 101. The cumulative effect was recorded as deferred revenue
that is being recognized as revenue over the remaining contractual terms of the
specific agreements. During the year ended December 31, 2000, the impact of this
change in accounting principle increased net loss applicable to common stock by
$18,734,000 or $1.58 per share. This amount is comprised of the $20,612,000, or
$1.73 per share, cumulative effect adjustment net of $1,878,000, or $0.16 per
share, recognized as revenue during the year ended December 31, 2000. During the
year ended December 31, 2001, the Company recognized $2,718,000 of the SAB 101
adjustment as revenue. The remainder of the deferred revenue under the SAB 101
adjustment will be recognized as follows: $4,384,000 for each year from 2002
through 2004, $2,926,000 in 2005, $11,000 for each year from 2006 through 2015
and $2,000 in 2016. The amount recognized in 2001 and amounts to be recognized
in 2002 through 2010 were adjusted in 2001 to reflect an amendment to the
agreement with Block Drug Company, see Note 5, and to include additional license
and milestone payments received in 2001.
RESEARCH AND DEVELOPMENT
Costs incurred in connection with research and development activities
are expensed as incurred. These costs consist of direct and indirect costs
associated with specific projects, as well as fees paid to various entities that
perform certain research on the Company's behalf. Additionally, licensing fees
paid by the Company to acquire technology are expensed as incurred if no
alternative future use exists. A portion of overhead costs is allocated to
research and development costs on a weighted-average percentage basis among all
projects under development.
The following table summarizes research and development activities
funded, in whole or in part, by our collaborators, as well as, research and
development activities funded by the Company for the years ended December 31:
2001 2000 1999
------------ ------------ ------------
Research and Development - Funded $ 10,626 $ 1,921 $ 2,429
Research and Development - Not Funded 15,009 14,814 13,126
------------ ------------ ------------
Research and Development $ 25,635 $ 16,735 $ 15,555
============ ============ ============
NET LOSS PER COMMON SHARE
Basic net loss per common share excludes dilution and is computed by
dividing net loss by the weighted-average number of common shares outstanding
during the periods presented. Diluted net loss per common share reflects the
potential dilution of securities that could participate in the earnings. Stock
options, warrants outstanding and their equivalents are included in diluted
earnings per share computations through the "treasury stock method" unless they
are antidilutive. Convertible securities are included in diluted earnings per
share computations through the "if converted" method unless they are
antidilutive. The effect of assuming conversion of the Series A convertible
preferred stock is excluded from the diluted earnings per share computations
since the conversion option commences July 18, 2002. Additionally, since the
Company did not draw any proceeds under the convertible promissory note
agreement with Elan as of December 31, 2001, there was no effect on earnings per
share computations pertaining to this convertible promissory note for the
periods presented. Common share equivalents are excluded from the computations
in loss periods, as their effect would be antidilutive.
F-12
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
For the years ended December 31, 2001, 2000 and 1999, 1,681,000, 2,267,000, and
1,932,000 equivalent dilutive securities (primarily convertible notes and common
stock options), respectively, have been excluded from the weighted-average
number of common shares outstanding for the diluted net loss per share
computations as they are antidilutive.
COMPREHENSIVE LOSS
Items of other comprehensive loss include unrealized gains and losses
on marketable securities available-for-sale securities and foreign currency
translation adjustments. Disclosure of comprehensive loss for the years ended
December 31, 2001, 2000 and 1999 is included in the accompanying financial
statements as part of the consolidated statements of changes in shareholders'
equity.
STOCK BASED COMPENSATION
The Company accounts for stock-based compensation to employees and
directors using the intrinsic value method. The Company accounts for stock-based
compensation to non-employees using a fair value based method. Pro forma
operating results showing the impact of using the intrinsic value method instead
of the fair value method for employee stock options is provided in Note 6.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires an asset and liability approach to
financial accounting and reporting for income taxes. Deferred income tax assets
and liabilities are computed annually for differences between the financial
statement basis and the income tax basis of assets and liabilities that will
result in taxable or deductible amounts in the future. Such deferred income tax
liability computations are based on enacted tax laws and rates applicable to the
years in which the differences are expected to affect taxable income. A
valuation allowance is established when it is necessary to reduce deferred
income tax assets to the expected realized amounts.
TRANSLATION OF FOREIGN CURRENCIES
The Company's primary functional currency is the U.S. dollar. Foreign
subsidiaries with a functional currency other than the U.S. dollar translate
balance sheet accounts at period-end exchange rates. Revenue and expense
accounts are translated at average exchange rates in effect during the period.
Translation adjustments are recorded as a component of comprehensive income.
Some of the Company's transactions and transactions of its subsidiaries are made
in currencies different from their functional currency. Gains and losses from
these transactions are included in other income or expense as they occur. To
date, the effect on income and expenses for such amounts has been immaterial.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities," was issued
which, as amended, was effective for all fiscal years beginning after June 15,
1999. SFAS No. 133 provides new standards for the identification, recognition
and measurement of derivative financial instruments, including embedded
derivatives. Historically, the Company has not entered into derivative contracts
to hedge existing risks nor have we
F-13
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
entered into speculative derivative contracts. Although the Company's
convertible debt and preferred stock include conversion features that are
considered to be embedded derivatives, accounting for those instruments is not
affected by SFAS No. 133. The adoption of SFAS No. 133 did not have a material
affect on the Company's financial position or results of operations.
RELATED PARTY TRANSACTIONS
A member of the Board of Directors, as of November 2001, is a partner
at a law firm that is the primary provider of legal services for the Company.
Legal fees paid to this law firm were $1,112,000, $587,000 and $366,000 for the
years ended December 31, 2001, 2000 and 1999, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
On June 29, 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 141, "Business Combinations". SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. The Company adopted SFAS No. 141 on July 1, 2001. The
adoption of this statement did not have a material impact on the Company's
financial position or results of operations.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets"
was issued by the FASB. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Goodwill and certain
intangible assets will remain on the balance sheet and not be amortized. On an
annual basis, and when there is reason to suspect that their values have been
diminished or impaired, these assets must be tested for impairment, and
write-downs may be necessary. The Company is required to implement SFAS No. 142
on January 1, 2002 and it has determined that this statement will not have a
material impact on its financial position or results of operations.
In August 2001, the FASB issued SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 provided new guidance on
the recognition of impairment losses on long-lived assets to be held and used or
to be disposed of and also broadens the definition of what constitutes a
discontinued operation and how the results of a discontinued operation are to be
measured and presented. SFAS 144 is effective for the Company's fiscal year
beginning 2002, but is not expected to have a material impact on the Company's
financial statements.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year's consolidated financial statement presentation.
F-14
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. MARKETABLE SECURITIES
As of December 31, 2001, marketable securities available-for-sale
consist of the following (amounts in thousands, except share data):
NUMBER OF SHARES OR
PRINCIPAL AMOUNT COST FAIR VALUE
------------------------ ----------- -----------------
U.S. Government and Agency Bond Funds:
Thornburg Fund......................... 50,718 Shares $ 637 $ 635
Pimco Fund............................. 1,010,194 Shares 10,809 10,567
----------- -----------------
Sub-Total......................... 11,446 11,202
----------- -----------------
Other Marketable Securities AFS:
U.S. Government and Agency Bonds............ $30,200 30,413 30,640
Corporate Notes............................. $41,079 41,539 41,390
CollaGenex Common Stock..................... 330,556 Shares 2,500 2,677
MFS Limited Maturity Fund................... 289,226 Shares 2,000 2,001
----------- -----------------
Sub-Total......................... 76,452 76,708
----------- -----------------
Total ............................ $ 87,898 $ 87,910
=========== =================
As of December 31, 2000, marketable securities available-for-sale
consist of the following (amounts in thousands, except share data):
NUMBER OF SHARES OR
PRINCIPAL AMOUNT COST FAIR VALUE
------------------------ ----------- -----------------
U.S. Government and Agency Bond Funds:
Thornburg Fund......................... 48,172 Shares $ 605 $ 592
Pimco Fund............................. 661,342 Shares 7,097 6,871
----------- ----------------
Sub-Total......................... 7,702 7,463
----------- ----------------
U.S. Government and Agency Bonds............ $ 21,695 21,692 21,448
----------- ----------------
Total............................. $ 29,394 $ 28,911
=========== ================
As of December 31, 2001, gross unrealized gains and losses pertaining
to marketable securities available-for-sale were $590,000 and $577,000,
respectively. As of December 31, 2000, gross unrealized gains and losses
pertaining to marketable securities available-for-sale were $-0- and $484,000,
respectively.
Realized investment gains and losses are included in investment income
and included no gains in 2001 and $1,000 in 2000, and no gains in 1999. Realized
losses were $831,000, $172,000, and $141,000, in 2001, 2000, and 1999,
respectively. A charge of $831,000 against investment income was recognized in
the fourth quarter of 2001 for a write-down of the Company's $1,000,000 Enron
corporate note investment, which was adjusted to fair value as of December 31,
2001. The fair value for this investment was $195,000 as of December 31, 2001.
F-15
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. INTANGIBLE ASSETS
Intangible assets consist of the following as of December 31 (amounts
in thousands):
2001 2000
----------- -----------
Patents ........................... $ 2,534 $ 2,115
Purchased technology .............. 2,800 2,800
Purchased royalty rights .......... 600 600
Goodwill .......................... 933 933
----------- -----------
Sub-total .................... 6,867 6,448
----------- -----------
Less: Accumulated amortization .... (3,421) (2,399)
----------- -----------
Total ........................ $ 3,446 $ 4,049
=========== ===========
4. CONVERTIBLE SUBORDINATED NOTES PAYABLE
In November 1997, the Company issued $50,000,000 of convertible
subordinated notes. The notes bear interest at the rate of 7% and are due in
2004. The notes are convertible, at the option of the holder, into the Company's
common stock, $.001 par value, at any time prior to maturity, unless previously
redeemed or repurchased, at a conversion price of $19.00 per share, subject to
adjustments in certain events. The notes are redeemable, in whole or in part, at
the Company's option, on or after December 5, 2000.
During the year ended December 31, 2001, the Company completed a series
of private transactions involving the exchange of 1,725,735 shares of its common
stock for $30,984,000 of the 7% Convertible Subordinated Notes. Of the 1,725,735
shares issued, 1,630,726 shares were valued at the conversion price of $19.00
per share and the remaining 95,009 shares were valued at the closing market
price as of the various exchange dates. As a result, the Company recognized an
extraordinary loss of $319,000, for the write-off of $664,000 of pro rata
unamortized deferred finance charges net of $345,000 interest expense payable
eliminated as a result of these exchanges. Additionally, of the 95,009 shares
exchanged, a debt conversion expense of $2,194,000 was recognized for the year
ended December 31, 2001. In 2000 and 1999, the Company repurchased $500,000 and
$11,810,000 of the notes and recognized an extraordinary gain of approximately
$80,000 and $3,275,000, respectively. As of December 31, 2001 and 2000, the
notes payable balance was $5,206,000 and $36,190,000, respectively. The
estimated fair value of the notes payable, based on quoted market prices or
dealer quotes, was $5,961,000 and $37,226,000 at December 31, 2001 and 2000,
respectively.
5. COLLABORATIVE ARRANGEMENTS
Pfizer,Inc.
In August 2000, the Company entered into a non-exclusive research and
worldwide licensing agreement with Pfizer, Inc. to provide access to the
Company's proprietary drug delivery systems in the development of new products.
Pfizer will provide the funding to develop and commercialize selected products
under the agreement. The Company will receive research and development payments,
product sales and royalty payments from Pfizer's sales of products. As part of
the agreement, Pfizer purchased 447,550 shares of the Company's common stock for
$5,000,000.
F-16
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Sanofi-Synthelabo, Inc.
In December 2000, the Company entered into an exclusive North American
marketing agreement with Sanofi-Synthelabo, Inc., a major international
pharmaceutical company, for the one-, three-, and four-month Eligard products
for the treatment of prostate cancer.
The Company received a licensing fee of $8,000,000 upon signing the
agreement. Additionally, the Company will receive payments for certain clinical,
regulatory and sales milestones, product sales, and royalty payments based on
Sanofi-Synthelabo's sales of the Eligard products. Under the terms of the
agreement, the Company will fund all research and development for the one-,
three, and four-month Eligard products and Sanofi-Synthelabo will fund all
research and development for a unique dosage formulation of Eligard.
Additionally, in December 2001, Sanofi-Synthelabo exercised its rights under the
agreement with the Company for the Eligard unique dosage formulation. The
licensing fee was recorded as deferred revenue and is being recognized over the
term of the agreement. As part of the agreement, Sanofi-Synthelabo purchased
824,572 shares of the Company's common stock for $15,000,000.
During 2001, the Company received $6,000,000 of milestone payments
related to certain FDA filings. The licensing fee and milestone payments were
recorded as deferred revenue and are being recognized in revenue over the
remaining term of the agreement. Additionally, in 2001, the Company received
$1,000,000 as an advanced payment for research and development of the unique
dosage formulation of the Eligard product to be performed in 2002. This payment
has been reflected as deferred revenue at December 31, 2001.
MediGene AG
In April 2001, the Company entered into an exclusive European marketing
agreement with MediGene AG, a German biotechnology company, to market the one-,
three-, and four-month Eligard products. Additionally, MediGene has the right to
develop the Eligard unique dosage formulation product. The Company received a
licensing fee of $2,000,000 upon signing the agreement. Additionally, the
Company will receive payments for certain clinical, regulatory and sales
milestones, product sales and royalty payments based on MediGene's sales of
Eligard products. Under the terms of the agreement, the Company will fund all
research and development for the products with the exception of costs required
to obtain certain European approvals, which shall be borne by MediGene if it
chooses to pursue such approvals. The licensing fee was recorded as deferred
revenue and is being recognized over the term of the agreement. As part of the
agreement, MediGene purchased 233,918 shares of the Company's common stock for
$3,780,000. In December 2001, MediGene submitted an MAA for our Eligard 7.5-mg
one-month product to the German regulatory authority, BfArM, as a reference
member state under a mutual recognition process.
Fujisawa Healthcare, Inc.
In October 2001, the Company entered into an exclusive North American
marketing agreement with Fujisawa Healthcare, Inc. for the Atrisone acne
product. The Company received a $2,000,000 licensing fee upon signing of the
agreement. Additionally, the Company will receive payments for certain clinical,
regulatory and sales milestones, product sales, and royalty payments for
Fujisawa's sales of the Atrisone acne product. Under the terms of the agreement,
Fujisawa commenced reimbursing the
F-17
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Company for 75% of the research and development costs of the product in July
2001. The licensing fee was recorded as deferred revenue and is being recognized
over the term of the agreement.
Elan International Services, Ltd.
In July 2000, the Company formed a joint venture, Transmucosal
Technologies, with Elan International Services, Ltd., a wholly owned subsidiary
of Elan Corporation, plc. The purpose of the joint venture is to develop and
commercialize oncology and pain management products.
In connection with the formation of Transmucosal Technologies, the
Company issued to Elan 12,015 shares of its Series A convertible exchangeable
preferred stock (Series A), valued at $12,015,000 in exchange for 6,000 shares
of common stock and 3,612 shares of preferred stock of Transmucosal
Technologies, representing an initial ownership in the joint venture of 80.1%.
Series A bears a 7% annual dividend, accruing semi-annually, payable in-kind.
During the year ended December 31, 2001, the Company issued 856 shares of Series
A stock in payment of accreted dividends of $856,000. When the Series A stock
was issued in payment of these dividends, the trading price of the Company's
common stock was in excess of the conversion rate of the Series A. As a result,
the Company recorded $288,000 for the beneficial conversion feature related to
this issuance, which was recorded as an additional dividend on preferred stock.
Accreted and unpaid dividends at December 31, 2001 and 2000 were $410,000 and
$382,000, respectively.
Series A is convertible commencing in July 2002, at Elan's option, into
the Company's common stock at $18.00 per common share, subject to anti-dilution
adjustments. Elan may elect to exchange its Series A stock for a 30.1% ownership
interest in the joint venture, increasing Elan's ownership in Transmucosal
Technologies to 50% and decreasing the Company's ownership to 50%. This exchange
right will terminate if Elan elects to convert the Series A stock into the
Company's common stock. The Series A stock must be redeemed by the Company in
July 2006, either in cash or in common stock at Atrix' option, in an amount
equal to the liquidation preference. The liquidation preference of Series A is
its stated value plus accreted and unpaid dividends. In connection with the
formation of the joint venture, Elan purchased 442,478 shares of the Company's
common stock for $5,000,000 and the Company issued Elan a warrant to purchase up
to 1,000,000 shares of the Company's common stock at $18.00 per share. The
warrant was exercisable at issuance and expires in July 2005. Additionally, the
Company and Elan entered into a convertible promissory note agreement whereby
the Company may borrow up to $8,010,000 from Elan to fund its share of research
and development activities undertaken by the joint venture. The note is
convertible into the Company's common stock at $14.60 per share. At December 31,
2001 and 2000, no amounts had been drawn under this note.
Under the terms of the related agreements, in July 2000, Transmucosal
Technologies recognized $15,000,000 expense to Elan for a license granted by
Elan to the joint venture for exclusive rights to use Elan's nanoparticulate
drug delivery technology. This license expense was recognized when incurred in
accordance with SFAS No. 2, "Accounting for Research and Development Costs," as
the sole use of the license is for use in research and development activities of
the joint venture and the license has no future alternative use. Additionally,
the joint venture contracts with Atrix and Elan to perform certain research and
development activities. During the years ended December 31, 2001 and 2000, the
Company earned contract research and development revenues of $4,086,000 and
$251,000, respectively, and had receivables from the joint venture of $946,000
and $251,000, respectively. Additionally, the Company had payables to the joint
venture at December 31, 2001 and 2000 of $758,000 and $224,000,
F-18
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
respectively. During 2001 and 2000, the Company recognized $3,285,000 and
$12,239,000, respectively, for its share of the losses of Transmucosal
Technologies.
Geneva Pharmaceuticals, Inc. (a Subsidiary of Novartis)
In August 2000, the Company entered into a development agreement with
Geneva Pharmaceuticals, Inc. to develop generic topical prescription dermatology
products. Under the terms of the agreement, Geneva will reimburse the Company
for 50% of the research and development costs incurred on the products.
Additionally, the Company and Geneva will split profits from sales of products
equally.
CollaGenex Pharmaceuticals, Inc.
In August 2001, the Company licensed the exclusive U.S. marketing
rights for Atridox, Atrisorb FreeFlow GTR Barrier and Atrisorb-D GTR Barrier to
CollaGenex Pharmaceuticals, Inc. following the reacquisition of the sales and
marketing rights from Block Drug Corporation. The Company received a $1,000,000
licensing fee upon signing of the agreement. Additionally, the Company will
receive payments for product sales and royalty payments for CollaGenex's sales
of the dental products. In connection with the transaction, the Company
purchased 330,556 shares of CollaGenex's common stock for $3,000,000, which was
a $500,000 premium to market at the date of purchase. The Company recorded the
common stock as an available-for-sale security and the premium was reflected as
a reduction of the licensing fee. The net licensing fee was recorded as deferred
revenue and is being recognized over the term of the agreement. CollaGenex
commenced U.S. sales of Atridox and Atrisorb FreeFlow in November 2001 and
commenced Atrisorb-D sales in January 2002.
Block Drug Corporation
In 1996, the Company licensed exclusive U.S. marketing rights for
Atridox, Atrisorb FreeFlow GTR Barrier and Atrisorb-D GTR Barrier to Block Drug
Corporation. Under the terms of the agreement, the Company received a licensing
fee, certain regulatory, marketing and sales milestone payments, product sales
and royalty payments from Block Drug's sales of the products. Prior to 2000, the
Company received licensing fee and milestone payments in the amount of
$24,100,000. These fees were recorded as revenue when received; however, as
discussed in Note 1, in 2000 the Company changed its method of recognizing
licensing fee and milestone payments to record them as revenue over the term of
the agreement. No additional payments were received in 2000.
In August 2001, the Company reacquired certain marketing rights to the
products from Block Drug. Under the terms of the agreement, Block Drug agreed to
pay the Company $3,000,000 for milestones previously attained by the Company and
the Company agreed to pay Block Drug up to $7,000,000, based on sales of
products, over the term of the agreement, which is through August 2005. Upon
termination of this agreement, all agreements between the Company and Block Drug
will terminate. The Company recorded the additional milestone payments as
deferred revenue and is reducing deferred revenue for payments made to Block
Drug. As of December 31, 2001, the Company has paid Block Drug $3,800,000 under
the agreement.
F-19
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Other
The Company has several other individually insignificant collaborative
agreements that provide for licensing fees, milestone payment and research and
development payments. During the years ended December 31, 2001, 2000 and 1999,
the Company received licensing fees and milestone payments of $100,000, $195,000
and $145,000, respectively. These payments are being recognized in revenue over
the terms of the contracts on a straight-line basis.
6. STOCK OPTION PLANS
As of December 31, 2001, the Company has the following stock-based
compensation plans: (i) the 1987 Performance Stock Option Plan; (ii) the 2000
Stock Incentive Plan; (iii) the Non-Employee Director Stock Incentive Plan; and
(iv) the Non-Qualified Stock Option Plan. These plans are discussed below.
1987 PERFORMANCE STOCK OPTION PLAN (THE 1987 PLAN)
The Company has reserved 2,500,000 of its authorized but unissued
common stock for stock options to be granted under the 1987 Plan. Under the
terms of the 1987 Plan, options generally vest ratably over a period of three
years from the date of grant and expire after ten years. The exercise price of
all options is the closing bid price of the stock on the date of grant. There
are 3,396 shares that remain available under the 1987 Plan for future employee
stock option grants. The 1987 Plan expires in May 2002 and no stock options will
be granted under this plan after expiration.
The following tables summarize information on stock option activity for
the 1987 Plan:
WEIGHTED-
NUMBER OF EXERCISE PRICE PER AVERAGE
SHARES SHARE EXERCISE PRICE
-------------- ------------------ --------------
Options outstanding, December 31, 1998 1,275,154 $ .50 - 21.75 $ 9.60
Options granted 342,390 5.38 - 12.88 13.98
Options canceled or expired (68,942) .50 - 21.75 12.30
Options exercised (120,650) 8.75 - 15.00 11.15
-------------- ------------------ --------------
Options outstanding, December 31, 1999 1,427,952 $5.38 - 20.75 $ 9.54
Options granted 289,450 7.88 - 16.25 9.53
Options canceled or expired (71,526) 5.50 - 18.94 9.37
Options exercised (135,352) 9.00 - 19.00 14.67
Options outstanding, December 31, 2000 1,510,524 $5.38 - 20.75 $ 9.61
Options granted 86,390 5.50 - 25.99 16.12
Options canceled or expired (88,277) 5.50 - 17.25 8.10
Options exercised (393,980) 5.50 - 20.75 9.98
-------------- ------------------ --------------
Options outstanding, December 31, 2001 1,114,657 $5.38 - 25.99 $ 10.11
-------------- ------------------ --------------
Options outstanding were available for exercise as follows:
Exercisable at December 31, 2001 816,999 $ 9.76
Exercisable at December 31, 2000 972,784 9.90
Exercisable at December 31, 1999 884,743 9.57
F-20
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NUMBER WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT AVERAGE WEIGHTED- EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, REMAINING AVERAGE DECEMBER 31, EXERCISE PRICE
EXERCISE PRICES 2001 CONTRACTUAL LIFE EXERCISE PRICE 2001 EXERCISABLE
--------------- -------------- ---------------- -------------- -------------- --------------
$ 5.50 - 17.25 143,770 1 year $ 8.32 143,770 $ 8.32
5.88 - 7.75 36,100 2 years 6.42 36,100 6.42
6.75 - 10.00 66,769 3 years 7.09 66,769 7.09
6.63 - 11.63 59,781 4 years 7.89 59,781 7.89
9.50 - 12.75 119,387 5 years 9.99 119,387 9.99
11.75 - 19.00 124,202 6 years 16.64 124,202 16.64
9.19 - 11.00 140,405 7 years 10.24 118,150 10.30
5.38 - 16.25 361,243 8 years 8.18 148,840 7.56
10.06 - 25.99 63,000 9 years 19.62 -- --
-------------- ------------- -------------- ------------- ------------ ------------
$ 5.38 - 25.99 1,114,657 7 years $ 10.11 816,999 $ 9.76
============== ============= ============== ============= ============ ============
2000 STOCK INCENTIVE PLAN (THE 2000 PLAN)
The Company has reserved 2,750,000 of its authorized but unissued
common stock for stock options to be granted under the 2000 Plan. Under the
terms of the 2000 Plan, options generally vest ratably over a period of three
years from the date of grant and expire ten years after grant. The exercise
price of all options is the closing bid price of the stock on the date of grant.
There are 816,246 shares that remain available under the 2000 Plan for future
employee stock option grants.
In August 2001, the Company adopted the 2001 Executive Long Term
Incentive Compensation Program (the "2001 Program") pursuant to, and subject to
the provisions of, the 2000 Plan. Only the Company's chief executive officer and
chairman of the board is eligible to receive awards under the 2001 Program.
Grants may be made under the 2001 Program at any time prior to August 5, 2004.
The exercise price of the options is determined by the Board of Directors or a
designated committee. The aggregate value of awards that may be granted under
the 2001 Program, at the time of grant, is $7,000,000. Awards under the 2001
Program vest and become exercisable as determined by the Board of Directors or a
designated committee. The Board of Directors or a designated committee may
determine that awards shall be fully vested at the time of grant or base vesting
or the lapse of a repurchase right on the attainment of designated performance
goals and criteria, the passage of time, the occurrence of one or more events,
or other factors. On August 6, 2001, the Company granted 100,503 options to the
chief executive officer at an exercise price of $5.00 per share which was below
fair value of $24.90 per share based on stated market quotes at the date of the
grant. All options granted were fully vested at the date of the grant. As a
result, the Company recognized $2,000,000 of administrative compensation expense
in the year ended 2001.
F-21
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following tables summarize information about stock option activity
for the 2000 Plan:
WEIGHTED-
NUMBER OF EXERCISE PRICE PER AVERAGE
SHARES SHARE EXERCISE PRICE
------------ ------------------ --------------
Options granted 1,064,325 $9.00 - 18.88 $ 12.09
Options canceled or expired (3,840) 9.00 - 15.19 10.60
------------ ---------------- -------------
Options outstanding, December 31, 2000 1,060,485 $9.00 - 18.88 $ 12.09
Options granted 1,047,238 5.00 - 28.19 18.48
Options canceled or expired (173,969) 9.00 - 25.99 17.59
Options exercised (17,385) 9.00 - 17.63 10.43
------------ ---------------- -------------
Options outstanding, December 31, 2001 1,916,369 $5.00 - 28.19 $ 15.21
------------ ---------------- -------------
============ ================ =============
Options outstanding were available for exercise as follows:
Exercisable at December 31, 2001 412,233 $ 10.49
Exercisable at December 31, 2000 -- --
Exercisable at December 31, 1999 -- --
NUMBER WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT AVERAGE WEIGHTED- EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, REMAINING AVERAGE DECEMBER 31, EXERCISE PRICE
EXERCISE PRICES 2001 CONTRACTUAL LIFE EXERCISE PRICE 2001 EXERCISABLE
------------------- ------------------ ------------------ ------------------ ------------------ ----------------
$ 9.31 - 9.75 380,474 8 years 9.68 120,349 $ 9.75
9.50 - 23.75 1,049,492 9 years 14.37 191,381 13.84
5.00 - 28.19 486,403 10 years 21.34 100,503 5.00
------------------- ------------------ ------------------ ------------------ ------------------ ----------------
$ 5.00 - 28.19 1,916,369 9 years $ 15.21 412,233 $ 10.49
=================== ================== ================== ================== ================== ================
NON-EMPLOYEE DIRECTOR STOCK INCENTIVE PLAN (THE DSI PLAN)
During the year ended December 31, 1999, the Company adopted the DSI
Plan. The purposes of the DSI Plan are to attract and retain the best available
Non-Employee Directors, to provide them additional incentives, and to promote
the success of the Company's business. This DSI Plan is comprised of two
components: an "Automatic Option Grant Program" and a "Stock Fee Program."
Automatic Option Grant Program
Immediately following each annual meeting of the Company's
stockholders, commencing with the 1999 Annual Stockholders' Meeting, each
Non-Employee Director is granted a Non-Qualified Stock Option to purchase 4,000
(5,000 in the case of the Chairman) shares of the Company's common stock. These
options vest ratably over a period of three years and expire ten years after
grant. The exercise price of each option is equal to the market price of the
Company's common stock on the date of the grant. All options awarded under this
portion of the plan are made under the 1987 Performance Stock Option Plan. For
the year ended December 31, 2001, 24,000 stock options were issued at a price of
$17.00 and none were exercised under this program.
Stock Fee Program
Commencing with the 1999 Annual Stockholders' Meeting, each
Non-Employee Director will receive an annual retainer fee. Each Non-Employee
Director was eligible to elect to apply all or any portion of the retainer fee
to the acquisition of shares of restricted common stock or the receipt of stock
options. The portion of the fee subject to election of restricted common stock
is determined by dividing
F-22
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
the elected dollar amount by the fair market value per share on the date the fee
is due to be paid. The restricted common stock vests ratably over a period of
three years.
Beginning with the August 2000 meeting, the annual retainer was amended
to provide each Non-Employee Director with 2,800 stock options in place of the
retainer fee. The options vest ratably over a period of three years. The
exercise price of each stock option, which has a maximum ten-year life, is equal
to the market price of the Company's common stock on the date of the grant.
The maximum aggregate number of restricted shares that may be issued
under the Stock Fee Program portion of the plan is 25,000 shares. During the
years ended December 31, 2001, 2000 and 1999, the Non-Employee Directors elected
to have 932, 3,092 and 2,474 shares of Restricted Common Stock issued,
respectively. Under this plan, no stock options were elected to be granted.
There are 18,502 shares that remain available under this program.
PRO FORMA EFFECT OF STOCK OPTION ISSUANCES
The Company accounts for the 1987 Plan, the 2000 Plan and the DSI Plan
options using the intrinsic value method. Accordingly, no compensation expense
has been recognized for stock option grants. Had compensation cost been
determined based on the fair value of the options at the grant dates of awards
under the 1987 Plan and 2000 Plan consistent with SFAS No. 123, the Company's
net loss applicable to common stock and basic and diluted loss per common share
would have been changed to the pro forma amounts indicated below (amounts in
thousands, except share data):
2001 2000 1999
------------ ------------ ------------
Net loss applicable to common stock:
-- as reported $ (26,704) $ (47,411) $ (13,270)
-- pro forma (34,072) (51,498) (14,912)
Basic and diluted net loss per common share:
-- as reported $ (1.63) $ (3.99) $ (1.17)
-- pro forma (2.08) (4.33) (1.32)
The weighted-average Black-Scholes fair value per option granted in
2001, 2000, and 1999 was $8.63, $5.65 and $5.63, respectively. The fair value of
options was estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions used for grants in
2001, 2000 and 1999: no dividend yield, expected volatility of 62.2% for 2001,
59.1 % for 2000 and 52.5% for 1999, risk free interest rate of 7.0%, and
expected life of five years.
NON-QUALIFIED STOCK OPTION PLAN (NON-QUALIFIED PLAN)
The Company has reserved 150,000 shares of its authorized but unissued
common stock for stock options to be granted to outside consultants under the
Non-Qualified Plan. The Compensation Committee sets the option price and
exercise terms granted under the Non-Qualified Plan. The exercise price of all
options granted under the Non-Qualified Plan currently outstanding has been the
closing market price at the date of grant. There are 42,020 shares, which remain
available under the Non-Qualified Plan for future stock option grants.
The Company accounts for grants under the Non-Qualified Plan at fair
value. The weighted-average fair value per option, granted under the
Non-Qualified Plan in 2001 and 2000 was $11.65 and $4.66, respectively. The fair
value of options granted under the Non-Qualified Plan was estimated on
F-23
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
the grant date using the Black-Scholes option-pricing model and included as
compensation expense. The stock compensation recorded under the Non-Qualified
Plan was $117,000 for the year ended December 31, 2001 and no compensation
expense was recorded for the years ended December 31, 2000, and 1999. The
following weighted-average assumptions were used in 2001 and 2000: no dividend
yield, expected volatility of 62.2% for 2001, and 59.1% for 2000, risk free
interest rate of 7.0%, and expected lives of five years.
The following tables summarize information on stock option activity for
the Non-Qualified Plan:
WEIGHTED-
NUMBER OF EXERCISE PRICE AVERAGE
SHARES PER SHARE EXERCISE PRICE
------------ --------------- --------------
Options outstanding, December 31, 1999 33,480 $5.13 - 16.50 $ 8.67
Options granted 20,000 6.00 - 10.13 8.06
Options exercised (4,480) 6.63 6.63
------------ ------------- ------------
Options outstanding, December 31, 2000 49,000 5.13 - 16.50 $ 9.21
Options granted 10,000 20.31 20.31
Options exercised (5,000) 6.00 6.00
------------ ------------- ------------
Options outstanding, December 31, 2001 54,000 $5.13 - 20.31 $ 11.56
------------ ------------- ------------
Options outstanding were available for exercise as follows:
Exercisable at December 31, 2001 54,000 $11.56
Exercisable at December 31, 2000 48,000 9.08
Exercisable at December 31, 1999 27,480 8.68
NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
RANGE OF OUTSTANDING AT REMAINING WEIGHTED-AVERAGE EXERCISABLE AT EXERCISE PRICE
EXERCISE PRICES DECEMBER 31, 2001 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 2001 EXERCISABLE
--------------- ----------------- ---------------- ---------------- ----------------- -----------------
$ 5.13 7,000 3 years $ 5.13 7,000 $ 5.13
7.00 4,000 4 years 7.00 4,000 7.00
9.50 - 16.50 15,000 5 years 12.01 15,000 12.01
15.38 3,000 6 years 15.38 3,000 15.38
6.00 - 10.13 15,000 8 years 8.75 15,000 8.75
20.31 10,000 9 years 20.31 10,000 20.31
--------------- --------------- --------------- --------------- --------------- ---------------
$ 5.13 - 20.31 54,000 6 years $5.13 - 20.31 54,000 $ 11.56
=============== =============== =============== =============== =============== ===============
7. INCOME TAXES
Net deferred tax assets at December 31, consist of (amounts in
thousands):
2001 2000
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 31,169 $ 27,976
Research and development tax credit
carryforwards 2,885 2,320
Amortization of intangibles 1,735 1,929
Deferred revenue 13,368 7,688
Depreciation 123 115
Stock compensation 927 132
Loss on write-down of marketable security 310 --
Other items 341 284
------------ ------------
Net deferred tax assets 50,858 40,444
------------ ------------
Less valuation allowance 50,858 40,444
------------ ------------
Total $ -- $ --
============ ============
F-24
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The gross deferred tax assets have been reduced by a valuation
allowance based on management's belief that it is currently more likely than not
that such benefits will not be realized.
At December 31, 2001, the Company had approximately $83,279,000 of
income tax net operating loss carryforwards, of which $1,769,000 relates to
foreign losses available for carryforward. The Company has research and
development credits of $2,885,000 which expire through 2021. At December 31,
2001 and 2000, the Company has $1,788,000 and $445,000 of deferred tax assets
included in the total deferred tax asset for net operating loss carryforwards.
These deferred tax assets resulted from the benefits from the exercise of
employee stock options of $5,259,000 and $3,999,792 during 2001 and 2000,
respectively, which when subsequently recognized will be allocated to additional
paid in capital. The Internal Revenue Code places certain limitations on the
annual amount of net operating loss carryforwards which can be utilized if
certain changes in the Company's ownership occurs.
A reconciliation of the differences in income tax expense from income
(loss) computed at the federal statutory rate and income tax expense as recorded
for the years ended December 31 are as follows (amounts in thousands):
2001 2000 1999
------------ ------------ ------------
Income tax computed at federal statutory rate: $ (8,628) $ (16,120) $ (4,512)
State income taxes - net of federal (837) (1,564) (438)
Equity in loss of joint venture 1,117 4,565 --
Research and development (565) (353) (359)
Amortization of intangibles 314 302 294
Other (27) 457 (1,343)
Change in valuation allowance 8,626 12,713 6,358
------------ ------------ ------------
Income tax expense $ -- $ -- $ --
============ ============ ============
8. SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
The Company is engaged principally in one line of business, the
development and commercialization of drug delivery systems. Enterprise-wide
disclosures about net sales and royalties by category and total revenues by
geographic area are presented below.
Net sales and royalties by category consisted of the following for the
years ended December 31 (in thousands):
2001 2000 1999
------------ ------------ ------------
Dental $ 2,436 $ 4,705 $ 4,144
Contract manufacturing 1,092 1,235 163
Other 290 216 235
------------ ------------ ------------
Net sales and royalties $ 3,818 $ 6,156 $ 4,542
============ ============ ============
F-25
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Revenues by geographic area consisted of the following for the years
ended December 31 (in thousands):
2001 2000 1999
------------ ------------ ------------
United States $ 10,306 $ 8,872 $ 4,846
Foreign countries 5,505 1,171 789
------------ ------------ ------------
Total revenue $ 15,811 $ 10,043 $ 5,635
============ ============ ============
The geographic classification of revenues was based upon the domicile
of the entity from which the revenues were earned. Long-lived assets in foreign
countries individually or in aggregate did not exceed 10% of total long-lived
assets of the Company.
For the year ended December 31, 2001, revenues from two customers
accounted for 26% and 22% of total revenue. For the year ended December 31,
2000, revenues from three customers accounted for 49%, 12% and 10% of total
revenue. For the year ended December 31, 1999, revenues from one customer
accounted for 56% of total revenue.
At December 31, 2001, amounts due from three customers each exceeded
10% of accounts receivable and accounted for 71% of total accounts receivable.
At December 31, 2000, amounts due from three customers each exceeded 10% of
accounts receivable and accounted for 97% of total accounts receivable.
9. COMMITMENTS AND OTHER
As of December 31, 2001, minimum rental commitments for future years
under non-cancelable operating leases of one year or more are as follows
(amounts in thousands):
YEARS ENDING MINIMUM RENTAL
DECEMBER 31, COMMITMENTS
------------------------- --------------
2002 $ 461
2003 408
2004 339
2005 311
2006 128
------------
Total $ 1,647
============
Rent expenses were $422,000, $344,000, and $330,000, for the following
years ended December 31, 2001, 2000, and 1999, respectively.
In January 2001, the Company acquired an exclusive option from Tulane
University Health Sciences Center to license a patented human growth hormone
releasing peptide-1 compound, or GHRP-1, for $540,000. In September 2001, the
Company exercised its option to license GHRP-1 for an additional $1,960,000.
Under the agreement, the Company will be responsible for all research and
development funding and will pay Tulane a royalty on sales of any GHRP-1 product
developed.
In September 2001, the Company signed a licensing agreement for an oral
interferon product from Amarillo Biosciences, Inc. for an initial licensing fee
of $485,000. Under the agreement, the Company will be responsible for all
research and development funding and will pay Amarillo Biosciences a royalty on
sales of any oral interferon product developed. Additionally, the Company is
obligated to make up to $2,050,000 of additional one-time payments upon the
attainment of certain
F-26
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
regulatory and marketing milestones. These milestones are subject to reduction
in certain events and are only payable if and when attained.
The Company has a 401(k)-Employee Savings Plan, or the Savings Plan,
that allows eligible employees to contribute from 1% to 17% of their income to
the Savings Plan. The Company matches 50% of the first 6% of the employees'
contributions. Matching contributions to the Savings Plan were $108,000,
$106,000, and $119,000 for the following years ended December 31, 2001, 2000,
and 1999, respectively.
The Company has an Employee Stock Purchase Plan, or ESPP, that provides
eligible employees with the opportunity to purchase shares through authorized
payroll deductions at 85% of the average market price on the last day of each
quarter. The Company reserved 300,000 shares of its authorized but unissued
common stock for issuance under the ESPP, of which 279,741 shares remain
available at December 31, 2001.
Effective September 17, 2001, the Company's Board of Directors approved
a new stock repurchase program to acquire up to $5,000,000 of the Company's
common stock. The stock repurchase program is authorized through December 31,
2002. For the year ended December 31, 2001, the Company had repurchased 77,500
shares of its common stock in the open market. The average price per share was
$20.11 for total stock repurchases of $1,558,000.
10. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table summarizes the quarterly financial information for
the year ended December 31, 2001 (amounts in thousands):
2001 FISCAL QUARTERS
---------------------------------------------------------------
First Second Third Fourth
------------ ------------ ------------ ------------
Total revenue $ 3,255 $ 4,265 $ 3,257 $ 5,036
Total operating expense 8,470 8,381 12,877 8,152
Net other expense 2,106 517 243 280
Loss before extraordinary item (7,320) (4,633) (9,863) (3,396)
Net loss applicable to common stock (7,815) (4,856) (10,092) (3,938)
------------ ------------ ------------ ------------
Basic and diluted earnings per common share before
extraordinary item (.52) (.31) (.58) (.18)
------------ ------------ ------------ ------------
Basic and diluted earnings per common share for net
loss applicable to common stock (.55) (.32) (.59) (.21)
------------ ------------ ------------ ------------
F-27
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes the quarterly financial information for
the year ended December 31, 2000 (amounts in thousands):
2000 FISCAL QUARTERS (RESTATED)
---------------------------------------------------------------
First Second Third Fourth
------------ ------------ ------------ ------------
Total revenue $ 2,164 $ 2,354 $ 2,585 $ 2,940
Total operating expense 5,207 5,461 6,444 6,651
Net other expense 97 233 12,148 297
Loss before extraordinary item and cumulative effect of
change in accounting principle (3,140) (3,340) (16,007) (4,008)
Net loss applicable to common stock (23,751) (3,340) (16,098) (4,220)
------------ ------------ ------------ ------------
Basic and diluted earnings per common share before
extraordinary and cumulative effect of change in
accounting principle (.27) (.29) (1.32) (.32)
------------ ------------ ------------ ------------
Basic and diluted earnings per common share for net loss
applicable to common stock (2.08) (.29) (1.33) (.34)
------------ ------------ ------------ ------------
The quarterly information for 2000 differs from that reported in the
Company's quarterly filings on Form 10-Q due to the adoption of SAB No. 101 in
the fourth quarter of 2000. The effect of this change resulted in a reduction of
loss before extraordinary items and cumulative effect of change in accounting
principle of $403,000, $428,000, and $319,000 for the first, second and third
quarters of 2000, respectively. The effect of this change resulted in an
increase in net loss applicable to common stock of $20,208,000 for the first
quarter of 2000. The effect of this change resulted in a reduction of loss on
earnings per common share before extraordinary items and cumulative effect of
change in accounting principle of $.04, $.04, and $.03 for the first, second and
third quarters of 2000, respectively. The effect of this change resulted in an
increase of loss on earnings per common share for net loss applicable to common
stock of $1.77 for the first quarter of 2000.
F-28
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Agreement and Plan of Reorganization dated November 24, 1998
by and among Atrix Laboratories, Inc., Atrix Acquisition
Corporation and ViroTex Corporation.(1)
2.2 Certificate of Merger of Atrix Acquisition Corporation into
ViroTex Corporation dated November 24, 1998.(1)
3.1 Amended and Restated Certificate of Incorporation.(2)
3.2 Certificate of Amendment to Amended and Restated Certificate
of Incorporation.(3)
3.3 Certificate of Designation of the Series A Preferred Stock
filed with the State of Delaware on September 25, 1998.(4)
3.4 Certificate of Designations of Preferences and Rights of
Series A Convertible Exchangeable Preferred Stock filed with
the State of Delaware on July 18, 2000.(5)
3.5 Ninth Amended and Restated Bylaws.*
4.1 Form of Common Stock Certificate.(6)
4.2 Indenture, dated November 15, 1997, by and among the
Registrant and State Street Bank and Trust Company of
California, N.A., as trustee thereunder.(7)
4.3 Form of Note (included in Indenture, see Exhibit 4.2).
4.4 Amended and Restated Rights Agreement (including form of
Right Certificate, as Exhibit A, and form of Summary of
Rights, as Exhibit B).(8)
4.5 Warrant to purchase 6,750 shares of Atrix Common Stock
issued to Gulfstar Investments, Limited.(2)
4.6 Registration Rights Agreement, dated as of July 18, 2000,
between Registrant and Elan International Services, Ltd., or
EIS.(5)
4.7 Warrant dated as of July 18, 2000, issued by Registrant to
EIS.(5)
4.8 Convertible Promissory Note, dated as of July 18, 2000,
issued by Registrant to EIS.(5)
4.9 Warrant, dated as of April 4, 2001, issued by Atrix
Laboratories, Inc. to Ferghana Partners, Inc.(9)
10.1 Lease Agreement dated May 11, 1991 between the Registrant
and GB Ventures.(6)
10.2 Agreement dated December 16, 1996 between the Registrant and
Block Drug Corporation ("Block Agreement").(10)
10.2A First Amendment to Block Agreement dated June 10, 1997.
(2)**
10.2B Second Amendment to Block Agreement dated July 31, 1997.
(2)**
10.2C Third Amendment to Block Agreement dated February 4,
1998.(2)**
10.2D Fourth Amendment to Block Agreement dated January 12,
1999.(2)**
10.2E Fifth Amendment to Block Agreement dated January 27,
1999.(2)**
10.2F Sixth Amendment to Block Agreement dated September 24,
1999.(11)**
10.2G Eighth Amendment to Block Agreement dated as of August 24,
2001.(12)**
10.3 Registration Rights Agreement, dated as of November 15,
1997, by and among Registrant and NationsBanc Montgomery
Securities, Inc. and SBC Warburg Dillon Read, Inc.(7)
10.4 Amended and Restated Performance Stock Option Plan, as
amended.(2)
10.5 Non-Qualified Stock Option Plan, as amended.(2)
10.6 Non-Employee Director Stock Incentive Plan.(13)
10.7 Employment Agreement between Registrant and Dr. J. Steven
Garrett dated April 17, 1995.(2)
10.8 Employment Agreement between Registrant and Dr. David W.
Osborne dated November 24, 1998.(2)
10.9 Employment Agreement between Registrant and Dr. Richard L.
Jackson dated November 1, 1998.(2)
10.10 Personal Services Agreement between Registrant and David R.
Bethune dated August 10, 1999.(13)
10.11 Stock Purchase Agreement, dated as of August 8, 2000, by and
between Registrant and Pfizer Inc.(14)
10.12 Collaborative Research Agreement, dated as of August 8,
2000, by and between Registrant and Pfizer Inc.(14)**
10.13 License and Royalty Agreement, dated as of August 8, 2000,
by and between Registrant and Pfizer Inc.(14)**
10.14 Collaboration, Development and Supply Agreement dated as of
August 28, 2000 between Registrant and Geneva
Pharmaceuticals, Inc.(15)**
10.15 Securities Purchase Agreement, dated as of July 18, 2000,
between Registrant and EIS.(5) **
10.16 Newco Registration Rights Agreement, dated as of July 18,
2000, among Registrant, Atrix Newco Ltd., or Newco, and
EIS.(5)
10.17 Subscription, Joint Development and Operating Agreement,
dated as of July 18, 2000, among EIS, Registrant, Newco and
Elan Pharma International Limited, or EPIL.(5)**
10.18 Company License Agreement, dated as of July 18, 2000, among
Registrant, Newco and Elan Corporation plc, or Elan.(5)**
10.19 EPIL License Agreement, dated as of July 18, 2000 among
Elan, EPIL, Newco and Registrant.(5)**
10.20 Collaboration, License and Supply Agreement, dated as of
December 8, 2000, by and between Registrant and
Sanofi-Synthelabo Inc.(16)**
10.21 Stock Purchase Agreement, dated as of December 29, 2000, by
and between Registrant and Sanofi-Synthelabo.(16)
10.22 2000 Stock Incentive Plan.(17)
10.23 License Agreement by and between Registrant and CollaGenex
Pharmaceuticals, Inc. dated as of August 24, 2001. (12)**
10.24 Stock Purchase Agreement by and between Registrant and
CollaGenex Pharmaceuticals, Inc. dated as of August 24,
2001. (12)**
10.25 Collaboration, License and Supply Agreement by and between
Registrant and Fujisawa Healthcare, Inc., dated October 15,
2001. (12)**
10.26 Collaboration, License and Supply Agreement, dated as of
April 4, 2001, by and between Registrant and MediGene.
(18)**
10.27 Stock Purchase Agreement, dated as of April 4, 2001, by and
between Registrant and MediGene.(18)**
10.28 2001 Executive Long Term Incentive Compensation Program.*
21 Subsidiaries of the Registrant. (17)
23 Consent of Deloitte & Touche LLP.*
----------
* Filed herewith.
** We have omitted certain portions of this Exhibit and have requested
confidential treatment with respect to such portions.
(1) Incorporated by reference to Registrant's Current Report on Form 8-K
dated November 24, 1998, as filed with the Securities and Exchange
Commission (File No. 000-18321).
(2) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998, as filed with the Securities and
Exchange Commission (File No. 000-18321).
(3) Incorporated by reference to Registrant's Registration Statement on Form
S-3, filed with the Securities and Exchange Commission on June 5, 2001
(File No. 333-55634).
(4) Incorporated by reference to Registrant's Registration Statement on Form
8-A, as filed with the Securities and Exchange Commission on October 1,
1998 (File No. 000-18231).
(5) Incorporated by reference to Registrant's Current Report on Form 8-K
dated July 18, 2000, as filed with the Securities and Exchange Commission
on August 4, 2000 (File No. 000-18321).
(6) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended September 30, 1993, as filed with the Securities
and Exchange Commission (File No. 000-18321).
(7) Incorporated by reference to Registrant's Current Report on Form 8-K
dated November 6, 1997, as filed with the Securities and Exchange
Commission on December 9, 1997 (File No. 000-18321).
(8) Incorporated by reference to Registrant's Current Report on Form 8-K
dated November 16, 2001, as filed with the Securities and Exchange
Commission on November 27, 2001 (File No. 000-18231).
(9) Incorporated by reference to Registrant's Registration Statement on Form
S-3, filed with the Securities and Exchange Commission on February 6,
2002 (File No. 333-82250).
(10) Incorporated by reference to Registrant's Current Report on Form 8-K
dated December 16, 1996, as amended on May 20, 1998, as filed with the
Securities and Exchange Commission (File No. 000-18321).
(11) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999, as filed with the Securities
and Exchange Commission (File No. 000-18321).
(12) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001 (File No. 000-18231).
(13) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1999, as filed with the Securities and
Exchange Commission (File No. 000-18321).
(14) Incorporated by reference to Registrant's Current Report on Form 8-K
dated August 8, 2000, as filed with the Securities and Exchange
Commission on September 7, 2000 (File No. 000-18321).
(15) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000, as filed with the Securities
and Exchange Commission (File No. 000-18321).
(16) Incorporated by reference to Registrant's Current Report on Form 8-K
dated December 29, 2000, as filed with the Securities and Exchange
Commission on February 23, 2001 (File No. 000-18231).
(17) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the year ended December 31, 2000, as filed with the Securities and
Exchange Commission (File No. 000-18231).
(18) Incorporated by reference to Registrant's Current Report on Form 8-K
dated April 4, 2001, filed with the Securities and Exchange Commission on
June 20, 2001 (File No. 000-18231).