sv1za
As filed with the Securities and Exchange Commission on
July 7, 2005
Registration Statement No. 333-125982
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CONNETICS CORPORATION
(Exact name of Registrant as specified in its charter)
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Delaware |
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2834 |
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94-3173928 |
(State or Other Jurisdiction of
Incorporation or Organization) |
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(Primary Standard Industrial
Classification Code Number) |
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(I.R.S. Employer
Identification Number) |
3160 Porter Drive
Palo Alto, California 94304
(650) 843-2800
(Address, Including Zip Code, and Telephone Number Including
Area Code,
of Registrant’s Principal Executive Offices)
Katrina J. Church
Executive Vice President, Legal Affairs,
General Counsel & Secretary
Connetics Corporation
3160 Porter Drive
Palo Alto, California 94304
(650) 843-2800
(Name, Address, Including Zip Code, and Telephone Number
Including Area Code,
of Agent for Service)
Copy to:
Celeste E. Greene
Skadden, Arps, Slate, Meagher & Flom LLP
525 University Avenue, Suite 1100
Palo Alto, California 94301
(650) 470-4500
Approximate date of commencement of proposed sale to the
public: From time to time after this registration statement
becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933 check the
following
box: þ
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following
box. o
CALCULATION OF REGISTRATION FEE
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Proposed Maximum |
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Proposed Maximum |
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Amount to be |
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Offering Price |
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Aggregate Offering |
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Amount of |
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Registered |
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Per Unit |
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Price |
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Registration Fee |
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2.00% Convertible Senior Notes due March 30, 2015
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$200,000,000 |
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100% |
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$200,000,000 |
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—(1) |
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Not |
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Not |
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Common Stock
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7,182,000(2)(3) |
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Applicable |
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Applicable |
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—(4) |
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Not |
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Not |
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Series B Participating Preferred Stock Purchase Rights(5)
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7,182,000(2)(3) |
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Applicable |
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Applicable |
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—(4) |
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| (1) |
The filing fee of $23,540 was paid upon the initial filing of
this Registration Statement on June 20, 2005. |
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| (2) |
Each share of common stock being registered pursuant to this
Registration Statement includes a right to purchase one
one-thousandth of a share of Series B Participating
Preferred Stock pursuant to an Amended and Restated Rights
Agreement between the Registrant and EquiServe Trust Company,
N.A., as Rights Agent. |
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| (3) |
Represents the maximum number of shares of common stock that are
issuable upon conversion of the 2.00% Convertible Senior
Notes due March 30, 2015 registered hereby. In the event of
a stock split, stock dividend or similar transaction involving
the Registrant’s common stock, in order to prevent
dilution, the number of shares registered shall automatically be
increased to cover additional shares in accordance with
Rule 416 under the Securities Act of 1933, plus such
additional indeterminate number of shares as may become issuable
upon conversion of the Convertible Senior Notes being registered
hereunder by means of adjustment in the conversion price. |
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| (4) |
Pursuant to Rule 457(i), there is no filing fee with
respect to the shares of Common Stock issuable upon conversion
of the Convertible Senior Notes because no additional
consideration will be received in connection with the exercise
of the conversion right. |
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The Series B Participating Preferred Stock Purchase Rights are
attached to, and trade and transfer with, the Common Stock. The
Series B Participating Preferred Stock Purchase Rights are only
exercisable upon the occurrence of certain prescribed events,
none of which has occurred. |
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act or until the Registration Statement shall
become effective on such date as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may
determine.
The information in this preliminary
prospectus is not complete and may be changed. The selling
securityholders may not sell these securities until the
registration statement filed with the Securities and Exchange
Commission is effective. This prospectus is not an offer to sell
these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
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SUBJECT TO COMPLETION, DATED
JULY 7, 2005
PROSPECTUS
Connetics Corporation
$200,000,000 Principal Amount of 2.00% Convertible
Senior Notes
Due March 30, 2015
and
Shares of Common Stock Issuable Upon Conversion of the
Notes
Connetics Corporation, or Connetics, issued $200,000,000
principal amount of 2.00% Convertible Senior Notes due
March 30, 2015 in private placements in March 2005. Selling
securityholders may use this prospectus to sell their notes and
Connetics common stock issuable upon conversion of their notes.
For purposes of this prospectus, references to Connetics common
stock include the associated right to purchase shares of
series B participating preferred stock.
The notes will mature on March 30, 2015. The notes are
convertible into cash or, under certain circumstances, cash and
shares of Connetics’ common stock, in each case having an
aggregate value equal to the applicable conversion rate
multiplied by the applicable stock price described in this
prospectus, at any time before their maturity, or before they
are redeemed or repurchased by Connetics. The initial conversion
rate is 28.1972 shares of common stock per each $1,000
principal amount of notes, subject to adjustment in certain
circumstances. This is equivalent to a conversion price of
approximately $35.46 per share. Holders may convert the
notes under the following circumstances: (1) on or before
March 30, 2009, if the closing sale price of Connetics
common stock is above a specified level; (2) at any time
after March 30, 2009; or (3) if specified corporate
transactions occur. If a holder elects to convert its notes in
connection with the occurrence of a fundamental change, the
holder will be entitled to receive additional shares of common
stock upon conversion in some circumstances.
Connetics will pay interest on the notes on March 30 and
September 30 of each year until March 30, 2010.
Beginning March 30, 2010, the notes will be subject to
accretion of the principal at a rate that provides holders with
an aggregate yield to maturity of 2.00% (computed on a
semiannual bond equivalent yield basis). The first interest
payment will be made on September 30, 2005. Beginning with
the six-month interest period commencing on March 30, 2010,
Connetics will pay contingent interest for each six-month
interest period from March 30 to September 29 or from
September 30 to March 29, if the average trading price
of a note is above a specified level during the five trading day
period ending on the second trading day immediately before such
six-month interest period, as described in this prospectus.
Connetics will pay contingent interest on the interest payment
date immediately following the applicable six-month interest
period. The notes will be issued only in denominations of $1,000
and integral multiples of $1,000.
Holders may require Connetics to repurchase their notes for cash
on March 30, 2010 at 100% of the principal amount of the
notes plus accrued and unpaid interest, if any. On or after
April 4, 2010, Connetics has the option to redeem all or a
portion of the notes that have not been previously converted at
a redemption price equal to 100% of the accreted principal
amount of the notes to be redeemed plus accrued and unpaid
interest (which includes liquidated damages and contingent
interest), if any, to, but excluding, the redemption date.
Connetics will not receive any proceeds when the selling
securityholders sell the notes or the common stock issuable upon
conversion of the notes. The selling securityholders may offer
the notes or the underlying common stock, in negotiated
transactions or otherwise, at market prices prevailing at the
time of sale or at negotiated prices. In addition, the common
stock may be offered from time to time through ordinary
brokerage transactions on the Nasdaq National Market. The
selling securityholders may be deemed to be
“underwriters” as defined in the Securities Act of
1933. If any broker-dealers are used by the selling
securityholders, any commissions paid to broker-dealers and, if
broker-dealers purchase any notes or common stock as principals,
any profits received by such broker-dealers on the resale of the
notes or common stock, may be deemed to be underwriting
discounts or commissions under the Securities Act of 1933. In
addition, any profits realized by the selling securityholders
may be deemed to be underwriting commissions. Other than selling
commissions and fees and stock transfer taxes, Connetics will
pay all expenses of registering the notes and common stock and
certain other expenses.
On July 6, 2005, the last reported sale price for the
common stock on the Nasdaq National Market was $17.77 per share.
The common stock is listed under the symbol “CNCT.”
Connetics does not intend to apply for listing of the notes on
any securities exchange or for inclusion of the notes in any
automated quotation system.
Our principal executive offices are located at 3160 Porter
Drive, Palo Alto, California, 94304. Our telephone number is
(650) 843-2800.
See “Risk Factors” beginning on page 7 to read
about important factors you should consider before buying the
notes.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The date of this prospectus is
,
2005.
TABLE OF CONTENTS
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7 |
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i
ABOUT THIS PROSPECTUS
Before making your investment decision, you should read this
entire prospectus carefully. This prospectus is part of a
registration statement that we have filed with the Securities
and Exchange Commission, or the SEC, using a “shelf”
registration process. Under this shelf registration process, the
selling securityholders may from time to time offer and sell
their notes and the shares of common stock issuable upon
conversion of the notes described in this prospectus in the
general manner described in “Plan of Distribution.”
This prospectus also relates to the issuance of shares of our
common stock upon conversion of the notes by holders other than
the selling securityholders.
This prospectus provides you with a general description of the
securities that the selling securityholders may offer. Each time
a selling securityholder sells securities, that selling
securityholder is required to provide you with a prospectus
and/or a prospectus supplement that contains information about
the selling securityholder and the securities being offered. The
prospectus supplement may add, update or change information in
this prospectus. If there is any inconsistency between the
information in the prospectus and any prospectus supplement, you
should rely on the information in the prospectus supplement. You
should read both this prospectus and any prospectus supplement
together with the additional information described under the
heading “Where You Can Find More Information.”
You should rely only on the information contained in this
prospectus. Neither we nor the selling securityholders have
authorized anyone to provide you with different information. The
selling securityholders are offering to sell and seeking offers
to buy shares of our common stock only in jurisdictions where
offers and sales are permitted. The information contained in
this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
FORWARD LOOKING STATEMENTS
This prospectus contains and incorporates forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, or Securities Act, and
Section 21E of the Securities Exchange Act of 1934, as
amended, or Exchange Act. Forward-looking statements give our
current expectations or forecasts of future events.
Forward-looking statements may turn out to be wrong. They can be
affected by inaccurate assumptions or by known or unknown risks
and uncertainties. Many factors mentioned under “Risk
Factors” and elsewhere in this prospectus — for
example, governmental regulation and competition in our
industry — will be important in determining future
results. We cannot guarantee any forward-looking statement, and
our actual results may vary materially from those anticipated in
any forward-looking statement.
You can identify forward-looking statements by the fact that
they do not relate strictly to historical or current events.
They use words such as “anticipate,”
“estimate,” “expect,” “will,”
“may,” “intend,” “plan,”
“believe” and similar expressions in connection with
discussion of future operating or financial performance. These
include statements relating to future actions, prospective
products or product approvals, future performance or results of
current and anticipated products, sales efforts, expenses, the
outcome of contingencies such as legal proceedings, and
financial results.
Although we believe that our plans, intentions and expectations
reflected in these forward-looking statements are reasonable, we
may not achieve these plans, intentions or expectations.
Forward-looking statements in this prospectus include, but are
not limited to, those relating to the commercialization of our
currently marketed products, the progress of our product
development programs, developments with respect to clinical
trials and the regulatory approval process, and developments
relating to our sales and marketing capabilities. Actual
results, performance or achievements could differ materially
from those contemplated, expressed or implied by the
forward-looking statements contained in this prospectus. In
particular, this prospectus sets forth important factors that
could cause actual results to differ materially from our
forward-looking statements. These and other factors, including
general economic factors and business strategies, and other
factors not currently known to us, may be significant, now or in
the future, and the factors set forth in this prospectus may
affect us to a greater extent than indicated. All
forward-looking statements attributable to us or persons acting
on our behalf are expressly qualified in their entirety by the
cautionary statements contained in or incorporated into this
prospectus. Except as required by law, we do not undertake any
obligation to update any forward-looking statement, whether as a
result of new information, future events or otherwise.
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PROSPECTUS SUMMARY
This summary provides an overview of selected information and
does not contain all the information you should consider. You
should read the entire prospectus, including the section
entitled “Risk Factors,” carefully before making an
investment decision. When used in this prospectus, unless
otherwise indicated, the terms “we,” “our”
and “us” refer to Connetics and its subsidiaries.
The Company
Connetics is a specialty pharmaceutical company that develops
and commercializes products for the dermatology marketplace.
This marketplace is characterized by a large patient population
that is served by a relatively small, and therefore readily
accessible, number of treating physicians. We currently market
four pharmaceutical products, OLUX® (clobetasol propionate)
Foam, 0.05%, Luxíq® (betamethasone valerate) Foam,
0.12%, Soriatane®-brand acitretin, and Evoclin™
(clindamycin) Foam, 1%. We promote the clinically proven
therapeutic advantages of our products and provide quality
customer service to physicians and other healthcare providers
through our experienced sales and marketing professionals.
Our principal executive offices are located at 3160 Porter
Drive, Palo Alto, California, 94304. Our telephone number is
(650) 843-2800. To find out how to obtain more information
regarding us and our business, you should read the section of
this prospectus entitled “Where You Can Find More
Information.” You may also visit our website at
http://www.connetics.com, although the information on our
website is not part of this prospectus.
The Notes
The following is a brief summary of certain terms of this
offering. For a more complete description of the terms of the
notes, see “Description of the Notes” beginning on
page 72 of this prospectus.
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Issuer |
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Connetics Corporation, a Delaware corporation. |
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Notes |
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$200 million aggregate principal amount of
2.00% Convertible Senior Notes due March 30, 2015. |
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Issue Price |
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100% of the principal amount of each note. |
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Maturity |
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March 30, 2015, unless earlier redeemed, repurchased,
exchanged or converted. |
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Ranking |
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The notes are our senior, unsecured obligations and rank equal
in right of payment to all of our other unsecured and
unsubordinated indebtedness and junior in right of payment to
all of our future secured indebtedness to the extent of the
assets securing such indebtedness. As of March 31, 2005,
our senior unsecured indebtedness totaled $290 million and
we had no secured indebtedness. The notes are not guaranteed by
any subsidiaries and, accordingly, the notes are
“structurally subordinated” to the indebtedness and
other liabilities, including trade payables and lease
obligations, of our existing and future subsidiaries. As of
March 31, 2005, our existing subsidiaries had total
long-term debt and other liabilities of approximately $25,000,
which does not include any intercompany amounts that are
eliminated in consolidation. |
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Interest |
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2.00% per year on the principal amount, payable
semiannually in arrears on March 30 and September 30
of each year beginning September 30, 2005. We will also pay
contingent interest on the notes as described below. The notes
will cease to bear interest (except contingent interest, as
applicable) on March 29, 2010. |
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Accretion |
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Commencing on March 30, 2010, the principal amount of the
notes will be subject to accretion at a rate that provides
holders with an aggregate annual yield to maturity of 2.00%
(computed on a semiannual bond equivalent yield basis). |
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Contingent Interest |
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We will make additional interest payments, referred to in this
prospectus as “contingent interest,” for any six-month
interest period from March 30 to September 29 or from
September 30 to March 29, beginning with the six-month
interest period commencing on March 30, 2010, if the
average trading price of the notes for the applicable five
trading day reference period equals or exceeds 120% of the
accreted principal amount of the notes. We will pay contingent
interest on the interest payment date immediately following the
applicable six-month interest period. The amount of contingent
interest payable per note in respect of any six-month interest
period will be equal to 0.30% of the average trading price of a
note for the applicable five trading day reference period. The
“five trading day reference period” means the five
trading days ending on the second trading day immediately
preceding the beginning of the relevant six-month interest
period. See “Description of the Notes —
Contingent Interest.” |
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Conversion Rights |
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Subject to the satisfaction of one of the circumstances
described below, you may surrender your notes for conversion
into cash and, under certain circumstances, our common stock
initially at a conversion rate (subject to adjustment in certain
events) of 28.1972 shares of our common stock per $1,000
principal amount of notes (which is equivalent to an initial
conversion price of approximately $35.46 per share). |
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You may surrender your notes for conversion under any of the
following circumstances: |
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• before March 30, 2009, during any conversion
period if the closing sale price of our common stock for at
least 20 trading days in the 30 consecutive trading day period
ending on the first day of such conversion period is greater
than 120% of the applicable conversion price on the first day of
the conversion period; a conversion period means the period from
and including the 11th trading day in a fiscal quarter up to but
not including the 11th trading day of the following fiscal
quarter, |
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• before March 30, 2009, during the five
consecutive business day period following any five consecutive
trading day period in which the trading price for a note for
each day of that trading period was less than 98% of the closing
sale price of our common stock on the corresponding trading day
multiplied by the applicable conversion rate, |
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• at any time on or after March 30, 2009, or |
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• when specified corporate transactions occur, as
described under “Description of the Notes —
Conversion Rights — Conversion Upon Specified
Corporate Transactions,” including |
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the occurrence of a fundamental change (as defined under
“Description of the Notes — Fundamental
Change”). |
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The conversion rate may be adjusted for certain events, but it
will not be adjusted for accrued interest. The right to convert
notes that have been called for redemption will terminate at the
close of business on the business day immediately preceding the
date of redemption. |
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For notes surrendered for conversion, we will satisfy our
conversion obligation with respect to the accreted principal
amount of the notes to be converted in cash, we will satisfy any
remaining amount in shares of our common stock. |
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See “Description of the Notes — Conversion
Rights.” |
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Conversion Consideration |
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Upon conversion, you will receive, in respect of each $1,000
principal amount of the notes: |
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• cash in an amount equal to the lesser of
(1) the accreted principal amount of each note or
(2) an amount equal to the applicable conversion rate
multiplied by the average of the closing sale prices of our
common stock during the applicable conversion reference period,
which is generally (subject to an exception if we have specified
a redemption date for the notes) the 10 consecutive trading days
beginning on the third trading day following the conversion
date, and |
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• a number of shares of our common stock determined in
the manner described in “Description of the
Notes — Conversion Consideration,” provided,
however, that we will pay cash in lieu of fractional shares
otherwise issuable upon conversion of the notes. |
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Exchange in Lieu of Conversion |
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When you submit your notes for conversion, the conversion agent
may direct you to surrender your notes to a financial
institution we designate for exchange in lieu of conversion. In
order to accept any notes surrendered for conversion, the
designated institution must agree to deliver, in exchange for
your notes, the cash payment, including cash for any fractional
shares, and the number of shares of our common stock issuable
upon conversion. |
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Redemption of Notes at Our Option |
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On or after April 4, 2010, we may redeem for cash all or a
portion of the notes at any time, upon not less than 30 nor more
than 60 days’ prior notice, at a redemption price
equal to 100% of the accreted principal amount of the notes to
be redeemed, plus accrued but unpaid interest, including
liquidated damages and contingent interest, if any, to, but not
including, the redemption date. See “Description of the
Notes — Redemption Rights.” |
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Purchase of Notes at Your Option |
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You have the right to require us to repurchase in cash all or
any portion of your notes on March 30, 2010, which we refer
to as the “repurchase date.” The repurchase price
payable will be equal to 100% of the principal amount of the
notes to be repurchased, plus accrued and unpaid interest,
including liquidated damages and contingent interest, if any,
to, but not |
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including, the repurchase date. See “Description of the
Notes — Repurchase Rights.” |
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Exchange in Lieu of Repurchase |
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If you require us to repurchase notes held by you, we may direct
you to first offer the notes to a financial institution we
designate for exchange in lieu of repurchase. In order to accept
any notes surrendered for repurchase, the designated institution
must agree to deliver, in exchange for your notes, the
repurchase price for such notes you would otherwise receive upon
repurchase by us. |
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Fundamental Change |
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Subject to our rights described under “Public Acquirer
Change of Control” below, if we undergo a fundamental
change (as defined under “Description of the
Notes — Fundamental Change”), you will have the
right, at your option, to require us to purchase for cash all or
any portion of your notes. The cash price we are required to pay
is equal to 100% of the accreted principal amount of the notes
to be repurchased plus accrued and unpaid interest, including
liquidated damages and contingent interest, if any, to, but not
including, the fundamental change repurchase date. |
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Adjustment to Conversion Rate Upon a Fundamental Change |
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Subject to our rights described under “Public Acquirer
Change of Control” below, if and to the extent you convert
your notes in connection with a “fundamental change”
before April 4, 2010, we will increase the conversion rate
for the notes by a number of additional shares determined by
reference to a table based on the date of the fundamental change
and the price paid per share of our common stock in the
fundamental change transaction, provided that we will not make
any increase if at least 95% of the consideration paid for our
common stock in the fundamental change transaction consists of
securities quoted on an established over-the-counter market or
traded on a U.S. national securities exchange (or that will
be so quoted or traded immediately following the transaction).
See “Description of the Notes — Adjustment to
Conversion Rate Upon a Fundamental Change.” |
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Public Acquirer Change of Control |
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If there is a fundamental change that would otherwise give you a
right to cause us to repurchase the notes as described under
“Description of the Notes — Fundamental
Change” and the acquirer, or a parent entity or subsidiary
of the acquirer, has a class of common stock (or American
Depository Receipts representing such common stock) traded on a
U.S. national securities exchange or quoted on The Nasdaq
National Market (or that will be so traded or quoted when issued
or exchanged in connection with the fundamental change), we may,
in lieu of permitting you to cause us to repurchase the notes as
a result of the fundamental change, elect to adjust the
conversion rate and the related conversion obligation such that
the notes will be convertible into shares of acquirer common
stock at an adjusted conversion rate as described in
“Description of the Notes — Public Acquirer
Change of Control.” |
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Events of Default |
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If there is an event of default with respect to the notes, an
amount equal to 100% of the accreted principal amount of the
notes, plus accrued and unpaid interest, including liquidated |
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damages and contingent interest, if any, may be declared
immediately due and payable. The following are events of default
with respect to the notes: |
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• default for 30 days in payment of any interest,
contingent interest or liquidated damages due and payable on the
notes, |
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• default in payment of principal of the accreted
notes at maturity, upon redemption, repurchase or following a
fundamental change, when the same becomes due and payable, |
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• default by us or any of our subsidiaries in the
payment of principal, interest or premium when due under any
other instruments of indebtedness having an aggregate
outstanding principal amount of $10.0 million (or its
equivalent in any other currency or currencies) or more, and
such default continues in effect for more than 30 days
after any grace period or extension of time for payment expires, |
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• default in our conversion obligations upon exercise
of a holder’s conversion right, unless such default is
cured within five days after our receipt of written notice of
default from the trustee or the holder of the note, |
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• default in our obligations to give notice of your
right to require us to repurchase notes following the occurrence
of a fundamental change within the time required to give such
notice, |
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• acceleration of any of our indebtedness or the
indebtedness of any of our subsidiaries under any instrument or
instruments evidencing indebtedness (other than the notes)
having an aggregate outstanding principal amount of
$10.0 million (or its equivalent in any other currency or
currencies) or more unless such acceleration has been rescinded
or annulled within 30 days after we receive written notice
of such acceleration, |
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• default in our performance of any other covenants or
agreements contained in the indenture or the notes for
60 days after we receive written notice from the trustee or
the holders of at least 25% in aggregate principal amount of the
notes, and |
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• certain events of bankruptcy, insolvency and
reorganization of us or any of our subsidiaries. |
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Registration Rights |
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Pursuant to a registration rights agreement, we have filed with
the SEC, and agreed to use our commercially reasonable best
efforts to cause to become effective, a shelf registration
statement of which this prospectus is a part. The shelf
registration statement relates to the resale of the notes and
the sale of our shares issuable upon conversion of the notes. If
we fail to comply with certain of our obligations under the
registration rights agreement, liquidated damages will be
payable on the notes. |
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Transfer Restrictions |
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Connetics’ registration of the resale by the holders of the
notes and the common stock of Connetics into which the notes are
convertible may not be available to all holders at all times. |
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Use of Proceeds |
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We will not receive any proceeds from the sale of the securities
offered by this prospectus. |
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Trading |
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Connetics does not intend to list the notes on any securities
exchange or on the Nasdaq National Market. Our common stock is
quoted on The Nasdaq National Market under the symbol
“CNCT.” |
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Certain U.S. Federal Income Tax Consequences |
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Each holder will agree pursuant to the terms of the indenture,
to treat the notes, for U.S. federal income tax purposes,
as “contingent payment debt instruments” that are
subject to Treasury regulation section 1.1275-4 and to be
bound by our application of the Treasury regulations that govern
contingent payment debt instruments, including our determination
that the rate at which interest will accrue for
U.S. federal income tax purposes will be 7.00% compounded
semi-annually, pursuant to the terms of the indenture.
Accordingly, each holder will recognize taxable income
significantly in excess of cash received while the notes are
outstanding. In addition, a U.S. Holder will recognize
ordinary income upon a sale, exchange, conversion, redemption,
or repurchase of the notes at a gain. See “Certain
U.S. Federal Income Tax Consequences.” |
The Common Stock
Selling securityholders may use this prospectus to sell the
common stock of Connetics issuable upon conversion of their
notes.
6
RISK FACTORS
In addition to the other information contained in this
prospectus or the documents incorporated by reference in this
registration statement, you should carefully consider the
following risks in evaluating an investment in the notes and the
common stock issuable upon conversion of the notes.
Risks Related To Our Business
Our operating results may fluctuate. This fluctuation could
cause our financial results to be below expectations and the
market prices of our securities to decline.
Our operating results may fluctuate from period to period for a
number of reasons, some of which are beyond our control. Even a
relatively small revenue shortfall may cause a period’s
results to be below our expectations or projections, which in
turn may cause the market price of our securities to drop
significantly and the value of your investment to decline.
If we do not sustain profitability, stockholders may lose
their investment.
Fiscal year 2004 was our first year of operating profitability.
Our accumulated deficit was $111.2 million at
December 31, 2004. We may incur additional losses in the
future. If we are unable to sustain profitability during any
quarterly or annual period, our stock price may decline.
Our reported earnings per share may be more volatile because
of the conversion provisions of our convertible senior notes or
the exercise of outstanding stock options.
We issued $90 million principal amount of convertible
senior notes in May 2003 which are due in 2008. Although none of
the noteholders converted their notes in 2004, they may convert
the notes into shares of our common stock at any time before the
notes mature, at a conversion rate of 46.705 shares per
$1,000 principal amount of notes, subject to adjustment in
certain circumstances. Additionally, in March 2005 we issued
$200 million principal amount of convertible senior notes
due in 2015, which are convertible into cash and, under certain
circumstances, shares of our common stock at an initial
conversion rate of 28.1972 shares per $1,000 principal
amount of notes, subject to adjustment. At April 30, 2005
we had approximately 19.5 million shares reserved for
issuance upon exercise of outstanding stock options, sales
through our Employee Stock Purchase Plan, and conversion of our
convertible senior notes. If any noteholders convert the notes,
or if our option holders exercise their options, our basic
earnings per share would be expected to decrease because
underlying shares would be included in the basic earnings per
share calculation.
If we do not obtain the capital necessary to fund our
operations, we will be unable to develop or market our
products.
In the future our product revenues could decline or we might be
unable to raise additional funds when we need them. In that
case, we may not have sufficient funds to be able to market our
products as planned or continue development of our other
products. Accordingly, we may need to raise additional funds
through public or private financings, strategic relationships or
other arrangements. 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.
Our total revenue depends on receiving royalties and contract
payments from third parties, and we cannot control the amount or
timing of those revenues.
We generate contract and royalty revenues by licensing our
products to third parties for specific territories and
indications. Our reliance on licensing arrangements with third
parties carries several risks, including the possibilities that:
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royalties generated from licensing arrangements may be
insignificant or may fluctuate from period to period, |
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we may be contractually bound to terms that, in the future, are
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a loss of royalties could have a disproportionately large impact
on our operating income in periods where the operating income is
a small profit. |
Any significant impact on our operating income may prevent us
from successfully developing our products.
If we fail to protect our proprietary rights, competitors may
be able to use our technologies, which would weaken our
competitive position, reduce our revenues and increase our
costs.
We believe that the protection of our intellectual property,
including patents and trademarks, is an important factor in
product recognition, maintaining goodwill, and maintaining or
increasing market share. If we do not adequately protect our
rights in our trademarks from infringement, any goodwill that we
have developed in those trademarks could be lost or impaired. If
the trademarks we use are found to infringe upon the trademark
of another company, we could be forced to stop using those
trademarks, and as a result we could lose all the goodwill that
has been developed in those trademarks and could be liable for
damages caused by an infringement.
Our commercial success depends in part on our ability and the
ability of our licensors to obtain and maintain patent
protection on technologies, to preserve trade secrets, and to
operate without infringing the proprietary rights of others.
We are pursuing several U.S. and international patent
applications, although we cannot be sure that any of these
patents will ever be issued. We also have acquired rights to
patents and patent applications from certain of our consultants
and officers. Any of our patents and patent applications could
be subject to claims of rights by third parties. Even if we do
have some rights in a patent or application, those rights may
not be sufficient for marketing and distributing products
covered by the patent or application.
The patents and applications in which we have an interest may be
challenged as to their validity or enforceability. Challenges
may result in potentially significant harm to our business. In
November 2004 we announced that Medicis Pharmaceutical Corp. had
informed us that a patent to which it holds certain rights will
be infringed by our product candidate Velac. While we are not
aware of any legal filings related to Medicis’ assertion,
we believe, based on information publicly available on the
U.S. Patent and Trademark Office, or USPTO, website, that
the inventor named on the patent has filed a Reissue Patent
Application with the USPTO. The cost of responding to any
challenges that may arise and the inherent costs to defend the
validity of our licensed technology and issued patents,
including the prosecution of infringements and the related
litigation, could be substantial whether or not we are
successful. Such litigation also could require a substantial
commitment of management’s time. Our business could suffer
materially if Medicis or any third party were to be awarded a
judgment adverse to us in any patent litigation or other
proceeding arising in connection with Velac, or any of our other
products or patent applications.
In May 2004, the U.S. Patent and Trademark Office issued to
us a patent for our emollient-foam technology. The ownership of
a patent or an interest in a patent, however, does not always
provide significant protection. Others may independently develop
similar technologies or design around the patented aspects of
our technology. We only conduct patent searches to determine
whether our products infringe upon any existing patents when we
think such searches are appropriate. As a result, the products
and technologies we currently market, and those we may market in
the future, may infringe on patents and other rights owned by
others. If we are unsuccessful in any challenge to the marketing
and sale of our products or technologies, we may be required to
license the disputed rights, if the holder of those rights is
willing, or to cease marketing the challenged products, or to
modify our products to avoid infringing upon those rights. Under
these circumstances, we may not be able to license the
intellectual property on favorable terms, if at all. We may not
succeed in any attempt to redesign our products or processes to
avoid infringement.
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We rely on our employees and consultants to keep our trade
secrets confidential.
We rely on trade secrets and unpatented proprietary know-how and
continuing technological innovation in developing and
manufacturing our products. We require each of our employees,
consultants, manufacturing partners, and advisors to enter into
confidentiality agreements prohibiting them from taking our
proprietary information and technology or from using or
disclosing proprietary information to third parties except in
specified circumstances. The agreements also provide that all
inventions conceived by an employee, consultant or advisor, to
the extent appropriate for the services provided during the
course of the relationship, are our exclusive property, other
than inventions unrelated to us and developed entirely on the
individual’s own time. These agreements may not provide
meaningful protection of our trade secrets and proprietary
know-how that is used or disclosed. Despite all of the
precautions we may take, people who are not parties to
confidentiality agreements may obtain access to our trade
secrets or know-how. In addition, others may independently
develop similar or equivalent trade secrets or know-how.
Our use of hazardous materials exposes us to the risk of
environmental liabilities, and we may incur substantial
additional costs to comply with environmental laws.
Our research and development activities involve the controlled
use of hazardous materials, potent compounds, chemicals and
various radioactive materials. We are subject to laws and
regulations governing the use, storage, handling and disposal of
these materials and certain waste products. If any of these
materials resulted in contamination or injury, we could be
liable for any damages that result and any liability could
exceed our resources. We may also be required to incur
significant costs to comply with environmental laws and
regulations as our research activities increase. We maintain
general liability insurance in the amount of $10 million
aggregate and workers compensation coverage in the amount of
$1 million per incident. Our insurance may not provide
adequate coverage against potential claims or losses related to
our use of hazardous materials, however, and we cannot be
certain that our current coverage will continue to be available
on reasonable terms, if at all.
Evoclin represents a new product entry for us into the acne
market and we may be unable to achieve desired market acceptance
and sales of Evoclin.
The FDA approved Evoclin in October 2004 for the treatment of
acne vulgaris. It is our first product entry into the acne
market, which is generally believed to be more competitive than
the market for other dermatoses. We will not be able to achieve
the desired market acceptance and sales of Evoclin unless our
marketing and sales strategy is effective in competing with
existing and well established products in the acne market.
Additionally, the commercial launch of Evoclin has required and,
we anticipate, will continue to require significant expenditures
of management time and resources from which we may not realize
anticipated returns.
The growth of our business depends in part on our ability to
identify, acquire on favorable terms, and assimilate
technologies, products or businesses.
Our strategy for the continuing growth of our business includes
identifying and acquiring strategic pharmaceutical products,
technologies and businesses. These acquisitions may involve
licensing or purchasing the assets of other pharmaceutical
companies. We may not be able to identify product or technology
candidates suitable for acquisition or licensing or, if we do
identify suitable candidates, they may not be available on
acceptable terms. Even if we are able to identify suitable
product or technology candidates, acquiring or licensing them
may require us to make considerable cash outlays, issue equity
securities, incur debt and contingent liabilities, incur
amortization expenses related to intangible assets, and can
result in the impairment of goodwill, which could harm our
profitability. In addition, acquisitions involve a number of
risks, including:
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difficulties in and costs associated with assimilating the
operations, technologies, personnel and products of the acquired
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assumption of known or unknown liabilities or other
unanticipated events or circumstances, and |
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risks of entering markets in which we have limited or no
experience. |
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.
Our future product revenues could be reduced by imports from
countries where our products are available at lower prices.
Certain of our products are, or will soon be, available for sale
in other countries. In July 2004 we signed a multi-year consent
with Hoffman-La Roche Inc. to sell Soriatane to a
U.S.-based distributor that exports branded pharmaceutical
products to select international markets. Roche continues to
market Soriatane outside of the U.S. In addition, Mipharm
S.p.A has exclusive rights to market and sell OLUX in Italy and
the U.K., and in September 2004, we granted to Pierre Fabre
Dermatologie the exclusive commercial rights to OLUX for sale in
all other European markets, with marketing rights for certain
countries in South America and Africa. There have been cases in
which pharmaceutical products were sold at steeply discounted
prices in markets outside the U.S. and then re-imported to the
U.S. where they could be resold at prices higher than the
original discounted price, but lower than the prices
commercially available in the U.S. If this happens with our
products our revenues would be adversely affected.
In addition, in the European Union, we are required to permit
cross border sales. This allows buyers in countries where
government-approved prices for our products are relatively high
to purchase our products legally from countries where they must
be sold at lower prices. Such cross-border sales could adversely
affect our royalty revenues.
Our current and future indebtedness and debt service
obligations may adversely affect our cash flow.
In May 2003 we issued $90.0 million of convertible senior
notes in a private offering. We will pay interest on the notes
at a rate of 2.25% per year. In 2004, we recorded
$2.0 million in interest on the notes. Assuming none of the
notes are redeemed or converted, we will record interest on the
notes in the amounts of $2.0 million per year from 2005
through 2007, and $843,750 for 2008. The notes mature on
May 30, 2008.
In March 2005 we issued $200 million principal amount of
convertible senior notes maturing on March 30, 2015. On
September 30, 2005, we will begin paying interest on these
notes at a rate of 2.00% per year. Assuming none of these
notes are redeemed or converted, we will record interest on the
notes in the amount of $3.1 million for 2005,
$4.0 million for years 2006 through 2009, and
$1.0 million for 2010. Commencing March 30, 2010, we
may be required to make additional interest payments under
certain circumstances.
Whether we are able to make required payments on the existing
notes, and any other future debt obligations we may incur in
order to continue the growth of our business, will depend on
(a) our ability to generate sufficient cash, this will
depend on efficiently developing new products with significant
market potential, increasing sales of our existing products,
collecting receivables, and other factors, including general
economic, financial, competitive, legislative and regulatory
conditions, some of which are beyond our control; and
(b) our future operating performance and our ability to
obtain additional debt or equity financing on favorable terms.
Risks Related to Our Products
Because we rely on third-party manufacturers and suppliers,
any manufacturing difficulties they encounter could delay future
revenues from our product sales.
We rely exclusively on third party manufacturers to manufacture
our products. In general, our contract manufacturers purchase
principal raw materials and supplies in the open market.
Manufacturing facilities are subject to ongoing periodic
inspection by the FDA and corresponding state agencies and must
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be licensed before they can be used in commercial manufacturing
of our products. If our contract manufacturers cannot provide us
with our product requirements in a timely and cost-effective
manner, or if the product they supply does not meet commercial
requirements for shelf life, our sales of marketed products
could be reduced. Currently, DPT Laboratories, Ltd. and Accra
Pac Group, Inc. manufacture commercial supplies of OLUX,
Luxíq, and Evoclin. Roche is our sole manufacturer for
commercial supplies of Soriatane.
The active ingredient in OLUX is supplied by a single source. We
have agreements with Roche to fill and finish Soriatane through
2005, and to provide active pharmaceutical ingredient through
2007. We believe that these agreements will allow us to maintain
supplies of Soriatane finished product through 2012 due to the
five-year shelf life of the active pharmaceutical ingredient. We
will continue to buy Soriatane finished product and active
pharmaceutical ingredient from Roche, and we expect to qualify
alternate sources for Soriatane finished product in 2006.
Substantially all other raw materials are available from a
number of sources, although delays in the availability of some
raw materials could cause delays in our commercial production.
We cannot be certain that manufacturing sources will continue to
be available or that we can continue to out-source the
manufacturing of our products on reasonable or acceptable terms.
If we are unable to maintain agreements on favorable terms with
any of our contract manufacturers, or if we experience any
disruption in the supply of raw materials required for the
manufacture of our products, it could impair our ability to
deliver our products on a timely basis or cause delays in our
clinical trials and applications for regulatory approvals which
in turn would harm our business and financial results. In
addition, any loss of a manufacturer or any difficulties that
could arise in the manufacturing process could significantly
affect our inventories and supply of products available for
sale. If we are unable to supply sufficient amounts of our
products on a timely basis, our market share could decrease and,
correspondingly, our profitability could decrease.
If our contract manufacturers fail to comply with FDA GMP
regulations, we may be unable to meet demand for our products
and may lose potential revenue.
All of our contract manufacturers must comply with the
applicable FDA Good Manufacturing Practices, or GMP,
regulations, which include quality control and quality assurance
requirements as well as the corresponding maintenance of records
and documentation. If our contract manufacturers do not comply
with the applicable GMP regulations and other FDA regulatory
requirements, the availability of marketed products for sale
could be reduced and we could suffer delays in the progress of
clinical trials for products under development. We do not have
full control over our third-party manufacturers’ compliance
with these regulations and standards. Our business interruption
insurance, which covers the loss of income for up to
$14.1 million at our California and Australia locations,
and $25.7 million for our contract manufacturers, which may
not completely mitigate the harm to our business from the
interruption of the manufacturing of products. The loss of a
manufacturer could still have a negative effect on our sales,
margins and market share, as well as our overall business and
financial results.
If our supply of finished products is interrupted, our
ability to maintain our inventory levels could suffer and future
revenues may be delayed.
We try to maintain inventory levels that are no greater than
necessary to meet our current projections. Any interruption in
the supply of finished products could hinder our ability to
timely distribute finished products. If we are unable to obtain
adequate product supplies to satisfy our customers’ orders,
we may lose those orders and our customers may cancel other
orders and stock and sell competing products. This in turn could
cause a loss of our market share and negatively affect our
revenues.
Supply interruptions may occur and our inventory may not always
be adequate. Numerous factors could cause interruptions in the
supply of our finished products, including shortages in raw
material required by our manufacturers, changes in our sources
for manufacturing, our failure to timely locate and
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obtain replacement manufacturers as needed, and conditions
affecting the cost and availability of raw materials.
We cannot sell our current products and product candidates if
we do not obtain and maintain governmental approvals.
Pharmaceutical companies are subject to heavy regulation by a
number of national, state and local agencies. Of particular
importance is the FDA in the U.S. The FDA has jurisdiction
over all of our business and administers requirements covering
testing, manufacture, safety, effectiveness, labeling, storage,
record keeping, approval, advertising and promotion of our
products. If we fail to comply with applicable regulatory
requirements, we could be subject to, among other things, fines,
suspensions of regulatory approvals of products, product
recalls, delays in product distribution, marketing and sale, and
civil or criminal sanctions.
The process of obtaining and maintaining regulatory approvals
for pharmaceutical products, and obtaining and maintaining
regulatory approvals to market these products for new
indications, is lengthy, expensive and uncertain. The
manufacturing and marketing of drugs, including our products,
are subject to continuing FDA and foreign regulatory review, and
later discovery of previously unknown problems with a product,
manufacturing process or facility may result in restrictions,
including recall or withdrawal of the product from the market.
The FDA is permitted to revisit and change its prior
determinations and it may change its position with regard to the
safety or effectiveness of our products.
Even if the FDA approves our products, the FDA is authorized to
impose post-marketing requirements such as:
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submitting products for inspection and, if any inspection
reveals that the product is not in compliance, prohibiting the
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suspending manufacturing, |
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recalling products, and |
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withdrawing marketing approval. |
Even before any formal regulatory action, we could voluntarily
decide to cease distribution and sale or recall any of our
products if concerns about safety or effectiveness develop.
To market our products in countries outside of the U.S., we and
our partners must obtain approvals from foreign regulatory
bodies. The foreign regulatory approval process includes all of
the risks associated with obtaining FDA approval, and approval
by the FDA does not ensure approval by the regulatory
authorities of any other country.
In its regulation of advertising, the FDA from time to time
issues correspondence to pharmaceutical companies alleging that
some advertising or promotional practices are false, misleading
or deceptive. The FDA has the power to impose a wide array of
sanctions on companies for such advertising practices, and if we
were to receive correspondence from the FDA alleging these
practices we might be required to:
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take FDA-mandated corrective action, which could include placing
advertisements or sending letters to physicians rescinding
previous advertisements or promotion, |
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incur substantial expenses, including fines, penalties, legal
fees and costs to comply with the FDA’s requirements, |
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disrupt the distribution of products and stop sales until we are
in compliance with the FDA’s position. |
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We may spend a significant amount of money to obtain FDA and
other regulatory approvals, which may never be granted. Failure
to obtain such regulatory approvals could adversely affect our
prospects for future revenue growth.
Successful product development in our industry is highly
uncertain, and the process of obtaining FDA and other regulatory
approvals is lengthy and expensive. Very few research and
development projects produce a commercial product. Product
candidates that appear promising in the early phases of
development may fail to reach the market for a number of
reasons, including that the product candidate did not
demonstrate acceptable clinical trial results in humans even
though it demonstrated positive preclinical trial results, or
that the product candidate was not effective in treating a
specified condition or illness.
The FDA approval processes require substantial time, effort and
expense. The FDA continues to modify product development
guidelines and we may not be able to obtain FDA approval to
conduct clinical trials or to manufacture and market any of the
products we develop, acquire or license. Clinical trial data can
be the subject of differing interpretation, and the FDA has
substantial discretion in the approval process. The FDA may not
interpret our clinical data the way we do. The FDA may also
require additional clinical data to support approval. The FDA
can take between one and two years to review new drug
applications, or longer if significant questions arise during
the review process. Moreover, the costs to obtain approvals
could be considerable and the failure to obtain, or delays in
obtaining, an approval could have a significant negative effect
on our business.
In November 2004, the FDA notified us that it would not approve
our NDA for Extina. The FDA’s position was based on the
conclusion that, although Extina demonstrated non-inferiority to
the comparator drug currently on the market, it did not
demonstrate statistically significant superiority to placebo
foam. We have continued discussions with the FDA and we expect
to initiate our final Phase III trial for Extina in the
third quarter of 2005. On June 10, 2005, the FDA issued a
non-approvable letter for Velac. The FDA based its decision on
the fact that “a positive carcinogenicity signal was
detected in a Tg.AC mouse dermal carcinogenicity study.”
Based on our clinical trials and our analysis of the mouse
study, we had concluded that the mouse study was not predictive
of human results. We expect to continue working with the FDA to
determine if and how Velac may be approved at some future date.
Any factor adversely affecting the prescription volume
related to our products could harm our business, financial
condition and results of operations.
We sell our products directly to distributors, who in turn sell
the products into the retail marketplace. Patients have their
prescriptions filled by pharmacies that buy our products from
the wholesale distributors. We derive all of our product revenue
from OLUX, Luxíq, Soriatane and Evoclin. Accordingly, any
factor adversely affecting our sales related to these products,
individually or collectively, could harm our business, financial
condition and results of operations. OLUX, Luxíq and
Evoclin are all currently subject to generic competition in
their respective markets, and each of them could be rendered
obsolete or uneconomical by regulatory or competitive changes. A
generic competitor for Soriatane could enter the market at any
time which would have a significantly negative impact on its
sales. Sales of all of our products could also be adversely
affected by other factors, including:
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manufacturing or supply interruptions, |
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the development of new competitive pharmaceuticals and
technological advances to treat the conditions addressed by our
core branded products, |
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marketing or pricing actions by one or more of our competitors, |
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regulatory action by the FDA and other government regulatory
agencies, |
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changes in the prescribing or procedural practices of
dermatologists, pediatricians or podiatrists, |
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changes in the reimbursement or substitution policies of
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product liability claims. |
We depend on a limited number of customers, and if we lose
any of them, our business could be harmed.
Our customers include the nation’s leading wholesale
pharmaceutical distributors, such as Cardinal Health, Inc.,
McKesson HBOC, Inc. and AmerisourceBergen Corporation. During
2004, McKesson, Cardinal, AmerisourceBergen accounted for 29%,
27%, and 16%, respectively, of our net product revenues. In
December 2004, we entered into distribution agreements with both
Cardinal and McKesson in which we agreed to pay a fee to each
distributor in exchange for certain product distribution,
inventory information, return goods processing, and
administrative services.
The distribution network for pharmaceutical products is subject
to increasing consolidation, and a few large wholesale
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
relationship with them were to deteriorate, our business could
also be materially and adversely affected.
Orders for our products may increase or decrease depending on
the inventory levels held by our major customers. Significant
increases and decreases in orders from our major customers could
cause our operating results to vary significantly from quarter
to quarter.
Retail availability of our products is greatly affected by the
inventory levels our customers hold. We monitor wholesaler
inventory of our products using a combination of methods,
including tracking prescriptions filled at the pharmacy level to
determine inventory amounts the wholesalers have sold to their
customers. Beginning in 2005, pursuant to our agreements with
Cardinal and McKesson, we will receive inventory level reports.
For other wholesalers, however, our estimates of wholesaler
inventories may differ significantly from actual inventory
levels. Significant differences between actual and estimated
inventory levels may result in excessive inventory production,
inadequate supplies of products in distribution channels,
insufficient or excess product available at the retail level,
and unexpected increases or decreases in orders from our major
customers. Forward-buying by wholesalers, for example, may
result in significant and unexpected changes in customer orders
from quarter to quarter. These changes may cause our revenues to
fluctuate significantly from quarter to quarter, and in some
cases may cause our operating results for a particular quarter
to be below our expectations or projections. If our financial
results are below expectations for a particular period, the
market price of our securities may drop significantly.
The expenses associated with our clinical trials are
significant. We rely on third parties to conduct clinical trials
for our product candidates, and those third parties may not
perform satisfactorily. If those third parties do not perform
satisfactorily, it may significantly delay commercialization of
our products, increase expenditures and negatively affect our
prospects for future revenue growth.
The clinical trials we undertake for regulatory approval of our
products are very expensive and we cannot predict the amount and
timing of these expenses from quarter to quarter. We rely on
third parties to independently conduct clinical studies for our
product candidates. If these third parties do not perform
satisfactorily, we may not be able to locate acceptable
replacements or enter into favorable agreements with them. If we
are unable to rely on clinical data collected by others, we
could be required to repeat, extend the duration of, or increase
the size of, clinical trials, which could significantly delay
required regulatory approvals and require significantly greater
expenditures.
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Our continued growth depends on our ability to develop new
products, and if we are unable to develop new products, our
expenses may exceed our revenues without any return on the
investment.
We currently have a variety of new products in various stages of
research and development and are working on possible
improvements, extensions and reformulations of some existing
products. These research and development activities, as well as
the clinical testing and regulatory approval process, will
require significant commitments of personnel and financial
resources. Delays in the research, development, testing or
approval processes will cause a corresponding delay in the
commencement of revenue generation from those products.
We re-evaluate our research and development efforts regularly to
assess whether our efforts to develop a particular product or
technology are progressing at a rate that justifies our
continued expenditures. On the basis of these re-evaluations, we
have abandoned in the past, and may abandon in the future, our
efforts on a particular product or technology. Products we are
researching or developing may never be successfully released to
the market and, regardless of whether we ever release them to
the market; we will already have incurred the expense of such
processes.
If we do not successfully integrate new products into our
business, we may not be able to sustain revenue growth and we
may not be able to compete effectively.
When we acquire or develop new products and product lines, we
must be able to integrate those products and product lines into
our systems for marketing, sales and distribution. If we do not
integrate these products or product lines successfully, the
potential for growth is limited. The new products we acquire or
develop could have channels of distribution, competition, price
limitations or marketing acceptance different from our current
products. As a result, we do not know whether we will be able to
compete effectively or obtain market acceptance in any new
product categories. A new product may require us to
significantly increase our sales force and incur additional
marketing, distribution and other operational expenses. These
additional expenses could negatively affect our gross margins
and operating results. In addition, we could incur many of these
expenses before the actual distribution of new products. Because
of this timing, if the market does not accept the new products,
or if they are not competitive with similar products distributed
by others, the ultimate success of the acquisition or
development could be substantially diminished.
We rely on the services of a single company to distribute our
products to our customers. A delay or interruption in the
distribution of our products could negatively impact our
business.
Cardinal Health SPS, or SPS, handles all of our product
distribution activities. SPS stores and distributes our products
from a warehouse in Tennessee. Any delay or interruption in the
process or in payment could result in a delay delivering product
to our customers, which could have a significant negative impact
on our business.
The termination of the agreement for the co-promotion of OLUX
and Luxíq to certain primary care physicians, or
PCP’s, could negatively impact our business, and the recent
sales support agreement may not result in a significant increase
in product sales.
In October 2004, UCB Pharma, Inc. informed us that it would
terminate our co-promotion agreement for the co-promotion of
OLUX and Luxíq to a certain segment of primary care
physicians, or PCP’s. UCB informed us that the termination
was the result of a decision to shift its commercial focus
following a recent acquisition. The co-promotion agreement
terminated effective March 31, 2005. We do not have any
financial obligation to UCB on prescriptions generated by
PCP’s after March 31, 2005.
In April 2005, we entered into an agreement with Ventiv Pharma
Services, LLC, or VPS, a subsidiary of Ventiv Health, Inc.,
under which VPS will provide sales support for certain of our
products to PCP’s and pediatricians. VPS began product
sales activities under this agreement in mid-April. VPS will
promote OLUX, Luxíq, and Evoclin. We will record 100% of
the revenue from product sales generated by VPS’s
promotional efforts. We will pay VPS a fee for the personnel
providing the
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promotional efforts and bear the marketing costs for promoting
the products, including product samples and marketing materials.
The VPS agreement may not result in any significant increase in
sales of the products covered by the agreement, and it may not
provide access to the PCP market comparable to the services
provided by UCB.
Our revenues depend on payment and reimbursement from third
party payors, and if they reduce or refuse payment or
reimbursement, the use and sales of our products will suffer, we
may not increase our market share, and our revenues and
profitability will suffer.
Our operating results and business success depend, in part, on
whether adequate reimbursement is available for the use of our
products by hospitals, clinics, doctors and patients.
Third-party payors include state and federal programs such as
Medicare and Medicaid, managed care organizations, private
insurance plans and health maintenance organizations. Because of
the size of the patient population covered by managed care
organizations, it is important to our business that we market
our products to them and to the pharmacy benefit managers that
serve many of these organizations. If only a portion of the cost
of our prescription products is paid for or reimbursed, our
products could be less attractive, from a net-cost perspective,
to patients, suppliers and prescribing physicians.
Managed care organizations and other third-party payors try to
negotiate the pricing of medical services and products to
control their costs. Managed care organizations and pharmacy
benefit managers typically develop formularies to reduce their
cost for medications. Formularies can be based on the prices and
therapeutic benefits of the available products. Due to their
lower costs, generics are often favored on formularies. The
breadth of the products covered by formularies varies
considerably from one managed care organization to another, and
many formularies include alternative and competitive products
for treatment of particular medical conditions. In some cases,
third-party payors will pay or reimburse users or suppliers of a
prescription drug product only a portion of the product purchase
price. Consumers and third-party payors may not view our
marketed products as cost-effective, and consumers may not be
able to get reimbursement or reimbursement may be so low that we
cannot market our products on a competitive basis. If a product
is excluded from a formulary, its usage may be sharply reduced
in the managed care organization patient population. If our
products are not included within an adequate number of
formularies or adequate reimbursement levels are not provided,
or if those policies increasingly favor generic products, our
market share and gross margins could be negatively affected, as
could our overall business and financial condition.
To the extent that patients buy our products through a managed
care group with which we have a contract, our average selling
price is lower than it would be for a non-contracted managed
care group. We take reserves for the estimated amounts of
rebates we will pay to managed care organizations each quarter.
Any increase in returns and any increased usage of our products
through Medicaid or managed care programs will affect the amount
of rebates that we owe.
Risks Related to Our Industry
We face intense competition, which may limit our commercial
opportunities and limit our ability to generate revenues.
The specialty pharmaceutical industry is highly competitive.
Competition in our industry occurs on many fronts, including
developing and bringing new products to market before others,
developing new technologies to improve existing products,
developing new products to provide the same benefits as existing
products at less cost, developing new products to provide
benefits superior to those of existing products, and acquiring
or licensing complementary or novel technologies from other
pharmaceutical companies or individuals.
Most of our competitors are large, well-established companies in
the fields of pharmaceuticals and health care. Many of these
companies have substantially greater financial, technical and
human resources than we have to devote to marketing, sales,
research and development and acquisitions. Some of these
competitors have more collective experience than we do in
undertaking preclinical testing and human
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clinical trials of new pharmaceutical products and obtaining
regulatory approvals for therapeutic products. As a result, they
have a greater ability to undertake more extensive research and
development, marketing and pricing policy programs. Our
competitors may develop or acquire new or improved products to
treat the same conditions as our products treat, or may make
technological advances that reduce their cost of production so
that they may engage in price competition through aggressive
pricing policies to secure a greater market share to our
detriment. Our commercial opportunities will be reduced or
eliminated if our competitors develop or acquire and market
products that are more effective, have fewer or less severe
adverse side effects, or are less expensive than our products.
Competitors also may develop or acquire products that make our
current or future products obsolete. Any of these events could
have a significant negative impact on our business and financial
results, including reductions in our market share and gross
margins.
Luxíq, OLUX and Evoclin compete with generic
pharmaceuticals, which claim to offer equivalent benefit at a
lower cost. In some cases, insurers and other health care
payment organizations encourage the use of these less expensive
generic brands through their prescription benefits coverage and
reimbursement policies. These organizations may make the generic
alternative more attractive to the patient by providing
different amounts of reimbursement so that the net cost of the
generic product to the patient is less than the net cost of our
prescription brand product. Aggressive pricing policies by our
generic product competitors and the prescription benefits
policies of insurers could cause us to lose market share or
force us to reduce our margins in response. In particular,
Evoclin faces significant competition in the market for the
treatment of acne, one of the largest segments in
U.S. dermatology market. The active ingredient in Evoclin,
clindamycin, is the most popular topical antibiotic for treating
acne patients. Soriatane competes in the market for the
treatment of severe psoriasis in adults. Generic competition for
Soriatane may arise in the future.
The growth of managed care organizations and other
third-party reimbursement policies and state regulatory agencies
may have an adverse effect on our pricing policies and our
margins.
Managed care initiatives to control costs have influenced
PCP’s to refer fewer patients to specialists such as
dermatologists. Further reductions in these referrals could have
a material adverse effect on the size of our potential market as
well as our business, financial condition and results of
operation.
Federal and state regulations govern or influence the
reimbursement to health care providers of fees in connection
with medical treatment of certain patients. In the U.S., there
have been, and we expect there will continue to be, a number of
state and federal proposals that could limit the amount that
state or federal governments will pay to reimburse the cost of
drugs. Continued significant changes in the health care system
could have a significant negative impact on our business.
Decisions by state regulatory agencies, including state pharmacy
boards, and/or retail pharmacies may require substitution of
generic for branded products, may prefer competitors’
products over our own, and may impair our pricing and thereby
constrain our market share and growth. In addition, we believe
the increasing emphasis on managed care in the U.S. will
continue to put pressure on the price and usage of our products,
which may in turn adversely impact product sales. Further, when
a new therapeutic product is approved, the availability of
governmental and/or private reimbursement for that product is
uncertain, as is the amount for which that product will be
reimbursed. We cannot predict whether reimbursement for our
products or product candidates will be available or in what
amounts, and current reimbursement policies for existing
products may change at any time. Changes in reimbursement
policies or health care cost containment initiatives that limit
or restrict reimbursement for our products may cause our
revenues to decline.
In recent years, various legislative proposals have been offered
in Congress and in some state legislatures that include major
changes in the health care system. These proposals have included
price or patient reimbursement constraints on medicines and
restrictions on access to certain products. We cannot predict
the outcome of such initiatives, and it is difficult to predict
the future impact to us of the broad and expanding legislative
and regulatory requirements that may apply to us.
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Our industry is subject to extensive governmental
regulation.
The FDA must approve a drug before it can be sold in the
U.S. In addition, the Federal Food, Drug and Cosmetic Act,
the Federal Trade Commission, Office of the Inspector General
and other federal and state agencies, statutes, and regulations
govern the safety, effectiveness, testing, manufacture,
labeling, storage, record keeping, approval, sampling,
advertising and promotion of pharmaceutical products. Complying
with the mandates of these agencies, statutes and regulations is
expensive and time consuming, and adds significantly to the cost
of developing, manufacturing and marketing our products. In
addition, failure to comply with applicable agency, statutory
and regulatory requirements could, among other things, result in:
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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 patients or 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. In March 2004, we acquired exclusive U.S. rights to
Soriatane, which is a product known to cause serious birth
defects and other serious side effects. We maintain product
liability insurance in the amount of $15 million aggregate,
which may not provide adequate coverage against potential
product liability claims or losses. In particular, we anticipate
that insurers may be less willing to extend product liability
insurance for Soriatane, and that insurance will only be
available at higher premiums and with higher deductibles than
our other products have required. We also cannot be certain that
our current coverage will continue to be available in the future
on reasonable terms, if at all. Even if we are ultimately
successful in product liability litigation, the litigation would
consume substantial amounts of our financial and managerial
resources, and might create significant negative 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
coverage or outside of our coverage, the cost and expense of
such liability could severely damage our business, financial
condition and profitability.
Risks Related to the Offering
Our indebtedness and debt service obligations may adversely
affect our cash flow.
Our ability to make payments on and to refinance our debt,
including the notes subject to this registration statement, will
depend on our ability to generate sufficient cash. Whether we
are able to generate sufficient cash flow, in turn, will depend
on our ability to increase sales of our products and collect
receivables, the results of our research and development efforts
and other factors, including general economic, financial,
competitive, legislative and regulatory conditions, some of
which are beyond our control.
If we incur new indebtedness, the related risks that we now face
could intensify. Our ability to make required payments on the
notes and to satisfy any other debt obligations will depend upon
our future operating performance and our ability to obtain
additional debt or equity financing.
The notes are unsecured, and future indebtedness could
effectively rank senior to the notes.
The notes are unsecured, rank equal in right of payment with our
2.25% Convertible Senior Notes due May 30, 2008 in the
principal amount of $90 million, and will rank equal in
right of payment with future unsecured and unsubordinated
indebtedness. As of March 31, 2005, we had total current
liabilities of approximately $28 million on a consolidated
basis. The notes are effectively subordinated to any secured
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debt to the extent of the value of the assets that secure the
indebtedness. We currently have no secured debt. The notes are
also “structurally subordinated” to all indebtedness
and other liabilities, including trade payables and lease
obligations, of our existing and future subsidiaries. As of
March 31, 2005, our existing subsidiaries had total
long-term debt and other liabilities of approximately $25,000,
which does not include any intercompany amounts that are
eliminated in consolidation. In the event of our bankruptcy,
liquidation or reorganization or upon acceleration of the notes,
payment on the notes could be less, ratably, than on any secured
indebtedness. We may not have sufficient assets remaining to pay
amounts due on any or all of the notes then outstanding.
The notes do not restrict our ability to incur additional
debt or to take other actions that could negatively impact
holders of the notes.
The indenture governing the notes does not prohibit or limit us
from incurring additional indebtedness and other liabilities or
from pledging assets to secure such indebtedness and
liabilities. In addition, the notes do not require us to achieve
or maintain any minimum financial results relating to our
financial position or results of operations. Our ability to
recapitalize, incur additional debt, secure existing or future
debt and take a number of other actions that are not limited by
the terms of the indenture and the notes could have the effect
of diminishing our ability to make payments on the notes when
due. In addition, neither the indenture nor the notes restrict
us from repurchasing indebtedness or common stock. If we issue
other debt securities in the future, our debt service
obligations will increase.
The notes are not protected by restrictive covenants, which
allows us to engage in transactions that may impair our ability
to fulfill our obligations under the notes.
Because the indenture contains no covenants or other provisions
to protect holders of the notes in the event of a fundamental
change involving us except to the extent described under
“Description of the Notes — Repurchase at Option
of Holders Upon a Fundamental Change,” we may engage in
transactions that may impair our ability to fulfill our
obligations under the notes. Absent a contractual restriction,
we generally have no duty to consider the interests of our
noteholders in determining whether to engage in such
transactions and under what terms.
We may not have the funds necessary to purchase the notes at
the option of the holders or upon a fundamental change.
On March 30, 2010, and upon the occurrence of fundamental
changes under some circumstances as described in this
registration statement, you may require us to repurchase your
notes. In addition, the occurrence of an event similar to a
fundamental change may require us to repurchase our other
outstanding notes in the principal amount of $90 million.
We cannot assure you that we would have the financial resources,
or would be able to arrange financing, to pay the repurchase
price in cash for all of the notes that noteholders might
deliver upon the occurrence of any fundamental change.
The adjustment to the conversion rate of notes converted in
connection with a fundamental change may not adequately
compensate you for the lost option time value of your notes as a
result of such fundamental change.
If a fundamental change occurs, under certain circumstances, we
will adjust the conversion rate of the notes converted in
connection with such fundamental change. The amount of the
conversion rate adjustment will be determined based on the date
on which the fundamental change becomes effective and the
closing sale price of our common stock in the five consecutive
trading days before the effective date of the fundamental
change, as described below under “Description of the
Notes — Adjustment to Conversion Rate Upon a
Fundamental Change.” Although the conversion rate
adjustment is designed to compensate you for the lost option
time value of your notes as a result of such fundamental change,
the amount of the conversion rate adjustment is only an
approximation of such lost value and may not adequately
compensate you for the loss. In addition, if the market price of
our common stock at the time of the designated event
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is greater than $150.00 per share of common stock or less
than $26.27 per share of common stock (in each case,
subject to adjustment), no additional shares will be issued upon
conversion.
The trading price of our securities could be subject to
significant fluctuations.
The trading price of our common stock has been volatile and may
be volatile in the future. Factors such as announcements of
fluctuations in our or our competitors’ operating results,
changes in our prospects and general market conditions for
pharmaceutical biotechnology stocks could have a significant
impact on the future trading prices of our common stock and the
notes. In particular, the trading price of the common stock of
many pharmaceutical and biotechnology companies, including us,
has experienced extreme price and volume fluctuations, which
have at times been unrelated to the operating performance of the
companies whose stocks were affected. Some of the factors that
may cause volatility in the price of our securities include:
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clinical trial results and regulatory developments, |
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quarterly variations in results, |
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business and product market cycles, |
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fluctuations in customer requirements, |
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the availability and utilization of manufacturing capacity, |
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the timing of new product introductions, |
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our ability to develop and implement new technologies, |
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the timing and amounts of royalties paid to us by third
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issues with the safety or effectiveness of our products. |
The price of our common stock may also be adversely affected by
the estimates and projections of the investment community,
general economic and market conditions, and the cost of
operations in our product markets. These factors, either
individually or in the aggregate, could result in significant
variations in the trading prices of our common stock.
The market price of the notes is expected to be significantly
affected by fluctuations in the market price of our common stock
as well as the general level of interest rates and our credit
quality. This may result in a significantly greater volatility
in the trading value of the notes than would be expected for
nonconvertible debt securities we issue.
In addition to the factors described above, the price of our
common stock also could be affected by possible sales of our
common stock by investors who view the notes as a more
attractive means of equity participation in our company and by
hedging or arbitrage activity that we expect to develop
involving our common stock as a result of the issuance of the
notes. The hedging or arbitrage could, in turn, affect the
trading prices of the notes.
Because it is unlikely that an active trading market for the
notes will develop and there are restrictions on resale of the
notes, you may not be able to sell your notes. You should
therefore be prepared to hold the notes until maturity unless
you convert them into shares of our common stock or cash.
The notes constitute a new issue of securities for which there
is no established trading market. Because the notes will not be
listed on the Nasdaq or a national securities exchange and no
notes resold under this prospectus will trade in the PORTAL
system, it is unlikely that an active trading market for the
notes will develop. If an active trading market for the notes
does not develop, or if one develops but is not maintained,
holders of the notes may experience difficulty in reselling, or
may not be able to resell, the notes and the trading price of
the notes could fall. If an active trading market were to
develop, the notes
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could trade at prices that may be lower than the initial
offering price of the notes. Whether or not the notes will trade
at lower prices depends on many factors, including:
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prevailing interest rates and the markets for similar securities, |
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our financial condition, historic financial performance and
future prospects. |
If a trading market does not develop, you may be required to
hold the notes to maturity unless you convert them into shares
of our common stock or cash.
The market price of our common stock could be affected by the
substantial number of shares that are eligible for future sale,
which could decrease the value of your investment.
As of May 31, 2005, we had 34,897,027 shares of common
stock outstanding, excluding approximately 12.3 million
shares reserved for issuance pursuant to our stock plans,
inducement grants and upon conversion of our convertible notes
due May 30, 2008. Your ability to profit from converting
the notes will be adversely affected if our common stock price
decreases. We have agreed not to, and our executive officers and
directors have agreed that they will not, offer, sell, contract
to sell or otherwise dispose of, directly or indirectly, or file
a registration statement under the Securities Act relating to,
any shares of common stock or securities convertible or
exchangeable or exercisable for any shares of our common stock
(except for shares issuable upon conversion of the notes
described in this registration statement) until June 15,
2005, subject to certain exceptions. Except for the restriction
described in the preceding sentence, we are not restricted from
issuing additional common stock during the life of the notes.
The conversion rate of the notes may not be adjusted for all
dilutive events.
The conversion rate of the notes is subject to adjustment for
certain events, including but not limited to the issuance of
stock dividends on our common stock, the issuance of rights or
warrants, subdivisions, stock splits and combinations,
distributions of indebtedness, securities or assets, certain
cash dividends, certain issuer tender or exchange offers and
certain repurchases as described under “Description of
Notes — Conversion Rights — Conversion Rate
Adjustments.” The conversion rate will not be adjusted for
other events, such as a third-party tender or exchange offer or
an issuance of common stock for cash, that could also adversely
affect the trading price of the notes or the common stock. An
event that adversely affects the value of the notes, but does
not result in an adjustment to the conversion rate, could occur.
The conditional conversion features of the notes could result
in your receiving less than the value of the common stock into
which a note would otherwise be convertible.
Until March 30, 2009, the notes are convertible into common
stock only if specified conditions are met as described under
“Description of Notes — Conversion Rights.”
During this period, if the specific conditions for conversion
are not met, you will not be able to convert your notes and you
may not be able to receive the value you would otherwise receive
upon conversion.
Conversion of the notes will dilute the ownership interest of
existing stockholders, including holders who had previously
converted their notes.
The conversion into common stock of some or all of the notes, or
of our other convertible notes, will dilute the ownership
interests of existing stockholders. Any sales in the public
market of the common stock or of shares issuable upon conversion
could adversely affect prevailing market prices of our common
stock. In addition, the existence of the notes or our existing
convertible notes may encourage short selling by market
participants because the conversion of the notes could depress
the price of our common stock.
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If you hold notes, you will not be entitled to any rights
with respect to our common stock, but you will be subject to all
changes made with respect to our common stock.
If you hold the notes, you will not be entitled to any rights
with respect to our common stock (including, without limitation,
voting rights and rights to receive any dividends or other
distributions on our common stock), but you will be subject to
all changes affecting the common stock, to the extent you
receive such stock upon conversion. You will only be entitled to
rights of the common stock if and when we deliver shares of
common stock to you upon conversion of your notes. For example,
if an amendment is proposed to our certificate of incorporation
or bylaws requiring stockholder approval and the record date for
determining stockholders of record entitled to vote on the
amendment occurs before the conversion of your notes, you will
not be entitled to vote on the amendment, although you will
nevertheless be subject to any changes in the powers,
preferences or special rights of our common stock.
You will recognize income for U.S. federal income tax
purposes significantly in excess of current cash payments. Any
gain recognized upon a sale, conversion, or other disposition
will be treated as ordinary interest income rather than capital
gain.
We have treated, and will continue to treat, the notes as
contingent payment debt instruments for U.S. federal income
tax purposes. As a result of this treatment, if you acquire
notes, you will be required to include amounts in income
significantly in excess of the stated interest on the notes. Any
gain you recognize upon a sale, conversion, or other disposition
will generally be treated as ordinary interest income rather
than capital gain. Any loss recognized on such disposition will
be treated as ordinary loss to the extent of interest on the
notes previously included in income and, thereafter, capital
loss. There is some uncertainty as to the proper application of
the Treasury regulations governing contingent payment debt
instruments, and if our treatment were successfully challenged
by the Internal Revenue Service, it might be determined that,
among other things, you should have accrued interest income at a
lower or higher rate, should not have recognized ordinary income
upon the conversion, and/or should have recognized capital gain
or loss, rather than ordinary income or loss, upon a taxable
disposition of the notes. See “Certain U.S. Federal
Income Tax Consequences.”
Our charter documents and Delaware law contain provisions
that could delay or prevent a change in control, even if the
change in control would be beneficial to our stockholders.
Our certificate of incorporation authorizes our board of
directors to issue undesignated preferred stock and to determine
the rights, preferences, privileges and restrictions of the
preferred stock without further vote or action by our
stockholders. The issuance of preferred stock could make it more
difficult for third parties to acquire a majority of our
outstanding voting stock. We also have a stockholder rights
plan, which entitles existing stockholders to rights, including
the right to purchase shares of preferred stock, in the event of
an acquisition of 15% or more of our outstanding common stock,
or an unsolicited tender offer for such shares. We have also
entered into change in control agreements with our directors,
officers, and key employees. These change in control agreements
provide for severance payments to be made in the event of a
change in control of the company. Provisions of Delaware law,
our rights plan, our charter documents, and other arrangements,
including a provision eliminating the ability of stockholders to
take actions by written consent, could delay or make difficult
the removal of our current management or a merger, tender offer
or proxy contest involving us. Further, our stock option and
purchase plans generally provide for the assumption of such
plans or substitution of an equivalent option of a successor
corporation or, alternatively, at the discretion of the board of
directors, exercise of some or all of the option stock,
including non-vested shares, or acceleration of vesting of
shares issued pursuant to stock grants, upon a change of control
or similar event.
22
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market under
the symbol “CNCT.” The following table sets forth for
the periods indicated the low and high closing prices for our
common stock.
| |
|
|
|
|
|
|
|
|
|
| | |
| |
|
High | |
|
Low | |
| | |
|
2003
|
|
|
|
|
|
|
|
|
| |
First Quarter
|
|
$ |
16.75 |
|
|
$ |
12.30 |
|
| |
Second Quarter
|
|
|
18.18 |
|
|
|
14.70 |
|
| |
Third Quarter
|
|
|
18.74 |
|
|
|
14.24 |
|
| |
Fourth Quarter
|
|
|
19.27 |
|
|
|
16.00 |
|
|
2004
|
|
|
|
|
|
|
|
|
| |
First Quarter
|
|
$ |
24.91 |
|
|
$ |
17.69 |
|
| |
Second Quarter
|
|
|
22.60 |
|
|
|
18.59 |
|
| |
Third Quarter
|
|
|
28.09 |
|
|
|
19.46 |
|
| |
Fourth Quarter
|
|
|
29.92 |
|
|
|
20.30 |
|
|
2005
|
|
|
|
|
|
|
|
|
| |
First Quarter
|
|
$ |
27.96 |
|
|
$ |
22.02 |
|
| |
Second Quarter
|
|
$ |
28.99 |
|
|
$ |
15.13 |
|
| |
On July 6, 2005, the closing price of our common stock on
the Nasdaq National Market was $17.77. On May 31, 2005, we
had approximately 132 stockholders of record of our common stock.
We have never declared or paid cash dividends on our common
stock. We currently intend to retain all available funds for use
in our business, and do not anticipate paying any cash dividends
in the foreseeable future.
On March 23, 2005 we repurchased $35.0 million of our
issued and outstanding common stock. We do not have a plan or
program to repurchase shares of our common stock.
RATIO OF EARNINGS TO FIXED CHARGES
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Three Months | |
|
|
| |
|
Ended | |
|
Years Ended December 31, | |
| |
|
March 31, | |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
(In thousands) | |
| | |
|
Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and cumulative change in
accounting principle
|
|
$ |
1,146 |
|
|
$ |
20,508 |
|
|
$ |
(2,933 |
) |
|
$ |
(16,409 |
) |
|
$ |
(16,397 |
) |
|
$ |
33,198 |
|
|
Add: Fixed charges
|
|
|
828 |
|
|
|
2,912 |
|
|
|
1,750 |
|
|
|
161 |
|
|
|
164 |
|
|
|
340 |
|
|
Less: Capitalized interest
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
| |
Earnings
|
|
$ |
1,974 |
|
|
$ |
23,420 |
|
|
$ |
(1,183 |
) |
|
$ |
(16,248 |
) |
|
$ |
(16,233 |
) |
|
$ |
33,538 |
|
| |
|
Fixed Charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expensed
|
|
$ |
575 |
|
|
$ |
2,042 |
|
|
$ |
1,202 |
|
|
$ |
11 |
|
|
$ |
46 |
|
|
$ |
235 |
|
|
Amortization of convertible notes offering costs
|
|
|
196 |
|
|
|
736 |
|
|
|
430 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Estimated interest portion of rent expense(2)
|
|
|
57 |
|
|
|
134 |
|
|
|
118 |
|
|
|
150 |
|
|
|
118 |
|
|
|
105 |
|
| |
| |
Fixed charges
|
|
$ |
828 |
|
|
$ |
2,912 |
|
|
$ |
1,750 |
|
|
$ |
161 |
|
|
$ |
164 |
|
|
$ |
340 |
|
| |
|
Ratio of earnings to fixed charges(1)
|
|
|
2 |
|
|
|
8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
99 |
|
| |
|
|
| (1) |
For purposes of computing this ratio of earnings to fixed
charges, fixed charges consist of interest expense on long-term
debt and capital leases, amortization of deferred financing
costs and that portion of rental expense deemed to be
representative of interest. Earnings consist of income (loss)
before income taxes plus fixed charges. Earnings were
insufficient to cover fixed charges by $2.9 million in
2003, $16.4 million in 2002 and $16.4 million in
2001. |
| |
| (2) |
The estimated interest portion of rent expense for the years
2000 through 2003 has been updated from prior filings. |
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the
notes or common stock offered by the selling securityholders.
23
SELECTED FINANCIAL DATA
You should read Connetics’ selected consolidated financial
data set forth below in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” and our consolidated financial statements and
related notes thereto contained elsewhere in this prospectus.
The selected consolidated statements of operations data for the
years ended December 31, 2004, 2003, and 2002 and the
selected consolidated balance sheet data as of December 31,
2004 and 2003 are derived from our audited consolidated
financial statements contained elsewhere in this prospectus. The
consolidated statements of operations data for the three months
ended March 31, 2005 and 2004 and the consolidated balance
sheet data as of March 31, 2005 are derived from our
unaudited condensed consolidated financial statements contained
elsewhere in this prospectus. The consolidated statements of
operations data for the years ended December 31, 2001 and
2000 and the consolidated balance sheet data as of December
2002, 2001 and 2000 are derived from our audited consolidated
financial statements not included or incorporated by reference
in this prospectus.
Selected Consolidated Financial Data
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Three Months Ended | |
|
Years Ended December 31, | |
| |
|
March 31, | |
|
| |
| |
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Unaudited) | |
|
(Unaudited) | |
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands, except per share amounts) | |
| | |
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Product
|
|
$ |
42,190 |
|
|
$ |
23,566 |
|
|
$ |
142,059 |
|
|
$ |
66,606 |
|
|
$ |
47,573 |
|
|
$ |
30,923 |
|
|
$ |
20,095 |
|
| |
|
Royalty and contract(1)
|
|
|
181 |
|
|
|
1,416 |
|
|
|
2,296 |
|
|
|
8,725 |
|
|
|
5,190 |
|
|
|
3,141 |
|
|
|
20,679 |
|
| |
| |
|
|
Total revenues
|
|
|
42,371 |
|
|
|
24,982 |
|
|
|
144,355 |
|
|
|
75,331 |
|
|
|
52,763 |
|
|
|
34,064 |
|
|
|
40,774 |
|
| |
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Cost of product revenues
|
|
|
3,766 |
|
|
|
1,568 |
|
|
|
12,656 |
|
|
|
5,129 |
|
|
|
4,190 |
|
|
|
3,123 |
|
|
|
3,868 |
|
| |
|
Amortization of intangible assets(2)
|
|
|
3,399 |
|
|
|
1,272 |
|
|
|
11,471 |
|
|
|
819 |
|
|
|
805 |
|
|
|
1,048 |
|
|
|
— |
|
| |
|
Research and development
|
|
|
5,898 |
|
|
|
4,441 |
|
|
|
21,539 |
|
|
|
30,109 |
|
|
|
25,821 |
|
|
|
19,156 |
|
|
|
21,875 |
|
| |
|
Selling, general and administrative
|
|
|
27,809 |
|
|
|
15,293 |
|
|
|
73,206 |
|
|
|
41,781 |
|
|
|
36,819 |
|
|
|
35,014 |
|
|
|
26,673 |
|
| |
|
In-process research and development and milestone payments(3)
|
|
|
— |
|
|
|
— |
|
|
|
3,500 |
|
|
|
— |
|
|
|
4,350 |
|
|
|
1,080 |
|
|
|
— |
|
| |
|
Loss on program termination(4)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
312 |
|
|
|
1,142 |
|
|
|
— |
|
| |
| |
|
|
Total operating expenses
|
|
|
40,872 |
|
|
|
22,574 |
|
|
|
122,372 |
|
|
|
77,838 |
|
|
|
72,297 |
|
|
|
60,563 |
|
|
|
52,416 |
|
| |
| |
|
|
Income (loss) from operations
|
|
|
1,499 |
|
|
|
2,408 |
|
|
|
21,983 |
|
|
|
(2,507 |
) |
|
|
(19,534 |
) |
|
|
(26,499 |
) |
|
|
(11,642 |
) |
| |
Gain on sale of investment(5)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,086 |
|
|
|
122 |
|
|
|
42,967 |
|
| |
Gain on sale of Ridaura product line(6)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8,002 |
|
|
|
— |
|
| |
Interest and other income (expense) net
|
|
|
(353 |
) |
|
|
(292 |
) |
|
|
(1,475 |
) |
|
|
(426 |
) |
|
|
1,039 |
|
|
|
1,978 |
|
|
|
1,873 |
|
| |
24
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Three Months Ended | |
|
Years Ended December 31, | |
| |
|
March 31, | |
|
| |
| |
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Unaudited) | |
|
(Unaudited) | |
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands, except per share amounts) | |
| | |
| |
Income (loss) before income taxes and cumulative effect of a
change in accounting principle
|
|
|
1,146 |
|
|
|
2,116 |
|
|
|
20,508 |
|
|
|
(2,933 |
) |
|
|
(16,409 |
) |
|
|
(16,397 |
) |
|
|
33,198 |
|
| |
Income tax provision
|
|
|
105 |
|
|
|
243 |
|
|
|
1,493 |
|
|
|
1,167 |
|
|
|
181 |
|
|
|
345 |
|
|
|
1,010 |
|
| |
| |
Income (loss) before cumulative effect of change in accounting
principle
|
|
|
1,041 |
|
|
|
1,873 |
|
|
|
19,015 |
|
|
|
(4,100 |
) |
|
|
(16,590 |
) |
|
|
(16,742 |
) |
|
|
32,188 |
|
| |
Cumulative effect of change in accounting principle, net of
tax(7)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5,192 |
) |
| |
| |
Net income (loss)
|
|
$ |
1,041 |
|
|
$ |
1,873 |
|
|
$ |
19,015 |
|
|
$ |
(4,100 |
) |
|
$ |
(16,590 |
) |
|
$ |
(16,742 |
) |
|
$ |
26,996 |
|
| |
|
Basic Earnings Per Share —
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income (loss) per share before cumulative effect of change in
accounting principle
|
|
$ |
0.03 |
|
|
$ |
0.06 |
|
|
$ |
0.54 |
|
|
$ |
(0.13 |
) |
|
$ |
(0.54 |
) |
|
$ |
(0.56 |
) |
|
$ |
1.13 |
|
| |
Cumulative effect of change in accounting principle, net of tax
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.18 |
) |
| |
| |
Net income (loss) per share
|
|
$ |
0.03 |
|
|
$ |
0.06 |
|
|
$ |
0.54 |
|
|
$ |
(0.13 |
) |
|
$ |
(0.54 |
) |
|
$ |
(0.56 |
) |
|
$ |
0.95 |
|
| |
|
Diluted Earnings Per Share —
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income (loss) per share before cumulative effect of change in
accounting principle
|
|
$ |
0.03 |
|
|
$ |
0.05 |
|
|
$ |
0.51 |
|
|
$ |
(0.13 |
) |
|
$ |
(0.54 |
) |
|
$ |
(0.56 |
) |
|
$ |
1.07 |
|
| |
Cumulative effect of change in accounting principle, net of tax
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.17 |
) |
| |
| |
Net income (loss) per share
|
|
$ |
0.03 |
|
|
$ |
0.05 |
|
|
$ |
0.51 |
|
|
$ |
(0.13 |
) |
|
$ |
(0.54 |
) |
|
$ |
(0.56 |
) |
|
$ |
0.90 |
|
| |
| |
Shares used to calculate basic net earnings (loss) per share
|
|
|
35,699 |
|
|
|
33,587 |
|
|
|
35,036 |
|
|
|
31,559 |
|
|
|
30,757 |
|
|
|
29,861 |
|
|
|
28,447 |
|
| |
Shares used to calculate diluted net earnings (loss) per share
|
|
|
38,014 |
|
|
|
35,887 |
|
|
|
37,443 |
|
|
|
31,559 |
|
|
|
30,757 |
|
|
|
29,861 |
|
|
|
30,086 |
|
|
Pro forma amounts assuming the accounting change was applied
retroactively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income (loss)
|
|
$ |
1,041 |
|
|
$ |
1,873 |
|
|
$ |
19,015 |
|
|
$ |
(4,100 |
) |
|
$ |
(16,590 |
) |
|
$ |
(16,742 |
) |
|
$ |
32,188 |
|
| |
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Basic
|
|
$ |
0.03 |
|
|
$ |
0.06 |
|
|
$ |
0.54 |
|
|
$ |
(0.13 |
) |
|
$ |
(0.54 |
) |
|
$ |
(0.56 |
) |
|
$ |
1.13 |
|
| |
|
Diluted
|
|
$ |
0.03 |
|
|
$ |
0.05 |
|
|
$ |
0.51 |
|
|
$ |
(0.13 |
) |
|
$ |
(0.54 |
) |
|
$ |
(0.56 |
) |
|
$ |
1.07 |
|
| |
25
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
|
|
As of December 31, | |
| |
|
As of March 31, | |
|
| |
| |
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Unaudited) | |
|
(Unaudited) | |
|
|
|
|
|
|
|
|
|
|
| |
|
(In thousands, except per share amounts) | |
| | |
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cash, cash equivalents, marketable securities and restricted cash
|
|
$ |
237,814 |
|
|
$ |
44,143 |
|
|
$ |
76,346 |
|
|
$ |
114,966 |
|
|
$ |
33,788 |
|
|
$ |
48,476 |
|
|
$ |
80,184 |
|
| |
Working capital
|
|
|
233,114 |
|
|
|
45,727 |
|
|
|
71,094 |
|
|
|
112,247 |
|
|
|
25,185 |
|
|
|
44,026 |
|
|
|
71,030 |
|
| |
Total assets
|
|
|
414,341 |
|
|
|
212,275 |
|
|
|
245,728 |
|
|
|
145,897 |
|
|
|
59,553 |
|
|
|
72,327 |
|
|
|
85,713 |
|
| |
Convertible senior notes
|
|
|
290,000 |
|
|
|
90,000 |
|
|
|
90,000 |
|
|
|
90,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Total stockholders’ equity
|
|
|
95,457 |
|
|
|
105,390 |
|
|
|
127,920 |
|
|
|
45,754 |
|
|
|
44,743 |
|
|
|
61,354 |
|
|
|
72,606 |
|
| |
|
|
| (1) |
In the second quarter of 2003, we received a one-time royalty
payment from S.C. Johnson in the amount of $2.9 million in
connection with our aerosol spray technology. |
| |
| (2) |
In March 2004, we acquired exclusive U.S. rights to
Soriatane, resulting in an intangible asset that is being
amortized 10 years. Amortization charges for the Soriatane
rights in 2004 were $10.6 million. |
| |
| (3) |
In May 2002, we entered into an agreement with Yamanouchi
Europe, B.V. to license Velac. In connection with this agreement
we paid Yamanouchi an initial $2.0 million licensing fee in
the second quarter of 2002 and recorded another
$2.0 million in the fourth quarter of 2002 when we
initiated the Phase III trial for Velac. In the third
quarter of 2004, we recorded an additional milestone payment of
$3.5 million upon filing an NDA with the FDA. |
| |
| (4) |
In 2001, we recorded a net charge of $1.1 million
representing costs accrued in connection with the reduction in
workforce and the wind down of relaxin development contracts. |
| |
| (5) |
In the fourth quarter of 2000, we recorded a
$43.0 million gain on the sale of securities. |
| |
| (6) |
In April 2001, we sold our rights to Ridaura including
inventory to Prometheus Laboratories, Inc. for $9.0 million
in cash plus a royalty on annual sales in excess of
$4.0 million through March 2006. We recognized a gain of
$8.0 million in connection with the sale of Ridaura. |
| |
| (7) |
Effective January 1, 2000, we changed our method of
accounting for non-refundable license fees in accordance with
Staff Accounting Bulletin 101, “Revenue Recognition in
Financial Statements.” |
26
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated
Financial Statements contained elsewhere in this prospectus.
OVERVIEW
Business Overview
We are a specialty pharmaceutical company that develops and
commercializes innovative products for the dermatology market.
Our products aim to improve the management of dermatological
diseases and provide significant product differentiation. We
have branded our proprietary foam drug delivery vehicle,
VersaFoam®.
Through March 2005 our marketed products were: OLUX, a super
high-potency topical steroid prescribed for the treatment of
steroid responsive dermatological diseases; Luxíq, a
mid-potency topical steroid prescribed for scalp dermatoses such
as psoriasis, eczema and seborrheic dermatitis; Soriatane, an
oral medicine for the treatment of severe psoriasis; and
Evoclintm,
a topical treatment for acne vulgaris. We began selling
Soriatane in March 2004 after we acquired the U.S. product
rights from Roche. We launched Evoclin commercially in December
2004 after we received product approval from the FDA. Revenue
from the new products contributed significantly to our revenue
growth in 2004 and into 2005.
In addition to the new products launched since 2003, other
projects in our research and development pipeline in 2004 and
the first quarter of 2005 included Extina for the treatment of
seborrheic dermatitis, Velac for the treatment of acne, Desilux
(desonide) VersaFoam-EF, 0.05%, a low-potency topical steroid
formulated to treat atopic dermatitis, Primolux (clobetasol
propionate) VersaFoam-EF, 0.05%, a high-potency topical steroid
formulated to treat atopic dermatitis and plaque psoriasis, and
other products in the preclinical development stage. We also
have the rights to a variety of pharmaceutical agents in various
stages of preclinical and clinical development in multiple novel
delivery technologies.
We sell product directly to wholesale distributors and to one
national retail pharmacy chain. Consistent with pharmaceutical
industry patterns, approximately 93% of our product revenues in
2004 were derived from seven major customers.
To enable us to focus on our core sales and marketing
activities, we selectively outsource certain non-sales and
non-marketing functions, such as manufacturing, warehousing and
distribution. Currently DPT and AccraPac manufacture commercial
supplies of OLUX, Luxíq and Evoclin. Roche manufactures
commercial supplies of Soriatane. SPS handles all of our product
distribution activities. As we expand our activities in these
areas, we expect to invest additional financial resources in
managing those outsourced functions.
In November 2004, the FDA notified us that it would not approve
our NDA for Extina. The FDA’s position was based on the
conclusion that, although Extina demonstrated non-inferiority to
the comparator drug currently on the market, it did not
demonstrate statistically significant superiority to placebo
foam. We have continued discussions with the FDA and we expect
to initiate our final Phase III trial for Extina in the
third quarter of 2005. On June 10, 2005, the FDA issued a
non-approvable letter for Velac. The FDA based its decision on
the fact that “a positive carcinogenicity signal was
detected in a Tg.AC mouse dermal carcinogenicity study.”
Based on our clinical trials and our analysis of the mouse
study, we had concluded that the mouse study was not predictive
of human results. We expect to continue working with the FDA to
determine if and how Velac may be approved at some future date.
Summary of Results for 2004 and Three Months Ended
March 31, 2005
In 2004 we completed our first full year of operating
profitability. Our total revenues increased by 92% to
$144.4 million and we generated net income of
$19.0 million or $0.51 per diluted share. We were also
27
profitable for the three months ended March 31, 2005
generating $1.0 million in net income or $0.03 per
diluted share with total revenues of $42.3 million, an
increase of 70% over the same period in the prior year.
Product revenues increased by 113% to $142.1 million in
2004 from $66.6 million in 2003 and by 79% to
$42.2 million for the three months ended March 31,
2005 from $23.6 million for the three months ended
March 31, 2004. The increase was due to the introduction of
two new products, Soriatane and Evoclin, as well as growth from
our two existing products, OLUX and Luxíq.
We significantly increased our direct and indirect promotional
capabilities during 2004. This included hiring 66 sales
professionals, which more than doubled our sales force to 124
professionals at the end of the year and positions Connetics as
a strong commercial force in the dermatology market. Selling,
general, and administrative expenses increased from
$41.8 million in 2003 to $73.2 million in 2004 and
from $15.3 million for the three months ended
March 31, 2004 to $27.8 million for the three months
ended March 31, 2005.
Research and development expenses in 2004 decreased to
$21.5 million from $30.1 million in 2003 primarily due
to the completion of pivotal trials for Velac, Evoclin and
Extina in 2003. However, research and development increased to
$5.9 million for the three months ended March 31, 2005
from $4.4 million in the same period in the prior year
primarily due to increased clinical trial activity and headcount.
We generated cash from operations of $29.7 million in 2004,
compared to using $8.5 million of cash in operations in
2003. In addition to the cash provided by operations, our most
significant changes in cash flow during 2004 were the use of
$123.5 million to acquire Soriatane product rights and
$56.9 million of net proceeds from a private placement of
common stock. For the three months ended March 31, 2005, we
generated cash from operations of $2.3 million, compared to
using $5.2 million for operations from the same period in
the prior year. Other significant changes to cash in the three
months ended March 31, 2005 included $194 million from
the issuance of convertible debt partially offset by
$35 million used to repurchase our common stock. Our
working capital was $71.1 million at the end of 2004
compared to $112.2 million at the end of 2003. Our working
capital was $233.1 million at March 31, 2005.
CERTAIN EVENTS IN 2004 AND 2005
During 2004, we filed NDA’s with the FDA for our product
candidates Extina, a foam formulation of a 2% concentration of
the antifungal drug ketoconazole, for the treatment of
seborrheic dermatitis, and Velac, a combination of 1%
clindamycin and 0.025% tretinoin, for the treatment of acne. We
also commenced Phase III clinical trials for our product
candidate, Desilux, a low-potency topical steroid, formulated
with 0.05% desonide in our proprietary emollient foam delivery
vehicle. In the first quarter of 2005, we commenced
Phase III clinical trials for our product candidate,
Primolux, a high-potency topical steroid formulated to treat
atopic dermatitis and plaque psoriasis.
In February 2004, we completed the sale of 3.0 million
shares of our common stock in a private offering to certain
accredited investors at a price of $20.25 per share for net
proceeds of $56.9 million. We used the proceeds from this
offering to acquire the exclusive U.S. rights to
Roche’s Soriatane, which we completed in March 2004.
Including the purchase price of $123.0 million, assumed
liabilities of $4.1 million and transaction costs of
$529,000, we recorded an intangible asset of approximately
$127.7 million related to the Soriatane acquisition, which
we are amortizing over an estimated useful life of
10 years. In July 2004, we entered into a multi-year
consent with Roche to sell Soriatane to a U.S.-based distributor
that exports branded pharmaceutical products to select
international markets. Product sold to this distributor is not
permitted to be resold in the U.S. Under the terms of the
agreement, we will pay a royalty to Roche on Soriatane sales
made during the term of the agreement to this distributor.
In March 2004, we entered into an agreement with UCB Pharma, a
subsidiary of UCB Group, pursuant to which we authorized UCB
Pharma to promote OLUX and Luxíq to a segment of
U.S. PCP’s. In September 2004, in connection with UCB
Pharma’s acquisition of Celltech plc, UCB notified us that
it
28
intended to discontinue the co-promotion agreement, effective
March 31, 2005. UCB will continue to promote OLUX and
Luxíq until then. Through the end of the promotion period,
UCB’s focus will be on approximately 10% of PCP’s who
are active prescribers of dermatology products, including OLUX
and Luxíq. The purpose of the co-promotion agreement is to
ensure appropriate use of OLUX and Luxíq with the current
PCP users and to build value for the OLUX and Luxíq brands.
We estimate that before we entered into the agreement with UCB
Pharma, PCP’s wrote approximately 15% of prescriptions for
OLUX and Luxíq, even though we have promoted primarily to
dermatologists. We pay UCB a fee based on prescriptions written
by targeted PCP’s which is recorded as an expense in
selling general and administrative expense. UCB bears the
marketing costs for promoting the products (including product
samples, marketing materials, etc.). We will not have any
financial obligation to UCB on prescriptions generated by
PCP’s after March 31, 2005.
In August 2004, we submitted an NDA for Velac (1% clindamycin
and 0.025% tretinoin) with the FDA and, in October 2004, we
received notification that the FDA accepted the NDA for filing
as of August 23, 2004. For the three months ended
September 30, 2004, we recorded a $3.5 million fee due
to the licensor upon the filing of the NDA. Because the product
has not been approved and has no alternative future use, we
recorded the fee as an in-process research and development and
milestone expense. Under the terms of the license agreement we
entered into in 2002 with Yamanouchi Europe B.V., we hold
exclusive rights to develop and commercialize Velac in the U.S.
and Canada and non-exclusive rights in Mexico.
In September 2004, we licensed to Pierre Fabre Dermatologie
exclusive commercial rights to OLUX for Europe, excluding Italy
and the U.K. where the product is licensed to Mipharm S.p.A. The
license agreement with Pierre Fabre also grants marketing rights
for certain countries in South America and Africa. Pierre Fabre
will market the product under different trade names. Under the
terms of the license, we received an upfront license payment of
$250,000 and we will receive milestone payments and royalties on
product sales. Pierre Fabre will be responsible for costs
associated with product manufacturing, sales, marketing and
distribution in its licensed territories. As part of the
agreement, we also negotiated a right-of-first-refusal in the
U.S. to an early-stage, innovative dermatology product
currently under development by Pierre Fabre. Pierre Fabre
anticipates an initial launch of OLUX in select European markets
in mid-2005.
In October 2004, we received approval from the FDA for Evoclin
(clindamycin) Foam, 1% for the treatment of acne vulgaris.
Evoclin is delivered in our proprietary VersaFoam vehicle. In
anticipation of the commercial launch of Evoclin, we hired 66
sales professionals in November 2004 and we announced the
commercial launch of the product in December 2004 with the
availability of 50g and 100g trade unit sizes.
In November 2004, the FDA notified us that it would not approve
Extina. The FDA’s position was based on the conclusion
that, although Extina demonstrated non-inferiority to the
comparator drug currently on the market, it did not demonstrate
statistically significant superiority to placebo foam. We have
continued discussions with the FDA and we announced on
June 8, 2005 that we will resume development of Extina by
initiating a final Phase III trial intended to demonstrate
that Extina is superior to placebo foam. We expect to commence
the Phase III clinical trial in the third quarter of 2005
and expect to resubmit the NDA for Extina to the FDA by the end
of 2006.
In November 2004 we announced that Medicis informed us that it
has in-licensed rights to an issued patent that it asserts will
be infringed by our product candidate Velac. Based on our prior
review of the Medicis licensed patent, we believe that Velac
will not infringe the patent assuming the patent is valid. While
we are not aware of any legal filings related to this assertion
by the patent holder or Medicis, we believe, based on
information publicly available on the USPTO website, that the
inventor named on the patent has filed a Reissue Patent
Application with the USPTO. To our knowledge, the USPTO has not
formally announced the filing of the reissue application in the
Official Gazette as of the date of this prospectus.
29
In March 2005, we completed a private placement of convertible
senior notes maturing March 30, 2015 in the principal
amount of $200 million to qualified institutional buyers.
We received net cash proceeds of approximately $159 million
after expenses and net of approximately $35 million used to
repurchase our common stock. The notes are convertible into cash
and, under specified circumstances, shares of common stock at an
initial conversion price of approximately $35.46 per share.
We expect to use the net proceeds from the sale of the notes for
general corporate purposes, including potential future product
or company acquisitions, capital expenditures, and working
capital.
In April 2005, we entered into an agreement with Ventiv Pharma
Services, LLC, or VPS, a subsidiary of Ventiv Health, Inc.,
under which VPS will provide sales support for certain of our
products to primary care physicians and pediatricians. Product
sales activities under this agreement commenced in mid-April.
VPS will promote OLUX, Luxíq and Evoclin. We will record
100% of the revenue from product sales generated by promotional
efforts of VPS. We will pay VPS a fee for the personnel
providing the promotional efforts and bear the marketing costs
for promoting the products including product samples and
marketing materials.
On June 13, 2005, we announced that the FDA has issued a
non-approvable letter dated June 10, 2005 for Velac. The
FDA based its decision on the fact that “a positive
carcinogenicity signal was detected in a Tg.AC mouse dermal
carcinogenicity study.” We saw no signs in our clinical
trials that the mouse study was predictive of human results. We
expect to continue working with the FDA to determine if and how
Velac may be approved at some future date.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements are prepared in accordance
with generally accepted accounting principles in the United
States, or GAAP. These accounting principles require us to make
certain estimates, judgments and assumptions. We believe that
the estimates, judgments and assumptions upon which we rely are
reasonable based upon information available to us at the time
that they are made. These estimates, judgments and assumptions
can affect the reported amounts of assets and liabilities as of
the date of the financial statements, as well as the reported
amounts of revenues and expenses during the periods presented.
To the extent there are material differences between these
estimates, judgments or assumptions and actual results, our
financial statements will be affected.
Our senior management has reviewed these critical accounting
policies and related disclosures with our Audit Committee. Our
significant accounting policies are described in Note 2 to
the Consolidated Financial Statements for the year ended
December 31, 2004 and Note 1 to the Condensed
Consolidated Financial Statements for the three months ended
March 31, 2005 included in this prospectus. We believe the
following critical accounting policies affect our more
significant judgments, assumptions, and estimates used in the
preparation of our condensed consolidated financial statements,
and therefore are important in understanding our financial
condition and results of operations.
Revenue Recognition — Reserves for Discounts,
Returns, Rebates and Chargebacks
We recognize product revenue net of allowances for estimated
discounts, returns, rebates and chargebacks. We allow a discount
for prompt payment. We estimate these allowances based primarily
on our past experience. We also consider the volume and price
mix of products in the retail channel, trends in distributor
inventory, economic trends that might impact patient demand for
our products (including competitive environment), and other
factors.
We accept from customers the return of pharmaceuticals that are
within six months before their expiration date. As a practice,
we avoid shipping product that has less than 10 months
dating. We authorize returns for damaged products and exchanges
for expired products in accordance with our returned goods
policy and procedures. We monitor inventories in the distributor
channel to help us assess the rate of return.
30
We establish and monitor reserves for rebates payable by us to
managed care organizations and state Medicaid programs.
Generally, we pay managed care organizations and state Medicaid
programs a rebate on the prescriptions filled that are covered
by the respective programs with us. We determine the reserve
amount at the time of the sale based on our best estimate of the
expected prescription fill rate to managed care and state
Medicaid patients, adjusted to reflect historical experience and
known changes in the factors that impact such reserves.
In the past, actual discounts, returns, rebates and chargebacks
have not generally exceeded our reserves. However, the rates and
amount in future periods are inherently uncertain. Our revenue
reserve rate was approximately 17% of our gross product revenues
for 2004 compared to 14% in 2003, reflecting the higher reserve
requirements for Soriatane. If future rates and amounts are
significantly greater than the reserves we have established, the
actual results would decrease our reported revenue; conversely,
if actual returns, rebates and chargebacks are significantly
less than our reserves, this would increase our reported
revenue. If we changed our assumptions and estimates, our
revenue reserves would change, which would impact the net
revenue we report.
Goodwill, Purchased Intangibles and Other Long-Lived
Assets — Impairment Assessments
We have in the past made acquisitions of products and businesses
that include goodwill, license agreements, product rights, and
other identifiable intangible assets. We assess goodwill for
impairment in accordance with Statement of Financial Accounting
Standards No. 142, “Goodwill and other Intangible
Assets,” or SFAS 142, which requires that goodwill be
tested for impairment at the “reporting unit level”
(“reporting unit”) at least annually and more
frequently upon the occurrence of certain events, as defined by
SFAS 142. Consistent with our determination that we have
only one reporting segment, we have determined that there is
only one reporting unit, specifically the sale of specialty
pharmaceutical products for dermatological diseases. We test
goodwill for impairment in the annual impairment test on
October 1 using the two-step process required by
SFAS 142. First, we review the carrying amount of the
reporting unit compared to the “fair value” of the
reporting unit based on quoted market prices of our common stock
and on discounted cash flows based on analyses prepared by
management. An excess carrying value compared to fair value
would indicate that goodwill may be impaired. Second, if we
determine that goodwill may be impaired, then we compare the
“implied fair value” of the goodwill, as defined by
SFAS 142, to its carrying amount to determine the
impairment loss, if any. Based on these estimates, we determined
that as of October 1, 2004 there was no impairment of
goodwill. Since October 1, 2004, there have been no
indications of impairment and the next annual impairment test
will occur as of October 1, 2005.
In accordance with Statement of Financial Accounting Standards
No. 144, “Accounting for Impairment or Disposal of
Long-Lived Assets,” or SFAS 144, we evaluate purchased
intangibles and other long-lived assets, other than goodwill,
for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be
recoverable based on expected undiscounted cash flows
attributable to that asset. The amount of any impairment is
measured as the difference between the carrying value and the
fair value of the impaired asset. We have not recorded any
impairment charges for long-lived intangible assets for the
three years ended December 31, 2004.
Assumptions and estimates about future values and remaining
useful lives are complex and often subjective. They can be
affected by a variety of factors, including external factors
such as industry and economic trends, and internal factors such
as changes in our business strategy and our internal forecasts.
Although we believe the assumptions and estimates we have made
in the past have been reasonable and appropriate, different
assumptions and estimates could materially impact our reported
financial results. Accordingly, future changes in market
capitalization or estimates used in discounted cash flows
analyses could result in significantly different fair values of
the reporting unit, which may result in impairment of goodwill.
31
Income Taxes
We recognize deferred tax assets and liabilities for temporary
differences between the financial reporting basis and the tax
basis of our assets and liabilities. We record valuation
allowances against our deferred tax assets to reduce the net
carrying value to an amount that management believes is more
likely than not to be realized.
Our income tax provision is determined using an annual effective
tax rate, which is generally less than the U.S. Federal
statutory rate, primarily because of tax deductions and
operating loss carryforwards available in the United States. Our
effective tax rate may be subject to fluctuations during the
fiscal year as we obtain new information that may affect the
assumptions we use to estimate our annual effective tax rate,
including factors such as our mix of pre-tax earnings in the
various tax jurisdictions in which we operate, valuation
allowances against deferred tax assets, utilization of tax
credits and changes in tax laws in jurisdictions where we
conduct operations.
In 2004 we experienced a full year of profitability. In prior
years, we recorded an income tax provision primarily based on
the foreign operations of our subsidiary in Australia, while
experiencing losses for our U.S. operations. As a result,
we have some remaining operating losses to carryforward and
partially offset future domestic profits, if and when earned.
The deferred tax asset resulting from the operating loss carry
forwards is offset by a valuation allowance until we meet
certain specific tests regarding continued profitability. Our
effective tax rate and the related income tax provision may
increase significantly in the future after the operating loss
carryforwards have been exhausted.
RESULTS OF OPERATIONS
Three Months ended March 31, 2005 and 2004
Revenues
| |
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Three Months Ended | |
| |
|
March 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
| |
|
(In thousands) | |
| | |
|
Product revenues:
|
|
|
|
|
|
|
|
|
| |
Soriatane
|
|
$ |
17,581 |
|
|
$ |
3,640 |
|
| |
OLUX
|
|
|
15,792 |
|
|
|
14,370 |
|
| |
Luxíq
|
|
|
5,654 |
|
|
|
5,471 |
|
| |
Evoclin
|
|
|
3,067 |
|
|
|
— |
|
| |
Other
|
|
|
96 |
|
|
|
85 |
|
| |
| |
|
Total product revenues
|
|
|
42,190 |
|
|
|
23,566 |
|
|
Royalty and contract:
|
|
|
|
|
|
|
|
|
| |
Royalty
|
|
|
98 |
|
|
|
1,353 |
|
| |
Contract
|
|
|
83 |
|
|
|
63 |
|
| |
| |
|
Total royalty and contract revenues
|
|
|
181 |
|
|
|
1,416 |
|
| |
| |
|
Total revenues
|
|
$ |
42,371 |
|
|
$ |
24,982 |
|
| |
Our product revenues were $42.2 million for the three
months ended March 31, 2005, compared to $23.6 million
for the three months ended March 31, 2004. Total product
revenues increased $18.6 million or 79% in the first three
months of 2005 as compared to the same period in 2004. The
introduction of two new products, Soriatane in March 2004 and
Evoclin in December 2004, accounted for 91% of the increase in
product revenues. For our other marketed products, primarily
OLUX and Luxíq, increased sales volumes accounted for 6% of
the increase in total product revenues and higher sales prices
accounted for the remaining 3%. During the three months ended
March 31, 2005, we recorded an increase in revenue of
$445,000 related to the reduction of certain revenue reserves
recorded on sales of Soriatane through December 31, 2004.
We reduced the reserves to reflect our actual experience of
chargebacks processed since the acquisition of the Soriatane
product rights.
32
Royalty and contract revenues were $0.2 million for the
three months ended March 31, 2005, compared to
$1.4 million for the three months ended March 31,
2004. Royalty and contract revenues were lower for the first
quarter of 2005 compared to the same period in the prior year
due to the final royalty payment of $1.2 million made by
S.C. Johnson in the first quarter of 2004.
Cost of Product Revenues
Our cost of product revenues includes the third party costs of
manufacturing OLUX, Luxíq and Evoclin, the cost of
Soriatane inventory acquired from Roche, depreciation costs
associated with Connetics-owned equipment located at the DPT
facility in Texas, allocation of overhead, royalty payments
based on a percentage of our product revenues, product freight
and distribution costs from SPS and certain manufacturing
support and quality assurance costs.
We recorded cost of product revenues of $3.8 million for
the three months ended March 31, 2005, compared to
$1.6 million for the three months ended March 31,
2004, for an increase of $2.2 million or 138%. The increase
was primarily due to $0.7 million of increased production
costs relating to our new products Soriatane and Evoclin,
$0.7 million of increased royalty payments resulting
primarily from royalties paid on Soriatane sales to a U.S.-based
distributor that exports branded pharmaceuticals to select
international markets, and $0.8 million of increased
overhead costs allocated to cost of finished goods sold.
Amortization of Intangible Assets
We recorded amortization expenses of $3.4 million for the
three months ended March 31, 2005, compared to
$1.3 million for the three months ended March 31,
2004, for an increase of $2.1 million. The increase is the
result of a full quarter’s amortization in the first
quarter of 2005 of the Soriatane product rights acquired in
March 2004.
Research and Development
Research and development expenses include costs of personnel to
support our research and development activities, costs of
preclinical studies, costs of conducting our clinical trials
(such as clinical investigator fees, monitoring costs, data
management and drug supply costs), external research programs,
and an allocation of facilities costs. Year to year changes in
research and development expenses are primarily due to the
timing of and sample sizes required for particular trials.
For the three months ended March 31, 2005, research and
development costs increased to $5.9 million from
$4.4 million in the same period in 2004, for an increase of
$1.5 million or 34%. The increase is primarily attributable
to $0.8 million for increased clinical trial activity in
2005 as compared to 2004 and $0.6 million due to increased
headcount costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include sales and
marketing activities as well as expenses and costs associated
with finance, legal, insurance, marketing, sales, and other
administrative matters. Selling, general and administrative
expenses were $27.8 million for the three months ended
March 31, 2005, compared to $15.3 million for the
comparable period in 2004. The increase consists of
$5.2 million in increased direct and indirect promotional
activities, $1.5 million in increased headcount costs in
the marketing, general and administrative departments,
$2.9 million in marketing and sales expenses such as
tradeshows, advertising and conventions and $1.0 million in
increased product samples and market research costs.
Interest and other income (expense), net
Interest income was $0.5 million for the three months ended
March 31, 2005, compared to $0.3 million for the three
months ended March 31, 2004. The increase in interest
income was primarily due to higher market interest rates on
investments. The investment proceeds from the March 2005 sale of
convertible senior notes had an insignificant effect on interest
income in the quarter.
33
Interest expense was $0.8 million for the three months
ended March 31, 2005, compared to $0.7 million for the
same period in 2004. The increase in interest expense was
primarily due to the sale of convertible senior notes in March
2005.
Income Taxes
We recognized an income tax expense of $0.1 million for the
three months ended March 31, 2005 primarily related to
U.S. Federal income taxes. For the three months ended
March 31, 2004, we recognized an income tax expense of
$0.2 million primarily related to foreign income taxes on
our activities in Australia.
Years Ended December 31, 2004, 2003 and 2002
Revenues
We recognize product revenues net of allowances for estimated
discounts, returns, rebates and chargebacks.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
$ | |
|
% Change | |
|
$ | |
|
% Change | |
|
$ | |
| |
|
(Dollars in thousands) | |
| | |
|
Product revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
OLUX
|
|
$ |
61,894 |
|
|
|
30% |
|
|
$ |
47,538 |
|
|
|
47% |
|
|
$ |
32,339 |
|
| |
Luxíq
|
|
|
23,582 |
|
|
|
25% |
|
|
|
18,857 |
|
|
|
25% |
|
|
|
15,042 |
|
| |
Soriatane
|
|
|
53,567 |
|
|
|
100% |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Evoclin
|
|
|
2,883 |
|
|
|
100% |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Other
|
|
|
133 |
|
|
|
(37)% |
|
|
|
211 |
|
|
|
10% |
|
|
|
192 |
|
| |
| |
|
Total product revenues
|
|
|
142,059 |
|
|
|
113% |
|
|
|
66,606 |
|
|
|
40% |
|
|
|
47,573 |
|
|
Royalty and contract revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Royalty
|
|
|
1,839 |
|
|
|
(76)% |
|
|
|
7,788 |
|
|
|
166% |
|
|
|
2,926 |
|
| |
Contract
|
|
|
457 |
|
|
|
(51)% |
|
|
|
937 |
|
|
|
(59)% |
|
|
|
2,264 |
|
| |
| |
|
Total royalty and contract revenues
|
|
|
2,296 |
|
|
|
(74)% |
|
|
|
8,725 |
|
|
|
68% |
|
|
|
5,190 |
|
| |
| |
|
Total revenues
|
|
$ |
144,355 |
|
|
|
92% |
|
|
$ |
75,331 |
|
|
|
43% |
|
|
$ |
52,763 |
|
| |
Our product revenues increased to $142.1 million in 2004
from $66.6 million in 2003. The increase in product
revenues reflects the introduction of two new products in 2004,
Soriatane in March and Evoclin in December, and, to a lesser
extent, increases in sales volume and sales prices for existing
products. Of the 113% increase in revenues, 84% is attributable
to the introduction of the new products, 17% to increases in the
prices of existing products, and 12% to increased sales volumes
on existing products. Net product revenues increased to
$66.6 million in 2003 from $47.6 million in 2002.
Increased sales volumes for OLUX and Luxíq in 2003
accounted for 64% of this increase and increases in pricing
accounted for the remaining 36% of this increase.
During the first half of 2004, we made a decision to bring in
house the function of Contract Administration responsibility for
the calculation and related reporting of all allowances and
discounts for which Managed care plans and Medicaid programs are
eligible. Previously we utilized third parties to perform the
allowance calculation and related reporting. In connection with
this change we performed a comprehensive review of our
calculation for Medicaid product pricing allowances, which
resulted in an adjustment to reserves recorded in prior periods.
As a result, we recorded a one-time reduction of product
revenues in the amount of $564,000 in the second quarter of
2004. We have determined that the effect of this change in
estimate would not have had a material impact on our previously
issued financial statements.
Royalty and contract revenues decreased to $2.3 million in
2004 from $8.7 million in 2003. The $6.4 million
decrease was primarily due to the termination of the S.C.
Johnson royalty agreement related to a concentrated aerosol foam
spray in the first quarter of 2004. Royalties received from S.C.
Johnson
34
totaled $1.2 million in 2004 and $7.0 million in 2003,
which included a one-time royalty payment of $2.9 million.
Additionally, in 2003 we recognized $761,000 of relaxin-related
revenue associated with the execution of the agreement with BAS
Medical, Inc. in July 2003. Of the relaxin-related revenue,
$661,000 represented previously deferred revenue associated with
license agreements with other third-parties that was fully
recognized upon the execution of the BAS Medical agreement. We
did not receive any relaxin-related revenue in 2004 and do not
expect any in the future.
Royalty and contract revenues increased to $8.7 million in
2003 from $5.2 million in 2002. The increase was primarily
due to royalties received in connection with the S.C. Johnson
license agreement in the amount of $7.0 million in 2003,
compared to $2.4 million in 2002. The recognition of
$761,000 in relaxin-related revenue in 2003 also contributed to
the increase over 2002. These increases were partially offset by
decreases in contract revenue from other third parties related
to one-time contract payments made in 2002, including an initial
fee of $1.0 million received from Pharmacia Corporation
(now Pfizer) to license certain rights related to our foam drug
delivery technology and $580,000 paid by Novartis to exercise an
option to expand their license.
We expect that product revenues will increase in 2005, although
at a slower rate than in 2004, due to continued sales growth of
all of our products and the effect of having a full year of
revenue for Soriatane, which we acquired in March 2004, and
Evoclin, which we launched in December 2004. In 2005, we
anticipate that royalty and contract revenues will be flat to
slightly down due to the absence of the royalties from S.C.
Johnson. However, in 2005 and beyond, contract revenue may
fluctuate depending on whether we enter into additional
collaborations, when and whether we or our partners achieve
milestones under existing agreements, and the timing of any new
business opportunities that we may identify.
Cost of Product Revenues
Our cost of product revenues includes the third party costs of
manufacturing OLUX, Luxíq and Evoclin, the cost of
Soriatane inventory acquired from Roche, depreciation costs
associated with Connetics-owned equipment located at the DPT
facility in Texas, allocation of overhead, royalty payments
based on a percentage of our product revenues, product freight
and distribution costs from SPS and certain manufacturing
support and quality assurance costs.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
As a % of Net | |
|
|
|
As a % of Net | |
|
|
|
As a % of Net | |
| |
|
|
|
Product | |
|
|
|
Product | |
|
|
|
Product | |
| |
|
$ | |
|
Revenues | |
|
$ | |
|
Revenues | |
|
$ | |
|
Revenues | |
| |
|
(Dollars in thousands) | |
| | |
|
Cost of product revenues
|
|
$ |
12,656 |
|
|
|
9 |
% |
|
$ |
5,129 |
|
|
|
8 |
% |
|
$ |
4,190 |
|
|
|
9 |
% |
| |
Our cost of product revenues increased to $12.7 million in
2004 from $5.1 million in 2003. The increase included
$2.4 million for increased product revenues,
$4.1 million due to increased royalty payments resulting
primarily from royalties paid on Soriatane sales to a U.S.-based
distributor that exports branded pharmaceutical products to
select international markets, and $1.1 million as a result
of the allocation of costs previously categorized as research
and development.
Before January 1, 2004, inventory and cost of goods sold
only captured third party product manufacturing costs,
depreciation on Connetics-owned equipment at our third-party
manufacturers, product freight and distribution costs from the
third party that handles all of our product distribution
activities and royalties. Effective January 1, 2004, we
began including certain manufacturing support and quality
assurance costs in the cost of finished goods inventory and
samples inventory which had previously been classified as
research and development expense. Those activities include
overseeing third party manufacturing, process development,
quality assurance and quality control activities. We have
determined that the effect of this change in accounting would
not have had a material impact on our financial statements in
any prior quarterly or annual period. For the year ended
December 31, 2004, we allocated $4.6 million of costs
which
35
in previous years would have been included in research and
development, or R&D, expense as follows:
(1) $1.1 million to cost of goods sold;
(2) $1.0 million to selling expense;
(3) $2.1 million to the value of commercial inventory;
and, (4) $324,000 to the value of samples inventory.
Cost of product revenues increased to $5.1 million in 2003
from $4.2 million in 2002. The increase is primarily
attributable to the increase in sales volume of our products, as
well as the establishment of a $262,000 reserve recorded during
2003 related to minimum purchase commitments under an agreement
with DPT. If the effects of the $262,000 reserve are excluded,
we experienced a slight improvement in our gross product margin
due to the combined effects of the price increases for OLUX and
Luxíq, effective in the fourth quarter 2002 and the second
quarter 2003, and slightly lower cost of manufacturing our
products.
In 2005, we expect the cost of product revenues as a percentage
of revenue to trend marginally higher due to an increased
proportion of sales coming from products with higher royalty
rates.
Amortization of Intangible Assets
We amortize certain identifiable intangible assets, primarily
product rights, over the estimated life of the asset.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
$ | |
|
% Change | |
|
$ | |
|
% Change | |
|
$ | |
| |
|
(Dollars in thousands) | |
| | |
|
Amortization of intangible assets
|
|
$ |
11,471 |
|
|
|
NM |
|
|
$ |
819 |
|
|
|
2 |
% |
|
$ |
805 |
|
| |
In the first quarter of 2004, we entered into an agreement to
acquire exclusive U.S. rights to Soriatane which resulted
in recording $127.7 million in intangible assets. We are
amortizing the related intangible assets over an estimated
useful life of 10 years. Amortization expense in 2004
included 10 months of amortization related to Soriatane
totaling $10.6 million, which is the primary reason for the
increase over 2003.
In 2005 we will record a full year of amortization for the
Soriatane intangible assets totaling approximately
$12.8 million, resulting in an increase in amortization
expense of $2.2 million over 2004.
Research and Development
Research and development expenses include costs of personnel to
support our research and development activities, costs of
pre-clinical studies, costs of conducting our clinical trials
(such as clinical investigator fees, monitoring costs, data
management and drug supply costs), external research programs
and an allocation of facilities costs.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
$ | |
|
% Change | |
|
$ | |
|
% Change | |
|
$ | |
| |
|
(Dollars in thousands) | |
| | |
|
Research and development expenses
|
|
$ |
21,539 |
|
|
|
(29 |
)% |
|
$ |
30,109 |
|
|
|
17 |
% |
|
$ |
25,821 |
|
| |
As noted above under Cost of Product Revenues, for the year
ended December 31, 2004, we allocated $4.6 million of
costs, which in previous years would have been included in
R&D expense, to cost of goods sold, sales expense, and the
values of commercial and samples of inventory. R&D expense
for 2004 before the allocation was $26.1 million or
$4.0 million less than in 2003.
Year to year changes in research and development expenses are
primarily due to the timing of and sample sizes required for
particular trials. The increase in expenses in 2003 compared to
2002 and the subsequent decrease in 2004 are primarily due to
the timing and completion of pivotal trials for Extina, Evoclin,
and Velac in 2003, as noted in the “Preclinical and
clinical research in the development of new dermatology
products” category in the table below. The reduction in
2004 is also due to the allocation of research and development
expenses as noted above, partially offset by $514,000 related to
the write-off of the Extina finished goods inventory in late
2004.
36
Our research and development expenses, including the
$4.6 million allocated to other accounts in 2004, primarily
consisted of:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| Category |
|
(In millions) | |
| | |
|
Preclinical and clinical research in the development of new
dermatology products
|
|
$ |
6.4 |
|
|
$ |
13.0 |
|
|
$ |
7.4 |
|
|
Quality assurance and quality control in the maintenance and
enhancement of existing dermatology products
|
|
|
4.9 |
|
|
|
5.2 |
|
|
|
5.1 |
|
|
Optimization of manufacturing and process development for
existing dermatology products
|
|
|
2.7 |
|
|
|
2.8 |
|
|
|
3.9 |
|
|
Manufacturing, process development and optimization of
dermatology products under development
|
|
|
3.6 |
|
|
|
2.1 |
|
|
|
2.7 |
|
|
Quality assurance and quality control in the development of new
dermatology products
|
|
|
1.8 |
|
|
|
2.0 |
|
|
|
1.9 |
|
|
Basic research and formulation of new dermatology products
|
|
|
1.6 |
|
|
|
1.3 |
|
|
|
1.3 |
|
|
Regulatory review of new and existing dermatology products
|
|
|
2.7 |
|
|
|
1.6 |
|
|
|
1.1 |
|
| |
The following table sets forth the status of, and costs
attributable to, our product candidates currently in clinical
trials as well as other current research and development
programs. The actual timing of completion of phases of research
could differ materially from the estimates provided in the table.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Estimated Completion | |
| |
|
Accumulated Program of Phase III | |
| |
|
Related Research and Development | |
| |
|
| |
| |
|
Phase of | |
|
|
| Description/Indication |
|
Development | |
|
Clinical Trials | |
|
Expenses through 2004 | |
| | |
|
Velac, a gel formulation of clindamycin and tretinoin for the
treatment of acne (excluding license and milestone payments to
Yamanouchi) |
|
|
NDA filed |
|
|
|
Completed |
|
|
$ |
15.6 million |
|
|
Desiluxtm
(desonide), VersaFoam-EF, 0.05%, a low-potency
topical steroid formulated to treat atopic dermatitis |
|
|
Phase III |
|
|
|
late-2005 |
|
|
$ |
2.8 million |
|
|
OLUX (clobetasol propionate) VersaFoam-EF, 0.05%, a high-potency
topical steroid formulated to treat atopic dermatitis and plaque
psoriasis |
|
|
Preclinical |
|
|
|
late-2005 |
|
|
$ |
1.3 million |
|
|
Preclinical research and development for multiple dermatological
indications |
|
|
Preclinical |
|
|
|
N/A |
|
|
$ |
1.6 million |
|
| |
In general, we expect research and development expenses to
increase significantly in 2005 due to additional research and
clinical trials. Consistent with our 4:2:1 development model, we
have a minimum of four product candidates in product
formulation, at least two in late-stage clinical trials and we
expect to launch one new product or indication commercially in
2005. Pharmaceutical products that we develop internally can
take several years to research, develop and bring to market in
the U.S. We cannot reliably estimate the overall completion
dates or total costs to complete our major research and
development programs. The clinical development portion of these
programs can span several years and any estimation of completion
dates or costs to complete would be highly speculative and
subjective due to the numerous risks and uncertainties
associated with developing pharmaceutical products. The FDA
defines the steps required to develop a drug in the
U.S. Clinical development typically involves three phases
of study, and the most significant costs associated with
clinical development are the Phase III trials as they tend
to be the longest and largest studies conducted during the drug
development process. The lengthy process of seeking these
approvals, and the subsequent compliance with applicable
statutes and regulations, require the expenditure of substantial
resources. If we fail to obtain, or experience any delay in
obtaining, regulatory approval, it could materially adversely
affect our business. For additional discussion of the risks and
uncertainties associated with completing development of
potential products, see “Risks Related to Our
Products — We cannot sell our current products and
product candidates if we do not obtain and maintain
37
governmental approvals,” “— We may spend a
significant amount of money to obtain FDA and other regulatory
approvals, which may never be granted,” “—The
expenses associated with our clinical trials are significant. We
rely on third parties to conduct clinical trials for our product
candidates, and those third parties may not perform
satisfactorily,” and “— Our continued growth
depends on our ability to develop new products, and if we are
unable to develop new products, our expenses may exceed our
revenues without any return on the investment.”
Selling, General and Administrative Expenses
Selling, general and administrative expenses include expenses
and costs associated with finance, legal, insurance, marketing,
sales, and other administrative matters.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
$ | |
|
% Change | |
|
$ | |
|
% Change | |
|
$ | |
| |
|
(Dollars in thousands) | |
| | |
|
Selling, general and administrative expenses
|
|
$ |
73,206 |
|
|
|
75% |
|
|
$ |
41,781 |
|
|
|
13% |
|
|
$ |
36,819 |
|
| |
Selling, general and administrative expenses increased to
$73.2 million in 2004 from $41.8 million in 2003. The
increase was primarily due to:
|
|
|
| |
• |
increased direct and indirect promotional capabilities
($11.0 million), |
| |
| |
• |
increased marketing and sales activities such as advertising,
tradeshows and conventions ($4.1 million), |
| |
| |
• |
increased labor and benefit expenses, primarily due to increased
headcount in the marketing, general and administrative
departments ($2.4 million), |
| |
| |
• |
increased expenses related to product sampling
($1.8 million), |
| |
| |
• |
increased outside legal, audit and tax expenses
($1.9 million), and |
| |
| |
• |
increased business insurance costs ($1.1 million). |
Selling, general and administrative expenses increased to
$41.8 million in 2003 from $36.8 million in 2002. The
increase was primarily due to:
|
|
|
| |
• |
increased labor and benefit expenses due to increased headcount
($2.3 million), |
| |
| |
• |
increased expenses related to product sampling and sales
promotion programs ($1.8 million), |
| |
| |
• |
increased cost of outside service and other fees primarily
related to warehousing, distribution and production of sales and
marketing materials ($600,000), |
| |
| |
• |
increased business development activities ($250,000), and |
| |
| |
• |
increased outside legal expenses incurred ($185,000). |
Those increases were partially offset by a $662,000 decrease in
various marketing activities such as tradeshows, honorariums,
and medical education.
We expect selling, general and administrative expenses to
increase in 2005 primarily because of increased promotional
activities and a full year of expenses related to the increased
headcount in the sales and other departments.
In-Process Research and Development and Milestone
Payments
In-process research and development and milestone expense
represents payments made in connection with an acquisition of a
product or milestone payments related to product development. We
expense these costs when they are incurred as the product may
not meet either technological feasibility or commercial
38
success because the product remains in clinical development or
alternative future use has not been established.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| Years Ended December 31, | |
| | |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
$ | |
|
% Change | |
|
$ | |
|
% Change | |
|
$ | |
| |
|
(Dollars in thousands) | |
| | |
|
In-process research and development and milestone payments
|
|
$ |
3,500 |
|
|
|
NM |
|
|
|
— |
|
|
|
NM |
|
|
$ |
4,350 |
|
| |
In May 2002, we entered into an agreement with Yamanouchi Europe
B.V. to license Velac. Under the terms of the agreement, we paid
Yamanouchi an initial $2.0 million licensing fee, which we
recorded as in-process research and development expense in 2002
as the product remains in clinical development. In 2002, we
initiated a Phase III trial for Velac. Under the terms of
the agreement, we recorded an additional $2.0 million of
in-process research and development expense related to this
milestone.
In August 2004, we submitted a NDA for Velac with the FDA and,
in October 2004, we received notification that the FDA accepted
the NDA for filing as of August 23, 2004. As a result, we
recorded an additional $3.5 million milestone in the third
quarter of 2004 due to the licensor upon the filing of the NDA.
As noted above, because the product has not been approved, we
recorded the fee as in-process research and development and
milestone payment expense.
Interest and other income (expense), net
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
$ | |
|
% Change | |
|
$ | |
|
% Change | |
|
$ | |
| |
|
(Dollars in thousands) | |
| | |
|
Interest and other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest income
|
|
$ |
1,194 |
|
|
|
23 |
% |
|
$ |
972 |
|
|
|
18 |
% |
|
$ |
823 |
|
| |
Gain on sale of investment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
NM |
|
|
|
2,086 |
|
| |
Interest expense
|
|
|
(2,778 |
) |
|
|
70 |
% |
|
|
(1,632 |
) |
|
|
NM |
|
|
|
(11 |
) |
| |
Other income (expense), net
|
|
|
109 |
|
|
|
(53 |
)% |
|
|
234 |
|
|
|
3 |
% |
|
|
227 |
|
| |
Interest Income. Interest income increased to
$1.2 million in 2004 from $972,000 in 2003. The increase in
2004 was due to interest earned on larger cash investment
balances in connection with cash we received from
$56.9 million in net proceeds from a private placement of
common stock in February 2004 and issuing $90.0 million in
convertible senior notes in May 2003. Interest income increased
to $972,000 in 2003 from $823,000 in 2002. The increase in 2003
was due to interest earned on larger cash and investment
balances in connection with the cash we received from issuing
$90.0 million of convertible senior notes in May 2003,
partially offset by lower market interest rates on investments.
Interest Expense. Interest expense increased to
$2.8 million in 2004 from $1.6 million in 2003. The
increase reflects the fact that we incurred a full year of
interest expense in 2004 on the convertible senior notes issued
in May 2003. Interest expense increased to $1.6 million in
2003 from $11,000 in 2002. The increase in 2003 is a direct
result of the interest expense associated with the convertible
senior notes issued in May 2003.
Income Taxes
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
$ | |
|
% Change | |
|
$ | |
|
% Change | |
|
$ | |
| |
|
(Dollars in thousands) | |
| | |
|
Income tax provision
|
|
$ |
1,493 |
|
|
|
28 |
% |
|
$ |
1,167 |
|
|
|
545 |
% |
|
$ |
181 |
|
| |
39
Prior to 2004, we recorded an income tax provision primarily
based on the foreign operations of our subsidiary in Australia,
while experiencing losses for our U.S. operations. As a
result, we will use operating loss carryforwards to partially
offset future domestic profits, if and when earned. The deferred
tax asset resulting from the operating loss carry forwards is
offset by a valuation allowance until we meet certain specific
tests regarding the continued profitability. Our income tax
provision is determined using an annual effective tax rate,
which is generally less than the U.S. Federal statutory
rate, primarily because of tax deductions and operating loss
carryforwards available in the United States.
The income tax provision increased to $1.5 million in 2004
from $1.2 million in 2003 primarily due to an increase for
U.S. Federal tax of $986,000, resulting mostly from the
effect of the alternative minimum tax in 2004, and $281,000 for
various U.S. states, partially offset by a reduction for
foreign taxes of $941,000. The income tax provision increased to
$1.2 million in 2003 from $200,000 in 2002. The increase
was primarily due to an increase for U.S. Federal tax of
$541,000, resulting mostly from tax benefits taken in 2002, and
an increase for foreign tax of $370,000. The U.S. tax
benefit arose principally due to the Job Creation and Worker
Assistance Act of 2002 enacted on March 9, 2002, which
allows taxpayers to carry back net operating losses generated in
2001 and 2002 to offset alternative minimum tax previously paid.
The amounts reported above for U.S. Federal tax include
U.S. withholding taxes paid on foreign earnings and the
foreign taxes are net of the foreign tax credit claimed in
Australia for the U.S. withholding tax.
Our effective tax rate and related tax provisions may increase
significantly in the future after our net operating loss and
other carryforwards have been exhausted. For a more complete
description of our income tax position, refer to Note 12 in
the Notes to Consolidated Financial Statements elsewhere in this
prospectus.
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash for the Three Months Ended
March 31, 2005
We have financed our operations to date primarily through
proceeds from equity and debt financings, and product revenues.
Cash, cash equivalents and marketable securities totaled
$233.7 million at March 31, 2005, up from
$72.4 million at December 31, 2004. The increase of
$161.3 million was primarily due to receipt of the net cash
proceeds of $194.0 million from the issuance of convertible
senior notes, partially offset by a $35.0 million
repurchase of our common stock. For a more complete description
of the terms of the debt instruments and sales, refer to
Note 4 in the Notes to Condensed Consolidated Financial
Statements for the three months ended March 31, 2005
elsewhere in this prospectus. Net cash generated from operating
activities for the first quarter of 2005 was $2.3 million.
Working capital at March 31, 2005 was $233.1 million
compared to $71.2 million at December 31, 2004. In
addition to the increased amounts identified above, the other
significant change in working capital during the first quarter
of 2005 was an increase of $2.5 million in inventory to
support increased product sales and the planned launch of Velac
in the second half of 2005.
We made capital expenditures of $1.4 million for the three
months ended March 31, 2005 compared to $0.4 million
for the same period in 2004. The expenditures in 2005 were
primarily for leasehold improvements on, and laboratory
equipment purchased for, our new corporate headquarters, which
we occupied at the end of February 2005.
Sources and Uses of Cash for 2004 and 2003
Cash, cash equivalents and marketable securities totaled
$72.4 million at December 31, 2004, down from
$114.7 million at December 21, 2003. The decrease of
$42.3 million was primarily due to our acquisition of
Soriatane product rights, for which the cash used was
$123.5 million, partially offset by a our private placement
of common stock with net proceeds of $56.9 million and net
cash provided by our operations of $29.7 million. Other
major sources and uses of cash included our net sales of
marketable securities of $42.0 million, primarily to
finance our Soriatane acquisition, partially offset by
$21.2 million used for increases in accounts receivable
resulting from our increased sales.
40
Working capital at December 21, 2004 was $71.1 million
compared to $112.2 million at December 31, 2003.
Significant changes in working capital during 2004 (in addition
to the changes identified above for cash, marketable securities,
and accounts receivable) included increases in current assets of
$5.3 million for prepayments and other current assets and
$3.5 million for inventory and increases in liabilities of
$12.7 million for allowances for rebates, returns, and
chargebacks and $10.7 million for accounts payable. The
$5.3 million increase for prepayments and other current
assets and the $3.5 million increase in inventory are
primarily a result of growth in our business and related
expenses. We increased our allowance for rebates, returns, and
chargebacks as a result of our increased net product revenues,
primarily due to Soriatane. The $10.7 million increase in
accounts payable was related primarily to the increase in
business activity.
We made capital expenditures of $7.6 million in 2004
compared to $959,000 in 2003 and $3.9 million in 2002. The
expenditures in 2004 were primarily for leasehold improvements
on our new corporate headquarters, which we occupied starting in
February 2005, and for manufacturing and laboratory equipment.
On February 13, 2004, we completed a private placement of
3.0 million shares of our common stock to accredited
institutional investors at a price of $20.25 per share, for
net proceeds of approximately $56.9 million.
On May 28, 2003, we issued $90.0 million of
2.25% convertible senior notes due May 30, 2008 in a
private placement exempt from registration under the Securities
Act of 1933. The notes are senior, unsecured obligations and
rank equal in right of payment with any of our existing and
future unsecured and unsubordinated debt. The notes are
convertible into our shares of common stock at any time at the
option of the note holder at a conversion rate of
46.705 shares of common stock per $1,000 principal amount
of notes, subject to adjustment in certain circumstances, which
is equivalent to a conversion price of approximately
$21.41 per share of common stock. This conversion price is
higher than the price of our common stock on the date the notes
were issued. The notes bear interest at a rate of 2.25% per
annum, which is payable semi-annually in arrears on May 30
and November 30 of each year, beginning November 30,
2003. Offering expenses of $3.7 million related to the
issuance of these notes have been included in other assets and
are amortized to interest expense over the contractual term of
the notes.
Capital Resources
We believe our existing cash, cash equivalents and marketable
securities, and cash generated from product sales will be
sufficient to fund our operating expenses, debt obligations and
capital requirements through at least the next 12 months.
We cannot be certain of the amount of our future product
revenues. Our product sales may be impacted by patent risks and
competition from new products.
Products under development may not be safe and effective or
approved by the FDA, or we may be unable to produce them in
commercial quantities at reasonable costs. Additionally, our
products may not gain satisfactory market acceptance. The amount
of capital we require for operations in the future depends on
numerous factors, including the level of product revenues, the
extent of commercialization activities, the scope and progress
of our clinical research and development programs, the time and
costs involved in obtaining regulatory approvals, the cost of
filing, prosecuting, and enforcing patent claims and other
intellectual property rights, and competing technological and
market developments. If we need funds in the future to
in-license or acquire additional marketed or late-stage
development products, a portion of the funds may come from our
existing cash, which will result in fewer resources available to
our current products and clinical programs. In order to take
action on business development opportunities we may identify in
the future, we may need to use some of our available cash, or
raise additional cash by liquidating some of our investment
portfolio and/or raising additional funds through equity or debt
financings.
We currently have no commitments for any additional financings.
If we need to raise additional money to fund our operations,
funding may not be available to us on acceptable terms, or at
all. If we are unable to raise additional funds when we need
them, we may not be able to market our products as planned or
continue development of potential products, or we could be
required to delay, scale back or eliminate some or all of our
research and development programs.
41
Contractual Obligations and Commercial Commitments.
As of December 31, 2004, we had the following contractual
obligations and commitments:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Payments Due by Period | |
| |
|
| |
| |
|
|
|
Less Than | |
|
|
|
More Than | |
| Contractual Obligations |
|
Total | |
|
1 Year | |
|
1 – 3 Years | |
|
3 – 5 Years | |
|
5 Years | |
| |
|
(In millions) | |
| | |
|
Long-Term Debt Obligations(1)
|
|
$ |
97.0 |
|
|
$ |
2.0 |
|
|
$ |
4.1 |
|
|
$ |
90.9 |
|
|
$ |
— |
|
|
Operating Lease Obligations(2)
|
|
|
21.2 |
|
|
|
5.0 |
|
|
|
5.3 |
|
|
|
2.8 |
|
|
|
8.1 |
|
|
Purchase Obligations(3)(4)
|
|
|
19.8 |
|
|
|
11.5 |
|
|
|
4.3 |
|
|
|
1.7 |
|
|
|
2.3 |
|
|
Other Long-Term Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Reflected on the Registrant’s
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Balance Sheet under GAAP
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
Total Contractual Cash Obligations
|
|
$ |
138.0 |
|
|
$ |
18.5 |
|
|
$ |
13.7 |
|
|
$ |
95.4 |
|
|
$ |
10.4 |
|
| |
|
|
|
| |
(1) |
On May 28, 2003, we issued $90 million of
2.25% convertible senior notes due May 30, 2008 in a
private offering. The notes are unsecured and rank equal to all
of our future unsecured and unsubordinated debts. The notes are
convertible at any time at the option of note holders into
shares of our common stock at a conversion rate of
46.705 shares for each $1,000 principal amount of notes,
subject to adjustment in certain circumstances, which is
equivalent to a conversion price of approximately
$21.41 per share. The amounts reflected above include
annual interest payments of approximately $2.0 million per
year, assuming that the notes are not redeemed or converted
before maturity. |
| |
| |
(2) |
We lease laboratory and office facilities under
non-cancelable operating leases, which expire in April 2005. In
June 2004, we signed a series of new non-cancelable facility
lease agreements to lease approximately 96,000 square feet
of space in Palo Alto, California that we moved into in February
2005. Under our agreement with DPT, we are also obligated to pay
approximately $56,000 per year in rent for the pro rata
portion of DPT’s facility allocated to the aerosol line.
Under the DPT agreement, we will pay rent for the term of the
agreement or as long as we own the associated assets, whichever
is longer. We also lease various automobiles and office
equipment under similar leases, expiring through 2008. These
obligations are to be partially offset by $94,000 to be received
from subleasing arrangements with third parties. |
| |
| |
(3) |
In March 2002 we entered into a manufacturing and supply
agreement with DPT that requires minimum purchase commitments,
beginning six months after the opening of the commercial
production line and continuing for 10 years. Also in 2002
we entered into a license agreement that requires minimum
royalty payments beginning in 2005 and continuing for fifteen
years, unless the agreement is terminated earlier by either
party. In 2003, we entered into a five year service agreement
for prescription information that requires minimum fees. |
| |
| |
(4) |
Per our manufacturing and supply agreements with our three
suppliers, AccraPac, DPT and Roche, we may incur significant
penalties related to cancellation of purchase orders, including
paying an amount equal to the entire cancelled purchase order.
We had approximately $9.6 million in outstanding open
purchase orders to our suppliers at December 31, 2004 and
the entire amount is included in the table in Year 2005. |
In April 2005, we received landlord approval for a sublease
signed in August 2004 for approximately 19,500 square feet
of office space in Palo Alto, California. Payments for the
sublease will commence on January 1, 2006.
42
As a result of this new leasing arrangement, our operating lease
payments will increase as follows:
| |
|
|
|
|
| | |
| |
|
Increase In | |
| |
|
Operating | |
| |
|
Lease | |
| |
|
Payments | |
| |
|
(In thousands) | |
| | |
|
For the year ending December 31, 2006
|
|
$ |
339 |
|
|
For the year ending December 31, 2007
|
|
|
303 |
|
|
For the year ending December 31, 2008
|
|
|
315 |
|
|
For the year ending December 31, 2009
|
|
|
338 |
|
|
For the year ending December 31, 2010
|
|
|
88 |
|
|
Thereafter
|
|
|
0 |
|
| |
| |
|
$ |
1,383 |
|
| |
In March 2005, we issued $200 million of
2.00% convertible senior notes due March 30, 2005 to
qualified institutional buyers in a private placement exempt
from registration pursuant to Rule 144A of the Securities
Act of 1933, as amended. The notes are unsecured and rank equal
in right of payment with all of our existing and future
unsecured and unsubordinated debt. The initial conversion rate
of the notes are 28.1972 shares of common stock per each
$1,000 principal amount of notes, subject to adjustment.
Assuming that the notes are not redeemed or converted before
maturity, interest payments due by period are $3.1 million
for 2005, $4.0 million for each of the years 2006 through
2009 and $1.0 million for 2010. The holders may convert the
principal of the notes for cash before March 30, 2010 under
certain circumstances, as defined. On or after March 30,
2010 the holders may require us to repurchase for cash all or a
portion of their notes at a 100% of the principal amount of the
notes plus accrued and unpaid interest.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements (as that term
is defined in Item 303 of Regulation S-K) that are
reasonably likely to have a current or future material effect on
our financial condition, revenue or expenses, results of
operations, liquidity, capital expenditures or capital resources.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board, or
FASB, issued SFAS No. 123 (revised 2004),
“Share-Based Payment,” or SFAS 123R, which
requires companies to measure and recognize compensation expense
for all stock-based awards at fair value. Stock-based awards
include grants of employee stock options. SFAS 123R
replaces SFAS 123 and supersedes APB 25, which are
discussed above. SFAS 123R requires companies to recognize
all stock-based awards to employees and to reflect those awards
in the financial statements based on the fair values of the
awards. In April 2005, the SEC modified the effective date for
SFAS 123R, resulting in the pronouncement being effective
for all annual periods beginning after June 15, 2005. We
are required to adopt SFAS 123R in our fiscal year
beginning January 1, 2006, after which the pro forma
disclosures previously permitted under SFAS 123 will no
longer be an alternative to financial statement recognition.
Under SFAS 123R, we must determine the appropriate fair
value model to be used for valuing share-based awards, the
amortization method for compensation cost, and the transition
method to be used at date of adoption. The transition methods
include options for adopting the model retroactively or
prospectively. The prospective method requires that we record
compensation expense for all unvested stock options and
restricted stock at the beginning of the year we adopt
SFAS 123R. Under the retroactive method, we may restate
prior periods either as of the beginning of the year of adoption
or for all periods presented, and we would record compensation
expense for all unvested stock options and restricted stock
beginning with the first period restated. We are evaluating the
requirements of SFAS 123R and we expect that the adoption
of SFAS 123R will have a material impact on our
consolidated results of operations and earnings per share. We
have not yet determined which method of adoption we will use or
the effect of adopting SFAS 123R, and we have not
43
determined whether the adoption will result in amounts that are
similar to the current pro forma disclosures under SFAS 123.
On September 30, 2004, the Emerging Issues Task Force, or
EITF, reached a consensus on Issue No. 04-8, The Effect
of Contingently Convertible Debt on Diluted Earnings per
Share, concluding that contingently convertible debt
instruments should be included in diluted earnings per share
computations (if dilutive) regardless of whether the market
price trigger (or other contingent feature) has been met. This
consensus is effective for reporting periods ending after
December 15, 2004, and requires companies to restate prior
period earnings per share amounts presented for comparative
purposes utilizing a transition method. As of December 31,
2004, we had no outstanding contingently convertible debt. In
March 2005, we issued contingently convertible debt and adopted
the consensus. Our adoption of EITF No. 04-8 had no impact
on diluted earnings per share for the three months ended
March 31, 2005 or for prior years.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. Our holdings of financial instruments
comprise a mix of securities that may include
U.S. corporate debt, U.S. government debt, municipal
debt, and asset and mortgage backed securities. All such
instruments are classified as securities available for sale.
Generally, we do not invest in portfolio equity securities or
commodities or use financial derivatives for trading purposes.
Our market risk exposure consists principally of exposure to
reductions in interest rates. Interest income from our
investments is sensitive to changes in the general level of
U.S. interest rates, particularly since the majority of our
investments are in short-term instruments. While a reduction in
interest rates would decrease interest income, the negative
effect would be partially offset by an increase in the value of
our marketable securities portfolio. A hypothetical decrease of
100 basis points in market-fixed interest rates would
increase the fair value of our portfolio by approximately
260,000 or one-half of one percent. An increase in interest
rates of 100 basis points would decrease the value of the
portfolio by a similar amount. Due to the nature of our
marketable securities, we have concluded that we face minimal
material market risk exposure.
The table below presents the principal amounts and weighted
average interest rates by year of maturity for our investment
portfolio as of December 31, 2004 (dollars in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
2005 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
Thereafter | |
|
Total | |
|
Fair Value | |
| | |
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$ |
21,075 |
|
|
$ |
12,621 |
|
|
$ |
6,643 |
|
|
$ |
300 |
|
|
$ |
901 |
|
|
$ |
12,016 |
|
|
$ |
53,556 |
|
|
$ |
53,442 |
|
|
Weighted average annual interest rate
|
|
|
4.5% |
|
|
|
4.5% |
|
|
|
2.3% |
|
|
|
1.2% |
|
|
|
2.4% |
|
|
|
2.5% |
|
|
|
— |
|
|
|
— |
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.25% Convertible Senior Notes Due 2008
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
90,000 |
|
|
|
— |
|
|
|
— |
|
|
$ |
90,000 |
|
|
$ |
113,310 |
|
|
Average interest rate
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2.25% |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
The table above includes principal and fair value amounts of
$7.0 million as of December 31, 2004, related to
auction rate securities. Although these securities have long
final maturities (from 19 years to perpetuity), we consider
them to be short-term investments because liquidity is provided
through the short-term (7 to 90 days) interest rate reset
mechanism. These securities are allocated between maturity
groupings based on their final maturities. The table above also
includes principal amounts of $7.3 million and fair value
amounts of $7.2 million related to asset-backed and
mortgage-backed securities that are allocated between maturity
groupings based on their final maturities.
Foreign Currency Exchange Risk. Certain payments that
third parties make to Connetics Australia are made in local
currency or Australian dollars. Any fluctuations in the
currencies of our licensees or licensors against the Australian
or the U.S. dollar will cause our royalty revenues and
expenses to fluctuate as well. We currently do not hedge our
exposure to changes in foreign currency exchange rates.
44
BUSINESS
Overview
References in this prospectus to “Connetics,”
“the Company,” “we,” “our” and
“us” refer to Connetics Corporation, a Delaware
corporation, and its consolidated subsidiaries. Unless the
context specifically requires otherwise, these terms include
Connetics Australia Pty Ltd. and Connetics Holdings Pty. Ltd.
Connetics was incorporated in Delaware in February 1993, and our
principal executive offices are located at 3160 Porter Drive,
Palo Alto, California 94304. Our telephone number is
(650) 843-2800. Connetics®, Luxíq®,
OLUX®, Extina®, Soriatane®, VersaFoam® and
the seven interlocking “C’s” design are
registered trademarks, and
Evoclintm,
Liquipatchtm,
VersaFoam-EFtm,
and
Desiluxtm
are trademarks, of Connetics. Velac® is a registered
trademark of Yamanouchi Europe B.V. All other trademarks or
service marks appearing in this prospectus are the property of
their respective companies. We disclaim any proprietary interest
in the marks and names of others.
Connetics is a specialty pharmaceutical company that develops
and commercializes products for the dermatology marketplace.
This marketplace is characterized by a large patient population
that is served by a relatively small, and therefore readily
accessible, number of treating physicians. We currently market
four pharmaceutical products, OLUX® (clobetasol propionate)
Foam, 0.05%, Luxíq® (betamethasone valerate) Foam,
0.12%, Soriatane®-brand acitretin, and
Evoclintm
(clindamycin) Foam, 1%. We promote the clinically proven
therapeutic advantages of our products and provide quality
customer service to physicians and other healthcare providers
through our experienced sales and marketing professionals.
Dermatological diseases often persist for an extended period of
time and are treated with a variety of clinically proven drugs
that are delivered in a variety of formulations. Topical
solutions have traditionally included lotions, creams, gels and
ointments. These topical delivery systems often inadequately
address a patient’s needs for efficacy, ease of use and
cosmetic elegance, and the failure to address those needs may
decrease patient compliance. We believe that VersaFoam®,
the proprietary foam delivery system used in OLUX, Luxíq
and Evoclin, has significant advantages over conventional
therapies for dermatological diseases. The foam formulation
liquefies when applied to the skin, and enables the active
therapeutic agent to penetrate rapidly. When the foam is
applied, it dries quickly and does not leave any residue, stains
or odor. We believe that the combination of the increased
efficacy and the cosmetic elegance of the foam may actually
improve patient compliance and satisfaction. In market research
sponsored by Connetics, more than 80% of patients said that they
preferred the foam to other topical delivery vehicles.
OLUX and Luxíq compete in the topical steroid market.
According to NDC Healthcare, or NDC, for the 12 months
ended December 2004, the value of the retail topical steroid
market for mid-potency and high- and super-high potency steroids
was $869 million. Luxíq competes in the mid-potency
steroid market and OLUX competes in the high- and super-high
potency steroid market. On March 4, 2004, we acquired from
Hoffmann-La Roche, Inc., or Roche, the exclusive
U.S. rights to Soriatane®, an approved oral therapy
for the treatment of severe psoriasis in adults. According to
NDC, the value of the entire retail market for psoriasis was
$636 million in 2004. In October 2004, we received approval
from the Food and Drug Administration, or FDA, for Evoclin for
the treatment of acne vulgaris, and we launched Evoclin
commercially in December 2004. Evoclin competes in the topical
antibiotics market for the treatment of acne. For the
12 months ended December 2004, NDC reported that this
market totaled $547 million.
We have one New Drug Application, or NDA, under review by the
FDA, and one product candidate in Phase III clinical
trials. In August 2004, we submitted an NDA for Velac® (1%
clindamycin and 0.025% tretinoin) with the FDA. In October 2004,
the FDA accepted the NDA for filing effective as of
August 23, 2004 with a user fee goal date of June 25,
2005. On June 13, 2005, we announced that the FDA has
issued a non-approvable letter dated June 10, 2005 for
Velac. The FDA based its decision on the fact that “a
positive carcinogenicity signal was detected in a Tg.AC mouse
dermal carcinogenicity study.” We saw no signs in our
clinical trials that the mouse study was predictive of human
results. We expect to continue working with the FDA to determine
the next steps required for Velac to be approved at some future
date.
45
In September 2004 we commenced a Phase III clinical trial
for Desilux, a low-potency topical steroid for the treatment of
atopic dermatitis, formulated with 0.05% desonide in our
proprietary emollient foam delivery vehicle,
VersaFoam-EFtm.
In July 2003, we submitted an NDA for Extina® Foam. Extina
is an investigational new drug formulation of 2% ketoconazole
formulated using our proprietary platform foam delivery vehicle
for the treatment of seborrheic dermatitis. In November 2004, we
received a non-approvable letter from the FDA for Extina. The
FDA’s position was based on the conclusion that, although
Extina demonstrated non-inferiority to the comparator drug
currently on the market, it did not demonstrate statistically
significant superiority to placebo foam. We have continued
discussions with the FDA, and have determined to recommence
development of Extina by initiating a final Phase III trial
intended to demonstrate that Extina is superior to placebo foam.
We expect to commence the Phase III clinical trial in the
third quarter of 2005 and expect to resubmit the NDA for Extina
to the FDA by the end of 2006.
We continue to develop and formulate new product candidates by
leveraging the experience and expertise of our wholly owned
subsidiary, Connetics Australia Pty Ltd., and the Connetics
Center for Skin Biology, or CSB. The CSB, which is a segment of
our product development group staffed by Connetics employees,
explores ways to optimize drug penetration, distribution, and
efficiency at the targeted treatment site on the skin, and
assesses novel formulations and new delivery technologies. The
CSB assists in the continued development of innovative topical
dermatology products through rigorous scientific evaluation of
products and product candidates. The CSB presents us with the
opportunity to bring together dermatologists and pharmacologists
from across the country to interact with our researchers to
explore how topical drugs interact with and penetrate the skin.
We believe this novel approach to drug development is a key part
of our innovation and enables us to bring even more effective
and novel treatments to our product platform and the dermatology
market. We did not incur any additional costs to establish the
CSB, which was created in 2001.
We own worldwide rights to a number of unique topical delivery
systems, including several distinctive aerosol foams. We have
leveraged our broad range of drug delivery technologies by
entering into license agreements with several well-known
pharmaceutical companies around the world. Those license
agreements for marketed products bear royalties payable to us.
In 2001, we entered into a global licensing agreement with
Novartis Consumer Health SA for the use of our Liquipatch
drug-delivery system in topical antifungal applications. In 2002
we entered into a license agreement with Pfizer, Inc. (formerly
Pharmacia Corporation) pursuant to which we granted Pfizer
exclusive global rights, excluding Japan, to our proprietary
foam drug delivery technology for use with Pfizer’s
Rogaine® hair loss treatment. In September 2004, we entered
into a license agreement granting Pierre Fabre Dermatologie
exclusive commercial rights to OLUX for Europe, excluding Italy
and the U.K., where the product is licensed to Mipharm S.p.A.
The license agreement with Pierre Fabre also grants marketing
rights for certain countries in South America and Africa. Pierre
Fabre will market the product under different trade names. Under
the terms of the license, we will receive an upfront license
payment, milestone payments and royalties on product sales.
Pierre Fabre will be responsible for costs associated with
product manufacturing, sales, marketing, and distribution in its
licensed territories. As part of the agreement, we also
negotiated a right-of-first-refusal in the United States to an
early-stage, innovative dermatology product currently under
development by Pierre Fabre. Pierre Fabre anticipates an initial
launch of OLUX in select European markets in mid-2005.
Our Strategy
Our principal business objective is to be a leading specialty
pharmaceutical company focused on providing innovative
treatments in the field of dermatologic disease. To achieve this
objective, we intend to continue to pursue our commercial
strategy of maximizing product sales by leveraging novel
delivery technologies, accelerating the processes of getting
products to market, managing the risks of product development
where possible, and identifying and targeting specific market
opportunities where there are unmet needs. We have described our
development paradigm as a “4:2:1 model.” We
strive in any given year to have four product candidates in
product formulation, two product candidates in late-stage
clinical
46
trials, and one product or new indication launched commercially.
We fuel our product pipeline by a combination of internally
developing product candidates and in-licensing novel products
that fit with our broader strategy. Key elements of our business
and commercialization strategy include the following:
|
|
|
| |
• |
Maximizing Commercial Opportunities for OLUX, Luxíq,
Soriatane and Evoclin. We have a focused sales force
dedicated to establishing our products as the standard of care
for their respective indications. Our commercial strategy is to
call on those medical professionals in dermatology who are most
likely to prescribe our products. We are able to effectively
reach approximately 98% of our target audience. In March 2004,
we acquired exclusive U.S. rights to Soriatane-brand
acitretin, and in April 2004 we began promoting Soriatane to
dermatologists for the treatment of severe psoriasis in adults.
In October 2004, we received FDA approval for Evoclin, a foam
formulation of clindamycin for the treatment of acne vulgaris.
We launched Evoclin commercially in December 2004 with
availability of the product in 50g and 100g trade unit sizes. |
| |
| |
• |
Advancing the Development of Novel Dermatology Drugs. We
plan to continue to leverage our investment in Connetics
Australia and the CSB to enhance our ability to develop novel
products and drug delivery technologies for the dermatology
market. We concluded clinical trials in 2004 and subsequently
submitted an NDA with the FDA for our product candidate Velac, a
combination of 1% clindamycin, and 0.025% tretinoin in a gel
formulation, for the potential treatment of acne vulgaris. The
FDA accepted the Velac NDA for filing in October 2004 with a
filing date of August 23, 2004. In September 2004, we
commenced the Phase III clinical program for Desilux, a
low-potency topical steroid, formulated with 0.05% desonide in
our proprietary emollient foam delivery vehicle. The clinical
program focuses on atopic dermatitis, and subject to a
successful Phase III trial outcome, we plan to file an NDA
for Desilux in the fourth quarter of 2005. |
| |
| |
• |
Broadening Our Product Portfolio Through Development, License
or Acquisition. We believe that we can leverage our
dermatology-dedicated product development and commercial
activities by acquiring or licensing additional products for the
dermatology market. We regularly evaluate the licensing or
acquisition of additional product candidates. We may also
acquire additional technologies or businesses that we believe
will enhance our research and development or commercial
capabilities. |
| |
| |
• |
Selective Collaborations that Leverage Our Technology. As
we expand certain aspects of our development pipeline and
delivery technologies, we may partner with pharmaceutical or
biotech companies to gain access to additional marketing
expertise, such as over-the-counter or non-U.S. markets, or
physician groups on whom we do not currently call. Our approach
to partnership will be on a selective basis, seeking to maintain
the highest possible value of our product candidates. |
Our Products
OLUX and Luxíq Foams
OLUX is a foam formulation of clobetasol propionate, one of the
most widely prescribed super high-potency topical steroids. OLUX
has been proven to deliver rapid and effective results for scalp
and non-scalp psoriasis. Topical steroids are used to treat a
range of dermatoses, for which approximately 24 million
steroid prescriptions are written annually. In 2004, OLUX and
Luxíq comprised 9.7% of the branded prescriptions in these
combined topical steroid markets, corresponding to 22.5% of the
retail annual branded sales for 2004. While the topical steroid
market is highly fragmented, we believe that OLUX is the number
one branded super-high potency topical steroid prescribed by
U.S. physicians, and that Luxíq is the number one
branded mid-potency topical steroid by retail sales and the
third most commonly prescribed mid-potency topical steroid by
U.S. dermatologists in 2004.
We began selling OLUX in November 2000 for the short-term,
topical treatment of inflammatory and pruritic manifestations of
moderate to severe corticosteroid-responsive scalp dermatoses.
In December 2002, the FDA approved our supplemental New Drug
Application, or sNDA, to market OLUX for the
47
treatment of mild to moderate non-scalp psoriasis. Luxíq is
a foam formulation of betamethasone valerate, a mid-potency
topical steroid prescribed for the treatment of mild-to-moderate
steroid-responsive scalp dermatoses such as psoriasis, eczema
and seborrheic dermatitis. We have been selling Luxíq
commercially in the United States since 1999.
A study conducted at Stanford University School of Medicine
compared the safety and effectiveness, patient satisfaction,
quality of life, and cost-effectiveness of two clobetasol
regimens in the treatment of psoriasis. In a single-blind
design, 29 patients were randomized to receive either
clobetasol foam on the skin and scalp or a combination of
clobetasol cream on the skin and lotion on the scalp for
14 days. Severity of disease and quality of life were
evaluated using several tools, including the Psoriasis Area
Severity Index, or PASI, and the Dermatology Life Quality Index.
The trial showed that the increased improvement in clinical
severity, decreased application time, and increased perception
of relative efficacy, combined with similar cost of treatment,
suggest that OLUX is a better choice than cream and lotion for
some patients. This study supports our belief that improved
patient compliance with the foam will yield better treatment
results than the same active ingredient in other formulations.
Currently, OLUX is approved for sale in more than
15 European countries. Mipharm holds a license to market
OLUX in Italy and the U.K. and we will receive milestone
payments and royalties from Mipharm on future product sales in
those territories. In September 2004, we entered into a license
agreement granting Pierre Fabre exclusive commercial rights to
OLUX for certain European markets. The license agreement with
Pierre Fabre also grants marketing rights for certain countries
in South America and Africa. Pierre Fabre anticipates an initial
launch of OLUX in select European markets in mid-2005 under
different trade names. The European super-high-potency steroid
market is currently estimated at approximately $50 million.
Soriatane
In March 2004, we entered into a binding purchase agreement with
Roche to acquire exclusive U.S. rights to Soriatane-brand
acitretin, an approved oral medicine for the treatment of severe
psoriasis in adults. Under the terms of the purchase agreement,
we paid Roche a total of $123.0 million in cash. We also
assumed certain liabilities in connection with returns, rebates
and chargebacks, and bought Roche’s then existing inventory
of existing product, active pharmaceutical ingredient, and
product samples.
Soriatane is a once-a-day oral retinoid approved in the
U.S. for the treatment of severe psoriasis in adults.
Approximately 4.5 million people in the U.S. suffer
from psoriasis; of these, approximately one million seek
treatment. Most cases are treated with topical steroids, while
the more severe cases are treated with oral or injectable
treatments. Soriatane is approved for the treatment of severe
psoriasis, and has been studied in plaque, guttate,
erythrodermic, palmar-plantar and pustular psoriasis. Soriatane
is the only treatment approved for both initial and maintenance
psoriasis therapy. It is supplied as 10 mg and 25 mg
capsules. Roche received FDA approval for Soriatane in 1997 and,
although its patent protection ended in 1995, there are
currently no generic competitors in the marketplace. Soriatane
is currently the only oral retinoid indicated for psoriasis in
the U.S. Through March 31, 2005, our net sales of
Soriatane were approximately $71 million. We began sampling
Soriatane in April 2004. At the FDA’s request, due
primarily to concerns that women of childbearing potential would
have access to the drug without participating in the risk
management program, we discontinued the sampling program in
December 2004.
In addition to U.S. sales of Soriatane, by agreement with
Roche we sell product to a U.S.-based distributor that exports
branded pharmaceutical products to certain international
markets. Product sold to this distributor is not permitted to be
resold in the U.S. We pay a royalty to Roche on Soriatane
sales to this distributor.
Clinical efficacy studies showed that 76% of patients taking
Soriatane showed statistically significant improvement in as
little as eight weeks. At six months, 40% of patients
experienced complete or almost complete clearing of their
psoriasis; at 12 months, patients continued to experience
statistically significant improvement in symptoms. In published
literature, patients treated with Soriatane had PASI 50 scores
of 85% (85% percent of the patients improved their PASI score by
at least 50%) and PASI 75 scores of
48
52%, both at 12 weeks. Additionally, 59% of patients
treated for 12 weeks were relapse-free from psoriasis at
six months post treatment, and at 12 months Soriatane
patients had PASI 75 scores of 78%. Since Soriatane is neither
immunosuppressive nor cytotoxic, it can be used without the risk
of reducing a patient’s resistance to common infections.
In women of childbearing potential, Soriatane should be reserved
for non-pregnant patients who have not responded to other
therapies or whose clinical condition makes other treatments
inappropriate, because the drug may cause serious birth defects.
Women who are pregnant or might become pregnant during therapy
or within three years after stopping therapy should not take
Soriatane. Less frequent but potentially serious adverse events
that have been reported include liver toxicity, pancreatitis and
increased intracranial pressure, as well as bone spurs,
alteration in lipid levels, possible cardiovascular effects and
eye problems.
Evoclin Foam
Evoclin is a foam formulation of 1% clindamycin for the
treatment of acne vulgaris. Evoclin is Connetics’ first
commercial product that addresses the acne market. According to
the National Institute of Arthritis, Musculoskeletal and Skin
Disorders, in the U.S. an estimated 17 million people
are affected by acne annually, and an estimated 5.6 million
people visited a physician for treatment during the
12 months ended October 2004. Prescriptions for the entire
topical U.S. acne market in 2004 were approximately
$1.2 billion, making it the largest segment of the
dermatology market. In the U.S., acne products containing
clindamycin generated approximately $416 million in revenue
in the 12 month period ended October 2004, making this
active ingredient one of the most widely prescribed for acne.
Evoclin will compete primarily in the topical antibiotic market,
representing approximately $535 million in
U.S. prescriptions in the 12 months ended October
2004. We received FDA approval to market Evoclin in October 2004
and began selling the product in December 2004 in 50g and 100g
trade unit sizes. Net product revenues for Evoclin through
March 31, 2005 were $6.0 million. Evoclin is indicated
for topical application in the treatment of acne vulgaris.
Evoclin is contraindicated in individuals with a history of
hypersensitivity to preparations containing clindamycin or
lincomycin, a history of regional enteritis or ulcerative
colitis, or a history of antibiotic-associated colitis.
Product Candidates And Clinical Trials
Our product candidates require extensive clinical evaluation and
clearance by the FDA before we can sell them commercially. Our
4:2:1 development model anticipates that we will conduct
simultaneous studies on several products at a given time.
However, we regularly re-evaluate our product development
efforts. On the basis of these re-evaluations, we have in the
past, and may in the future, abandon development efforts for
particular products. In addition, any product or technology
under development may not result in the successful introduction
of a new product.
Extina® Foam
In April 2003, we announced summary results from our
Phase III clinical trial with Extina, a foam formulation of
a 2% concentration of the antifungal drug ketoconazole for the
treatment of seborrheic dermatitis. Ketoconazole is used to
treat a variety of fungal infections, including seborrheic
dermatitis. Seborrheic dermatitis is a chronic, recurrent skin
condition that affects 3-5% of the U.S. population. It
usually involves the scalp, but also can affect the skin on
other parts of the body, including the face and chest. The
symptoms of seborrheic dermatitis include itching, redness and
scaling. In 2003 an estimated 1.1 million patients sought
physician treatment for seborrheic dermatitis. Extina is
intended to compete primarily in the topical antifungal market,
representing approximately $752 million in
U.S. prescriptions in 2004.
The Extina clinical program consisted of a pivotal trial and two
smaller supplemental clinical studies required by the FDA. In
the pivotal trial, 619 patients were treated for four weeks
in a double-blind, placebo- and active-controlled protocol. As
designed, the trial results demonstrated that Extina was not
49
inferior to Nizoral® (ketoconazole) 2% cream as
measured by the primary endpoint of Investigator’s Static
Global Assessment, or ISGA. The trial was also designed to
compare Extina to placebo foam per the ISGA. The result,
although in favor of Extina, did not achieve statistical
significance. On all other endpoints, statistical significance
was achieved; therefore, we believe that the totality of the
data demonstrated that Extina was clinically superior to placebo
foam. In July 2003, we submitted an NDA to the FDA for Extina.
In November 2004, the FDA issued a non-approvable letter for
Extina. The FDA’s position was based on the conclusion
that, although Extina demonstrated non-inferiority to the
comparator drug currently on the market, it did not demonstrate
statistically significant superiority to placebo foam. We have
continued discussions with the FDA and have determined to
recommence development of Extina by initiating a final
Phase III trial intended to demonstrate that Extina is
superior to placebo foam. We expect to commence the
Phase III clinical trial in the third quarter of 2005 and
expect to resubmit the NDA for Extina to the FDA by the end of
2006.
Velac®
In December 2002, we initiated the Phase III program for
Velac, a first-in-class combination of 1% clindamycin and 0.025%
tretinoin, for the treatment of acne. The Velac clinical program
consists of two pivotal trials designed to demonstrate
superiority to the individual drug products, and two smaller
supplemental clinical studies required by the FDA. We completed
enrollment of both pivotal trials in late 2003, enrolling over
2,200 patients. In March 2004, we announced the positive
outcome of the Phase III clinical trials of Velac. The data
from each trial demonstrated a consistently robust and
statistically superior treatment effect for Velac compared with
clindamycin gel, tretinoin gel and placebo gel on both of the
primary endpoints. An analysis of the combined data from the
clinical trials demonstrated similar results to the individual
trials. The data from these trials also demonstrated that Velac
was safe and well tolerated, with the most commonly observed
adverse effects being application site reactions such as
burning, dryness, redness and peeling. Following this positive
clinical outcome, we submitted an NDA with the FDA for Velac in
August 2004. The NDA was accepted for filing by the FDA in
October 2004 with a filing date of August 23, 2004 and a
user fee goal date of June 25, 2005. On June 10, 2005,
the FDA issued a non-approvable letter for Velac. The FDA based
its decision on the fact that “a positive carcinogenicity
signal was detected in a Tg.AC mouse dermal carcinogenicity
study.” We saw no signs in our clinical trials that the
mouse study was predictive of human results. We expect to
continue working with the FDA to determine if and how Velac may
be approved at some future date.
Desiluxtm
Foam
In September 2004, we commenced the Phase III clinical
program for Desilux, a low-potency topical steroid, formulated
with 0.05% desonide in our proprietary emollient foam delivery
vehicle. The clinical program focuses on atopic dermatitis and
is designed to include infants from three months of age and
children up to 17 years old. Subject to a successful
Phase III trial outcome, we plan to file an NDA for Desilux
in the fourth quarter of 2005.
Primolux
We anticipate initiating Phase III clinical trials for an
emollient foam of OLUX, or Primolux, by the end of the first
quarter of 2005. Primolux is a super-high potency steroid in our
new proprietary ethanol-free emollient VersaFoam vehicle
indicated for the treatment of steroid responsive dermatological
diseases. Our clinical trials will be conducted in atopic
dermatitis and psoriasis.
Other Pipeline Formulations
In addition to the product candidates described above, we are
also developing the foam technology for other disease
indications. As part of our 4:2:1 development model, we strive
to have four product candidates in product formulation at any
given time, so that we have some flexibility in determining which
50
two to move into human clinical trials. Our most promising
preclinical candidates include an emollient foam of Luxíq ,
a low potency steroid, as well as other formulation candidates
in early stages of development. We are exploring various product
formulations for Liquipatch as well, which is described in more
detail below under “Royalty-Bearing Products and Licensed
Technology — Liquipatch.”
Royalty-Bearing Products And Licensed Technology
Foam Technology. In 2002 we entered into a license
agreement with Pfizer, Inc. (formerly Pharmacia Corporation)
pursuant to which we granted Pfizer exclusive global rights,
excluding Japan, to our proprietary foam drug delivery
technology for use with Pfizer’s Rogaine® hair loss
treatment. The license with Pfizer will expand the reach of the
foam vehicle to the non-prescription (over-the-counter)
pharmaceutical market. Under the agreement, Pfizer paid us an
initial licensing fee, and agreed to pay us additional fees when
it achieves specified milestones, plus a royalty on product
sales. We recognized $1.0 million under the agreement
during 2002 related to license fees and milestone payments.
During 2003, 2004 and the three months ended March 31, 2005
we recognized $86,000, $11,000 and $8,000, respectively, in
license fees related to development costs. Pfizer will be
responsible for most product development activities and costs.
Unless terminated earlier, the agreement with Pfizer will
terminate on the first date on which all of Pfizer’s
obligations to pay royalties has expired or been terminated. In
general, in each country (excluding Japan) where the
manufacture, importation, distribution, marketing, sale or use
of the product would infringe any of our issued patents covered
by the agreement, Pfizer’s obligation to pay patent
royalties with respect to that country will expire automatically
on the expiration or revocation of the last of our patents to
expire (or to be revoked) in that country. No U.S. patents
have yet been issued covering the minoxidil foam technology,
although we have received a Notice of Allowance of our first
patent in this field.
Before April 2001, Connetics Australia (under the name Soltec
Research Pty Ltd., or Soltec) had entered into a number of other
agreements for the foam technology. Connetics Australia licensed
the technology of betamethasone valerate foam to Celltech plc in
Europe, and Celltech has licensed the worldwide rights to their
patent on the steroid foam technology to us through Connetics
Australia. In 2003, we bought the rights to the U.S. patent
from Celltech. In May 2004, Celltech was acquired by UCB Pharma,
or UCB, a subsidiary of UCB Group. We pay UCB royalties on all
sales worldwide of foam formulations containing steroids. UCB
markets their product as Bettamousse®(the product
equivalent of Luxíq), and UCB paid us royalties for their
sales under the betamethasone valerate foam license through
April 2003, at which time their royalty obligation under the
contract ceased. We have license agreements with Bayer (in the
U.S.) and Pfizer and Mipharm (internationally) for the use
of pyrethrin foam for head lice. The head lice product is
marketed as RID® in the U.S., as Banlice® in
Australia, and as Milice® in Italy. We receive royalties on
sales of those products. In February 2004, we entered into an
agreement with Mipharm to license ketoconazole foam to them in
exchange for an initial fee of $90,000, plus future milestone
and royalty payments. In 2004 and the three months ended
March 31, 2005, on a consolidated basis, we received
$244,000 and $93,000, respectively, in royalties for foam-based
technology.
As discussed under “OLUX and Luxíq Foams,” above,
we have licensed to Mipharm commercial rights to market and sell
OLUX in Italy and the U.K., and we will receive milestone
payments and royalties on future product sales. We have received
$55,000 under the agreement thru December 31, 2004. Based
on the aggregate minimum royalty provisions in the agreement and
assuming the agreement stays in force through 2021, the
aggregate potential minimum royalties under the contract are
$975,000. Unless terminated earlier, the agreement with Mipharm
will terminate on the later of September 2021 and the last
expiration date of the patents covering the aerosol mousse
technology, which is currently 2015. We have also granted
exclusive commercial rights to Pierre Fabre to market and sell
OLUX in Europe, excluding Italy and the U.K. The license
agreement with Pierre Fabre also grants marketing rights for
certain countries in South America and Africa. Under the terms
of the license, we received an upfront license payment of
$250,000 in 2004, and we will receive milestone payments and
royalties on product sales.
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Aerosol Spray. We have licensed to S.C.
Johnson & Son, Inc. the rights to a super-concentrated
aerosol spray that is marketed in the U.S. and internationally.
On January 5, 2004, we reached an agreement with S.C.
Johnson to terminate the license agreement and grant them a
fully paid-up, royalty-free license to the technology. We ceased
recognizing royalties in connection with the agreement as of
March 31, 2004. In 2002, 2003 and 2004, we received
$2.4 million, $7.0 million and $1.2 million,
respectively, in royalty payments under the license agreement.
Liquipatch. We have agreements with Novartis to develop
Liquipatch for various indications. Liquipatch is a
multi-polymer gel-matrix delivery system that applies to the
skin like a normal gel and dries to form a very thin, invisible,
water-resistant film. This film enables a controlled release of
the active agent, which we believe will provide a longer
treatment period. In June 2001, we entered into a global
licensing agreement with Novartis Consumer Health SA for the
Liquipatch drug-delivery system for use in topical antifungal
applications. The agreement followed successful pilot
development work and gives Novartis the exclusive, worldwide
right to use the Liquipatch technology in the topical antifungal
field. In March 2002, Novartis paid $580,000 to exercise its
then-existing option to expand the license agreement. We
received no payments from Novartis under the license agreement
in 2003, and in July 2004, we received a milestone payment of
$81,000. Novartis has paid an aggregate of $722,000 under the
contract as of March 31, 2005. Unless terminated earlier,
the agreement may be terminated by either party after the
expiration of one or more claims within a patent covered by the
agreement with respect to the relevant country (which claim has
not been declared to be invalid or unenforceable by a court of
competent jurisdiction) or after the eighth anniversary of the
first market introduction of the product in countries without
such a claim. The expiration date of the last patent to expire
is currently 2017. Novartis will be responsible for all
development costs, and will be obligated to pay royalties on
future product sales.
Actimmune®. We have an agreement with InterMune,
Inc. pursuant to which InterMune pays us royalties for sales of
Actimmune (gamma interferon). We recorded $172,000, $358,000,
$330,000 and $75,000 in royalty revenue related to Actimmune
sales in 2002, 2003, 2004 and for the three months ended
March 31, 2005, respectively. In August 2002, we entered
into an agreement with InterMune to terminate our exclusive
option for certain rights in the dermatology field in exchange
for a payment of $350,000. We recognized the full amount of this
revenue in 2002.
Sales And Marketing
We have an experienced, highly productive sales and marketing
organization, which is dedicated to dermatology. As of
May 31, 2005, we had 169 employees in our sales and
marketing organization, including 137 field sales directors and
representatives. Since a relatively small number of physicians
write the majority of prescriptions for dermatological
indications, we believe that the size of our sales force is
currently appropriate to reach our target physicians.
Our marketing efforts are focused on assessing and meeting the
needs of dermatologists, residents, dermatology nurses, and
physicians’ assistants. Our sales representatives strive to
cultivate relationships of trust and confidence with the
healthcare professionals they call on. In 2004, our sales force
called on over 11,300 U.S. dermatologists and dermatology
medical professionals who were responsible for approximately 98%
of all topical corticosteroid prescriptions and approximately
99% of all topical acne prescriptions written by dermatologists
in the U.S. To achieve our marketing objectives, we use a
variety of advertising, promotional material (including journal
advertising, promotional literature, and rebate coupons),
specialty publications, participation in educational
conferences, support of continuing medical education activities,
and advisory board meetings, as well as product internet sites
to convey basic information about our products and our company.
Our corporate website at www.connetics.com includes information
about the company as well as descriptions of ongoing research,
development and clinical work. Our product websites, at
www.olux.com, www.luxiq.com, www.soriatane.com, and
www.evoclin.com provide information about the products and their
approved indications, as well as copies of the full prescribing
information, the patient information booklet, and additional
product information. On the websites for our topical products,
we also offer downloadable rebate coupons.
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In March 2004, we entered into an agreement with UCB authorizing
them to promote OLUX and Luxíq to a select group of
U.S. primary care physicians, or PCPs. In September 2004,
in connection with UCB’s acquisition of Celltech plc, UCB
notified us that it intended to discontinue the co-promotion
agreement, and the agreement terminated effective March 31,
2005.
In April 2005, we entered into an agreement with Ventiv Pharma
Services, LLC, or VPS, a subsidiary of Ventiv Health, Inc.,
under which VPS will provide sales support for certain of our
products to PCPs and pediatricians. VPS began product sales
activities under this agreement in mid-April. VPS will promote
OLUX, Luxíq, and Evoclin. We will record 100% of the
revenue from product sales generated by VPS’s promotional
efforts. We will pay VPS a fee for the personnel providing the
promotional efforts and bear the marketing costs for promoting
the products, including product samples and marketing materials.
In addition to traditional marketing approaches and field sales
relationships with dermatologists, we sponsor several programs
that support the dermatology field. We currently provide funding
to sponsor one dermatology resident at Stanford University
Medical School and dermatology fellows at the Harvard Medical
School and Johns Hopkins Medical Center. We also provide
corporate sponsorship to various dermatology groups, including
the American Academy of Dermatology, the National Psoriasis
Foundation, the Dermatology Foundation, the Skin Disease
Education Foundation, and the Foundation for Research &
Education in Dermatology. In 2004, we sponsored 34 children to
attend Camp Wonder, a summer camp sponsored by the
Childrens’ Skin Disease Foundation for children suffering
from serious skin diseases.
Competition
The specialty pharmaceutical industry is characterized by
intense market competition, extensive product development and
substantial technological change. The principal means of
competition used to market our products include quality,
service, price, intellectual property, and product performance.
Each of our products competes for a share of the existing market
with numerous products that have become standard treatments
recommended or prescribed by dermatologists. OLUX and Luxíq
compete with a number of corticosteroid brands in the
super-high-, high- and mid-potency categories for the treatment
of inflammatory skin conditions. In addition, both OLUX and
Luxíq compete with generic (non-branded) pharmaceuticals
which claim to offer similar therapeutic benefits at a lower
cost. In some cases, insurers and other third-party payors seek
to encourage the use of generic products, making branded
products less attractive, from a cost perspective, to buyers. We
are not currently aware of any generic substitutes for any of
our marketed products. Competing brands for OLUX and Luxíq
include Halog® and Ultravate®, marketed by
Bristol-Myers Squibb Company; Elocon® and Diprolene®,
marketed by Schering-Plough Corporation; Locoid®, marketed
by Ferndale Labs; Temovate® and Cutivate®, which are
marketed by GlaxoSmithKline; DermaSmoothe FS®, marketed by
Hill Dermaceuticals;
Capextm
and
Clobextm,
marketed by Galderma; and Psorcon®, marketed by Dermik
Laboratories, Inc. Soriatane competes with three systemic
biologic drugs for the treatment of severe psoriasis:
Enbrel®, marketed by Amgen and Wyeth Pharmaceuticals;
Amevivetm,
marketed by Biogen; and
Raptivatm,
marketed by Genentech, Inc. Evoclin competes primarily in the
topical antibiotic market. Competition in this market includes
generic and branded clindamycin and erythromycin including
branded products Clindagel marketed by Galderma S.A., Cleocin-T
marketed by Pfizer, Inc., and Clindets marketed by Stiefel
Laboratories, Inc. Additional competition is posed by generic
and branded combinations of clindamycin and benzoyl peroxide,
such as Benzaclin marketed by Dermik and Duac marketed by
Stiefel, and erythromycin and benzoyl peroxide such as
Benzamycin marketed by Dermik.
Many of our existing or potential competitors, particularly
large pharmaceutical companies, have substantially greater
financial, marketing, sales, technical and human resources than
we do. In addition, many of these competitors have more
collective experience than we do in performing preclinical
testing and human clinical trials of new pharmaceutical products
and obtaining regulatory approvals for therapeutic products, and
have research and development capabilities that may allow such
competitors to develop new or improved products that may compete
with our product lines. Furthermore, many of our competitors are
private companies or divisions of much larger companies that do
not have the same
53
disclosure obligations regarding their product development and
marketing strategies and plans that we do as a public company,
which puts us at a distinct competitive disadvantage relative to
these competitors. Our products could be rendered obsolete or
made uneconomical by the development of new products to treat
the conditions addressed by our products, technological advances
affecting the cost of production, or marketing or pricing
actions by one or more of our competitors. Moreover, our
competitors may succeed in obtaining FDA approval for products
more rapidly or successfully than we do.
Our philosophy is to compete on the basis of the quality and
efficacy of our products and unique drug delivery vehicles,
combined with the effectiveness of our marketing, sales and
other product support efforts.
Whether we are competing successfully will depend on our
continued ability to attract and retain skilled and experienced
personnel, to identify, secure the rights to, and develop
pharmaceutical products and compounds, and to exploit these
products and compounds commercially before others are able to
develop competitive products.
Customers
We sell our products directly to distributors, who in turn sell
the products into the retail marketplace. Our customers include
the nation’s leading wholesale pharmaceutical distributors,
such as Cardinal Health, Inc., McKesson HBOC, Inc., and
AmerisourceBergen Corporation, and one national retail pharmacy
chain, Walgreens. In December 2004 we entered into a
distribution agreement with each of Cardinal Health, Inc. and
McKesson Corporation under which we agreed to pay a fee to each
of these distributors in exchange for certain product
distribution, inventory information, return goods processing,
and administrative services. While these agreements will provide
us with inventory level reports from these distributors
beginning in 2005, we must also rely on historical prescription
information to estimate future demand for our products. Patients
have their prescriptions filled by pharmacies that buy our
products from the wholesale distributors. Because sources
available to us track prescriptions filled but do not track the
total prescriptions written, and because pharmacies sometimes
substitute other drugs for our products when prescriptions are
presented, the number of prescriptions written for our products
only indirectly affects our product revenues.
Research And Development And Product Pipeline
Innovation by our research and development operations
contributes to the success of our business. Our research and
development expenses were $5.9 million for the three months
ended March 31, 2005, $21.5 million in 2004,
$30.1 million in 2003, and $25.8 million in 2002. Our
goal is to develop and bring to market innovative products that
address unmet healthcare needs. Our substantial investment in
research and development supports this goal. We also have an
active in-licensing strategy. We have a variety of
pharmaceutical agents in various stages of preclinical and
clinical development in several novel delivery technologies.
Our development activities involve work related to product
formulation, preclinical and clinical study coordination,
regulatory administration, manufacturing, and quality control
and assurance. Many pharmaceutical companies conduct early stage
research and drug discovery, but to obtain the most value from
our development portfolio, we are focusing on later-stage
development. This approach helps to minimize the risk and time
requirements for us to get a product on the market. Our strategy
involves targeting product candidates that we believe have
attractive market potential, and then rapidly evaluating and
formulating new therapeutics by using previously approved active
ingredients reformulated in our proprietary delivery system.
This product development strategy allows us to conduct limited
preclinical safety trials, and to move rapidly into safety and
efficacy testing in humans with products that offer significant
improvements over existing products. A secondary strategy is to
evaluate the acquisition of products from other companies.
We have developed a variety of aerosol foams similar to our foam
delivery system for OLUX and Luxíq, including water- and
petrolatum-based foams. We have also developed Liquipatch, a
multi-polymer gel-matrix delivery system that applies to the
skin like a normal gel and dries to form a very thin, invisible,
54
water-resistant film. This film enables a controlled release of
the active agent, which we believe provides a longer treatment
period. We anticipate developing one or more new products in the
aerosol foam or gel matrix formulations, by incorporating
leading dermatologic agents in formulations that are tailored to
treat specific diseases or different areas of the body.
All of our products and technologies under development require
us to make significant commitments of personnel and financial
resources. In addition to our in-house staff and resources, we
contract a portion of development work to outside parties. For
example, we typically engage contract research organizations to
manage our clinical trials. We have contracts with vendors to
conduct product analysis and stability studies, and we outsource
all of our manufacturing scale-up and production activities. We
also use collaborative relationships with pharmaceutical
partners and academic researchers to augment our product
development activities, and from time to time we enter into
agreements with academic or university-based researchers to
conduct various studies for us.
Patents And Proprietary Rights
Our success will depend in part on our ability and our
licensors’ ability to obtain and retain patent protection
for our products and processes, to preserve our trade secrets,
and to operate without infringing the proprietary rights of
third parties. We are pursuing a number of U.S. and
international patent applications, although we cannot be sure
that any of these patents will ever be issued. We also have
acquired rights by assignment to patents and patent applications
from certain of our consultants and officers. These patents and
patent applications may be subject to claims of rights by third
parties. If there are conflicting claims to the same patent or
patent application, we may not prevail and, even if we do have
some rights in a patent or application, those rights may not be
sufficient to allow us to market and distribute products covered
by the patent or application.
The U.S. and worldwide issued patents and pending applications
we are developing and pursuing in our intellectual property
portfolio relate to novel drug delivery vehicles for the topical
administration of active pharmaceutical ingredients, for use in
both human and veterinary applications. We own or are
exclusively licensed under pending applications and/or issued
patents worldwide relating to OLUX and Luxíq, and other
products in development. Of the 33 U.S. or worldwide issued
patents relating to our technologies, one relates to
corticosteroid foam formulations, three relate to our emollient
foam formulation, one relates to a foam formulation for the
treatment of head lice, three relate to an antibacterial foam
formulation, one relates to ketoconazole foam, 23 relate to
Liquipatch, and one relates to minoxidil. Of the additional 19
issued patents related to the technologies developed by
Connetics Australia, three relate to the aerosol technology
licensed to S. C. Johnson, one relates to an acne treatment and
15 relate to an ectoparasiticidal formulation that has
veterinary applications. We also have an exclusive license under
two patents covering stable retinoid compositions. The patents
discussed above expire between 2005 and 2019.
In May 2004, the U.S. Patent and Trademark Office, or
USPTO, issued to us a patent covering a pharmaceutical aerosol
foam composition having occlusive capability; that patent will
expire in 2019. The delivery technology that is the basis for
OLUX and Luxíq is covered by a U.S. patent on methods
of treating various skin diseases using a foam pharmaceutical
composition comprising a corticosteroid active substance, a
propellant and a buffering agent. That patent will expire in
2016. The Liquipatch technology is covered by one
U.S. patent, which will also expire in 2016. The technology
contained in Evoclin is the subject of a pending
U.S. patent application, as is the technology contained in
Extina.
Even though we or our licensors have filed patent applications
and we hold issued patents, our or our licensors’ patent
applications may not issue as patents, any issued patents may
not provide competitive advantage to us, and our competitors may
successfully challenge or circumvent any issued patents. In
November 2004 we announced that Medicis Pharmaceutical
Corporation, or Medicis, had informed us that it believed a
patent to which it holds certain rights will be infringed by our
product candidate Velac. While we are not aware of any legal
filings related to Medicis’ assertion, we believe, based on
information publicly available on the USPTO website, that the
inventor named on the patent has filed a Reissue
55
Patent Application with the USPTO. To our knowledge, the USPTO
has not formally announced the filing of the reissue application
in the Official Gazette as of the date of this prospectus. The
cost of responding to this and other similar challenges that may
arise and the inherent costs to defend the validity of our
licensed technology and issued patents, including the
prosecution of infringements and the related litigation, could
be substantial whether or not we are successful. Such litigation
also could require a substantial commitment of our
management’s time. Our business could suffer materially if
Medicis or any third party were to be awarded a judgment adverse
to us in any patent litigation or other proceeding arising in
connection with Velac or any of our other products or patent
applications.
We rely on and expect to continue to rely on unpatented
proprietary know-how and continuing technological innovation in
the development and manufacture of many of our principal
products. We require all our employees, consultants,
manufacturing partners, and advisors to enter into
confidentiality agreements with us. These agreements, however,
may not provide adequate protection for our trade secrets or
proprietary know-how in the event of any unauthorized use or
disclosure of such information. In addition, others may obtain
access to or independently develop similar or equivalent trade
secrets or know-how.
Trademarks
We believe that trademark protection is an important part of
establishing product and brand recognition. We own 10 U.S. and
10 non-U.S. registered trademarks, several trademark
applications and common law trademarks, and servicemarks and
domain names related to our dermatology business.
U.S. federal registrations for trademarks remain in force
for 10 years and may be renewed every 10 years after
issuance, provided the mark is still being used in commerce.
However, any such trademark or service mark registrations may
not afford us adequate protection, and we may not have the
financial resources to enforce our rights under any such
trademark or service mark registrations. If we are unable to
protect our trademarks or service marks from infringement, any
goodwill developed in such trademarks or service marks could be
impaired.
Manufacturing
We do not operate manufacturing or distribution facilities for
any of our products. Instead, we contract with third parties to
manufacture our products for us. Our company policy and the FDA
require that we contract only with manufacturers that comply
with current Good Manufacturing Practice, or cGMP, regulations
and other applicable laws and regulations. Currently, DPT
Laboratories, Ltd., or DPT, and Accra Pac Group, Inc., or Accra
Pac, manufacture commercial supplies of OLUX, Luxíq as well
as physician samples of those products for us. DPT also
manufactures Evoclin and clinical supplies for our various
clinical trial programs. We are currently qualifying Accra Pac
to manufacture Evoclin. We previously entered into agreements
with DPT under which they constructed an aerosol filling line at
their plant in Texas. This line is used to manufacture and fill
our commercial aerosol products. Roche manufactures commercial
supplies of Soriatane. We have agreements with Roche to fill and
finish Soriatane through 2005, and to provide active
pharmaceutical ingredient through 2007. We believe that these
agreements will allow us to maintain supplies of Soriatane
finished product through 2012 due to the five-year shelf life of
the combination of the active pharmaceutical ingredient and
finished product.
Warehousing And Distribution
All of our product distribution activities are handled by
Cardinal Health Specialty Pharmaceutical Services, or SPS. SPS
is a division of Cardinal Health, which was our second largest
customer in 2004. For more information about our customers, see
“Customers” above, and Note 2 of Notes to
Consolidated Financial Statements. SPS stores and distributes
products to our customers from a warehouse in Tennessee. When
SPS receives a purchase order, it processes the order into a
computerized distribution database. Generally, SPS ships our
customers’ orders within 24 hours after their order is
received. Once the order has shipped, SPS generates and mails
invoices on our behalf. Any delay or interruption in the
distribution process or in payment by our customers could have a
material adverse effect on our business.
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Government Regulation
Generally — Product Development. The
pharmaceutical industry is subject to regulation by the FDA
under the Food, Drug and Cosmetic Act, by the states under state
food and drug laws, and by similar agencies outside of the
United States. In order to clinically test, manufacture, and
market products for therapeutic use, we must satisfy mandatory
procedures and safety and effectiveness standards established by
various regulatory bodies. We have provided a more detailed
explanation of the standards we are subject to under
“Factors Affecting Our Business and Prospects —
We may spend a significant amount of money to obtain FDA and
other regulatory approvals, which may never be granted” and
“— We cannot sell our current products and
product candidates if we do not obtain and maintain governmental
approvals” below.
We expect that all of our prescription pharmaceutical products
will require regulatory approval by governmental agencies before
we can commercialize them. The nature and extent of the review
process for our potential products will vary depending on the
regulatory categorization of particular products. Federal,
state, and international regulatory bodies govern or influence,
among other things, the testing, manufacture, labeling, storage,
record keeping, approval, advertising, and promotion of our
products on a product-by-product basis. Failure to comply with
applicable requirements can result in, among other things,
warning letters, fines, injunctions, penalties, recall or
seizure of products, total or partial suspension of production,
denial or withdrawal of approval, and criminal prosecution.
Accordingly, initial and ongoing regulation by governmental
entities in the United States and other countries is a
significant factor in the production and marketing of any
pharmaceutical products that we have or may develop.
Product development and approval within this regulatory
framework, and the subsequent compliance with appropriate
federal and foreign statutes and regulations, takes a number of
years and involves the expenditure of substantial resources.
FDA Approval. The general process for approval by the FDA
is as follows:
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Preclinical Testing. Generally, a company must conduct
preclinical studies before it can obtain FDA approval for a new
therapeutic agent. The basic purpose of preclinical
investigation is to gather enough evidence on the potential new
agent through laboratory experimentation and animal testing, to
determine if it is reasonably safe to begin preliminary trials
in humans. The sponsor of these studies submits the results to
the FDA as a part of an investigational new drug application,
which the FDA must review before human clinical trials of an
investigational drug can start. We have filed and will continue
to be required to sponsor and file investigational new drug
applications, and will be responsible for initiating and
overseeing the clinical studies to demonstrate the safety and
efficacy that are necessary to obtain FDA approval of our
product candidates. |
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Clinical Trials. Clinical trials are normally done in
three distinct phases and generally take two to five years, but
may take longer, to complete: |
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Phase I trials generally involve administration of a
product to a small number of patients to determine safety,
tolerance and the metabolic and pharmacologic actions of the
agent in humans and the side effects associated with increasing
doses. |
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Phase II trials generally involve administration of a
product to a larger group of patients with a particular disease
to obtain evidence of the agent’s effectiveness against the
targeted disease, to further explore risk and side effect
issues, and to confirm preliminary data regarding optimal dosage
ranges. |
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Phase III trials involve more patients, and often more
locations and clinical investigators than the earlier trials. At
least one such trial is required for FDA approval to market a
branded, or non-generic, drug. |
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The rate of completion of our clinical trials depends upon,
among other factors, the rate at which patients enroll in the
study. Patient enrollment is a function of many factors,
including the size of the patient population, the nature of the
protocol, the proximity of patients to clinical sites, the |
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eligibility criteria for the study, and the sometimes seasonal
nature of certain dermatological conditions. Delays in planned
patient enrollment may result in increased costs and delays,
which could have a material adverse effect on our business. In
addition, side effects or adverse events that are reported
during clinical trials can delay, impede, or prevent marketing
approval. |
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Regulatory Submissions. The Food, Drug and Cosmetic Act
outlines the process by which a company can request approval to
commercialize a new product. After we complete the clinical
trials of a new drug product, we must file an NDA with the FDA.
We used the so-called 505(b)(2) application process for OLUX,
Luxíq, and Evoclin, which permitted us in each case to
satisfy the requirements for a full NDA by relying on published
studies or the FDA’s findings of safety and effectiveness
based on studies in a previously-approved NDA sponsored by
another applicant, together with the studies generated on our
products. Generally, although the FDA evaluation of safety and
efficacy is the same, the number of clinical trials required to
support a 505(b)(2) application, and the amount of information
in the application itself, may be substantially less than that
required to support a traditional NDA application. The 505(b)(2)
process will not be available for all of our other product
candidates, and as a result the FDA process may be longer for
our future product candidates than it has been for our products
to date. |
We must receive FDA clearance before we can commercialize any
product, and the FDA may not grant approval on a timely basis or
at all. The FDA can take between one and two years to review an
NDA, and can take longer if significant questions arise during
the review process. In addition, if there are changes in FDA
policy while we are in product development, we may encounter
delays or rejections that we did not anticipate when we
submitted the NDA for that product. We may not obtain regulatory
approval for any products that we develop, even after committing
such time and expenditures to the process. Even if regulatory
approval of a product is granted, it may entail limitations on
the indicated uses for which the product may be marketed.
Our products will also be subject to foreign regulatory
requirements governing human clinical trials, manufacturing and
marketing approval for pharmaceutical products. The requirements
governing the conduct of clinical trials, product licensing,
pricing and reimbursement are similar, but not identical, to FDA
requirements, and they vary widely from country to country.
Manufacturing. The FDA regulates and inspects equipment,
facilities, and processes used in the manufacturing of
pharmaceutical products before providing approval to market a
product. If after receiving clearance from the FDA, we make a
material change in manufacturing equipment, location, or
process, we may have to undergo additional regulatory review. We
must apply to the FDA to change the manufacturer we use to
produce any of our products. We and our contract manufacturers
must adhere to GMP and product-specific regulations enforced by
the FDA through its facilities inspection program. The FDA also
conducts regular, periodic visits to re-inspect equipment,
facilities, and processes after the initial approval. If, as a
result of these inspections, the FDA determines that our (or our
contract manufacturers’) equipment, facilities, or
processes do not comply with applicable FDA regulations and
conditions of product approval, the FDA may seek sanctions
and/or remedies against us, including suspension of our
manufacturing operations.
Post-Approval Regulation. The FDA continues to review
marketed products even after granting regulatory clearances, and
if previously unknown problems are discovered or if we fail to
comply with the applicable regulatory requirements, the FDA may
restrict the marketing of a product or impose the withdrawal of
the product from the market, recalls, seizures, injunctions or
criminal sanctions. In its regulation of advertising, the FDA
from time to time issues correspondence to pharmaceutical
companies alleging that some advertising or promotional
practices are false, misleading or deceptive. The FDA has the
power to impose a wide array of sanctions on companies for such
advertising practices.
Pharmacy Boards. We are required in most states to be
licensed with the state pharmacy board as either a manufacturer,
wholesaler, or wholesale distributor. Many of the states allow
exemptions from licensure if our products are distributed
through a licensed wholesale distributor. The regulations of
each state are different, and the fact that we are licensed in
one state does not authorize us to sell our products
58
in other states. Accordingly, we undertake an annual review of
our license status and that of SPS to ensure continued
compliance with the state pharmacy board requirements.
Fraud and Abuse Regulations. We are subject to various
federal and state laws pertaining to health care “fraud and
abuse,” including anti-kickback laws and false claims laws.
The Office of Inspector General, or OIG, of the
U.S. Department of Health and Human Services has provided
guidance that outlines several considerations for pharmaceutical
manufacturers to be aware of in the context of marketing and
promotion of products reimbursable by the federal health care
programs. Effective July 1, 2005, pursuant to a new
California law, all pharmaceutical companies doing business in
California will be required to certify that they are in
compliance with the OIG guidance.
The federal anti-kickback statute places constraints on business
activities in the health care sector that are common business
activities in other industries, including sales, marketing,
discounting, and purchase relations. Practices that may be
common or longstanding in other businesses are not necessarily
acceptable or lawful when soliciting federal health care program
business. Specifically, anti-kickback laws make it illegal for a
prescription drug manufacturer to solicit or to offer or pay
anything of value for patient referrals, or in return for
purchasing, leasing, ordering, or arranging for or recommending
the purchase, lease or ordering of, any item or service that is
reimbursable in whole or part by a federal health care program,
including the purchase or prescription of a particular drug. The
federal government has published regulations that identify
“safe harbors” or exemptions for certain payment
arrangements that do not violate the anti-kickback statutes. We
seek to comply with the safe harbors where possible. Due to the
breadth of the statutory provisions and the absence of guidance
in the form of regulations or court decisions addressing some of
our practices, it is possible that our practices might be
challenged under anti-kickback or similar laws.
False claims laws prohibit anyone from knowingly and willingly
presenting, or causing to be presented for payment to third
party payors (including Medicare and Medicaid) claims for
reimbursed drugs or services that are false or fraudulent,
claims for items or services not provided as claimed, or claims
for medically unnecessary items or services. Our activities
relating to the sale and marketing of our products may be
subject to scrutiny under these laws.
Violations of fraud and abuse laws may be punishable by criminal
and/or civil sanctions, including fines and civil monetary
penalties, as well as the possibility of exclusion from federal
health care programs (including Medicare and Medicaid).
Medicaid and State Rebate Programs. We participate in the
Federal Medicaid rebate program established by the Omnibus
Budget Reconciliation Act of 1990, as well as several state
supplemental rebate programs. Under the Medicaid rebate program,
we pay a rebate to each state Medicaid program for our products
that are reimbursed by those programs. As a manufacturer
currently of single source products only, the amount of the
rebate for each of our products is set by law as the greater of
15.1% of the average manufacturer price of that product, or the
difference between the average manufacturer price and the best
price available from the company to any customer, with the final
rebate amount adjusted upward if increases in average
manufacturer price since product launch have outpaced inflation.
The Medicaid rebate amount is computed each quarter based on our
submission to the U.S. Department of Health and Human
Services Centers for Medicare and Medicaid Services of our
current average manufacturer price and best price for each of
our products. As part of our revenue recognition policy, we
provide reserves on this potential exposure at the time of
product shipment.
Federal law also requires that any company that participates in
the Medicaid program must extend comparable discounts to
qualified purchasers under the Public Health Services, or PHS,
pharmaceutical pricing program. The PHS pricing program extends
discounts comparable to the Medicaid rebate to a variety of
community health clinics and other entities that receive health
services grants from the PHS, as well as hospitals that serve a
disproportionate share of poor Medicare and Medicaid
beneficiaries.
We also make our products available to authorized users of the
Federal Supply Schedule, or FSS, of the General Services
Administration under an FSS contract negotiated by the
Department of Veterans
59
Affairs. The Veterans Health Care Act of 1992, or VHCA, imposes
a requirement that the prices a company such as Connetics
charges the Veterans Administration, the Department of Defense,
the Coast Guard, and the PHS be discounted by a minimum of 24%
off the average manufacturer price charged to non-federal
customers. Our computation of the average price to non-federal
customers is used in establishing the FSS price for these four
purchasers. The government maintains the right to audit the
accuracy of our computations. Among the remedies available to
the government for failure to accurately calculate FSS pricing
and the average manufacturer price charged to non-federal
customers is recoupment of any overpayments made by FSS
purchasers as a result of errors in computations that affect the
FSS price.
The Medicaid rebate statute and the VHCA also provide that, in
addition to penalties that may be applicable under other federal
statutes, civil monetary penalties may be assessed for knowingly
providing false information in connection with the pricing and
reporting requirements under the laws. The amount that may be
assessed is up to $100,000 for each item of false information.
We have provided additional information about the risks
associated with participation in the Medicaid and similar
programs, under “Factors Affecting Our Business and
Prospects — Our sales depend on payment and
reimbursement from third party payors, and if they reduce or
refuse payment or reimbursement, the use and sales of our
products will suffer, we may not increase our market share, and
our revenues and profitability will suffer” and
“— The growth of managed care organizations and other
third-party reimbursement policies may have an adverse effect on
our pricing policies and our margins” below.
Marketing To Healthcare Professionals
We intend for our relationships with doctors to benefit patients
and to enhance the practice of medicine, and at the same time
represent the interests of our stockholders in maintaining and
growing our company. We have adopted internal policies that
emphasize to our employees that all interactions with healthcare
professionals should be focused on informing them about
FDA-approved uses of our products, providing scientific and
educational information consistent with FDA regulations and
guidance, or supporting medical research and education. We
believe that effective marketing of our products is necessary to
ensure that patients have access to the products they need, and
that the products are correctly used for maximum patient
benefit. Our marketing and sales organizations are critical to
achieving these goals, because they foster relationships that
enable us to inform healthcare professionals about the benefits
and risks of our products, provide scientific and educational
information, support medical research and education, and obtain
feedback and advice about our products through consultation with
medical experts.
Marketing Exclusivity
The FDA has the power to grant pharmaceutical companies new drug
product exclusivity for a drug, independent of any orphan drug
or patent term exclusivity accorded to that drug. This marketing
exclusivity essentially prevents competition from other
manufacturers who wish to put generic versions of the product
into U.S. commerce. The FDA has granted us marketing
exclusivity for foam-based products incorporating clobetasol
propionate until December 20, 2005, for the short-term
topical treatment of mild to moderate plaque-type psoriasis of
non-scalp regions. The exclusivity prevents other parties from
submitting or getting approval for any comparable application
before the exclusive period expires. The FDA determines whether
a drug is eligible for exclusivity on a case-by-case basis. The
FDA may grant three-year exclusivity provided that the
application included at least one new clinical investigation
other than bioavailability studies, the investigation was
conducted or sponsored by the drug company, and the reports of
the clinical investigation were essential to the approval of the
application. At the time we submitted the NDA for the expanded
label for OLUX, we requested exclusivity for the new indication.
As an antibiotic, Evoclin is not eligible for marketing
exclusivity.
Environmental Regulation
Our research and development activities involve the controlled
use of hazardous materials including biohazardous material,
organic solvents, potent pharmaceutical agents, compressed
flammable gases, and
60
certain radioactive materials, such as tritium, and carbon-14.
We are subject to federal, state and local laws and regulations
governing the use, storage, handling and disposal of such
materials and certain waste products. Although, to the best of
our knowledge, our safety procedures and equipment for handling
and disposing of hazardous materials comply with all applicable
prudent industry standards and all applicable state, federal,
and local laws and regulations, we cannot completely eliminate
the risk of accidental contamination or injury from these
materials.
We are committed to conducting our operations in a manner that
protects the health and safety of our employees, the environment
and the communities in which we operate. Maintaining a clean
environment and a safe and healthy workplace is an integral part
of our daily activities and business decisions. Our
environmental health and safety programs are developed and
continually improved to ensure the protection of our business,
assets, employees, customers, and the surrounding community.
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 on our capital
expenditures, earnings or 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 other than those funds
required for our ordinary course environmental health and safety
compliance programs.
Employees
As of May 31, 2005, we had 315 full-time employees,
including 18 in Connetics Australia. Of the full-time employees,
169 were engaged in sales and marketing, 76 were in research and
development and 52 were in general and administrative positions.
We believe our relations with our employees are good.
Properties
We currently sublease from Incyte Corporation 96,025 square
feet of laboratory and office space at 3160 Porter Drive also in
Palo Alto. We occupied this space as our new headquarters
facility on February 28, 2005. In March 2005, we received
approval from the Board of Trustees of the Leland Stanford
Junior University, the landlord, for a sublease with Incyte
Corporation signed in August 2004 for 19,447 square feet of
office space at 1841 Page Mill Road also in Palo Alto. Payment
under this sublease will commence on January 1, 2006. Our
subsidiary, Connetics Australia Pty Ltd., owns land and real
property consisting of laboratory and office space at 8 Macro
Court, Rowville, Victoria, Australia. In addition, we make
rental payments to DPT Laboratories, Ltd. for the floor space
occupied by our 12,000 square foot aerosol filling line in
DPT’s Texas facility. We believe that our existing
facilities are adequate to meet our requirements for the
foreseeable future.
Legal Proceedings
We are not a party to any material legal proceedings.
Changes In And Disagreements With Accountants On Accounting
And Financial Disclosure
We have had no changes in or disagreements with, our independent
public accountants on accounting and financial disclosure.
61
MANAGEMENT
Executive Officers
The following table shows information about our executive
officers as of June 1, 2005:
| |
|
|
|
|
|
|
| |
| Name |
|
Age | |
|
Position |
| |
|
Thomas G. Wiggans
|
|
|
53 |
|
|
Chief Executive Officer and Director |
|
C. Gregory Vontz
|
|
|
44 |
|
|
President and Chief Operating Officer |
|
John L. Higgins
|
|
|
34 |
|
|
Chief Financial Officer; Executive Vice President, Finance and
Corporate Development |
|
Katrina J. Church
|
|
|
43 |
|
|
Executive Vice President, Legal Affairs; General Counsel and
Secretary |
|
Lincoln Krochmal, M.D.
|
|
|
58 |
|
|
Executive Vice President, Research and Product Development |
|
Matthew W. Foehr
|
|
|
32 |
|
|
Senior Vice President, Technical Operations |
|
Michael Miller
|
|
|
47 |
|
|
Senior Vice President, Sales and Marketing and Chief Commercial
Officer |
|
Rebecca Sunshine
|
|
|
42 |
|
|
Senior Vice President, Human Resources and Organizational
Dynamics |
| |
Thomas Wiggans has served as Chief Executive Officer and
as a director of Connetics since July 1994. He served as
President of Connetics from July 1994 to February 2005. From
February 1992 to April 1994, Mr. Wiggans served as
President and Chief Operating Officer of CytoTherapeutics, a
biotechnology company. From 1980 to February 1992,
Mr. Wiggans served in various positions at Ares-Serono
Group, a pharmaceutical company, including President of its
U.S. pharmaceutical operations and Managing Director of its
U.K. pharmaceutical operations. From 1976 to 1980 he held
various sales and marketing positions with Eli Lilly &
Co., a pharmaceutical company. He is currently a director of the
Biotechnology Industry Organization (BIO), and a member of its
Executive Committee, and its Emerging Company Section. He is
also Chairman of the Biotechnology Institute, a non-profit
educational organization and a member of the Board of Overseers
of the Hoover Institution at Stanford University.
Mr. Wiggans also serves as a director of Abgenix
Corporation, Tercica, Inc., and Onyx Pharmaceuticals, Inc.
Mr. Wiggans received his B.S. in Pharmacy from the
University of Kansas and his M.B.A. from Southern Methodist
University.
Gregory Vontz joined Connetics as Executive Vice
President, Chief Commercial Officer in December 1999. He has
served as Chief Operating Officer since January 2001 and
President since February 2005. Before joining Connetics,
Mr. Vontz served 12 years with Genentech, Inc., most
recently as Director of New Markets and Healthcare Policy.
Before joining Genentech, Inc. in 1987, Mr. Vontz worked
for Merck & Co., Inc. Mr. Vontz received his B.S.
in Chemistry from the University of Florida and his M.B.A. from
the Haas School of Business at University of California at
Berkeley.
John Higgins joined Connetics as Chief Financial Officer
in 1997, and has served as Executive Vice President, Finance and
Administration and Corporate Development since January 2002. He
served as Executive Vice President, Finance and Administration,
from January 2000 to December 2001, and as Vice President,
Finance and Administration from September 1997 through December
1999. Before joining Connetics, he was a member of the executive
management team at BioCryst Pharmaceuticals, Inc. Before joining
BioCryst in 1994, Mr. Higgins was a member of the
healthcare banking team of Dillon, Read & Co. Inc., an
investment banking firm. He currently serves as a director of
BioCryst and a private company. He received his A.B. from
Colgate University.
Katrina Church joined Connetics in 1998, and has served
as Executive Vice President, Legal Affairs since January 2002
and as Secretary since September 1998. She served as Senior Vice
President, Legal Affairs and General Counsel from January 2000
through December 2001, and as Vice President, Legal Affairs and
Corporate Counsel from June 1998 through December 1999. Before
joining Connetics,
62
Ms. Church served in various positions at VISX,
Incorporated, most recently as Vice President, General Counsel.
Before joining VISX in 1991, Ms. Church practiced law with
the firm Hopkins & Carley in San Jose, California.
Ms. Church received her J.D. from the New York University
School of Law, and her A.B. from Duke University.
Lincoln Krochmal, M.D. joined Connetics in October
2003 as Executive Vice President, Research and Product
Development. Dr. Krochmal joined Unilever PLC, where he
worked since 1993, mostly recently as Senior Vice President,
Worldwide Research and Development for the Home and Personal
Care Division. Prior to Unilever, Dr. Krochmal held various
senior management positions in dermatology research and
development at Bristol-Myers Squibb and Westwood
Pharmaceuticals, Inc. Before joining Westwood he spent seven
years in his own private dermatology practice. Dr. Krochmal
received his Bachelor of Medical Sciences degree from the
University of Wisconsin, his Doctor of Medicine from the Medical
College of Wisconsin, and his board certification in dermatology
following successful completion of the residency training
program at the University of Missouri Medical Center. In 2005
Dr. Krochmal was appointed to the Board of Directors of the
International Academy of Cosmetic Dermatology. He is a fellow of
the American Academy of Dermatology, a Diplomat of the American
Board of Dermatology and a member of the International Society
of Dermatology and the Dermatology Foundation.
Matthew Foehr joined Connetics in 1999, and has served as
Senior Vice President, Technical Operations, since January 2003.
He served as Vice President, Manufacturing, from November 2001
through December 2002, and in various director and manager-level
manufacturing positions from July 1999 to November 2001. Before
joining Connetics, Mr. Foehr worked for over five years at
LXR Biotechnology, Inc., most recently serving as Associate
Director, Manufacturing and Process Development. Before joining
LXR, Mr. Foehr worked for Berlex Biosciences in the
Department of Process Development and Biochemistry/ Biophysics.
Mr. Foehr received his B.S. in Biology from
Santa Clara University.
Michael Miller joined Connetics in February 2003 as
Senior Vice President of Sales and Marketing and Chief
Commercial Officer. Mr. Miller most recently served as Vice
President of Commercial Operations at Cellegy Pharmaceuticals.
Before Cellegy, Mr. Miller spent four years with ALZA
Corporation, most recently as Vice President of the Urology
Business Unit, three years with VIVUS, Inc. as Marketing
Director, and 14 years with Syntex/ Roche in marketing and
sales management. Mr. Miller received his B.S. in Finance
from University of San Francisco and his M.B.A. in
Information Systems from San Francisco State University.
Rebecca Sunshine joined Connetics in 1996, and has served
as Senior Vice President Human Resources and Organizational
Dynamics since January 2002. Ms. Sunshine served as Vice
President of Human Resources from December 1999 to December
2002, and as Director of Human Resources from 1996 through
November 1999. She worked at COR Therapeutics from 1990 to 1996
in the positions of Manager of Research Administration, Manager
of Human Resources, and Senior Manager of Human Resources.
Ms. Sunshine also worked at Genelabs as Manager of Research
Administration from 1988 to 1990, at Genentech in 1987, and in
various hospital administration positions from 1984 to 1987.
Ms. Sunshine received her B.A. from UC Santa Barbara
and her M.P.A. in Health Services from the University of
San Francisco.
Directors
Eugene A. Bauer, M.D., 62, has served as a director
since 1996 and previously served as a Director from 1993 to
1995. Dr. Bauer is Chief Executive Officer of Neosil,
Incorporated, a privately held biotechnology company. From 2002
to 2004 he was a Senior Client Partner with Korn/ Ferry
International. He served as Vice President for the Stanford
University Medical Center from 1997 to 2001, and as Dean of the
Stanford University School of Medicine from 1995 through 2001.
Dr. Bauer was a founder of Connetics. Since 1988 he has
been Professor, Department of Dermatology, Stanford University
School of Medicine, and was Chief of the Dermatology Service at
Stanford University Hospital from 1988 to 1995. From 1982 to
1988, he was a professor at Washington University School of
Medicine. He has served as Chairman of two National Institutes
of Health study sections of the National Institute of Arthritis
and
63
Musculoskeletal and Skin Diseases and has served on a board of
scientific counselors for the National Cancer Institute.
Dr. Bauer also serves as a director of Protalex, Inc. and
three private companies and one non-profit dermatological
association. Dr. Bauer holds B.S. and M.D. degrees from
Northwestern University.
R. Andrew Eckert, 44, has served as a director since
2002. Mr. Eckert is the Chief Executive Officer of Sum
Total Systems, Inc., a business software company created by the
March 2004 merger of Docent, Inc. and Click2learn, Inc. He
served as Chief Executive Officer of Docent from April 2002.
From 1997 to 2000, Mr. Eckert served as Chief Executive
Officer of ADAC Laboratories, a $400 million medical
products company. Mr. Eckert also served as a director of
ADAC Laboratories from 1996 to 2000 and as Chairman of the Board
from 1999 to 2000. Mr. Eckert holds a B.S. in industrial
engineering and an M.B.A. from Stanford University. He currently
serves on the boards of Sum Total Systems, Inc. and Varian
Medical Systems, Inc.
Carl B. Feldbaum, 61, has served as a director since May,
2005. Mr. Feldbaum comes to the board with extensive
experience in the biotechnology industry including serving as
President of the Washington, D.C.-based Biotechnology
Industry Organization (BIO) from its founding 1993 until
January 2005. Prior to his appointment as President of BIO,
Mr. Feldbaum was Chief of Staff to Senator Arlen Specter of
Pennsylvania. He also was President and Founder of the Palomar
Corporation, a national security think tank in Washington D.C.
Before founding Palomar Corporation, Mr. Feldbaum was
Assistant to the Secretary of Energy, and served as Inspector
General for defense intelligence in the U.S. Department of
Defense. Mr. Feldbaum is also a director of Actelion
Pharmaceuticals Ltd. Mr. Feldbaum holds a B.S. in Biology
from Princeton University and a J.D. from University of
Pennsylvania Law School.
Denise M. Gilbert, PH.D., 47, has served as a director
since 2003. Dr. Gilbert is an independent consultant and
strategic advisor to life science companies. From 2001 to 2002,
she served as Chief Executive Officer of Entigen Corporation, a
private life science information technology company. From 1995
to 1999, Dr. Gilbert served as Chief Financial Officer and
Executive Vice President of Incyte Pharmaceuticals (now Incyte
Corporation), and from 1993 to 1995 she was Chief Financial
Officer and Executive Vice President of Affymax, Inc. From 1986
through 1993, Dr. Gilbert was a Managing Director and
senior biotechnology analyst at Smith Barney Harris &
Upham, and Vice President and biotechnology analyst at
Montgomery Securities. Dr. Gilbert is also a director of
Dynavax Technologies Corporation and a private life science
company. Dr. Gilbert holds a B.A. from Cornell University
and a Ph.D. in Cell and Developmental Biology from Harvard
University.
John C. Kane, 65, has served as a director since 1997.
Mr. Kane was President and Chief Operating Officer of
Cardinal Health, Inc., a healthcare services provider, from
March 1993 until his retirement in December 2000. Prior to
joining Cardinal, Mr. Kane served in various operational
and management positions at Abbott Laboratories for
19 years, most recently as President of the Ross
Laboratories Division. Mr. Kane is also a director of two
private companies. Mr. Kane holds a B.S. from West Chester
University.
Thomas D. Kiley, 61, has served as a director since 1993.
Mr. Kiley has been self-employed since 1988 as an attorney,
consultant and investor. From 1980 to 1988, he was an officer of
Genentech Inc., serving variously as Vice President and General
Counsel, Vice President for Legal Affairs and Vice President for
Corporate Development. From 1969 to 1980, he was with the law
firm of Lyon & Lyon, where he was a partner from 1975
to 1980. Mr. Kiley is also a director of Geron Corporation
and of four private companies. Mr. Kiley holds a B.S. in
Chemical Engineering from Pennsylvania State University and a
J.D. from George Washington University.
Leon E. Panetta, 66, has served as a director since 2000.
Mr. Panetta is the Director, along with his wife Sylvia, of
the Panetta Institute for Public Policy at California State
University, Monterey Bay, and is a member of the international
advisory board of Fleishman-Hillard, Inc. From 1994 to 1997, he
served as White House Chief of Staff. Before his appointment as
White House Chief of Staff, Mr. Panetta served as Director
of the White House Office of Management and Budget, having been
confirmed by the Senate for
64
that position on January 21, 1993. Prior to 1993,
Mr. Panetta was a member of the U.S. House of
Representatives for eight full terms. Mr. Panetta is also a
director of Zenith Insurance Company, IDT Telecom, Inc. and Blue
Shield of California. Mr. Panetta holds a B.A. from
Santa Clara University, and a J.D. from Santa Clara
University Law School.
G. Kirk Raab, 69, has served as a director since
1995. Mr. Raab was the President, Chief Executive Officer
and a director of Genentech, Inc. from January 1990 to July
1995, and President, Chief Operating Officer and a director of
Genentech from 1985 to January 1990. Prior to joining Genentech
in 1985, Mr. Raab was President, Chief Operating Officer,
and a director of Abbott Laboratories, and before that, held
executive positions with Beecham Group, A.H. Robins Company,
Inc. and Pfizer, Inc. He is currently Chairman of Applied
Imaging, Inc. and Protalex, Inc.; he is also Chairman of one
private company, and a board member of another two private
companies. Mr. Raab is a Trustee Emeritus of Colgate
University, and an honorary fellow of Exeter College, of Oxford
University, England. Mr. Raab holds an A.B. degree from
Colgate University.
Thomas G. Wiggans, 53, has served as a director since
1994. Mr. Wiggans has served as Chief Executive Officer and
as a director of Connetics since July 1994. He served as
President of Connetics from July 1994 to February 2005. From
February 1992 to April 1994, Mr. Wiggans served as
President and Chief Operating Officer of CytoTherapeutics, Inc.,
a biotechnology company. From 1980 to February 1992,
Mr. Wiggans served in various positions at Ares-Serono
Group, a pharmaceutical company, including President of its
U.S. pharmaceutical operations and Managing Director of its
U.K. pharmaceutical operations. From 1976 to 1980 he held
various sales and marketing positions with Eli Lilly &
Co., a pharmaceutical company. He is currently a director of the
Biotechnology Industry Organization (BIO), and a member of its
Executive Committee and its Emerging Company Section. He is also
Chairman of the Biotechnology Institute, a non-profit
educational organization, and a member of the Board of Overseers
of the Hoover Institution at Stanford University.
Mr. Wiggans also serves as a director of Abgenix
Corporation, Tercica, Inc., and Onyx Pharmaceuticals, Inc.
Mr. Wiggans received his B.S. in Pharmacy from the
University of Kansas and his M.B.A. from Southern Methodist
University.
Audit Committee
The Audit Committee of our Board of Directors reviews the
results and scope of the audit and other services provided by
our independent registered public accounting firm. The Audit
Committee is composed of Dr. Gilbert, Mr. Eckert, and
Mr. Kiley, all of whom are independent directors within the
meaning of the Nasdaq listing standards. Dr. Gilbert serves
as the chair of the Audit Committee, and our Board has
determined that Dr. Gilbert qualifies as the “audit
committee financial expert” as that term is defined by the
SEC. The charter of the Audit Committee was included as
Appendix A to our proxy statement for our 2004 Annual
Meeting of Stockholders and is available on our corporate
website at http://ir.connetics.com/governance/highlights.cfm.
65
EXECUTIVE COMPENSATION AND RELATED INFORMATION
Summary Compensation Table Long-Term
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Long Term | |
|
|
| |
|
Compensation | |
|
|
| |
|
|
|
| |
|
|
| |
|
Annual Compensation | |
|
Number of Shares | |
|
|
| |
|
| |
|
Underlying | |
|
All Other | |
| Name and Principal Position |
|
Year | |
|
Salary | |
|
Bonus | |
|
Options | |
|
Compensation(1) | |
| | |
|
Thomas G. Wiggans(2)
|
|
|
2004 |
|
|
$ |
514,000 |
|
|
$ |
425,000 |
|
|
|
200,000 |
|
|
$ |
62,149 |
|
| |
Chief Executive Officer
|
|
|
2003 |
|
|
$ |
490,000 |
|
|
$ |
338,100 |
|
|
|
225,000 |
|
|
$ |
64,867 |
|
| |
|
|
2002 |
|
|
$ |
490,000 |
|
|
$ |
270,000 |
|
|
|
300,000 |
|
|
$ |
70,154 |
|
|
C. Gregory Vontz(3)
|
|
|
2004 |
|
|
$ |
353,000 |
|
|
$ |
233,000 |
|
|
|
112,000 |
|
|
$ |
4,037 |
|
| |
President and Chief Operating
|
|
|
2003 |
|
|
$ |
325,000 |
|
|
$ |
172,250 |
|
|
|
125,000 |
|
|
$ |
5,218 |
|
| |
Officer
|
|
|
2002 |
|
|
$ |
325,000 |
|
|
$ |
143,325 |
|
|
|
85,000 |
|
|
$ |
3,807 |
|
|
Lincoln Krochmal(4)
|
|
|
2004 |
|
|
$ |
375,000 |
|
|
$ |
192,000 |
|
|
|
25,000 |
|
|
$ |
156,862 |
|
| |
Exec. Vice President, Research &
|
|
|
2003 |
|
|
$ |
93,750 |
|
|
$ |
37,500 |
|
|
|
125,000 |
|
|
$ |
263,059 |
|
| |
Product Development
|
|
|
2002 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
John L. Higgins
|
|
|
2004 |
|
|
$ |
315,000 |
|
|
$ |
208,000 |
|
|
|
90,000 |
|
|
$ |
3,807 |
|
| |
Chief Financial Officer
|
|
|
2003 |
|
|
$ |
300,000 |
|
|
$ |
153,000 |
|
|
|
100,000 |
|
|
$ |
3,528 |
|
| |
Exec. Vice President, Finance &
|
|
|
2002 |
|
|
$ |
300,000 |
|
|
$ |
128,100 |
|
|
|
75,000 |
|
|
$ |
3,615 |
|
| |
Corporate Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Katrina J. Church
|
|
|
2004 |
|
|
$ |
288,000 |
|
|
$ |
138,000 |
|
|
|
72,000 |
|
|
$ |
3,881 |
|
| |
Exec. Vice President, Legal Affairs
|
|
|
2003 |
|
|
$ |
275,000 |
|
|
$ |
120,000 |
|
|
|
80,000 |
|
|
$ |
3,600 |
|
| |
General Counsel and Secretary
|
|
|
2002 |
|
|
$ |
275,000 |
|
|
$ |
105,875 |
|
|
|
70,000 |
|
|
$ |
3,687 |
|
| |
|
|
| Note: |
Bonus amounts reflect compensation paid in a later year for
work performed in the stated year. Option numbers reflect
options granted in the stated year. |
|
|
| (1) |
Except as otherwise indicated, “other compensation”
for each individual represents (a) premiums paid by
Connetics for group term life insurance, and (b) a company
match for 401(k) contributions of $3,250 in 2004 $3,000 in 2003,
and $3,087 in 2002. |
| |
| (2) |
“All Other Compensation” also includes the
following: loan forgiveness of $56,200 in 2004, $59,300 in 2003,
and $62,400 in 2002; $3,367 for 401(k) match in 2002; and
premiums paid on life insurance for the benefit of
Mr. Wiggans’ family of $1,820 in 2002. |
| |
| (3) |
Mr. Vontz was appointed President of Connetics in
February 2005. “All Other Compensation” also includes
airfare paid for Mr. Vontz’s wife of $1,498 in
2003. |
| |
| (4) |
“All Other Compensation” includes relocation
payments of $150,000 in 2004 and $263,059 in 2003.
Dr. Krochmal joined Connetics in 2003. |
Option Grants in Last Fiscal Year
The following table provides certain information with respect to
stock options granted to the Named Officers in 2004.
Option Grants in 2004
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Percentage | |
|
|
|
Potential Realizable Value at | |
| |
|
of Total | |
|
|
|
Assumed Annual Rates of | |
| |
|
Number of | |
|
Options | |
|
|
|
Stock Price Appreciation for | |
| |
|
Securities | |
|
Granted to | |
|
|
|
Option Terms(2) | |
| |
|
Underlying | |
|
Employees | |
|
Exercise | |
|
|
|
|
| |
|
Options | |
|
in Fiscal | |
|
Price Per | |
|
Expiration | |
|
| |
| Name |
|
Granted(1) | |
|
Year | |
|
Share | |
|
Date | |
|
5% | |
|
10% | |
| | |
|
Thomas G. Wiggans
|
|
|
200,000 |
|
|
|
11.3 |
% |
|
$ |
18.05 |
|
|
|
Jan. 5, 2014 |
|
|
$ |
2,270,309 |
|
|
$ |
5,753,410 |
|
|
C. Gregory Vontz
|
|
|
112,000 |
|
|
|
6.3 |
% |
|
$ |
18.05 |
|
|
|
Jan. 5, 2014 |
|
|
$ |
1,271,373 |
|
|
$ |
3,221,910 |
|
|
Lincoln Krochmal
|
|
|
25,000 |
|
|
|
1.4 |
% |
|
$ |
18.05 |
|
|
|
Jan. 5, 2014 |
|
|
$ |
283,789 |
|
|
$ |
719,176 |
|
|
John L. Higgins
|
|
|
90,000 |
|
|
|
5.1 |
% |
|
$ |
18.05 |
|
|
|
Jan. 5, 2014 |
|
|
$ |
1,021,639 |
|
|
$ |
2,589,035 |
|
|
Katrina J. Church
|
|
|
72,000 |
|
|
|
4.1 |
% |
|
$ |
18.05 |
|
|
|
Jan. 5, 2014 |
|
|
$ |
817,312 |
|
|
$ |
2,071,228 |
|
| |
66
|
|
| (1) |
These stock options generally become exercisable at a rate of
one-fourth of the shares of common stock subject to the option
at the end of the first 12 month period after the date of
grant and monthly thereafter until the fourth anniversary of
grant, as long as the optionee remains an employee with,
consultant to, or director of Connetics. |
| |
| (2) |
Potential gains are net of exercise price, but before taxes
associated with exercise. These amounts represent certain
assumed rates of appreciation only, in accordance with SEC
rules. The hypothetical value for the options is calculated
based on 5% and 10% assumed rates of annual compound stock price
appreciation during the option term, as mandated by the SEC.
Actual gains, if any, on stock option exercises are dependent on
the future performance of the common stock, overall market
conditions and the option holders’ continued employment
through the vesting period. The amounts reflected in this table
may not necessarily be achieved. |
2004 Year-End Option Values
The following table provides certain information with respect to
each Named Officer’s unexercised stock options at
December 31, 2004.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Number of Shares | |
|
Value of Unexercised | |
| |
|
Underlying Unexercised | |
|
In-the-Money | |
| |
|
Shares | |
|
|
|
Options at 12/31/2004 | |
|
Options at 12/31/2004(1) | |
| |
|
Acquired | |
|
|
|
|
|
|
| |
|
On | |
|
Value | |
|
| |
|
| |
| Name |
|
Exercise | |
|
Realized($) | |
|
Exercisable | |
|
Unexercisable | |
|
Exercisable | |
|
Unexercisable | |
| | |
|
Thomas G. Wiggans
|
|
|
75,085 |
|
|
$ |
1,357,998 |
|
|
|
818,231 |
|
|
|
401,045 |
|
|
$ |
12,517,628 |
|
|
$ |
3,693,608 |
|
|
C. Gregory Vontz
|
|
|
30,000 |
|
|
$ |
569,257 |
|
|
|
340,309 |
|
|
|
201,691 |
|
|
$ |
5,193,127 |
|
|
$ |
1,785,820 |
|
|
Lincoln Krochmal
|
|
|
— |
|
|
$ |
— |
|
|
|
39,062 |
|
|
|
110,938 |
|
|
$ |
282,028 |
|
|
$ |
776,472 |
|
|
John L. Higgins
|
|
|
106,957 |
|
|
$ |
2,130,607 |
|
|
|
282,479 |
|
|
|
163,753 |
|
|
$ |
4,600,370 |
|
|
$ |
1,456,695 |
|
|
Katrina J. Church
|
|
|
10,000 |
|
|
$ |
183,360 |
|
|
|
200,570 |
|
|
|
133,983 |
|
|
$ |
3,113,013 |
|
|
$ |
1,204,274 |
|
| |
|
|
| (1) |
In accordance with SEC rules, values are calculated by
multiplying the number of shares times the difference between
the exercise price and the fair market value of the underlying
common stock. For purposes of this table, fair market value is
deemed to be $24.29 per share, the closing price of our
common stock on December 31, 2004 as reported on the Nasdaq
National Market. |
Compensation of Directors
Cash Compensation. For 2004, we paid non-employee
directors an annual retainer of $30,000 when they were
re-elected to the Board. The annual retainer is payable, at the
director’s election, in cash or Connetics common stock. We
pay each director $2,000 for each Board meeting attended in
person or $500 for each Board meeting attended by telephone. In
addition, we pay the Audit Committee chair an annual retainer of
$10,000 paid in quarterly installments, and we pay the
Governance and Compensation Committee chairs an annual retainer
of $5,000 paid in quarterly installments. We pay committee
members $1,000 for each committee meeting attended in person or
$250 for each such committee meeting attended by telephone. We
reimburse directors for out-of-pocket expenses they incur in
connection with attending Board meetings.
Stock Options. Non-employee directors automatically
receive options to purchase shares of our common stock pursuant
to the terms of our 1995 Directors’ Stock Option Plan.
The initial option to purchase 30,000 shares of common
stock (the “First Option”) is granted on the date on
which the individual first becomes a director. In each year that
the director is re-elected, the director receives an option to
purchase 15,000 shares of common stock (a
“Subsequent Option”) if, on such date, the director
has served on our Board of Directors for at least six months.
The First Option is exercisable in four equal installments on
each of the first, second, third and fourth anniversaries of the
date of grant. Each Subsequent Option is exercisable in full on
the first anniversary of the date of grant of that Subsequent
Option. The exercise price of all stock options granted under
the 1995 Directors’ Stock Option Plan is equal to the
fair market value of our common stock on the date of grant.
67
Consulting Agreements. We have consulting agreements with
Mr. Raab and Dr. Bauer pursuant to which we pay them
for certain consulting services in addition to the compensation
they receive as directors of Connetics. For more information
regarding both consulting agreements, see “Certain
Relationships and Related Transactions — Employment
and Consulting Agreements,” below.
Compensation Committee Interlocks and Insider
Participation
Dr. Bauer, Mr. Eckert and Mr. Kane are members of
the Compensation Committee. Mr. Kane serves as the chair of
the Compensation Committee. None of the members of the Committee
was at any time during the year ended December 31, 2004 or
at any other time an officer or employee of Connetics. None of
our executive officers serves on the board of directors or
compensation committee of any entity that has one or more
executive officers serving on our Board of Directors or
Compensation Committee.
Certain Relationships and Related Transactions
Employment and Consulting Agreements
We have a consulting agreement with G. Kirk Raab pursuant to
which Mr. Raab serves as a director, consultant and the
Chairman of our Board of Directors. Pursuant to that agreement,
we paid Mr. Raab a base annual fee of $270,000 in 2004.
That amount has been increased to $300,000 for 2005. In addition
to shares and stock options awarded to Mr. Raab as a
director of Connetics, we have awarded shares and stock options
to him in connection with the consulting agreement. Since 1995,
in addition to awards made in connection with his service as a
director, we have awarded Mr. Raab 50,000 restricted shares
and granted him options to purchase 564,950 shares of
our common stock with exercise prices ranging from $0.45 to
$18.92 per share.
We have a consulting agreement with Eugene A. Bauer, M.D.
pursuant to which he provides certain dermatology research and
market advisory services to Connetics. We paid Dr. Bauer
$54,000 under that agreement in 2004. The consulting agreement
was amended in December 2004 to extend its term until
December 31, 2005 and to set the annual retainer payable to
Dr. Bauer at $36,000.
Mr. Wiggans serves as our Chief Executive Officer pursuant
to an employment agreement entered into in June 1994. Pursuant
to that agreement, Mr. Wiggans receives an annual base
salary, which is reviewed annually, and is eligible for an
annual cash bonus based on consideration of his attainment of
corporate goals and achievement of key milestones. The
employment agreement provides for Mr. Wiggans to receive
continuation of salary and benefits and continuation of vesting
with respect to all of the common stock held by Mr. Wiggans
for nine months following the termination of his employment from
Connetics other than for cause, and to the payment of premiums
on a life insurance policy in the amount of $1,000,000 for the
benefit of Mr. Wiggans’ family. Effective in 2003
Connetics ceased paying the insurance policy premiums on
Mr. Wiggans’ behalf.
Loans to Certain Employees and Consultants
In February 2000, the Board authorized a loan to
Mr. Wiggans in the amount of $250,000, at an interest rate
equal to 6.2%. The loan is to be forgiven at a rate of
$50,000 per year plus accrued interest, on each anniversary
of the loan on which Mr. Wiggans is still employed by
Connetics. As of May 31, 2005 Mr. Wiggans’
repayment obligation had no further repayment obligation under
the loan.
Other Arrangements
We have agreed to pay Mr. Panetta a speaker’s fee when
he speaks to a group on behalf of Connetics other than in his
capacity as a Connetics director. In 2004 we paid speaker fees
of $10,000 to Mr. Panetta.
We have entered into Change of Control agreements with each of
our directors and executive officers and certain other key
employees. The Change of Control agreements (other than the
agreement with Mr. Raab) provide that in the event of a
change of control (as defined in the agreements), all stock
options held by those persons will automatically vest in full.
68
The Change of Control agreements with our executive officers
other than Mr. Wiggans also provide that under certain
circumstances that would constitute involuntary termination of
employment within 24 months following a change of control,
each executive officer will receive an amount equal to 2 times
that executive officer’s annual base salary and bonus at
the time of such termination, the same level of health insurance
benefits in effect immediately preceding the date of such
termination for a period of 24 months following
termination, and outplacement and administrative support for a
period of 6 months following termination.
The Change of Control agreement with Mr. Wiggans provides
that under certain circumstances that would constitute
involuntary termination of his employment within 24 months
following a change of control, Mr. Wiggans will receive an
amount equal to 2.99 times his annual base salary and bonus at
the time of such termination, the same level of health insurance
benefits in effect immediately preceding the date of such
termination for a period of 36 months following such
termination, and outplacement and administrative support for a
period of 6 months following such termination. The Change
of Control agreement with Mr. Raab provides that under
certain circumstances that would constitute involuntary
termination of his services as a consultant within
24 months following a change of control, Mr. Raab will
receive an amount equal to 2.99 times his annual consulting fee
at the time of such termination, the same level of health
insurance benefits in effect immediately preceding the date of
such termination for a period of 36 months following such
termination, and outplacement and administrative support for a
period of 6 months following such termination.
We have entered into indemnification agreements with our
officers and directors containing provisions which may require
the Company, among other things, to indemnify its officers and
directors against certain liabilities that may arise by reason
of their status or service as officers or directors (other than
liabilities arising from willful misconduct of a culpable
nature) and to advance their expenses incurred as a result of
any proceeding against them as to which they could be
indemnified.
69
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information we know with
respect to the beneficial ownership of our common stock as of
May 31, 2005 by (a) all persons who are beneficial
owners of more than five percent of our common stock,
(b) each director and nominee, (c) each of our
executive officers named in the Summary Compensation Table
below, and (d) all director nominees, current directors and
executive officers as a group.
Beneficial ownership is determined in accordance with the rules
and regulations of the SEC and generally includes voting or
investment power with respect to securities. Percentage
ownership is based on 34,897,027 shares of common stock
outstanding at May 31, 2005. Except as indicated otherwise
in the footnotes below, and subject to community property laws
where applicable, we believe based on information furnished by
them that the persons named in the table below have sole voting
and investment power with respect to all shares of common stock
shown as beneficially owned by them.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Percentage of | |
|
|
| |
|
Number of | |
|
Shares | |
|
|
| Name |
|
Shares | |
|
Outstanding | |
|
Footnote(s) | |
| | |
|
FMR Corp
|
|
|
5,107,000 |
|
|
|
14.61 |
% |
|
|
(1 |
) |
|
Edward C. Johnson 3d
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abigail P. Johnson
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
82 Devonshire Street
Boston, Massachusetts 02109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Wellington Management Company, LLP
|
|
|
2,788,663 |
|
|
|
7.99 |
% |
|
|
(2 |
) |
| |
75 State Street
Boston, Massachusetts 02109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Longwood Investment Advisors, Inc.
|
|
|
2,224,200 |
|
|
|
6.37 |
% |
|
|
(3 |
) |
| |
1275 Drummers Lane
Suite 207
Wayne, Pennsylvania 19087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Barclays Global Investors, N.A
|
|
|
2,039,830 |
|
|
|
5.85 |
% |
|
|
(4 |
) |
|
Barclays Global Fund Advisors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barclays Bank PLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barclays Capital Securities Limited
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
45 Fremont Street
San Francisco, CA 94105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas G. Wiggans
|
|
|
1,119,441 |
|
|
|
3.12 |
% |
|
|
(5 |
) |
|
G. Kirk Raab
|
|
|
527,790 |
|
|
|
1.49 |
% |
|
|
(6 |
) |
|
John L. Higgins
|
|
|
460,306 |
|
|
|
1.30 |
% |
|
|
(7 |
) |
|
C. Gregory Vontz
|
|
|
436,883 |
|
|
|
1.24 |
% |
|
|
(8 |
) |
|
Katrina J. Church
|
|
|
245,246 |
|
|
|
* |
|
|
|
(9 |
) |
|
Thomas D. Kiley
|
|
|
242,228 |
|
|
|
* |
|
|
|
(10 |
) |
|
Eugene A. Bauer, M.D.
|
|
|
141,658 |
|
|
|
* |
|
|
|
(11 |
) |
|
John C. Kane
|
|
|
134,939 |
|
|
|
* |
|
|
|
(12 |
) |
|
Leon E. Panetta
|
|
|
70,964 |
|
|
|
* |
|
|
|
(13 |
) |
|
Lincoln Krochmal, M.D.
|
|
|
66,666 |
|
|
|
* |
|
|
|
(14 |
) |
|
R. Andrew Eckert
|
|
|
31,111 |
|
|
|
* |
|
|
|
(15 |
) |
|
Denise M. Gilbert, Ph.D.
|
|
|
31,111 |
|
|
|
* |
|
|
|
(16 |
) |
|
All directors and executive officers as a group (29 persons)
|
|
|
4,131,673 |
|
|
|
10.88 |
% |
|
|
(17 |
) |
| |
|
|
|
| |
(1) |
As reported on a Schedule 13G/A filed with the SEC on or
about February 14, 2005. Represents 5,107,000 shares
held by FMR Corp and as to which FMR Corp, Edward C. Johnson 3d
and Abigail P. Johnson have shared dispositive power with the
beneficial owners, and 1,574,500 shares as to which FMR
Corp has sole voting power. Includes 70,058 shares of
common stock issuable upon the assumed conversion of
$1.5 million principal amount of our 2.25% convertible
senior notes due May 30, 2008. The notes are convertible at
any time at the option of the holder at a |
70
|
|
|
| |
|
conversion rate of 46.705 shares of common stock per
$1,000 principal amount of notes, subject to adjustment in
certain circumstances. |
| |
| |
(2) |
As reported on a Schedule 13G/A filed with the SEC on or
about December 10, 2004. Represents 2,788,663 shares
as to which Wellington Management Company, LLP has shared
dispositive power, and 2,467,363 shares as to which
Wellington Management Company, LLP has shared voting power, with
the unnamed beneficial owners, who are clients of Wellington
Management Company, LLP. |
| |
| |
(3) |
As reported on a Schedule 13G/ A filed with the SEC on
or about February 15, 2005. Represents
2,224,200 shares as to which Longwood Investment Advisors,
Inc. have sole dispositive power and sole voting power. |
| |
| |
(4) |
As reported on a Schedule 13G/ A filed with the SEC on
or about December 31, 2004 by Barclays Global Investor,
N.A. and a group of affiliated entities. According to the
Schedule 13G/ A, the following entities have sole voting
power with respect to an aggregate of 1,885,547 shares and
dispositive power with respect to an aggregate of
2,039,830 shares held in Trust accounts for the economic
benefit of the beneficiaries of those accounts: Barclays Global
Investors, N.A., (828,606 shares, voting power and
982,889 shares, dispositive power); Barclays Global
Fund Advisors (707,844 shares); Barclays Bank PLC
(338,611 shares); and Barclays Capital Securities Limited
(10,486 shares). |
| |
| |
(5) |
Mr. Wiggans’ total includes options to
purchase 942,399 shares of common stock that will be
exercisable on or before July 30, 2005. Also includes
10,490 shares held by Mr. Wiggans’ wife, and
12,486 shares held in trust for Mr. Wiggans’
children. Mr. Wiggans disclaims beneficial ownership of the
shares held in trust. |
| |
| |
(6) |
Mr. Raab’s total includes options to
purchase 509,950 shares of common stock that will be
exercisable on or before July 30, 2005. |
| |
| |
(7) |
Mr. Higgins’ total includes options to
purchase 381,605 shares of common stock that will be
exercisable on or before July 30, 2005. Also includes
250 shares of common stock held by Mr. Higgins’
wife. |
| |
| |
(8) |
Mr. Vontz’s total includes options to
purchase 412,220 shares of common stock that will be
exercisable on or before July 30, 2005. |
| |
| |
(9) |
Ms. Church’s total includes options to
purchase 230,801 shares of common stock that will be
exercisable on or before July 30, 2005. |
|
|
| (10) |
Mr. Kiley’s total includes options to
purchase 62,500 shares of common stock that will be
exercisable on or before July 30, 2005. Also includes
167,365 shares held in the Thomas D. and Nancy L.M. Kiley
Revocable Trust under Agreement dated August 7, 1981, and
10,000 shares held in The Kiley Family Partnership of which
Mr. Kiley is a trustee, and as to 7,500 of which
Mr. Kiley disclaims beneficial ownership. |
| |
| (11) |
Dr. Bauer’s total includes options to
purchase 90,000 shares of common stock that will be
exercisable on or before July 30, 2005. Also includes
300 shares held in trust for Dr. Bauer’s
grandchildren. Dr. Bauer disclaims beneficial ownership of
the shares held in trust. |
| |
| (12) |
Mr. Kane’s total includes options to
purchase 107,500 shares of common stock that will be
exercisable on or before July 30, 2005. |
| |
| (13) |
Mr. Panetta’s total includes options to
purchase 62,700 shares of common stock that will be
exercisable on or before July 30, 2005. |
| |
| (14) |
Dr. Krochmal’s total includes options to
purchase 66,666 shares of common stock that will be
exercisable on or before July 30, 2005. |
| |
| (15) |
Mr. Eckert’s total includes options to
purchase 30,000 shares of common stock that will be
exercisable on or before July 30, 2005. |
| |
| (16) |
Dr. Gilbert’s total includes options to
purchase 30,000 shares of common stock that will be
exercisable on or before July 30, 2005. |
| |
| (17) |
See footnotes 5 through 17. The total includes options
to purchase an aggregate of 3,547,948 shares of common
stock that will be exercisable on or before July 30, 2005
by all of the executive officers and directors as a group. |
71
DESCRIPTION OF THE NOTES
We issued the notes under an indenture dated as of
March 23, 2005 between us, as issuer, and J.P. Morgan
Trust Company, National Association, as trustee. The notes and
the common stock issuable upon conversion of the notes are
covered by a registration rights agreement. You may request a
copy of the indenture and the registration rights agreement from
the trustee.
The following description is a summary of selected provisions of
the indenture, the notes and the registration rights agreement.
It does not purport to be complete. This summary is subject to,
and is qualified by reference to, all the provisions of the
indenture, including the definitions of certain terms used in
the indenture. Wherever particular provisions or defined terms
of the indenture or form of note are referred to, those
provisions or defined terms are incorporated in this prospectus
by reference. We urge you to read the indenture in its entirety
because it, and not this description, defines your rights as a
holder of the notes.
In this section, references to “Connetics,”
“we,” “our” or “us” refer solely
to Connetics Corporation and not to its subsidiaries.
General
We have issued $200 million aggregate principal amount of
notes, and the notes are limited to an aggregate principal
amount of $200 million.
The notes are convertible into cash and, under some
circumstances, common stock as described in the sections titled
“— Exchange in Lieu of Conversion” and
“— Conversion Rights.”
The notes are our senior, unsecured obligations and rank equal
in right of payment to all of our existing and future unsecured
and unsubordinated indebtedness, including our unsecured
2.25% Convertible Senior Notes due 2008. At
December 31, 2004, our senior unsecured indebtedness
totaled $90 million and we had no senior secured
indebtedness. The indenture pursuant to which the notes were
issued does not limit the amount of additional indebtedness that
we can create, incur, assume or guarantee in the future.
The notes were issued only in registered form without coupons in
denominations of $1,000 principal amount and any integral
multiple of $1,000 above that amount. The notes will mature on
March 30, 2015, unless we redeem them earlier at our
option, or we repurchase them at a holder’s option as
described in this prospectus or they are exchanged as described
in this prospectus or converted at a holder’s option into
shares of our common stock as described under
“— Conversion Rights.”
We will not be required to make any sinking fund payments with
respect to the notes.
Interest
The notes bear interest at a rate of 2.00% per annum from
the date of the original issuance expected on March 23,
2005 through March 29, 2010. We will pay interest
semi-annually in arrears on March 30 and September 30
of each year beginning September 30, 2005 and ending on
March 30, 2010, to the holders of record at the close of
business on the preceding March 15 and September 15,
respectively.
There are three exceptions to the preceding sentence:
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• |
In general, we will not pay accrued interest on any notes that
are converted into shares of our common stock. However, interest
amounts will be payable if specified defaults under the
registration rights agreement occur. See
“— Registration Rights” and
“— Conversion Procedures.” |
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• |
We will pay interest to a person other than the holder of record
on the record date if we elect to redeem the notes, or the
holder elects to require us to repurchase the notes, on a date
that is after a record date but on or before the corresponding
interest payment date. In this instance, we will pay accrued
interest on the notes being redeemed to, but not including, the
redemption date to the same person to whom we will pay the
principal of those notes. |
72
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• |
We will not pay interest upon conversion except as described
under the heading “— Conversion Procedures.” |
Except as provided below, we will pay interest on:
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• |
the global note to DTC in immediately available funds; and |
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• |
any definitive notes by check mailed to the holders of those
notes. |
At maturity, interest on the definitive notes will be payable at
the office of the trustee as set forth under
“— Trustee.”
Interest generally will be computed on the basis of a 360-day
year comprised of twelve 30-day months. If an interest payment
date is not a business day at a place of payment, payment shall
be made on the next succeeding business day and no interest
shall accrue for the intervening period. If the stated maturity
date, redemption date or repurchase date of a note would fall on
a day that is not a business day, the required payment of
interest, if any, and principal will be made on the next
succeeding business day and no interest on such payment will
accrue for the period from and after the stated maturity date,
redemption date or repurchase date to such next succeeding
business day. The term “business day” means, with
respect to any note, any day other than a Saturday, a Sunday or
a day on which banking institutions in The City of New York are
authorized or required by law or executive order to close.
In addition, we will pay contingent interest on the notes under
the circumstances described below under
“— Contingent Interest.” References in this
prospectus to “interest” include regular interest,
contingent interest and liquidated damages, unless the context
requires otherwise.
Accretion
Commencing on March 30, 2010 the principal amount of the
notes will be subject to accretion at a rate that provides
holders with an aggregate annual yield to maturity of 2.00%
(computed on a semi-annual bond equivalent yield basis). When we
refer in this description of the notes to the “accreted
principal amount” of notes, we mean the initial principal
amount at any time before March 30, 2010 and the principal
amount as adjusted upwards for accretion at any time on or after
March 30, 2010.
The following table sets forth the accreted principal amounts as
of the accretion dates during the period from March 30,
2010 through the maturity date:
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| Accretion Date |
|
Accreted Principal Amount | |
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March 30, 2010
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|
$ |
1,000.00 |
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|
September 30, 2010
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|
$ |
1,010.00 |
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|
March 30, 2011
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|
$ |
1,020.10 |
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|
September 30, 2011
|
|
$ |
1,030.30 |
|
|
March 30, 2012
|
|
$ |
1,040.60 |
|
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September 30, 2012
|
|
$ |
1,051.01 |
|
|
March 30, 2013
|
|
$ |
1,061.52 |
|
|
September 30, 2013
|
|
$ |
1,072.14 |
|
|
March 30, 2014
|
|
$ |
1,082.86 |
|
|
September 30, 2014
|
|
$ |
1,093.69 |
|
|
March 30, 2015
|
|
$ |
1,104.62 |
|
| |
Contingent Interest
We will pay contingent interest to the holders of notes for any
six-month interest period from March 30 to September 29 or
from September 30 to March 29, beginning with the
six-month interest period commencing on March 30, 2010, if
the average trading price per note for the applicable five
trading
73
day reference period equals or exceeds 120% of the principal
amount of the notes as of the last day of such five trading day
reference period. The “five trading day reference
period” means the five trading days ending on the second
trading day immediately preceding the beginning of the relevant
six-month interest period.
The amount of contingent interest payable per note in respect of
any six-month interest period will be equal to 0.30% of the
average trading price per note for the applicable five trading
day reference period.
The record date and payment date for contingent interest, if
any, will be determined in the same manner as the regular record
date and payment date for the semi-annual interest payments on
the notes as described under “— Interest.”
The “trading price” of the notes on any date of
determination means the average of the secondary market bid
quotations per note obtained by the trustee for
$5.0 million principal amount of the notes at approximately
3:30 p.m., New York City time, on such determination date
from two independent nationally recognized securities dealers we
select, which may include the Initial Purchasers. If the trustee
cannot reasonably obtain at least two such bids, but can
reasonably obtain one such bid, this one bid shall be used. If
the trustee cannot reasonably obtain at least one bid for
$5.0 million principal amount of the notes from a
nationally recognized securities dealer, or if in our reasonable
judgment the bid quotations are not indicative of the secondary
market value of the notes, then the trading price of the notes
will equal 98% of (1) the applicable conversion rate of the
notes multiplied by (2) the closing sale price of our
common stock on such determination date.
The “closing sale price” of our common stock on any
date means the closing sale price per share (or, if no closing
sale price is reported, the average of the bid and asked prices
or, if more than one in either case, the average of the average
bid and the average asked prices) on that date as reported in
composite transactions by The Nasdaq National Market or, if our
common stock is not then quoted on The Nasdaq National Market,
as reported by the principal U.S. securities exchange on
which our common stock is traded. The closing sale price will be
determined without reference to after-hours or extended market
trading. If our common stock is not listed for trading on a
U.S. national or regional securities exchange and not
reported by The Nasdaq National Market on the relevant date, the
“closing sale price” will be the last quoted bid for
our common stock in the over-the-counter market on the relevant
date as reported by the National Quotation Bureau or similar
organization. If our common stock is not so quoted, the
“closing sale price” will be the average of the
midpoint of the last bid and asked prices for our common stock
on the relevant date from each of at least three nationally
recognized independent investment banking firms we select for
this purpose.
We will notify the holders of the notes upon a determination
that they will be entitled to receive contingent interest with
respect to a semi-annual interest period. In connection with
providing such notice, we will issue a press release containing
information regarding the contingent interest determination and
publish the information through a public medium customary for
such press releases.
The indenture provides that by accepting a note, each holder
agrees, for U.S. federal income tax purposes, to treat the
notes as “contingent payment debt instruments” and to
be bound by our application of the U.S. Treasury
regulations that govern contingent payment debt instruments,
including our determination that the rate at which interest will
be deemed to accrue for U.S. federal income tax purposes
will be 7.00%, compounded semi-annually, which is the rate we
would pay on a fixed-rate, noncontingent, nonconvertible debt
instrument with terms and conditions otherwise comparable to the
notes. See “Certain U.S. Federal Income Tax
Consequences.”
Conversion Rights
Subject to the conditions described below, you may convert your
notes, in denominations of $1,000 principal amount or integral
multiples thereof, into cash and, under certain circumstances,
shares of our common stock, as set forth more fully below,
initially at a conversion rate of 28.1972 shares of our
common stock per $1,000 principal amount of notes (which is
equivalent to an initial conversion price of
74
approximately $35.46 per share). The conversion rate in
effect at any given time is referred to in this prospectus as
the “applicable conversion rate” and will be subject
to adjustment as described under “— Anti-dilution
Adjustments” and “— Adjustment to Conversion
Rate upon a Fundamental Change” below, but it will not be
adjusted for accrued interest. The “applicable conversion
price” at any given time is equal to the principal amount
of a note divided by the applicable conversion rate.
You may surrender your notes for conversion at the applicable
conversion rate before the stated maturity of the notes under
any of the following circumstances:
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before March 30, 2009, during any conversion period if the
closing sale price of our common stock for at least 20 trading
days in the 30 consecutive trading day period ending on the
first day of such conversion period is greater than 120% of the
applicable conversion price on the first day of the conversion
period, |
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• |
before March 30, 2009, during the five consecutive business
day period following any five consecutive trading day period in
which the trading price (as defined below) for a note for each
day of that trading period was less than 98% of the closing sale
price of our common stock on such corresponding trading day
multiplied by the applicable conversion rate, |
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• |
at any time on or after March 30, 2009, or |
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• |
upon the occurrence of specified corporate transactions
discussed below. |
“Trading day” means a day during which trading in
securities generally occurs on The Nasdaq National Market or, if
our common stock is not then quoted on The Nasdaq National
Market, on another national or regional securities exchange on
which our common stock is then listed or quoted or, if our
common stock is not listed on The Nasdaq National Market or a
national or regional securities exchange, on the principal other
market on which our common stock is then traded or quoted.
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Conversion Upon Satisfaction of Sale Price
Condition |
Before March 30, 2009, you may surrender any of your notes
for conversion during any conversion period if the closing sale
price of our common stock for at least 20 trading days in the 30
consecutive trading day period ending on the first day of such
conversion period is greater than 120% of the applicable
conversion price on the first day of the conversion period. A
“conversion period” will be the period from and
including the eleventh trading day in a fiscal quarter up to but
not including the eleventh trading day of the following fiscal
quarter.
The conversion agent, which initially will be J.P. Morgan
Trust Company, National Association, will, on our behalf,
determine daily if the notes are convertible as a result of the
sale price of our common stock and notify us and the trustee.
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Conversion Upon Satisfaction of Trading Price
Condition |
Before March 30, 2009, you may surrender any of your notes
for conversion during the five consecutive business day period
following any five consecutive trading day period in which the
trading price for a note for each day of that trading period was
less than 98% of the closing sale price of our common stock on
such corresponding trading day multiplied by the applicable
conversion rate. We will pay you cash and deliver shares of our
common stock, as applicable, no later than the third business
day following the specified five trading day averaging period.
The conversion agent will, on our behalf, determine if the notes
are convertible as a result of the trading price of the notes
and notify us; provided, however, that the conversion agent
shall have no obligation to determine the trading price of the
notes unless we have requested such determination and we shall
have no obligation to make such request unless requested to do
so by a holder of the notes. At such time, we shall instruct the
conversion agent to determine the trading price of the notes
beginning on the next trading day and on each successive trading
day until the trading price of the notes is greater than or
75
equal to 98% of the product of the closing sale price of our
common stock multiplied by the applicable conversion rate.
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Conversion After March 30, 2009 |
You may surrender any of your notes for conversion at any time
on or after March 30, 2009.
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Conversion Upon Specified Corporate Transactions |
Even if none of the conditions described above has occurred, if
we elect to:
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• |
distribute to all holders of our common stock certain rights or
warrants entitling them to purchase, for a period expiring
within 60 days of the declaration date for such
distribution, our common stock at less than the current market
price (as defined below), or |
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• |
distribute to all holders of our common stock our assets, debt
securities or certain rights or warrants to purchase our
securities, which distribution has a per share value exceeding
10% of the closing sale price of our common stock on the trading
day preceding the declaration date for such distribution, |
we must notify you at least 20 days before the ex-dividend
date for such distribution. Once we have given that notice, even
if your notes are not otherwise convertible at that time, you
may surrender your notes for conversion at any time until the
earlier of the close of business on the business day before the
ex-dividend date or our announcement that such distribution will
not take place. You may not exercise this right to convert if
you may participate in the distribution without conversion.
In addition, if a fundamental change occurs, subject to certain
exceptions described in this prospectus, you may surrender any
of your notes for conversion during the period starting on the
effective date of the fundamental change and ending at the close
of business on the second business day preceding the fundamental
change repurchase date (as specified in the repurchase notice
described under “— Repurchase at Option of the
Holder Upon a Fundamental Change”). Upon such a conversion
in connection with a fundamental change, you will receive any
increase in the conversion rate described in
“— Adjustment to Conversion Rate Upon a
Fundamental Change” (subject to our rights described under
“— Public Acquirer Change of Control”). If a
fundamental change occurs, you may also have the right, at your
option, to require us to repurchase all or a portion of your
notes as described under “— Repurchase at Option
of the Holder Upon a Fundamental Change.”
When we or the trustee determine that you are or will be
entitled to convert your notes into cash and shares of our
common stock in accordance with the foregoing provisions, we
will issue a press release and publish the information on our
website.
Conversion Consideration
If you surrender your notes for conversion, you will receive, in
respect of each $1,000 principal amount of notes, cash in an
amount equal to the lesser of (1) the accreted principal
amount of each note or (2) the conversion value (as
described below); and a number of shares of our common stock
equal to the sum of the daily share amounts (calculated as
described below) for each of the 10 consecutive trading days in
the applicable conversion reference period (as described below),
provided, however, that we will pay cash in lieu of fractional
shares otherwise issuable upon conversion of the notes.
The “applicable conversion reference period” means:
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• |
for notes that are converted after we have specified a
redemption date, the 10 consecutive trading days beginning on
the third trading day following the redemption date (in the case
of a partial redemption, this clause applies only to those notes
which would be actually redeemed), or |
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• |
in all other cases, the 10 consecutive trading days beginning on
the third trading day following the conversion date. |
76
The “conversion value” is equal to (1) the
applicable conversion rate, multiplied by (2) the average
of the closing sale price of our common stock for each of the 10
consecutive trading days in the applicable conversion reference
period.
The “daily share amount” for each day in the
applicable conversion reference period is equal to the greater
of:
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• |
zero, or |
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• |
a number of shares determined by the following formula: |
(Closing Sale Price on That Trading Day * Applicable Conversion
Rate) - Accreted Principal Amount
10 * Closing Sale Price on That Trading Day
Notwithstanding the foregoing, in no event will (i) the
conversion rate exceed 38.0662 per $1,000 initial principal
amount of the notes or (ii) the total number of shares
issuable upon conversion of a note exceed 35.9100 per
$1,000 initial principal amount of the notes, in each case,
after giving effect to the make whole adjustment described below
and any related increase in the conversion rate, subject to
anti-dilution adjustments described under
“— Anti-dilution Adjustments.”
Conversion Procedures
If you wish to exercise your conversion right, you must deliver
an irrevocable conversion notice to the conversion agent. If the
notes are in certificated form, you must also deliver the
certificated security to the conversion agent. The date of such
delivery of notice and on which all other requirements for
conversion have been satisfied is the “conversion
date.” The conversion agent will, on your behalf, convert
the notes into our common stock. You may obtain copies of the
required form of the conversion notice from the conversion
agent. Upon conversion, we will satisfy our conversion
obligation with respect to the accreted principal amount of the
notes to be converted in cash, with any remaining amount to be
satisfied in shares of our common stock, as described under
“— Conversion Consideration.” Shares of our
common stock and cash deliverable upon conversion will be
delivered through the conversion agent no later than the third
business day following the applicable conversion reference
period (except as described under “— Adjustment
to Conversion Rate Upon a Fundamental Change”).
We will not issue fractional shares of our common stock upon
conversion of the notes. In lieu of fractional shares otherwise
issuable (calculated on an aggregate basis in respect of all the
notes you have surrendered for conversion), you will be entitled
to receive cash in an amount equal to the value of such
fractional shares, based on the applicable stock price.
Upon conversion of notes, you generally will not receive any
cash payment of interest. By delivering to the holder the cash
payment and the number of shares of our common stock issuable
upon conversion, we will satisfy all of our obligations with
respect to the notes through the conversion date. That is,
accrued but unpaid interest, if any, will be deemed to be paid
in full rather than canceled, extinguished or forfeited. We will
not adjust the conversion rate to account for accrued interest.
Notwithstanding the foregoing, if you convert after a record
date for an interest payment but before the corresponding
interest payment date, you will receive on that interest payment
date accrued interest on those notes, notwithstanding the
conversion of those notes prior to that interest payment date,
because you will have been the holder of record on the
corresponding record date. However, at the time you surrender
any notes for conversion, you must pay to us an amount equal to
the interest that has accrued and that will be paid with respect
to the notes being converted on the related interest payment
date. The preceding sentence does not apply, however, to notes
that are converted after we have specified a redemption date
that is after a record date for an interest payment but on or
before the corresponding interest payment date. Accordingly, if
we elect to redeem notes on a date that is after a record date
for an interest payment but on or before the corresponding
interest payment date, and you choose to convert your notes, you
will not be required to pay us, at the time you surrender your
notes for conversion, the amount of interest you will receive on
the date that has been fixed for redemption.
77
If you convert notes, we will pay any documentary stamp or
similar issue or transfer tax due on the issue of shares of our
common stock upon the conversion, unless the tax is due because
you request the shares to be issued or delivered in a name other
than your own, in which case you will pay the tax. Certificates
representing our common stock will be issued or delivered only
after you have paid all applicable taxes and duties payable by
you, if any.
Exchange in Lieu of Conversion
When you surrender the notes for conversion, the conversion
agent may direct you to surrender your notes to a financial
institution we designate for exchange in lieu of conversion. In
order to accept any notes surrendered for conversion, the
designated institution must agree to deliver, in exchange for
your notes, the cash payment, including cash for any fractional
shares, and the number of shares of our common stock issuable
upon conversion. If the designated institution accepts any such
notes, it will deliver the appropriate consideration to the
conversion agent and the conversion agent will deliver that
consideration to you. Any notes exchanged by the designated
institution will remain outstanding. If the designated
institution agrees to accept any notes for exchange but does not
timely deliver the related consideration, we will, as promptly
as practical thereafter, but not later than the third business
day following the conversion date, convert the notes and deliver
the cash payment and the number of shares of our common stock,
if any, issuable upon conversion.
Our designation of an institution to which the notes may be
submitted for exchange does not require the institution to
accept any notes. If the designated institution declines to
accept any notes surrendered for exchange, we will convert those
notes into the cash payment and the number of shares of our
common stock, if any, issuable upon conversion, as described
under “— Conversion Consideration.”
We will not pay any consideration to, or otherwise enter into
any arrangement with, the designated institution for or with
respect to such designation.
Anti-dilution Adjustments
The conversion rate will be subject to adjustment, without
duplication, upon the occurrence of any of the following events:
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(1) |
stock dividends in common stock: we pay a dividend or
make a distribution on our common stock, payable exclusively in
shares of our common stock or our other capital stock, |
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(2) |
issuance of rights or warrants: we issue to all or
substantially all holders of our common stock rights or warrants
that allow the holders to purchase shares of our common stock
for a period expiring within 60 days from the date of
issuance of the rights or warrants at less than the current
market price, provided that the conversion rate will be
readjusted to the extent that such rights or warrants are not
exercised on or before their expiration, |
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(3) |
stock splits and combinations: we: |
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• |
subdivide or split the outstanding shares of our common stock
into a greater number of shares, |
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• |
combine or reclassify the outstanding shares of our common stock
into a smaller number of shares, or |
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• |
issue by reclassification of the shares of our common stock any
shares of our capital stock, |
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(4) |
distribution of indebtedness, securities or assets: we
distribute to all or substantially all holders of our common
stock evidences of indebtedness, securities or assets or certain
rights to purchase our securities, but excluding: |
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dividends or distributions described in
paragraph (1) above, |
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rights or warrants described in paragraph (2) above, |
78
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• |
dividends or distributions paid exclusively in cash described in
paragraph (5), (6) or (7) below, (the
“distributed assets”), in which event (other than in
the case of a “spin-off” as described below), the
conversion rate in effect immediately before the close of
business on the record date fixed for determination of
stockholders entitled to receive that distribution will be
increased by multiplying: |
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• |
the conversion rate by |
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• |
a fraction, the numerator of which is the “current market
price” of our common stock and the denominator of which is
the current market price of our common stock minus the fair
market value, as determined by our board of directors, whose
determination in good faith will be conclusive, of the portion
of those distributed assets applicable to one share of common
stock. |
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For purposes of this section (unless otherwise stated), the
“current market price” of our common stock means the
average of the closing sale prices of our common stock for the
five consecutive trading days ending on the trading day before
the ex-dividend trading day for such distribution, and the new
conversion rate shall take effect immediately after the record
date fixed for determination of the stockholders entitled to
receive such distribution. |
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Notwithstanding the foregoing, in cases where (a) the fair
market value per share of the distributed assets equals or
exceeds the current market price of our common stock, or
(b) the current market price of our common stock exceeds
the fair market value per share of the distributed assets by
less than $1.00, in lieu of the foregoing adjustment, you will
have the right to receive upon conversion, in addition to cash
and shares of our common stock, if any, the distributed assets
you would have received if you had converted your notes
immediately before the record date. |
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In respect of a dividend or other distribution of shares of
capital stock of any class or series, or similar equity
interests, of or relating to a subsidiary or other business
unit, which we refer to as a “spin-off,” the
conversion rate in effect immediately before the close of
business on the record date fixed for determination of
stockholders entitled to receive that distribution will be
increased by multiplying: |
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• |
the conversion rate by |
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• |
a fraction, the numerator of which is the current market price
of our common stock plus the fair market value, determined as
described below, of the portion of those shares of capital stock
or similar equity interests so distributed applicable to one
share of common stock, and the denominator of which is the
current market price of our common stock. |
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The adjustment to the conversion rate in the event of a spin-off
will occur at the earlier of: |
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the tenth trading day from, and including, the effective date of
the spin-off, and |
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the date of the initial public offering of the securities being
distributed in the spin-off, if that initial public offering is
effected simultaneously with the spin-off. |
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For purposes of this section, “initial public
offering” means the first time securities of the same class
or type as the securities being distributed in the spin-off are
offered to the public for cash. |
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In the event of a spin-off that is not effected simultaneously
with an initial public offering of the securities being
distributed in the spin-off, the fair market value of the
securities to be distributed to holders of our common stock
means the average of the closing sale prices of those securities
over the 10 consecutive trading days following the
effective date of the spin-off. Also, for this purpose, the
current market price of our common stock means the average of
the closing sale prices of our common stock over the
10 consecutive trading days following the effective date of
the spin-off. |
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If, however, an initial public offering of the securities being
distributed in the spin-off is to be effected simultaneously
with the spin-off, the fair market value of the securities being
distributed in |
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the spin-off means the initial public offering price, while the
current market price of our common stock means the closing sale
price of our common stock on the trading day on which the
initial public offering price of the securities being
distributed in the spin-off is determined. |
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(5) |
cash distributions: we make a distribution consisting
exclusively of cash to all or substantially all holders of
outstanding shares of common stock, in which event the
conversion rate will be adjusted by multiplying: |
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the conversion rate by |
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a fraction, the numerator of which is the current market price
of our common stock, and the denominator of which is the current
market price of our common stock, minus the amount per share of
such distribution. |
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Notwithstanding the foregoing, in cases where (a) the per
share amount of such distribution equals or exceeds the current
market price of our common stock or (b) the current market
price of our common stock exceeds the per share amount of such
distribution by less than $1.00, in lieu of the foregoing
adjustment, you will have the right to receive upon conversion,
in addition to cash and shares of our common stock, if any, such
distribution you would have received if you had converted your
notes immediately prior to the record date. For purposes of this
section, the “current market price” of our common
stock means the average of the closing sale prices of our common
stock for the five consecutive trading days ending on the
trading day prior to the ex-dividend trading day for such cash
distribution, and the new conversion rate shall take effect
immediately after the record date fixed for determination of the
stockholders entitled to receive such distribution. |
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(6) |
tender or exchange offers: we (or one of our
subsidiaries) make a payment in respect of a tender offer or
exchange offer for our common stock, in which event, to the
extent the cash and value of any other consideration included in
the payment per share of our common stock exceeds the closing
sale price of our common stock on the trading day next
succeeding the last date on which tenders or exchanges may be
made pursuant to such tender offer or exchange offer, as the
case may be, the conversion rate will be adjusted by multiplying: |
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the conversion rate by |
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a fraction, the numerator of which will be the sum of
(a) the fair market value, as determined by our board of
directors, of the aggregate consideration payable for all shares
of our common stock we purchase in the tender or exchange offer
and (b) the product of (i) the number of shares of our
common stock outstanding less any such purchased shares and
(ii) the closing sale price of our common stock on the
trading day next succeeding the date of the expiration of the
tender or exchange offer, and the denominator of which will be
the product of (a) the number of shares of our common stock
outstanding, including any such purchased shares, and
(b) the closing sale price of our common stock on the
trading day next succeeding the date of expiration of the tender
or exchange offer. |
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(7) |
repurchases: we (or one of our subsidiaries) make a
payment in respect of a repurchase for our common stock the
consideration for which exceeded the then-prevailing market
price of our common stock (such amount, the “repurchase
premium”), and that repurchase, together with any other
repurchases of our common stock by us (or one of our
subsidiaries) involving a repurchase premium concluded within
the preceding 12 months, resulted in the payment by us of
an aggregate consideration exceeding an amount equal to 10% of
the market capitalization of our common stock, the conversion
rate will be adjusted by multiplying: |
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the conversion rate by |
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a fraction, the numerator of which is the current market price
of our common stock and the denominator of which is (A) the
current market price of our common stock, minus (B) the
quotient of (i) the aggregate amount of all of the
repurchase premiums paid in connection with such repurchases and
(ii) the number of shares of common stock outstanding on
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next succeeding the date of the repurchase triggering the
adjustment, as determined by our board of directors, |
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provided that if the above calculation does not increase the
conversion rate, no adjustment to the conversion rate shall be
made, and provided further that the repurchases of our common
stock that we or our agent effect in conformity with
Rule 10b-18 under the Exchange Act will not be included in
any adjustment to the conversion rate made under this
clause (7). For purposes of this clause (7),
(i) the market capitalization will be calculated by
multiplying the current market price of our common stock by the
number of shares of common stock then outstanding on the date of
the repurchase triggering the adjustment, and (ii) the
current market price will be the average of the closing sale
prices of our common stock for the five consecutive trading days
beginning on the trading day next succeeding the date of the
repurchase triggering the adjustment, and (iii) in
determining the repurchase premium, the “then-prevailing
market price” of our common stock will be the average of
the closing sale prices of our common stock for the five
consecutive trading days ending on the relevant repurchase date. |
In the event of a taxable distribution to holders of our common
stock which results in an adjustment of the conversion rate, you
may, in certain circumstances, be deemed to have received a
distribution subject to U.S. income tax as a dividend; in
certain other circumstances, the absence of such an adjustment
may result in a taxable dividend to the holders of our common
stock. See “Certain U.S. Federal Income Tax
Consequences.” In addition to these adjustments, we may
increase the conversion rate as our board of directors considers
advisable to avoid or diminish any income tax to holders of our
common stock or rights to purchase our common stock resulting
from any dividend or distribution of stock (or rights to acquire
stock) or from any event treated as such for income tax
purposes. We may also, from time to time, to the extent
permitted by applicable law, increase the conversion rate by any
amount for any period of at least 20 days if our board of
directors has determined that an increase would be in our best
interests. If our board of directors makes such a determination,
it will be conclusive. We will give you at least
15 days’ notice of an increase in the conversion rate.
Notwithstanding the foregoing, in no event will (i) the
conversion rate exceed 38.0662 per $1,000 initial principal
amount of the notes, or (ii) the total number of shares
issuable upon conversion of a note exceed 35.9100 per
$1,000 initial principal amount of the notes, in each case after
giving effect to the make whole adjustment described below and
any related increase in the conversion rate, subject to
anti-dilution adjustments described under
“— Anti-dilution Adjustments.”
No adjustment to the conversion rate or your ability to convert
will be made if you otherwise participate in the distribution
without conversion or in certain other cases.
The applicable conversion rate will not be adjusted:
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upon the issuance of any shares of our common stock pursuant to
any present or future plan providing for the reinvestment of
dividends or interest payable on our securities and the
investment of additional optional amounts in shares of our
common stock under any plan, |
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upon the issuance of any shares of our common stock or options
or rights to purchase those shares pursuant to any present or
future employee, director or consultant benefit plan or program
of ours or any of our subsidiaries including plans or programs
assumed by us, |
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upon the issuance of any shares of our common stock pursuant to
any option, warrant, right or exercisable, exchangeable or
convertible security not described in the preceding bullet and
outstanding as of the date the notes were first issued, |
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for a change in the par value of the common stock, or |
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for accrued and unpaid interest, including liquidated damages
and contingent interest, if any. |
You will receive, upon conversion of your notes, in addition to
cash and common stock, if any, the rights under our stockholder
rights plan or any other plan we may adopt, whether or not the
rights have separated from the common stock at the time of
conversion unless, before conversion, the rights have
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expired, terminated or been redeemed or exchanged. For a
description of our existing rights plan, see “Description
of Capital Stock — Series B Preferred Stock.”
Simultaneously with an adjustment of the conversion rate, we
will disseminate a press release detailing the new conversion
rate and other relevant information.
Redemption Rights
We must repay the notes in cash at their stated maturity on
March 30, 2015, unless earlier converted, repurchased,
redeemed or exchanged in accordance with the indenture. The
circumstances in which we may redeem the notes prior to their
stated maturity are described below.
We will have the right to redeem the notes, in whole or in part,
for cash at any time or from time to time, on or after
April 4, 2010 at a redemption price equal to 100% of the
accreted principal amount of the notes plus accrued and unpaid
interest, including liquidated damages and contingent interest,
if any, to, but not including, the redemption date.
We will give not less than 30 days’ or more than
60 days’ notice of redemption by mail to holders of
the notes. If we decide to redeem fewer than all of the
outstanding notes, the trustee will select the notes to be
redeemed in initial principal amounts of $1,000 or integral
multiples of $1,000 by lot, on a pro rata basis or by another
method the trustee considers fair and appropriate.
If the trustee selects a portion of your notes for partial
redemption and you convert a portion of your notes, the
converted portion will, to the fullest extent possible, be
deemed to be from the portion selected for redemption by lot, on
a pro rata basis, or any other method that the trustee considers
fair and appropriate.
In the event of any redemption in part, we will not be required
to:
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issue, register the transfer of or exchange any note during a
period beginning at the opening of business 15 days before
the mailing of a notice of redemption and ending at the close of
business on the day of that mailing, or |
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register the transfer or exchange of any note selected for
redemption, in whole or in part, except the unredeemed portion
of any note being redeemed in part. |
If we exercise our right to redeem the notes, in whole or in
part, we will disseminate a press release containing information
regarding the redemption and publish the information through a
public medium that is customary for such press release.
Repurchase Rights
You have the right to require us to repurchase the notes on
March 30, 2010, which we refer to as the “repurchase
date.” The repurchase price payable will be equal to 100%
of the principal amount of notes to be repurchased plus accrued
and unpaid interest, including liquidated damages and contingent
interest, if any, to, but not including, the repurchase date. We
will be required to repurchase any outstanding notes for which
you deliver a written repurchase notice to the paying agent.
This notice must be delivered during the period beginning at any
time from the opening of business on the date that is 21
business days before the relevant repurchase date until the
close of business on the last business day before the repurchase
date. If the repurchase notice is given and withdrawn during the
period, we will not be obligated to repurchase the related notes.
We will pay the repurchase price for any notes submitted for
repurchase solely in cash.
We are required to give notice at least 20 business days before
each repurchase date to all holders at their addresses shown in
the register of the registrar and to beneficial owners as
required by applicable law stating, among other things, the
procedures that holders must follow to require us to repurchase
their notes as described below.
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Each holder electing to require us to repurchase notes shall
give the repurchase notice so that the paying agent receives it
no later than the close of business on the business day
immediately preceding the repurchase date. The repurchase notice
must state:
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if certificated, the certificate numbers of the notes to be
delivered for repurchase, |
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the portion of the principal amount of notes to be repurchased,
which must be $1,000 or an integral multiple of $1,000, and |
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that the notes are to be repurchased by us pursuant to the
applicable provisions of the notes and the indenture. |
If notes are not in certificated form, your repurchase notice
must comply with appropriate DTC procedures.
You may withdraw any repurchase notice by delivering a written
notice of withdrawal to the paying agent before the close of
business on the repurchase date. The notice of withdrawal must
state:
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the principal amount of notes being withdrawn, |
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if certificated, the certificate numbers of the notes being
withdrawn, and |
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the principal amount, if any, of the notes that remain subject
to the repurchase notice. |
If notes are not in certificated form, your withdrawal notice
must comply with appropriate DTC procedures. In connection with
any repurchase, we will, to the extent applicable:
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comply with the provisions of Rule 13e-4, Rule 14e-1
and any other tender offer rules under the Exchange Act, which
may then be applicable, and |
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file Schedule TO or any other required schedule under the
Exchange Act. |
Our obligation to pay the repurchase price for notes for which a
repurchase notice has been delivered and not validly withdrawn
is conditioned upon the holder delivering the notes if the notes
are in certificated form, together with necessary endorsements,
to the paying agent at any time after delivery of the repurchase
notice. We will cause the repurchase price for the notes to be
paid promptly following the later of the repurchase date or the
time of delivery of the notes, together with such endorsements.
If the paying agent holds money sufficient to pay the repurchase
price of the notes for which a repurchase notice has been given
on the business day immediately following the repurchase date in
accordance with the terms of the indenture, then, immediately
after the repurchase date, the notes will cease to be
outstanding and interest, if any, on the notes will cease to
accrue, whether or not the notes are delivered to the paying
agent, and all other rights of the holder shall terminate, other
than the right to receive the repurchase price upon delivery of
the notes.
Our ability to repurchase notes for cash may be limited by
(i) restrictions on our ability to obtain funds from our
subsidiaries through dividends, loans or other distributions,
and (ii) the terms of our then existing borrowing
agreements. We cannot assure you that we would have the
financial resources, or would be able to arrange financing, to
pay the repurchase price in cash for all the notes that might be
delivered by holders of notes seeking to exercise the repurchase
right. See “Risk Factors — Risks Relating to an
Investment in the Notes — We may not have the funds
necessary to purchase the notes at the option of the holders or
upon a fundamental change.”
Exchange in Lieu of Repurchase
If you exercise your right to require us to repurchase notes, we
may cause the notes first to be offered to a financial
institution we choose for exchange in lieu of repurchase. In
order to accept any notes surrendered for repurchase, the
designated institution must agree to deliver, in exchange for
such notes, the repurchase price you otherwise would receive if
we exercised the repurchase. If the designated institution
accepts any such notes for repurchase, it will deliver the
repurchase price to the paying agent. Any notes
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that the designated institution purchases will remain
outstanding. If the designated institution agrees to accept any
notes for repurchase but does not timely deliver the related
repurchase price payment, we will, as promptly as practical
thereafter, but not later than one business day following the
repurchase date, cause the repurchase price for the notes to be
paid.
Our designation of an institution to which the notes may be
submitted for repurchase does not require the institution to
accept any notes. If the designated institution declines to
accept any notes surrendered for repurchase, we will repurchase
the notes on the terms provided in the indenture.
We will not pay any consideration to, or otherwise enter into
any arrangement with, the designated institution for or with
respect to such designation.
Repurchase at Option of the Holder Upon a Fundamental
Change
If a fundamental change (as defined below) occurs at any time
before maturity, you will have the right (subject to our rights
described under “— Public Acquirer Change of
Control”) to require us to repurchase any or all of your
notes for cash, or any portion of the principal amount of your
notes that is equal to $1,000 or an integral multiple of $1,000.
We are required to pay cash equal to 100% of the accreted
principal amount of the notes to be purchased plus accrued and
unpaid interest, including liquidated damages and contingent
interest, if any, to (but not including) the fundamental change
repurchase date, unless such fundamental change repurchase date
falls after a record date and on or before the corresponding
interest payment date, in which case we will pay the full amount
of accrued and unpaid interest, including liquidated damages and
contingent interest, payable on such interest payment date to
the holder of record at the close of business on the
corresponding record date. For a discussion of the
U.S. federal income tax treatment of a holder receiving
cash, see “Certain U.S. Federal Income Tax
Consequences.”
A “fundamental change” will be deemed to have occurred
at the time after the notes are originally issued that any of
the following occurs:
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(1) |
our common stock or other common stock into which the notes are
convertible is neither quoted on The Nasdaq Stock Market nor
another established automated over-the-counter trading market in
the United States nor approved for trading on the New York Stock
Exchange or another U.S. national securities
exchange, or |
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(2) |
any person, including any syndicate or group deemed to be a
“person” under Section 13(d)(3) of the Exchange
Act, acquires beneficial ownership, directly or indirectly,
through a purchase, merger or other acquisition transaction or
series of transactions, of shares of our capital stock entitling
the person to exercise 50% or more of the total voting power of
all shares of our capital stock entitled to vote generally in
elections of directors, other than an acquisition by us, any of
our subsidiaries or any of our employee benefit plans and other
than any transaction contemplated by the second bullet point of
clause (3) below, or |
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we merge or consolidate with or into any other person (other
than a subsidiary of Connetics), another person merges with or
into us, or we convey, sell, transfer or lease all or
substantially all of our assets to another person, other than
any transaction: |
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that does not result in a reclassification, conversion, exchange
or cancellation of our outstanding common stock, |
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pursuant to which the holders of our common stock immediately
before the transaction are entitled to exercise, directly or
indirectly, 50% or more of the total voting power of all shares
of capital stock entitled to vote generally in the election of
directors of the continuing or surviving corporation immediately
after the transaction, |
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where our continuing directors (as defined below) constitute a
majority of the board of directors of the continuing or
surviving corporation immediately after the transaction, |
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which is effected solely to change our jurisdiction of
incorporation and results in a reclassification, conversion or
exchange of outstanding shares of our common stock solely into
shares of common stock of the surviving entity, or |
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at any time our continuing directors do not constitute a
majority of our board of directors (or, if applicable, a
successor person to us). |
However, notwithstanding the foregoing, noteholders will not
have the right to require us to repurchase any notes under
clause (2) or (3) (and we will not be required to deliver
the notice incidental to the occurrence of the fundamental
change), if either:
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the closing sale price of our common stock for any five trading
days within the period of 10 consecutive trading days ending
immediately after the later of the fundamental change or the
public announcement of the fundamental change, in the case of a
fundamental change relating to an acquisition of capital stock
under clause (2) above, or the period of 10 consecutive
trading days ending immediately before the fundamental change,
in the case of a fundamental change relating to a merger,
consolidation, asset sale or otherwise under clause (3)
above, equals or exceeds 105% of the applicable conversion price
of the notes in effect on each of those five trading
days, or |
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at least 95% of the consideration paid for our common stock
(excluding cash payments for fractional shares and cash payments
made pursuant to dissenters’ appraisal rights) in a merger
or consolidation or a conveyance, sale, transfer or lease
otherwise constituting a fundamental change under
clause (2) and/or clause (3) above consists of shares
of capital stock quoted on The Nasdaq Stock Market or another
established automated over-the-counter trading market in the
United States or traded on the New York Stock Exchange or
another U.S. national securities exchange (or will be so
quoted or traded immediately following the merger or
consolidation) and as a result of the merger or consolidation
the notes become convertible into such shares of such capital
stock. |
For purposes of these provisions, whether a person is a
“beneficial owner” will be determined in accordance
with Rule 13d-3 under the Exchange Act and
“person” includes any syndicate or group that would be
deemed to be a “person” under Section 13(d)(3) of
the Exchange Act.
“Continuing directors” means, as of any date of
determination, any member of our board of directors who
(i) was a member of our board of directors on the date of
the indenture or (ii) becomes a member of our board of
directors after that date and was appointed, nominated for
election or elected to our board of directors with the approval
of a majority of the continuing directors who were members of
our board of directors at the time of such appointment,
nomination or election.
For purposes of the above, the term “capital stock” of
any person means any and all shares, interests, participations
or other equivalents however designated of corporate stock or
other equity participations, including partnership interests,
whether general or limited, of such person and any rights (other
than debt securities convertible or exchangeable into an equity
interest), warrants or options to acquire an equity interest in
such person, and American Depository Receipts.
On or before the 30th day after the occurrence of a fundamental
change, we will provide to all holders of the notes and the
trustee and paying agent a notice of the occurrence of the
fundamental change and of the resulting repurchase right. Such
notice shall state, among other things:
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the events causing a fundamental change, |
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the date of the fundamental change, |
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the last date on which a holder may exercise the repurchase
right, |
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the fundamental change repurchase price, |
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the fundamental change repurchase date, |
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the name and address of the paying agent and the conversion
agent, |
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the conversion rate and any adjustments to the conversion rate, |
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that the notes with respect to which a fundamental change
repurchase notice has been given by the holder may be converted
only if the holder withdraws the fundamental change repurchase
notice in accordance with the terms of the indenture, and |
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the procedures that holders must follow to require us to
repurchase their notes. |
Simultaneously with providing such notice, we will issue a press
release and publish the information through a public medium
customary for such press releases.
To exercise the repurchase right, you must deliver, before the
close of business on the second business day immediately
preceding the fundamental change repurchase date, the notes to
be purchased, duly endorsed for transfer, together with the
fundamental change repurchase notice duly completed, to the
paying agent. Your fundamental change repurchase notice shall
state:
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if certificated, the certificate numbers of the notes to be
delivered for repurchase, |
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the portion of the principal amount of notes to be purchased,
which must be $1,000 or an integral multiple of $1,000, and |
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that the notes are to be purchased by us pursuant to the
applicable provisions of the notes and the indenture. |
If the notes are not in certificated form, your repurchase
notice must comply with appropriate DTC procedures.
You may withdraw any repurchase notice (in whole or in part) by
a written notice of withdrawal delivered to the paying agent
prior to the close of business on the business day prior to the
fundamental change repurchase date. The notice of withdrawal
shall state:
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the principal amount of the withdrawn notes, |
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if certificated notes have been issued, the certificate numbers
of the withdrawn notes, and |
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the principal amount, if any, that remains subject to the
repurchase notice. |
If the notes are not in certificated form, the withdrawal notice
must comply with appropriate DTC procedures.
We will be required to repurchase the notes no less than 20 and
no more than 35 days after the date of our notice of the
occurrence of the relevant fundamental change, subject to
extension to comply with applicable law. You must either effect
book-entry transfer or deliver the notes, together with
necessary endorsements, to the office of the paying agent after
delivery of the repurchase notice to receive payment of the
repurchase price. Holders will receive payment of the
fundamental change repurchase price promptly following the later
of the fundamental change repurchase date or the time of
book-entry transfer or the delivery of the notes. If the paying
agent holds money or securities sufficient to pay the
fundamental change repurchase price of the notes on the business
day following the fundamental change repurchase date, then:
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the notes will cease to be outstanding and interest, if any,
will cease to accrue (whether or not book-entry transfer of the
notes is made or whether or not the note is delivered to the
paying agent), and |
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all other rights of the holder will terminate (other than the
right to receive the fundamental change repurchase price upon
delivery or transfer of the notes). |
The rights of the holders to require us to repurchase their
notes upon a fundamental change could discourage a potential
acquirer of us. The fundamental change repurchase feature,
however, is not the result of management’s knowledge of any
specific effort to accumulate shares of our common stock, to
obtain control of us by any means, or part of a plan by
management to adopt a series of anti-takeover
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provisions. Instead, the fundamental change repurchase feature
is a standard term contained in other offerings of debt
securities similar to the notes that certain of the Initial
Purchasers have marketed. The terms of the fundamental change
repurchase feature resulted from negotiations between the
Initial Purchasers and us.
The term “fundamental change” is limited to specified
transactions and may not include other events that might
adversely affect our financial condition. In addition, the
requirement that we offer to repurchase the notes upon a
fundamental change may not protect holders in the event of a
highly leveraged transaction, reorganization, merger or similar
transaction involving us.
The definition of fundamental change includes a phrase relating
to the conveyance, transfer, sale, lease or disposition of
“all or substantially all” of our consolidated assets.
There is no precise, established definition of the phrase
“substantially all” under applicable law. Accordingly,
the ability of a holder of the notes to require us to repurchase
its notes as a result of the conveyance, transfer, sale, lease
or other disposition of less than all of our assets may be
uncertain.
Our ability to repurchase notes for cash may be limited by
(i) restrictions on our ability to obtain funds from our
subsidiaries through dividends, loans or other distributions,
and (ii) the terms of our then existing borrowing
agreements. We cannot assure you that we would have the
financial resources, or would be able to arrange financing, to
pay the repurchase price in cash for all the notes that might be
delivered by holders of notes seeking to exercise the repurchase
right. See “Risk Factors — Risks Relating to an
Investment in the Notes — We may not have the funds
necessary to purchase the notes at the option of the holders or
upon a fundamental change.” In addition, we have, and may
in the future incur, other indebtedness with similar fundamental
change provisions permitting holders to accelerate or to require
us to repurchase our indebtedness upon the occurrence of similar
events or on some specific dates.
Adjustment to Conversion Rate Upon a Fundamental Change
If and only to the extent that you convert your notes in
connection with a fundamental change (and subject to our rights
described under “— Public Acquirer Change of
Control”), we will increase the conversion rate for the
notes surrendered for conversion by a number of additional
shares (the “additional shares”) as described below;
provided, however, that no increase will be made in the case of
a fundamental change if at least 95% of the consideration paid
for our common stock (excluding cash payments for fractional
shares and cash payments made pursuant to dissenters’
appraisal rights) in such fundamental change transaction
consists of shares of capital stock quoted on The Nasdaq Stock
Market or another established automated over-the-counter trading
market in the United States or traded on the New York Stock
Exchange or another U.S. national securities exchange (or
that will be so quoted or traded immediately following the
transaction).
The number of additional shares will be determined by reference
to the table below, based on the date on which such fundamental
change transaction becomes effective (the “effective
date”) and the price (the “stock price”) paid per
share of our common stock in such fundamental change
transaction. If holders of our common stock receive only cash in
such fundamental change transaction, the stock price will be the
cash amount paid per share. Otherwise, the stock price will be
the average of the closing sale prices of our common stock on
each of the five consecutive trading days prior to but not
including the effective date of such fundamental change
transaction.
A conversion of notes by a holder will be deemed for these
purposes to be “in connection with” a fundamental
change if the conversion agent receives the conversion notice
after the effective date of the fundamental change but before
the close of business on the second business day immediately
preceding the fundamental change repurchase date (as specified
in the repurchase notice described under
“— Repurchase at Option of the Holder Upon a
Fundamental Change”). Holders will not receive the
conversion consideration for the notes surrendered for
conversion in connection with such fundamental change before the
date on which we send to holders the repurchase notice described
under “— Repurchase at Option of the Holder Upon
a Fundamental Change.”
87
The stock prices set forth in the first row of the following
table (i.e., the column headers) will be adjusted as of
any date on which the conversion rate of the notes is adjusted,
as described above under “— Anti-dilution
Adjustments.” The adjusted stock prices will equal the
stock prices applicable immediately before such adjustment,
multiplied by a fraction, the numerator of which is the
conversion rate immediately before the adjustment giving rise to
the stock price adjustment and the denominator of which is the
conversion rate as so adjusted. The number of additional shares
will be adjusted in the same manner as the conversion rate as
set forth under “— Anti-dilution
Adjustments.”
The following table sets forth the hypothetical stock price and
number of additional shares issuable per $1,000 initial
principal amount of notes:
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|
Stock Price | |
| Effective Date of |
|
| |
| Fundamental Change |
|
$26.27 | |
|
$27.00 | |
|
$28.00 | |
|
$29.00 | |
|
$30.00 | |
|
$32.50 | |
|
$35.00 | |
|
$40.00 | |
|
$50.00 | |
|
$75.00 | |
|
$100.00 | |
|
$150.00 | |
| | |
|
March 23, 2005
|
|
|
9.8709 |
|
|
|
9.3732 |
|
|
|
8.7601 |
|
|
|
8.1824 |
|
|
|
7.6542 |
|
|
|
6.5102 |
|
|
|
5.6219 |
|
|
|
4.2457 |
|
|
|
2.6194 |
|
|
|
1.0121 |
|
|
|
0.4762 |
|
|
|
0.1300 |
|
|
March 30, 2006
|
|
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9.6338 |
|
|
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9.1601 |
|
|
|
8.5532 |
|
|
|
7.9821 |
|
|
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7.4669 |
|
|
|
6.3585 |
|
|
|
5.4782 |
|
|
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4.1429 |
|
|
|
2.5524 |
|
|
|
0.9843 |
|
|
|
0.4625 |
|
|
|
0.1255 |
|
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March 30, 2007
|
|
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9.4396 |
|
|
|
8.9737 |
|
|
|
8.3703 |
|
|
|
7.8124 |
|
|
|
7.3029 |
|
|
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6.2258 |
|
|
|
5.3562 |
|
|
|
4.0530 |
|
|
|
2.4925 |
|
|
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0.9600 |
|
|
|
0.4508 |
|
|
|
0.1218 |
|
|
March 30, 2008
|
|
|
9.2083 |
|
|
|
8.7481 |
|
|
|
8.1492 |
|
|
|
7.6071 |
|
|
|
7.1046 |
|
|
|
6.0656 |
|
|
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5.2111 |
|
|
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3.9441 |
|
|
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2.4201 |
|
|
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0.9317 |
|
|
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0.4368 |
|
|
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0.1180 |
|
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March 30, 2009
|
|
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8.8681 |
|
|
|
8.4114 |
|
|
|
7.8328 |
|
|
|
7.3050 |
|
|
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6.8228 |
|
|
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5.8267 |
|
|
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4.9975 |
|
|
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3.7801 |
|
|
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2.3171 |
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0.8917 |
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0.4196 |
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0.1124 |
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April 4, 2010
|
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0.0000 |
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0.0000 |
|
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0.0000 |
|
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0.0000 |
|
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|
0.0000 |
|
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|
0.0000 |
|
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0.0000 |
|
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|
0.0000 |
|
|
|
0.0000 |
|
|
|
0.0000 |
|
|
|
0.0000 |
|
|
|
0.0000 |
|
| |
The stock prices and additional share amounts set forth above
are based upon a common stock price of $26.27 at March 17,
2005 and an initial conversion price of $35.46.
The exact stock price and conversion dates may not be set forth
on the table; in which case, if the stock price is:
|
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| |
• |
between two stock price amounts on the table or the conversion
date is between two dates on the table, the number of additional
shares will be determined by straight-line interpolation between
the number of additional shares set forth for the higher and
lower stock price amounts and the two dates, as applicable,
based on a 365-day year, |
| |
| |
• |
more than $150.00 per share (subject to adjustment), no
additional shares will be issued in conversion, and |
| |
| |
• |
less than $26.27 per share (subject to adjustment), no
additional shares will be issued upon conversion. |
Notwithstanding the foregoing, in no event will (i) the
conversion rate exceed 38.0662 per $1,000 initial principal
amount of the notes, or (ii) the total number of shares
issuable upon conversion of a note exceed 35.9100 per
$1,000 initial principal amount of the notes, in each case after
giving effect to the make whole adjustment described above and
any related increase in the conversion rate, subject to
anti-dilution adjustments described under
“— Anti-dilution Adjustments.”
Public Acquirer Change of Control
Notwithstanding the foregoing, in the case of a public acquirer
change of control (as defined below), we may, in lieu of
permitting a repurchase at the holder’s option or adjusting
the conversion rate as described under
“— Adjustment to Conversion Rate Upon a
Fundamental Change,” elect to adjust the conversion rate
and the related conversion obligation such that from and after
the effective date of such public acquirer change of control,
holders of the notes will be entitled to convert their notes
into a number of shares of public acquirer common stock (as
defined below) at an adjusted conversion rate equal to the
conversion rate in effect immediately before the public acquirer
change of control multiplied by a fraction:
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| |
• |
the numerator of which will be (i) in the case of a share
exchange, consolidation, merger or binding share exchange,
pursuant to which our common stock is converted into cash,
securities or other property, the average value of all cash and
any other consideration (as determined by our board of
directors) paid or payable per share of common stock, or
(ii) in the case of any other public acquirer change of
control, the average of the closing sale prices of our common
stock for |
88
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| |
|
the five consecutive trading days prior to but excluding the
effective date of such public acquirer change of
control, and |
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| |
• |
the denominator of which will be the average of the closing sale
prices of the public acquirer common stock for the five
consecutive trading days commencing on the trading day next
succeeding the effective date of such public acquirer change of
control. |
A “public acquirer change of control” means any event
constituting a fundamental change that would otherwise give
holders the right to cause us to repurchase the notes as
described above under “— Repurchase at the Option
of the Holder Upon a Fundamental Change” where the acquirer
has a class of common stock (or American Depository Receipts
representing such common stock) traded on a U.S. national
securities exchange or quoted on The Nasdaq Stock Market or
which will be so traded or quoted when issued or exchanged in
connection with such fundamental change (the “public
acquirer common stock”). If an acquirer does not have a
class of common stock satisfying the foregoing requirement, it
will be deemed to have “public acquirer common stock”
if either (1) a direct or indirect majority-owned
subsidiary of acquirer, or (2) a corporation that directly
or indirectly owns at least a majority of the acquirer, has a
class of common stock satisfying the foregoing requirement; in
such case, all references to public acquirer common stock shall
refer to such class of common stock. Majority-owned for these
purposes means having “beneficial ownership” (as
defined in Rule 13d-3 under the Exchange Act) of more than
50% of the total voting power of all shares of the respective
entity’s capital stock that are entitled to vote generally
in the election of directors.
If we elect to adjust the conversion rate and conversion
obligations as described above in connection with a public
acquirer change of control, we will, at least 15 trading days
before the anticipated effective date of such public acquirer
change of control and again upon the effective date of such
public acquirer change of control, (1) provide to all
holders of the notes and the trustee and paying agent notice by
mail of such election, including in the notice the information
on the adjustment, and (2) disseminate a press release
containing information regarding the adjustment and publish the
information through a public medium that is customary for such
press release.
If we elect to adjust the conversion rate and conversion
obligation as described above in connection with a public
acquirer change of control, holders of the notes will not have
the right to require us to repurchase their notes as described
under “— Repurchase at Option of the Holder Upon
a Fundamental Change” or to convert at an adjusted
conversion rate as described under “— Adjustment
to Conversion Rate Upon a Fundamental Change” in connection
with the fundamental change that is also the public acquirer
change of control.
Merger and Sales of Assets
We may not (1) consolidate with or merge with or into any
other person or convey, sell, transfer or lease or otherwise
dispose of all or substantially all of our assets to any other
person in any one transaction or series of related transactions,
or (2) permit any person to consolidate with or merge into
us, unless:
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• |
in the case of a merger or consolidation, either we are the
surviving person, or if we are not the surviving person, the
surviving person formed by such consolidation or into which we
are merged or the person to which our properties and assets are
so transferred shall be a corporation organized and existing
under the laws of the United States of America, any state
thereof or the District of Columbia and shall execute and
deliver to the trustee a supplemental indenture expressly
assuming the payment when due of the principal of and interest,
if any, on the notes and the performance of each of our other
covenants under the notes and the indenture, and |
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| |
• |
in either case, immediately after giving effect to such
transaction, no default or event of default shall have occurred
and be continuing. |
In the case of a merger or consolidation pursuant to which all
or substantially all of our common stock would be converted into
cash, securities or other property, or any sale, transfer or
lease of all or substantially all of our assets, the right to
convert a note into our common stock will be changed into a
89
right to convert the notes into the kind and amount of cash,
securities or other property that you would have received if you
had converted your notes immediately prior to the transaction.
Upon any such merger, consolidation, sale, transfer or lease,
there shall be an adjustment to the applicable conversion rate.
Events of Default
The following are events of default with respect to the notes:
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• |
failure for 30 days to pay of any interest, contingent
interest or liquidated damages due and payable on the notes, |
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| |
• |
failure to pay of accreted principal of the notes at maturity,
upon redemption, repurchase or following a fundamental change,
when the same becomes due and payable, |
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• |
failure by us or any of our subsidiaries to pay of principal,
interest or premium when due under any other instruments of
indebtedness having an aggregate outstanding principal amount of
$10 million (or its equivalent in any other currency or
currencies) or more, and such default continues in effect for
more than 30 days after the expiration of any grace period
or extension of time for payment, |
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• |
default in our conversion obligations upon exercise of a
holder’s conversion right, unless such default is cured
within five days after the trustee or the holder of such note
gives us written notice of default, |
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• |
default in our obligations to give notice of your right to
require us to repurchase notes after a fundamental change
occurs, within the time required to give such notice, |
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• |
acceleration of any of our indebtedness or the indebtedness of
any of our subsidiaries under any instrument or instruments
evidencing indebtedness (other than the notes) having an
aggregate outstanding principal amount of $10 million (or
its equivalent in any other currency or currencies) or more
unless such acceleration has been rescinded or annulled within
30 days after we receive written notice of such
acceleration, |
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• |
default in our performance of any other covenants or agreements
contained in the indenture or the notes for 60 days after
the trustee or the holders of at least 25% in aggregate
principal amount of the notes gives us written notice, and |
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| |
• |
certain events of bankruptcy, insolvency and reorganization of
us or any of our subsidiaries. |
The indenture requires us to file annually with the trustee a
certificate describing any default by us in the performance of
any conditions or covenants that has occurred under the
indenture and its status. We must give the trustee written
notice within 30 days after any default under the indenture
that could mature into an event of default described in the
seventh bullet point above.
The indenture provides that if an event of default occurs and is
continuing with respect to the notes, either the trustee or the
registered holders of at least 25% in aggregate accreted
principal amount of the notes then outstanding may declare the
principal amount, plus accrued and unpaid interest, including
liquidated damages and contingent interest, if any, on the notes
to be due and payable immediately. If an event of default
relating to certain events of bankruptcy, insolvency or
reorganization occurs, the accreted principal amount plus
accrued and unpaid interest, including liquidated damages and
contingent interest, if any, on the notes automatically will
become immediately due and payable without any action on the
part of the trustee or any holder. At any time after a
declaration of acceleration, but before a judgment or decree for
payment of money has been obtained, if all events of default
with respect to the notes have been cured (other than the
nonpayment of accreted principal of or interest on the notes
which has become due solely by reason of the declaration of
acceleration), then the declaration of acceleration shall be
automatically annulled and rescinded.
A holder of notes may pursue any remedy under the indenture only
if:
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• |
the holder gives the trustee written notice of a continuing
event of default for the notes, |
90
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• |
the holders of at least 25% in aggregate accreted principal
amount of the then outstanding notes make a written request to
the trustee to pursue the remedy, |
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• |
the trustee fails to act for a period of 60 days after
receipt of notice and offer of indemnity, and |
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| |
• |
during that 60-day period, the holders of a majority in
aggregate accreted principal amount of the then outstanding
notes do not give the trustee a direction inconsistent with the
request. |
This provision does not, however, affect the right of a holder
of notes to sue for enforcement of payment of the accreted
principal of, or interest on, the holder’s note on or after
the respective due dates expressed in its notes or the
holder’s right to convert its notes in accordance with the
indenture.
The trustee will be entitled under the indenture, subject to the
duty of the trustee during a default to act with the required
standard of care, to be indemnified to its reasonable
satisfaction before proceeding to exercise any right or power
under the indenture at the direction of the holders of the
notes. The indenture also provides that the holders of a
majority in aggregate accreted principal amount of the then
outstanding notes may direct the time, method and place of
conducting any proceeding for any remedy available to the
trustee or exercising any trust or power conferred on the
trustee with respect to the notes. The trustee, however, may
refuse to follow any such direction that conflicts with law or
the indenture, is prejudicial to the rights of other holders of
the notes, or would involve the trustee in personal liability.
The indenture provides that while the trustee generally must
mail notice of a default or event of default to the holders of
the notes within 90 days after it occurs, the trustee may
withhold notice of any default or event of default (except in
payment on the notes) if the trustee in good faith determines
that withholding notice is in the interests of the registered
holders of the notes.
Modification and Waiver
We may amend or supplement the indenture if the holders of a
majority in accreted principal amount of the then outstanding
notes consent to it. Without the consent of the holder of each
note affected, however, no amendment, supplement or waiver may:
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• |
reduce the amount of notes whose holders must consent to an
amendment, supplement or waiver, |
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• |
reduce the rate of accrual of interest or modify the method for
calculating interest or change the time for payment of interest
on the notes, |
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| |
• |
modify the provisions with respect to holders’ rights upon
a fundamental change in a manner adverse to the holders of the
notes, including our obligations to repurchase the notes
following a fundamental change, |
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• |
reduce the initial or accreted principal amount of the notes or
change the final stated maturity of the notes, |
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• |
reduce the redemption or repurchase price of the notes or change
the time at which the notes may or must be redeemed or
repurchased, |
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• |
make payments on the notes payable in currency other than as
originally stated in the notes, |
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• |
impair the holder’s right to institute suit for the
enforcement of any payment on the notes, |
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• |
make any change in the percentage of principal amount of notes
necessary to waive compliance with provisions of the indenture
or to make any change in this provision for modification, |
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• |
waive a continuing default or event of default regarding any
payment on the notes (except a rescission of acceleration of the
notes as provided in the indenture and a waiver of the payment
default that resulted from such acceleration), or |
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• |
adversely affect the conversion or repurchase provisions of the
notes. |
91
We may amend or supplement the indenture or waive any provision
of it without the consent of any holders of notes in some
circumstances, including:
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• |
to cure any ambiguity, omission, defect or inconsistency, |
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• |
to provide for the assumption of our obligations under the
indenture by a successor upon any merger, consolidation or asset
transfer permitted under the indenture, |
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• |
to provide for exchange rights of holders of notes in certain
events such as our consolidation or merger or the sale or all or
substantially all of our assets, |
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• |
to provide for uncertificated notes in addition to or in place
of certificated notes, |
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• |
to secure the notes or to provide guarantees of the notes, |
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• |
to comply with any requirement to effect or maintain the
qualification of the indenture under the Trust Indenture Act of
1939, |
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• |
to evidence and provide for the acceptance of the appointment
under the indenture of a successor trustee, |
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• |
to add covenants that would benefit the holders of notes or to
surrender any rights we have under the indenture, |
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• |
to add events of default with respect to the notes, or |
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• |
to make any change that does not adversely affect any
outstanding notes in any material respect. |
The holders of a majority in aggregate principal amount of the
then outstanding notes generally may waive any existing or past
default or event of default. Those holders may not, however,
waive any default or event of default in any payment on any note
or compliance with a provision that cannot be amended or
supplemented without the consent of each holder affected.
Registration Rights
We have entered into a registration rights agreement with the
Initial Purchasers. In the registration rights agreement we
agreed, for the benefit of the holders of the notes and the
shares into which the notes are convertible, commonly referred
to as the registrable securities, that we will, at our expense:
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• |
file with the SEC, within 90 days after the date the notes
are originally issued, a shelf registration statement covering
resales of the registrable securities, |
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• |
use our commercially reasonable best efforts to cause the shelf
registration statement to be declared effective under the
Securities Act within 180 days after the date the notes are
originally issued, and |
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• |
use our reasonable best efforts to keep effective the shelf
registration statement until the earliest of (i) the sale
of all outstanding registrable securities registered under the
shelf registration statement; (ii) the expiration of the
period referred to in Rule 144(k) of the Securities Act
with respect to the notes held by non-affiliates of Connetics,
and (iii) two years after the effective date of the shelf
registration statement. |
We will be permitted to suspend the use of the prospectus that
is part of the effective shelf registration statement in
connection with the sale of registrable securities during
prescribed periods of time for reasons relating to pending
corporate developments, public filings with the SEC and other
events. The periods during which we can suspend the use of the
prospectus may not, however, exceed a total of 30 days in
any 90-day period or a total of 90 days in any 12-month
period. We will provide to each holder of registrable securities
copies of the prospectus that is a part of the shelf
registration statement, notify each holder when the shelf
registration statement has been filed with the SEC and when such
shelf registration statement has become effective and take
certain other actions required to permit public resales of the
registrable securities.
92
We may, upon written notice to all holders of notes, postpone
having the shelf registration statement declared effective for a
reasonable period not to exceed 90 days if we possess
material non-public information the disclosure of which would
have a material adverse effect on us and our subsidiaries taken
as a whole. Notwithstanding any such postponement, additional
interest referred to as “liquidated damages” will
accrue on the notes if either of the following registration
defaults occurs:
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| |
• |
on or before the 90th day following the date the notes were
originally issued, a shelf registration statement has not been
filed with the SEC, or |
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| |
• |
on or before the 180th day following the date the notes were
originally issued, the shelf registration statement is not
declared effective. |
In either case, liquidated damages will accrue on any notes
which are then restricted securities, from and including the day
following the registration default to but excluding the day on
which the registration default has been cured. Liquidated
damages will be paid semi-annually in arrears, with the first
semi-annual payment due on the first interest payment date
following the date on which the liquidated damages began to
accrue on any notes.
The rates at which liquidated damages will accrue on any notes
will be as follows:
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| |
• |
0.25% of the principal amount per annum to and including the
90th day after the registration default, and |
| |
| |
• |
0.50% of the principal amount per annum from and after the
91st day after the registration default. |
In addition, liquidated damages will accrue on any notes if the
shelf registration statement ceases to be effective, or we
otherwise prevent or restrict holders of registrable securities
from making sales under the shelf registration statement, for:
|
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| |
• |
more than 30 days, whether or not consecutive, during any
90 day period, or |
| |
| |
• |
more than 90 days, whether or not consecutive, during any
12-month period. |
In either event, liquidated damages will accrue on any notes at
a rate of 0.5% per annum from the 31st day of the
90 day period or the 91st day of the 12-month period
until the earlier of the following:
|
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| |
• |
the time the shelf registration statement again becomes
effective or the holders of registrable securities are again
able to make sales under the shelf registration statement,
depending on which event triggered the liquidated
damages, or |
| |
| |
• |
the earliest of (i) the sale of all outstanding registrable
securities registered under the shelf registration statement,
(ii) the expiration of the period referred to in
Rule 144(k) of the Securities Act with respect to the notes
held by non-affiliates of Connetics, and (iii) two years
after the effective date of the shelf registration statement. |
A holder who elects to sell any registrable securities pursuant
to the shelf registration statement:
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| |
• |
will be required to be named as a selling security holder in the
related prospectus, |
| |
| |
• |
may be required to deliver a prospectus to purchasers, |
|
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| |
• |
may be subject to certain civil liability provisions under the
Securities Act in connection with those sales, and |
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will be bound by the provisions of the registration rights
agreement that apply to a holder making such an election,
including certain indemnification provisions. |
We will mail a notice and questionnaire to the holders of
registrable securities not less than 30 calendar days before the
effective time of the shelf registration statement.
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No holder of registrable securities will be entitled:
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to be named as a selling security holder in the shelf
registration statement as of the date the shelf registration
statement is declared effective, or |
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to use the prospectus forming a part of the shelf registration
statement for offers and resales of registrable securities at
any time, |
unless such holder has returned a completed and signed notice
and questionnaire to us by the deadline for response set forth
in the notice and questionnaire. Holders of registrable
securities will, however, have at least 28 calendar days from
the date on which the notice and questionnaire is first mailed
to return a completed and signed notice and questionnaire to us.
Beneficial owners of registrable securities who have not
returned a notice and questionnaire by the questionnaire
deadline described above may receive another notice and
questionnaire from us upon request. After we receive a completed
and signed notice and questionnaire, we will include the
registrable securities covered by the questionnaire in the shelf
registration statement.
We agreed in the registration rights agreement to use our
reasonable best efforts to cause the shares of our common stock
issuable upon conversion of the notes to be quoted on The Nasdaq
National Market. However, if our common stock is not then quoted
on The Nasdaq National Market, we will use our reasonable best
efforts to cause the shares of our common stock issuable upon
conversion of the notes to be quoted or listed on whichever
market or exchange the common stock is then primarily traded,
upon effectiveness of the shelf registration statement.
This summary of certain provisions of the registration rights
agreement is not complete and is subject to, and qualified in
its entirety by reference to, all the provisions of the
registration rights agreement, a copy of which will be made
available to beneficial owners of the notes upon request to us.
Calculations in Respect of Notes
We will be responsible for making all calculations called for
under the notes. These calculations include, but are not limited
to, determinations of the trading prices of the notes and the
sale prices of our common stock, any accrued interest payable on
the notes, the conversion rate of the notes and the projected
payment schedule. We will make all these calculations in good
faith and, absent manifest error, our calculations will be final
and binding on holders of the notes. We will provide a schedule
of our calculations to the trustee, and the trustee is entitled
to rely upon the accuracy of our calculations without
independent verification. The trustee will forward our
calculations to any holder of the notes upon the request of that
holder.
Governing Law
The indenture and the notes will be governed by, and construed
in accordance with, the laws of the State of New York.
Trustee
J.P. Morgan Trust Company, National Association is the
trustee, registrar, conversion agent and paying agent. The
trustee maintains an office in New York, New York.
If an event of default occurs and is continuing, the trustee
will be required to use the degree of care and skill of a
prudent man in the conduct of his own affairs. The trustee will
become obligated to exercise any of its powers under the
indenture at the request of any of the noteholders only after
those holders have offered the trustee indemnity reasonably
satisfactory to it.
If the trustee becomes one of our creditors, it may become
subject to limitations in the indenture on its rights to obtain
payment of claims or to realize on some property received for
any such claim, as
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security or otherwise. The trustee is permitted to engage in
other transactions with us. Lf, however, it acquires any
conflicting interest, it must eliminate that conflict or resign
as trustee under the indenture.
Form, Exchange, Registration and Transfer
We will issue the notes in registered form, without interest
coupons. We will not charge a service charge for any
registration of transfer or exchange of the notes. We may,
however, require the payment of any tax or other governmental
charge payable for that registration.
Notes will be exchangeable for other notes for the same
principal amount and for the same terms but in different
authorized denominations in accordance with the indenture.
Holders may present notes for registration of transfer at the
office of the security registrar or any transfer agent we
designate. The security registrar or transfer agent will effect
the transfer or exchange when it is satisfied with the documents
of title and identity of the person making the request.
We have appointed the trustee as security registrar for the
notes. We may at any time rescind that designation or approve a
change in the location through which any registrar acts. We are
required to maintain an office or agency for transfers and
exchanges in each place of payment. We may at any time designate
additional registrars for the notes.
Payment and Paying Agents
Payments on the notes will be made in U.S. dollars at the
office of the trustee. At our option, however, we may make
payments by check mailed to the holder’s registered address
or, with respect to global notes, by wire transfer. We will make
any required interest payments to the person in whose name each
note is registered at the close of business on the record date
for the interest payment.
The trustee will be designated as our paying agent for payments
on the notes. We may at any time designate additional paying
agents or rescind the designation of any paying agent or approve
a change in the office through which any paying agent acts.
We will maintain an office in the Borough of Manhattan, the City
of New York, where we will pay the principal on the notes and
you may present the notes for conversion, registration of
transfer or exchange for other denominations. This office will
initially be an office or agency of the trustee.
Subject to the requirements of any applicable abandoned property
laws, the trustee and paying agent shall pay to us upon written
request any money they hold for payments on the notes that
remain unclaimed for two years after the date on which that
payment became due. After payment to us, holders entitled to the
money must look to us for payment. In that case, all liability
of the trustee or paying agent with respect to that money will
cease.
Notices
Except as otherwise described in this prospectus, notice to
registered holders of the notes will be given by mail to the
addresses as they appear in the security register. Notices will
be deemed to have been given on the date of such mailing.
Replacement of Notes
We will replace any notes that become mutilated, destroyed,
stolen or lost at the expense of the holder upon delivery to the
trustee of the mutilated notes or evidence of the loss, theft or
destruction satisfactory to us and the trustee. In the case of
lost, stolen or destroyed notes, indemnity satisfactory to the
trustee and us may be required at the expense of the holder of
the notes before a replacement note will be issued.
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Book-Entry System
The notes will be represented by one or more permanent global
notes in definitive, fully-registered form without interest
coupons. The global notes will be deposited with the trustee as
custodian for DTC and registered in the name of a nominee of DTC
in New York, New York for the accounts of participants in DTC.
Except in the limited circumstances described below, holders of
notes represented by interests in the global notes will not be
entitled to receive notes in definitive form.
DTC has advised us as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York
Uniform Commercial Code and a “clearing corporation”
with the meaning of the New York Uniform Commercial Code and a
“clearing agency” registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was
created to hold securities of institutions that have accounts
with DTC (which we refer to as “participants”) and to
facilitate the clearance and settlement of securities
transactions among its participants in such securities through
electronic book-entry changes in accounts of the participants,
thereby eliminating the need for physical movement of securities
certificates. DTC’s participants include securities brokers
and dealers (which may include the Initial Purchasers), banks,
trust companies, clearing corporations and certain other
organizations. Access to DTC’s book-entry system is also
available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial
relationship with a participant, whether directly or indirectly.
Upon the issuance of the global notes, DTC will credit, on its
book-entry registration and transfer system, the respective
initial principal amount of the individual beneficial interests
represented by the global notes to the accounts of participants.
The Initial Purchasers shall designate the accounts to be
credited. Ownership of beneficial interests in the global notes
will be limited to participants or persons that may hold
interests through participants. Ownership of beneficial
interests in the global notes will be shown on, and the transfer
of those ownership interests will be effected only through,
records maintained by DTC (with respect to participants’
interests) and such participants (with respect to the owners of
beneficial interests in the global notes other than
participants).
Except as set forth below and in the indenture, owners of
beneficial interests in the global notes will not be entitled to
receive notes in definitive form and will not be considered to
be the owners or holders of any notes under the global notes. We
understand that under existing industry practice, if an owner of
a beneficial interest in the global notes desires to take any
actions that DTC, as the holder of the global notes, is entitled
to take, DTC would authorize the participants to take such
action, and that participants would authorize beneficial owners
owning through such participants to take such action or would
otherwise act upon the instructions of beneficial owners owning
through them. No beneficial owner of an interest in the global
notes will be able to transfer the interest except in accordance
with DTC’s applicable procedures, and the procedures
provided for under the indenture.
Payments of the principal of and interest on the notes
represented by the global notes registered in the name of and
held by DTC or its nominee will be made to DTC or its nominee,
as the case may be, as the registered owner and holder of the
global notes.
We expect that DTC or its nominee, upon receipt of any payment
of principal or interest in respect of the global notes, will
credit participants’ accounts with payments in amounts
proportionate to their respective beneficial interest in the
principal amount of the global notes as shown on the records of
DTC or its nominee. We also expect that payments by participants
to owners of beneficial interests in the global notes held
through such participants will be governed by standing
instructions and customary practices as is now the case with
securities held for accounts of customers registered in the
names of nominees for such customers. Such payments, however,
will be the responsibility of such participants and indirect
participants, and neither we, the trustee nor any paying agent
will have any responsibility or liability for any aspect of the
records relating to, or payments made on account of, beneficial
ownership interests in the global notes or for maintaining,
supervising or reviewing any records relating to such beneficial
ownership
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interests or for any other aspect of the relationship between
DTC and its participants or the relationship between such
participants and the owners of beneficial interests in the
global notes.
Unless and until they are exchanged in whole or in part for
notes in definitive form, the global notes may not be
transferred except as a whole by DTC to a nominee of DTC or by a
nominee of DTC to DTC or another nominee of DTC.
Transfers between participants in DTC will be effected in the
ordinary way in accordance with DTC rules and will be settled in
same-day funds.
DTC may grant proxies and otherwise authorize any person,
including agent members and persons that may hold interests
through agent members, to take any action that a holder is
entitled to take. We expect that DTC will take any action
permitted to be taken by a holder of notes (including the
presentation of notes for exchange as described below) only at
the direction of one or more participants to whose account the
DTC interests in the global notes is credited and only in
respect of such portion of the aggregate principal amount of the
notes as to which such participant or participants has or have
given such direction. However, if there is an event of default
under the notes, the global notes may be exchanged for notes in
definitive form.
Although we expect that DTC will agree to the foregoing
procedures in order to facilitate transfers of interests in the
global notes among participants of DTC, DTC is under no
obligation to perform or continue to perform such procedures,
and such procedures may be discontinued at any time. Neither we
nor the trustee will have any responsibility for the performance
by DTC or their participants or indirect participants of their
respective obligations under the rules and procedures governing
their operations.
If DTC is at any time unwilling to continue as a depositary for
the global notes and a successor depositary is not appointed by
us within 90 days, or under other circumstances described
in the indenture, we will issue notes in fully registered,
definitive form in exchange for the global notes.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares
of common stock, $0.001 par value, and
5,000,000 shares of preferred stock, $0.001 par value,
of which no shares are designated as series A preferred
stock, 90,000 shares are designated series B preferred
stock and no shares are designated as series C preferred
stock. As of May 31, 2005, there were:
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34,897,027 shares of our common stock outstanding that were
held of record by approximately 132 stockholders, and |
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no shares of preferred stock issued or outstanding. |
In addition, as of May 31, 2005, there were outstanding
options to purchase 7,755,571 shares of common stock,
and we have reserved an additional 353,051 shares for sales
pursuant to our Employee Stock Purchase Plan.
We have a commitment to a third party to issue a warrant to
purchase 30,000 shares of our common stock when and if
Relaxin is approved for a commercial indication. As of
May 31, 2005, the warrant had not been issued. Although we
sold the Relaxin program to BAS Medical in 2003, the warrant
obligation was not transferred.
In addition, as of May 31, 2005, 4,203,450 shares of
common stock were reserved for issuance upon conversion of our
existing 2.25% Convertible Series Notes due 2008.
Common Stock
The holders of common stock are entitled to one vote per share
on all matters to be voted upon by the stockholders. Subject to
preferences that may be applicable to any outstanding preferred
stock, the holders of common stock are entitled to receive
ratably such dividends, if any, as may be declared from time to
time by the board of directors out of funds legally available
therefore. In the event of a liquidation, dissolution or winding
up of Connetics, the holders of common stock are entitled to
share ratably in all assets remaining after payment of
liabilities, subject to prior rights of preferred stock, if any,
then outstanding. There are no redemption or sinking fund
provisions available to the common stock. All outstanding shares
of common stock are fully paid and non-assessable.
Preferred Stock
As of the date of this offering memorandum, there were no shares
of preferred stock outstanding and we have no current plans to
issue any shares of such stock. The board of directors will have
the authority to issue the preferred stock in one or more
additional series and to determine the powers, preferences and
rights and the qualifications, limitations or restrictions
granted to or imposed upon any wholly unissued series of
undesignated preferred stock and to fix the number of shares
constituting any series and the designation of such series,
without any further vote or action by the stockholders. The
issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of Connetics without
further action by the stockholders and may adversely affect the
voting and other rights of the holders of common stock.
Series A Preferred Stock
No shares of preferred stock have been designated as
series A preferred stock.
Series B Preferred Stock
In November 2001, we adopted an Amended and Restated Preferred
Stock Rights Agreement, which entitles existing holders of
common stock to certain rights (including the right to purchase
shares of series B participating preferred stock) in the
event of an acquisition of fifteen percent (15%) or more of our
outstanding common stock or a tender offer for such shares
resulting in the beneficial ownership by a person or group of
fifteen percent (15%) or more of the outstanding common stock.
These rights expire on
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November 19, 2011 if not redeemed earlier by us or expired
pursuant to the consummation of certain mergers, consolidations
or sales of assets, or unless the final expiration date is
extended.
To date, no shares of series B preferred stock have been
issued. If issued, the holders of series B Participating
preferred stock would have the right, subject to the rights of
any holder of preferred stock with superior rights, to receive
cumulative quarterly dividends when, as and if declared by the
board of directors. These quarterly dividends are payable in an
amount per share equal to 1,000 times the aggregate per share
amount of all cash dividends, and 1,000 times the aggregate per
share amount (payable in kind) of all non-cash dividends or
other distributions declared on the common stock. If a required
dividend payment on the series B participating preferred
stock is in arrears, then the corporation may not declare or pay
dividends on, make any other distributions on or redeem or
purchase or otherwise acquire for consideration any shares of
stock ranking junior to the series B participating
preferred stock. The series B participating preferred stock
holders have a preference upon any liquidation, dissolution,
winding up, consolidation or merger of Connetics. In the event
of a liquidation, dissolution or winding up, no distribution
shall be made to the holders of the shares of stock ranking
junior to the series B participating preferred stock unless
the holders of the series B participating preferred stock
shall have received an amount equal to the accrued and unpaid
dividends and distributions thereon, whether or not declared, to
the date of such payment, plus an amount equal to the greater of
(1) $1,000 per share, provided that in the event there
are not sufficient assets available to permit such payment, then
the payment will be equal to the value of the amount of the
available assets divided by the number of outstanding shares of
series B participating preferred stock or (2) 1,000
times the aggregate per share amount to be distributed to the
holders of the common stock. In the event of a consolidation or
merger, the series B participating preferred stock shall be
exchanged or changed in an amount per share equal to 1,000 times
the aggregate amount of consideration received for each share of
common stock. Each share of series B participating
preferred stock entitles the holder thereof to 1,000 votes on
all matters submitted to the vote of the stockholders, voting
together with the common stock as one class.
Series C Preferred Stock
No shares of preferred stock have been designated as
series C preferred stock.
Anti-Takeover Provisions
We are subject to the provisions of Section 203 of the
Delaware General Corporation Law. In general, the statute
prohibits a publicly held Delaware corporation from engaging in
a “business combination” with an “interested
stockholder” for a period of three years after the date
that the person became an interested stockholder unless (with
certain exceptions) the business combination or the transaction
in which the person became an interested stockholder is approved
in a prescribed manner. Generally, a “business
combination” includes a merger, asset or stock sale or
other transaction resulting in a financial benefit to the
stockholder, and an “interested stockholder” is a
person who, together with affiliates and associates, owns (or
within three years prior, did own) 15% or more of the
corporation’s outstanding voting stock. This provision may
have the effect of delaying, deferring or preventing a change in
control of Connetics without further action by the stockholders.
In addition, certain provisions of our charter documents,
including a provision eliminating the ability of stockholders to
take actions by written consent, may have the effect of delaying
or preventing changes in control or management of Connetics,
which could have an adverse effect on the market price of our
common stock. Our stock option and purchase plans generally
provide for assumption of such plans or substitution of an
equivalent option of a successor corporation or, alternatively,
at the discretion of our board of directors, exercise of some or
all of the stock options, including non-vested shares, or
acceleration of vesting of shares issued pursuant to stock
grants, upon a change of control or similar event.
Our board of directors has authority to issue up to
5,000,000 shares of preferred stock and to fix the rights,
preferences, privileges and restrictions, including voting
rights, of these shares without any further vote or action by
the stockholders. The issuance of series B preferred stock
or any preferred stock subsequently issued by our board of
directors, under some circumstances, could have the effect of
delaying,
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deferring or preventing a change in control. The rights of the
holders of the common stock will be subject to, and may be
adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance
of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for
a third party to acquire a majority of our outstanding voting
stock, thereby delaying, deferring or preventing a change in
control of Connetics. Furthermore, such preferred stock may have
other rights, including economic rights senior to the common
stock, and, as a result, the issuance of such preferred stock
could have a material adverse effect on the market value of our
common stock.
Some provisions contained in our Amended and Restated Preferred
Stock Rights Plan may have the effect of discouraging a third
party from making an acquisition proposal for us and may thereby
inhibit a change in control. For example, such provisions may
deter tender offers for shares of common stock or exchangeable
shares, which offers may be attractive to stockholders, or deter
purchases of large blocks of common stock or exchangeable
shares, thereby limiting the opportunity for stockholders to
receive a premium for their shares of common stock or
exchangeable shares over the then-prevailing market prices.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Boston
Equiserve. Its telephone number is (781) 575-3766.
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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain U.S. federal income
tax consequences of the purchase, ownership, conversion, and
other disposition of the notes by an initial purchaser of the
notes that purchases the notes for their issue price (as defined
below) and of the shares received upon a conversion of the
notes. This summary is based upon existing U.S. federal
income tax law, which is subject to change or differing
interpretations, possibly with retroactive effect. This summary
does not discuss all aspects of U.S. federal income
taxation which may be important to particular investors in light
of their individual circumstances, such as notes held by
investors subject to special tax rules (e.g., financial
institutions, insurance companies, broker-dealers, tax-exempt
organizations (including private foundations), and partnerships
and their partners) or to persons that will hold the notes as
part of a straddle, hedge, conversion, constructive sale, or
other integrated transaction for U.S. federal income tax
purposes or U.S. Holders (as defined below) that have a
functional currency other than the U.S. dollar, all of whom
may be subject to tax rules that differ significantly from those
summarized below. In addition, this summary does not discuss any
(i) U.S. federal income tax consequences to a
Non-U.S. Holder (as defined below) that (A) is engaged
in the conduct of a U.S. trade or business and acquires or
holds the notes in connection therewith or (B) is a
nonresident alien individual and is present in the United States
for 183 or more days during the taxable year and
(ii) foreign, state, or local tax considerations. This
summary assumes that investors will hold their notes as
“capital assets” (generally, property held for
investment) under the Internal Revenue Code of 1986, as amended
(the “Code”). Each prospective investor is urged to
consult its tax advisor regarding the U.S. federal, state,
local, and foreign income and other tax consequences of the
purchase, ownership, conversion, and other disposition of the
notes and shares received upon a conversion of the notes.
For purposes of this summary, a “U.S. Holder” is
a beneficial owner of a note that is, for U.S. federal
income tax purposes, (i) an individual who is a citizen or
resident of the United States, (ii) a corporation,
partnership, or other entity created in, or organized under the
law of, the United States or any state or political subdivision
thereof, (iii) an estate the income of which is includible
in gross income for U.S. federal income tax purposes
regardless of its source, or (iv) a trust (A) the
administration of which is subject to the primary supervision of
a U.S. court and which has one or more United States
persons who have the authority to control all substantial
decisions of the trust or (B) that was in existence on
August 20, 1996, was treated as a United States person on
the previous day, and elected to continue to be so treated. A
beneficial owner of a note that is not a United States person
for U.S. federal income tax purposes is referred to in this
summary as a “Non-U.S. Holder.”
Classification of the Notes
Pursuant to the terms of the indenture, each holder of notes
agrees to treat the notes, for U.S. federal income tax
purposes, as debt instruments that are subject to the Treasury
regulations that govern contingent payment debt instruments (the
“CPDI Regulations”) and to be bound by our application
of the CPDI Regulations to the notes, including our
determination of the rate at which interest will be deemed to
accrue on the notes and the related “projected payment
schedule.” The remainder of this discussion assumes that
the notes will be treated in accordance with that agreement and
our determinations.
No authority directly addresses the treatment of all aspects of
the notes for U.S. federal income tax purposes. The
Internal Revenue Service (the “Service”) has issued
Revenue Ruling 2002-31 and Notice 2002-36, in which the
Service addressed the U.S. federal income tax
classification and treatment of a debt instrument similar,
although not identical, to the notes, and the Service concluded
that the debt instrument addressed in that published guidance
was subject to the CPDI Regulations. In addition, the Service
clarified various aspects of the applicability of certain other
provisions of the Code to the debt instrument addressed in that
published guidance. The applicability of Revenue Ruling 2002-31
and Notice 2002-36 to any particular debt instrument, however,
such as the notes, is uncertain. In addition, no rulings are
expected to be sought from the Service with respect to any of
the U.S. federal income tax consequences discussed below,
and no assurance can be given that the Service will not take
contrary positions. As a result, no assurance can be given that
the Service will agree with the tax characterizations
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and the tax consequences described below. A different treatment
of the notes for U.S. federal income tax purposes could
significantly alter the amount, timing, character, and/or
treatment of income, gain or loss recognized in respect of the
notes from that which is described below and could require a
U.S. Holder to accrue interest income at rate different
from the “comparable yield” rate described below.
U.S. Holders
Interest Income
Under the CPDI Regulations, a U.S. Holder will generally be
required to accrue interest income on the notes on a constant
yield to maturity basis based on the “adjusted issue
price” (as defined below) of the notes and the
“comparable yield” (as defined below), regardless of
whether the U.S. Holder uses the cash or accrual method of
tax accounting. Accordingly, a U.S. Holder will be required
to include interest in taxable income in each year significantly
in excess of the amount of interest payments, including
contingent interest payments, actually received by it in that
year.
The “issue price” of a note is the first price at
which a substantial amount of the notes is sold to investors,
excluding bond houses, brokers or similar persons or
organizations acting in the capacity of underwriters, placement
agents, or wholesalers. The “adjusted issue price” of
a note is its issue price increased by any interest income
previously accrued, determined without regard to any adjustments
to interest accruals described below and decreased by the amount
of any projected payments scheduled to be made with respect to
the notes.
Under the CPDI Regulations, we are required to establish the
“comparable yield” for the notes. The comparable yield
for the notes is the annual rate of interest we would be subject
to, as of the initial issue date, on a fixed rate nonconvertible
debt instrument with no contingent payments, but with terms and
conditions otherwise comparable to those of the notes. We have
determined the comparable yield to be 7.00% compounded
semi-annually.
We are required to provide to U.S. Holders, solely for
U.S. federal income tax purposes, a schedule of the
projected amounts of payments on the notes. This schedule must
produce the comparable yield. Our determination of the projected
payment schedule for the notes includes estimates for payments
of contingent interest and an estimate for a payment at maturity
that takes into account the conversion feature.
U.S. Holders may obtain the projected payment schedule by
submitting a written request for it to us at: Connetics
Corporation, Chief Financial Officer, 3160 Porter Drive, Palo
Alto, CA 94304.
The comparable yield and the projected payment schedule are not
determined for any purpose other than for the determination of a
U.S. Holder’s interest accruals and adjustments
thereof in respect of the notes for U.S. federal income tax
purposes and do not constitute a projection or representation
regarding the actual amounts payable to U.S. Holders of the
notes.
Adjustments to Interest Accruals on the Notes
If a U.S. Holder receives actual payments with respect to
the notes in a taxable year that in the aggregate exceed the
total amount of projected payments for that taxable year, the
U.S. Holder will have a “net positive adjustment”
equal to the amount of such excess. The U.S. Holder will be
required to treat the “net positive adjustment” as
additional interest income for the taxable year. For this
purpose, the payments in a taxable year include the fair market
value of any property received in that year.
If a U.S. Holder receives actual payments with respect to
the notes in a taxable year that in the aggregate are less than
the amount of the projected payments for that taxable year, the
U.S. Holder will have a “net negative adjustment”
equal to the amount of such deficit. This adjustment will
(a) reduce the U.S. Holder’s interest income on
the notes for that taxable year and (b) to the extent of
any excess after the application of (a), give rise to an
ordinary loss to the extent of the U.S. Holder’s
interest income on the notes that accrued during prior taxable
years, reduced to the extent such interest income was offset by
prior net negative adjustments. Any negative adjustment in
excess of the amounts described in (a) and
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(b) will be carried forward to offset future interest
income in respect of the notes or to reduce the amount realized
upon a sale, exchange, repurchase, or redemption of the notes.
Notes Purchased at other than the Adjusted Issue
Price
A U.S. Holder acquiring a note for an amount other than its
“adjusted issue price,” as defined above under
“— Interest Income” will generally accrue
original issue discount and make adjustments to such accruals in
accordance with the rules described above under
“— Interest Income.” To the extent that a
U.S. Holder’s adjusted tax basis in the note differs
from the note’s adjusted issue price, however, the
U.S. Holder must reasonably allocate any such difference
among the daily portions of original issue discount accruing
over the remaining term of the note and/or the remaining
projected payments. Amounts so allocated will be treated as a
positive or negative adjustment, as the case may be, on the date
of accrual or payment and the U.S. Holder’s adjusted
tax basis in the note will be increase or decreased, as the case
may be, to reflect such adjustment.
Sale, Exchange, Conversion, Repurchase, or Redemption
Generally, the sale, exchange, repurchase, or redemption of a
note will result in gain or loss to a U.S. Holder, which
will be subject to tax. As described above, our calculation of
the comparable yield and the schedule of projected payments for
the notes includes the receipt of our shares upon conversion as
a contingent payment with respect to the notes. Accordingly, we
intend to treat the payment of our shares to a U.S. Holder
upon the conversion of a note as a contingent payment under the
CPDI Regulations. As described above, U.S. Holders are
generally bound by our determination of the comparable yield and
the schedule of projected payments. Under this treatment, a
conversion will also result in taxable gain or loss to a
U.S. Holder. The amount of gain or loss on a taxable sale,
exchange, conversion, repurchase, or redemption will be equal to
the difference between (a) the amount of cash plus the fair
market value of any other property received by the
U.S. Holder, including the fair market value of any of our
shares received, reduced by any negative adjustment carryforward
as described above and (b) the U.S. Holder’s
adjusted tax basis in the note. A U.S. Holder’s
adjusted tax basis in a note on any date will generally be equal
to the U.S. Holder’s original purchase price for the
note, increased by any interest income previously accrued by the
U.S. Holder under the CPDI Regulations as described above
(determined without regard to any adjustments to interest
accruals described above), and decreased by the amount of any
projected payments, as described above, scheduled to be made on
the notes to the U.S. Holder through such date (without
regard to the actual amount paid).
Gain recognized upon a sale, exchange, conversion, repurchase,
or redemption of a note will generally be treated as ordinary
interest income. Any loss recognized upon a sale, exchange,
conversion, repurchase, or redemption of a note will be treated
as an ordinary loss to the extent of the excess of previous
interest inclusions over the total negative adjustment
previously taken into account as ordinary loss, and thereafter,
as capital loss (which will be long-term if the note is held for
more than one year). The deductibility of capital loss is
subject to limitations. Under recently finalized Treasury
regulations intended to address so-called tax shelters and other
tax-motivated transactions, a U.S. Holder that claims a
loss in excess of certain thresholds upon the sale, exchange,
conversion, repurchase, or redemption of a note may have to
comply with certain disclosure requirements and is urged to
consult its tax advisor.
A U.S. Holder’s tax basis in our shares received upon
a conversion of a note will equal the fair market value of such
shares at the time of conversion. The U.S. Holder’s
holding period for our shares received will commence on the day
immediately following the date of conversion.
Constructive Dividends
If at any time we make a distribution of property to our
stockholders that would be taxable to the stockholders as a
dividend for U.S. federal income tax purposes and, in
accordance with the anti-dilution provisions of the notes, the
conversion rate of the notes is increased, such increase may be
deemed to be the payment of a taxable dividend to
U.S. Holders of the notes. For example, an increase in the
103
conversion rate in the event of our distribution of our debt
instruments or our assets or an increase in the event of an
ordinary cash dividend paid on our shares will generally result
in deemed dividend treatment to U.S. Holders of the notes,
but an increase in the event of stock dividends or the
distribution of rights to subscribe for our shares will
generally not.
Dividends on Shares
If we make cash distributions on our shares, the distributions
will generally be treated as dividends to a U.S. Holder of
our shares, subject to tax as ordinary income, to the extent of
our current or accumulated earnings and profits as determined
under U.S. federal income tax principles at the end of the
taxable year of the distribution, then as a tax-free return of
capital to the extent of the U.S. Holder’s adjusted
tax basis in the shares, and thereafter as capital gain from the
sale or exchange of those shares. Under recently enacted tax
legislation, eligible dividends received in taxable years
beginning on or before December 31, 2008, will be subject
to tax to a non-corporate U.S. Holder at the special
reduced rate generally applicable to long-term capital gain. A
U.S. Holder will be eligible for this reduced rate only if
the U.S. Holder has held our shares for more than
60 days during the 121-day period beginning 60 days
before the ex-dividend date.
Disposition of Shares
Upon the sale or other disposition of our shares received on
conversion of a note, a U.S. Holder will generally
recognize capital gain or loss equal to the difference between
(i) the amount of cash and the fair market value of any
property received upon the sale or exchange and (ii) the
U.S. Holder’s adjusted tax basis in our shares. Such
capital gain or loss will be long-term if the
U.S. Holder’s holding period in respect of such note
is more than one year. The deductibility of capital loss is
subject to limitations. Under recently finalized Treasury
regulations intended to address so-called tax shelters and other
tax-motivated transactions, a U.S. Holder that claims a
loss in excess of certain thresholds upon the sale or exchange
of our shares may have to comply with certain disclosure
requirements and is urged to consult its tax advisor.
Non-U.S. Holders
Notes
All payments on the notes (except in the case of the payment of
liquidated damages as described below) made to a
Non-U.S. Holder, including a payment in our shares pursuant
to a conversion, and any gain realized on a sale or exchange of
the notes, will be exempt from U.S. income and withholding
tax, provided that: (i) such Non-U.S. Holder does not
own, actually or constructively, 10% or more of the total
combined voting power of all classes of our stock entitled to
vote, (ii) such Non- U.S. Holder is not a controlled
foreign corporation related, directly or indirectly, to us
through stock ownership, (iii) such Non-U.S. Holder is
not a bank receiving certain types of interest, (iv) the
beneficial owner of the notes certifies, under penalties of
perjury, to us or our paying agent on Internal Revenue Service
Form W-8BEN that it is not a United States person and
provides its name, address, and certain other required
information or certain other certification requirements are
satisfied, and (v) with respect only to gain realized on a
sale, exchange, or conversion of the notes, our shares continue
to be actively traded within the meaning of
section 871(h)(4)(v)(I) of the Code and we have not been a
“United States real property holding corporation,” as
defined in the Code, at any time within the five-year period
preceding the disposition or the Non-U.S. Holder’s
holding period for such shares, whichever is shorter. We believe
that we have not been during the past five years, are not, and
do not anticipate becoming, a United States real property
holding corporation. If a Non-U.S. Holder does not satisfy
the preceding requirements, payments of interest on the notes
held by such holder would generally be subject to
U.S. withholding tax at a 30% rate (or a lower applicable
treaty rate).
If a Non-U.S. Holder of a note were deemed to have received
a constructive dividend (see “U.S. Holders —
Constructive Dividends” above), however, the
Non-U.S. Holder would generally be subject to
U.S. withholding tax at a 30% rate on the amount of such
dividend, thereby potentially reducing
104
the amount of interest payable to it, subject to reduction under
an applicable treaty if the Non-U.S. Holder provides an
Internal Revenue Service Form W-8BEN certifying that it is
entitled to such treaty benefits.
We intend to treat payments of liquidated damages made to
Non-U.S. Holders as subject to U.S. federal
withholding tax at a rate of 30%, subject to reduction under an
applicable treaty if the Non-U.S. Holder provides an
Internal Revenue Service Form W-8BEN certifying that it is
entitled to such treaty benefits.
Shares
Dividends paid to a Non-U.S. Holder of shares will
generally be subject to withholding tax at a 30% rate subject to
reduction under an applicable treaty if the Non-U.S. Holder
provides an Internal Revenue Service Form W-8BEN certifying
that it is entitled to such treaty benefits.
A Non-U.S. Holder will generally not be subject to
U.S. federal income tax on gain realized on the sale or
exchange of the shares received upon a conversion of notes
unless we will have been a United States real property holding
corporation at any time within the shorter of the five-year
period preceding such sale or exchange and the
Non-U.S. Holder’s holding period for such shares. We
believe that we have not been during the past five years, are
not, and do not anticipate becoming, a United States real
property holding corporation.
Information Reporting and Backup Withholding
Payments of interest or dividends made by us on, or the proceeds
of the sale or other disposition of, the notes or our shares may
be subject to information reporting and U.S. federal backup
withholding tax at the rate then in effect if the recipient of
such payment fails to supply an accurate taxpayer identification
number or otherwise fails to comply with applicable
U.S. information reporting or certification requirements.
Any amount withheld under the backup withholding rules is
allowable as a credit against the holder’s
U.S. federal income tax, provided that the required
information is furnished to the Service.
105
SELLING SECURITYHOLDERS
Goldman, Sachs & Co., CIBC World Markets Corp., Lazard
Frères & Co. LLC, Piper Jaffray & Co. and
Roth Capital Partners, LLC were the initial purchasers for the
original offering of the notes in private placements. We were
advised that the initial purchasers sold the notes to
“qualified institutional buyers,” as defined in
Rule 144A under the Securities Act, in transactions exempt
from the registration requirements of the Securities Act.
The following table sets forth information with respect to the
selling securityholders and the respective principal amounts of
notes and common stock beneficially owned by each selling
securityholder that may be offered under this prospectus. The
information is based on information that has been provided to us
by or on behalf of the selling securityholders. Unless otherwise
indicated herein, none of the selling securityholders currently
listed in the following table has, or within the past three
years has had, any position, office or other material
relationship with us or any of our predecessors or affiliates.
Because the selling securityholders may from time to time use
this prospectus to offer all or some portion of the notes or the
common stock offered by this prospectus, we cannot provide an
estimate as to the amount or percentage of any such type of
security that will be held by any selling securityholder upon
termination of any particular offering or sale under this
prospectus. In addition, the selling securityholders identified
below may have sold, transferred or otherwise disposed of all or
a portion of any such securities since the date on which they
provided us information regarding their holdings, in
transactions exempt from the registration requirements of the
Securities Act.
For the purposes of the following table, the number of shares of
our common stock beneficially owned has been determined in
accordance with Rule 13d-3 of the Exchange Act, and such
information is not necessarily indicative of beneficial
ownership for any other purpose. Under Rule 13d-3,
beneficial ownership includes any shares as to which a selling
securityholder has sole or shared voting power or investment
power and also any shares which that selling securityholder has
the right to acquire within 60 days of the date of this
prospectus through the exercise of any stock option, warrant or
other rights.
| |
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|
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|
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|
|
|
| | |
| |
|
Principal Amount of Notes(1) | |
|
Number of Shares of Common Stock(1)(2)(3) | |
| |
|
| |
|
| |
| |
|
Beneficially | |
|
|
|
|
| |
|
Owned Prior | |
|
|
|
|
| |
|
to the | |
|
|
|
Beneficially | |
|
|
| |
|
Offering and | |
|
Percentage of | |
|
Owned Prior | |
|
Percentage of | |
|
|
| |
|
Offered | |
|
Notes | |
|
to the | |
|
Common Stock | |
|
Offered | |
| Selling Security Holder |
|
Hereby | |
|
Outstanding | |
|
Offering(4) | |
|
Outstanding(5) | |
|
Hereby | |
| | |
|
Akela Capital Master Fund, Ltd.(6)
|
|
|
8,500,000 |
|
|
|
4.25 |
% |
|
|
239,676 |
|
|
|
0.69 |
% |
|
|
239,676 |
|
|
Allstate Insurance Company(7)(45)
|
|
|
1,000,000 |
|
|
|
0.50 |
% |
|
|
43,797 |
|
|
|
0.13 |
% |
|
|
28,197 |
|
|
Barnet Partners Ltd.(8)
|
|
|
2,000,000 |
|
|
|
1.00 |
% |
|
|
56,394 |
|
|
|
0.16 |
% |
|
|
56,394 |
|
|
Calamos® Market Neutral Fund — Calamos®
Investment Trust(9)
|
|
|
5,600,000 |
|
|
|
2.80 |
% |
|
|
157,904 |
|
|
|
0.45 |
% |
|
|
157,904 |
|
|
Canadian Imperial Holdings Inc. (10)(45)
|
|
|
4,000,000 |
|
|
|
2.00 |
% |
|
|
112,789 |
|
|
|
0.32 |
% |
|
|
112,789 |
|
|
CBARB, a Segregated Account of Geode Capital Master Fund,
Ltd.(11)
|
|
|
2,250,000 |
|
|
|
1.13 |
% |
|
|
63,444 |
|
|
|
0.18 |
% |
|
|
63,444 |
|
|
CIBC World Markets(12)(44)
|
|
|
4,250,000 |
|
|
|
2.13 |
% |
|
|
119,838 |
|
|
|
0.34 |
% |
|
|
119,838 |
|
|
CNH CA Master Account, L.P.(13)
|
|
|
1,000,000 |
|
|
|
0.50 |
% |
|
|
28,197 |
|
|
|
0.08 |
% |
|
|
28,197 |
|
|
D.E. Shaw Investment Group, L.L.C.(14)(45)
|
|
|
2,017,000 |
|
|
|
1.01 |
% |
|
|
56,874 |
|
|
|
0.16 |
% |
|
|
56,874 |
|
|
D.E. Shaw Valence Portfolios, L.L.C.(15)(45)
|
|
|
18,158,000 |
|
|
|
9.08 |
% |
|
|
512,005 |
|
|
|
1.47 |
% |
|
|
512,005 |
|
|
DBAG London(16)(44)
|
|
|
2,500,000 |
|
|
|
1.25 |
% |
|
|
70,493 |
|
|
|
0.20 |
% |
|
|
70,493 |
|
|
DKR SoundShore Opportunity Holding Funding Ltd.(17)
|
|
|
4,500,000 |
|
|
|
2.25 |
% |
|
|
126,887 |
|
|
|
0.36 |
% |
|
|
126,887 |
|
|
Drawbridge Global Macro Master Fund Ltd(18)
|
|
|
1,000,000 |
|
|
|
0.50 |
% |
|
|
28,197 |
|
|
|
0.08 |
% |
|
|
28,197 |
|
|
Excelsior Master Fund L.P.(19)
|
|
|
500,000 |
|
|
|
0.25 |
% |
|
|
14,099 |
|
|
|
0.04 |
% |
|
|
14,099 |
|
106
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Principal Amount of Notes(1) | |
|
Number of Shares of Common Stock(1)(2)(3) | |
| |
|
| |
|
| |
| |
|
Beneficially | |
|
|
|
|
| |
|
Owned Prior | |
|
|
|
|
| |
|
to the | |
|
|
|
Beneficially | |
|
|
| |
|
Offering and | |
|
Percentage of | |
|
Owned Prior | |
|
Percentage of | |
|
|
| |
|
Offered | |
|
Notes | |
|
to the | |
|
Common Stock | |
|
Offered | |
| Selling Security Holder |
|
Hereby | |
|
Outstanding | |
|
Offering(4) | |
|
Outstanding(5) | |
|
Hereby | |
| | |
|
Fore Convertible Master Fund, Ltd.(20)
|
|
|
15,000,000 |
|
|
|
7.50 |
% |
|
|
422,958 |
|
|
|
1.21 |
% |
|
|
422,958 |
|
|
Fore Erisa Fund, Ltd.(21)
|
|
|
2,500,000 |
|
|
|
1.25 |
% |
|
|
70,493 |
|
|
|
0.20 |
% |
|
|
70,493 |
|
|
Fore Multi Strategy Master Fund, Ltd.(22)
|
|
|
4,500,000 |
|
|
|
2.25 |
% |
|
|
126,887 |
|
|
|
0.36 |
% |
|
|
126,887 |
|
|
FrontPoint Convertible Arbitrage Fund LP(23)
|
|
|
4,000,000 |
|
|
|
2.00 |
% |
|
|
112,789 |
|
|
|
0.32 |
% |
|
|
112,789 |
|
|
Grace Convertible Arbitrage Fund, Ltd.(24)
|
|
|
2,500,000 |
|
|
|
1.25 |
% |
|
|
70,493 |
|
|
|
0.20 |
% |
|
|
70,493 |
|
|
Guggenheim Portfolio Company VIII (Cayman), Ltd.(25)(45)
|
|
|
500,000 |
|
|
|
0.25 |
% |
|
|
14,099 |
|
|
|
0.04 |
% |
|
|
14,099 |
|
|
Highbridge International LLC(26)
|
|
|
7,500,000 |
|
|
|
3.75 |
% |
|
|
211,479 |
|
|
|
0.61 |
% |
|
|
211,479 |
|
|
Institutional Benchmark Management Fund c/o Quattro Fund(27)
|
|
|
500,000 |
|
|
|
0.25 |
% |
|
|
14,099 |
|
|
|
0.04 |
% |
|
|
14,099 |
|
|
KBC Financial Products USA Inc.(28)(44)
|
|
|
2,775,000 |
|
|
|
1.39 |
% |
|
|
78,247 |
|
|
|
0.22 |
% |
|
|
78,247 |
|
|
Man Mac I Limited(29)(45)
|
|
|
3,000,000 |
|
|
|
1.50 |
% |
|
|
84,592 |
|
|
|
0.24 |
% |
|
|
84,592 |
|
|
Mohican VCA Master Fund, Ltd.(30)
|
|
|
1,000,000 |
|
|
|
0.50 |
% |
|
|
28,197 |
|
|
|
0.08 |
% |
|
|
28,197 |
|
|
OZ Master Fund(31)
|
|
|
12,000,000 |
|
|
|
6.00 |
% |
|
|
338,366 |
|
|
|
0.97 |
% |
|
|
338,366 |
|
|
Partners Group Alternative Strategies PCC Limited, Red Delta
Cell c/o Quattro Fund(32)
|
|
|
300,000 |
|
|
|
0.15 |
% |
|
|
8,459 |
|
|
|
0.02 |
% |
|
|
8,459 |
|
|
Peoples Benefit Life Insurance Company Teamsters(33)
|
|
|
2,000,000 |
|
|
|
1.00 |
% |
|
|
56,394 |
|
|
|
0.16 |
% |
|
|
56,394 |
|
|
PIMCO Convertible Fund(34)
|
|
|
550,000 |
|
|
|
0.28 |
% |
|
|
15,509 |
|
|
|
0.04 |
% |
|
|
15,509 |
|
|
Putnam Convertible Income-Growth Trust(35)(45)
|
|
|
4,000,000 |
|
|
|
2.00 |
% |
|
|
112,789 |
|
|
|
0.32 |
% |
|
|
112,789 |
|
|
Quattro Fund Ltd.(36)
|
|
|
8,700,000 |
|
|
|
4.35 |
% |
|
|
245,316 |
|
|
|
0.70 |
% |
|
|
245,316 |
|
|
Quattro Multistrategy Fund LP(37)
|
|
|
500,000 |
|
|
|
0.25 |
% |
|
|
14,099 |
|
|
|
0.04 |
% |
|
|
14,099 |
|
|
Radcliffe SPC, Ltd for and on behalf of the Class A
Convertible Crossover Segregated Portfolio(38)
|
|
|
10,500,000 |
|
|
|
5.25 |
% |
|
|
296,071 |
|
|
|
0.85 |
% |
|
|
296,071 |
|
|
Redbourn Partners Ltd. (39)
|
|
|
2,500,000 |
|
|
|
1.25 |
% |
|
|
70,493 |
|
|
|
0.20 |
% |
|
|
70,493 |
|
|
Silverback Life Sciences(40)
|
|
|
1,000,000 |
|
|
|
0.50 |
% |
|
|
28,197 |
|
|
|
0.08 |
% |
|
|
28,197 |
|
|
Silverback Master, Ltd.(41)
|
|
|
10,000,000 |
|
|
|
5.00 |
% |
|
|
281,972 |
|
|
|
0.81 |
% |
|
|
281,972 |
|
|
TCW Group, Inc.(42)
|
|
|
9,295,000 |
|
|
|
4.65 |
% |
|
|
262,093 |
|
|
|
0.75 |
% |
|
|
262,093 |
|
|
The Northwestern Mutual Life Insurance Company(43)(45)
|
|
|
3,000,000 |
|
|
|
1.50 |
% |
|
|
84,592 |
|
|
|
0.24 |
% |
|
|
84,592 |
|
|
All other holders of notes of future transferees, pledgees,
donees, assignees, or successors of any such holders(46)
|
|
|
34,605,000 |
|
|
|
17.30 |
% |
|
|
975,763 |
(47) |
|
|
2.80 |
% |
|
|
975,763 |
|
| |
|
|
|
| |
(1) |
Information concerning the selling securityholders may change
from time to time. Any such changed information will be set
forth in prospectus supplements or post-effective amendments to
the shelf registration statement. From time to time, however,
the notes and the underlying shares of common stock may be used
by persons not named in the table and of whom we are unaware.
The amount of notes and the number of shares of our common stock
indicated may be in excess of the total amount registered under
the shelf registration statement of which this prospectus forms
a part, due to sales or transfers by selling securityholders of
such notes or shares in transactions exempt from the
registration requirements of the Securities Act after the date
on which they provided us information regarding their holdings
of notes and such common stock. |
107
|
|
|
| |
(2) |
For purposes of presenting the number of shares of our common
stock beneficially owned by holders of notes, we assume a
conversion rate of 28.1972 shares of common stock per each
$1,000 principal amount of notes (the initial conversion rate),
which is equivalent to a conversion price of approximately
$35.46 per share of common stock, and a cash payment in
lieu of the issuance of any fractional share interest. However,
the conversion price is subject to adjustment as described under
“Description of Notes — Conversion Rights.”
As a result, the number of shares of our common stock issuable
upon conversion of the notes, and as a consequence, the number
of shares beneficially owned by the holders of notes, may
increase or decrease in the future. |
| |
| |
(3) |
Does not include the conversion of all the notes and the
2.25% Convertible Senior Notes due May 30, 2008. |
| |
| |
(4) |
Does not include beneficial ownership of the
2.25% Convertible Senior Notes due May 30, 2008. |
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| |
(5) |
Does not include beneficial ownership of the
2.25% Convertible Senior Notes due May 30, 2008.
Percentages based on 34,897,027 shares outstanding as of
May 31, 2005. |
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|
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| |
(6) |
Anthony B. Bosco has voting and investment power with respect
to the securities listed for Akela Capital Master Fund, Ltd. |
|
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(7) |
Allstate Insurance Company is a wholly owned Subsidiary of
the Allstate Corporation (a publicly reporting company). |
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(8) |
Alex Lach has voting and investment power with respect to the
securities listed for Barnet Partners Ltd. |
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(9) |
Nick Calamos has voting and investment power with respect to
the securities listed for Calamos® Market Neutral
Fund — Calamos® Investment Trust. |
|
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|
|
|
|
| (10) |
Canadian Imperial Bank of Commerce (a publicly reporting
company), has voting and investment power with respect to the
securities listed for Canadian Imperial Holdings Inc. |
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| |
|
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| (11) |
Vincent Gubitsi has voting and investment power with respect
to the securities listed for CBARB, a Segre gated Account of
Geode Capital Master Fund, Ltd. |
|
|
| |
|
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| (12) |
Canadian Imperial Bank of Commerce (a publicly reporting
company), has voting and investment power with respect to the
securities listed for CIBC World Markets. |
|
|
| |
|
|
| (13) |
CNH Partners, LLC is the investment advisor of CNH CA Master
Account, L.P. and has sole voting and investment powers with
respect to the securities listed for CNH CA Master Account, L.P.
Robert Krail, Mark Mitchell and Todd Pulvino have voting and
investment power with respect to the securities listed for CNH
CA Master Account, L.P. |
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|
| |
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| (14) |
D.E. Shaw & Co. L.P., as either managing member or
investment advisor, has voting and investment power over the
securities listed for D.E. Shaw Investment Group, L.L.C. Julius
Gaudio, Eric Wepsic and Anne Dinning, or their designees have
voting and investment power with respect to the securities
listed for D.E. Shaw Investment Group, L.L.C. |
|
|
| |
|
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| (15) |
D.E. Shaw & Co. L.P., as either managing member or
investment advisor, has voting and investment power over the
securities listed for D.E. Shaw Valence Portfolios, L.L.C.
Julius Gaudio, Eric Wepsic and Anne Dinning, or their designees
have voting and investment power with respect to the securities
listed for D.E. Shaw Valence Portfolios, L.L.C. |
|
|
| |
|
|
| (16) |
Deutsche Bank Securities Inc. is the investment advisor of
DBAG London. Tom Sullivan has voting and investment power with
respect to the securities listed for DBAG London. |
|
|
| |
|
|
| (17) |
DKR Capital Partners L.P. (“DKR LP”) is a
registered investment advisor with the SEC and as such, is the
investment manager to DKR SoundShore Opportunity Holding
Fund Ltd. (the “Fund”). DKR LP has retained
certain portfolio managers to act as the portfolio manager to
the Fund managed by DKR LP. As such DKR LP and certain portfolio
managers have shared dispositive and voting power over the
securities. Tom Kirvaitis has trading authority over such
securities. |
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| |
|
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| (18) |
Fortress Investment Group (a publicly reporting company), has
voting and investment power with respect to the securities
listed for Drawbridge Global Macro Master Fund Ltd. |
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|
108
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| (19) |
Ed Lees, James White, Jr. and Robert Jordan have voting
and investment power with respect to the securities listed for
Excelsior Master Fund L.P. |
|
|
| |
|
|
| (20) |
David Egglishaw has voting and investment power with respect
to the securities listed for Fore Convertible Master Fund,
Ltd. |
|
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| |
|
|
| (21) |
David Egglishaw has voting and investment power with respect
to the securities listed for Fore Erisa Fund, Ltd. |
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|
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| (22) |
David Egglishaw has voting and investment power with respect
to the securities listed for Fore Multi Strategy Master Fund,
Ltd. |
|
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| |
|
|
| (23) |
FrontPoint Convertible Arbitrage Fund GP, LLC is the
general partner of FrontPoint Convertible Arbitrage Fund, L.P.
FrontPoint Partners LLC is the managing member of FrontPoint
Convertible Arbitrage Fund GP, LLC and as such has voting
and investment power over the securities listed for FrontPoint
Convertible Arbitrage Fund, L.P. (“Fund”). Philip
Duff, W. Gillespie Caffray and Paul Ghaffari are members of
the board of managers of FrontPoint Partners LLC and are the
sole members of its management committee. Messrs. Duff, Caffray
and Ghaffari and FrontPoint Partners LLC and FrontPoint
Convertible Arbitrage Fund GP, LLC each disclaim beneficial
ownership of the securities held by the Fund except for their
pecuniary interest therein. |
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|
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| (24) |
Bradford Whitmore and Michael Brailov have voting and
investment power with respect to the securities listed for Grace
Convertible Arbitrage Fund, Ltd. |
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| |
|
|
| (25) |
The sole shareholder of Guggenheim Portfolio Company VII
(Cayman) Ltd. is Guggenheim Portfolio Company VIII, LLC. The
manager of Guggenheim Portfolio Company VIII, LLC is Guggenheim
Advisors, LLC. Certain affiliates of Guggenheim Advisors, LLC
are broker-dealers. Matthew Li has voting and investment power
with respect to the securities listed for Guggenheim Portfolio
Company VIII (Cayman) Ltd. |
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|
| |
|
|
| (26) |
Highbridge Capital Management LLC (“Highbridge”) is
the trading manager of Highbridge International LLC
(“HIC”) and consequently has voting control and
investment discretion over securities held by HIC. Glenn Dubin
and Henry Swieca control Highbridge. Each of Highbridge, Glenn
Dubin and Henry Swieca disclaims beneficial ownership of the
securities held by HIC. |
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| |
|
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| (27) |
Gary Crowder has voting and investment power with respect to
the securities listed for Institutional Benchmark Management
c/o Quattro Fund. |
|
|
| |
|
|
| (28) |
KBC Financial Products USA Inc. is an indirect wholly-owned
subsidiary of KBC Bank N.V., which in turn is a direct
wholly-owned subsidiary of KBC Bank & Insurance Holding
Company N.V., a publicly reporting company. |
|
|
| |
|
|
| (29) |
Man-Diversified Fund II Ltd. Has been identified as the
controlling entity of Man Mac I Ltd., the beneficial owners of
the securities listed. The manager shares of Man-Diversified
Fund II Ltd. are owned 75% by Albany Management Company and
25% by Man Holdings Limited. The registered shareholder of
Albany Management Company Limited is Argonaut Limited, a Bermuda
company which is controlled by Michael Collins, a resident of
Bermuda. Man Holdings Limited is a subsidiary of Man Group plc,
a publicly reporting company on the London Stock Exchange. |
|
|
| |
|
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| (30) |
Eric C. Hage and Daniel C. Hage have voting and investment
power with respect to the securities listed for Mohican VCA
MasterFund, Ltd. |
|
|
| |
|
|
| (31) |
Daniel S. Och has voting and investment power with respect to
the securities listed for OZ Master Fund, Ltd. |
|
|
| |
|
|
| (32) |
Mark Rowe, Felix Hardner, Michael Fitchet and Denis
O’Mailey have voting and investment power with respect to
the securities listed for Partners Group Alternative Strategies
PCC Limited, Red Delta Cell c/o Quattro Fund. |
|
|
| |
|
|
| (33) |
Alex Lach has voting and investment power with respect to the
securities listed for Peoples Benefit Life Insurance Company
Teamsters. |
|
|
| |
|
|
| (34) |
Mark Hudoff has voting and investment power with respect to
the securities listed for PIMCO Convertible Fund. |
|
|
109
|
|
|
|
| (35) |
Putnam Investment Management, LLC, a wholly owned subsidiary
of Marsh & McLennan (a publicly reporting company), has
voting and investment power with respect to the securities
listed for Putnam Convertible Income-Growth Trust. |
|
|
| |
|
|
| (36) |
Andrew Kaplan, Louis Napoli and Brian Swain have voting and
investment power with respect to the securities listed for
Quattro Fund Ltd. |
|
|
| |
|
|
| (37) |
Andrew Kaplan, Louis Napoli and Brian Swain have voting and
investment power with respect to the securities listed for
Quattro Multistrategy Masterfund LP. |
|
|
| |
|
|
| (38) |
Pursuant to an investment management agreement, RG Capital
Management, L.P. (“RG Capital”) serves as the
investment manager of Radcliffe SPC, Ltd.’s Class A
Convertible Crossover Segregated Portfolio. RGC Management
Company, LLC (“Management”) is the general partner of
RG Capital. Steve Katznelson and Gerald Stahlecker serve as the
managing members of Management. Each of RG Capital, Management
and Messrs. Katznelson and Stahlecker disclaims beneficial
ownership of the securities owned by Radcliffe SPC, Ltd. for and
on behalf of the Class A Convertible Crossover Segregated
Portfolio. |
|
|
| |
|
|
| (39) |
Alex Lach has voting and investment power with respect to the
securities listed for Redbourn Partners Ltd. |
|
|
| |
|
|
| (40) |
Elliot Bossen has voting and investment power with respect to
the securities listed for Silverback Life Sciences. |
|
|
| |
|
|
| (41) |
Elliot Bossen has voting and investment power with respect to
the securities listed for Silverback Master, Ltd. |
|
|
| |
|
|
| (42) |
Thomas Lyon has voting and investment power with respect to
the securities listed for TCW Group, Inc. |
|
|
| |
|
|
| (43) |
Northwestern Investment Management Company, LLC
(“NMIC”) is one of the investment advisors to
Northwestern Mutual and is the investment advisor for
Northwestern Mutual with respect to the securities listed for
The Northwestern Mutual Life Insurance Company. NMIC therefore
may be deemed to be an indirect beneficial owner with shared
voting and investment power. Jerome R. Baier is a portfolio
manager for NMIC and manages the portfolio which holds the
securities listed for The Northwestern Mutual Life Insurance
Company. |
|
|
| |
|
|
| (44) |
Selling securityholder has identified itself as a
broker-dealer. Selling security holders who are broker-dealers
are deemed to be underwriters under the Securities Act. Each
such selling securityholder has informed us that: (a) such
selling securityholder purchased its notes in the ordinary
course of business, and (b) at the time the notes were
purchased, the selling securityholder had no agreements or
understandings, directly or indirectly, with any person to
distribute the notes. |
|
|
| |
|
|
| (45) |
Selling securityholder has identified itself as an affiliate
of a broker-dealer. Each such selling securityholder has
informed us that: (a) such selling securityholder purchased
its notes in the ordinary course of business, and (b) at
the time the notes were purchased, the selling securityholder
had no agreements or understandings, directly or indirectly,
with any person to distribute the notes. |
|
|
| |
|
|
| (46) |
We are unable to provide the names of certain holders of
notes and/or common shares issuable upon conversion of the notes
at this time, because they have not provided us with information
and/or their notes are evidenced by a global note that has been
deposited with DTC and registered in the name of Cede &
Co., as DTC’s nominee. Information concerning any such
holders who are not listed in the above table will be set forth
in post-effective amendments from time to time, if and when
required. |
|
|
| |
|
|
| (47) |
Assumes that any other holder of notes or any future
transferee from any such holder does not beneficially own any of
our common shares other than the shares issuable upon conversion
of the notes at the initial conversion rate. |
|
|
110
PLAN OF DISTRIBUTION
We are registering the notes and shares on behalf of the selling
securityholders. We will bear all costs, expenses and fees in
connection with the registration of the securities offered
hereby. Any brokerage commissions and similar selling expenses
attributable to the sale of securities will be borne by the
selling securityholders. Unless otherwise permitted by law, if
the securities are to be sold by pledgees, donees or transferees
of, or other successors in interest to the selling
securityholders, then we must distribute a prospectus supplement
and/or file an amendment to this registration statement under
Rule 424(b) of the Securities Act or other applicable
provision of the Securities Act, amending the list of selling
securityholders to include the pledgee, transferee or other
successors in interest as selling securityholders under this
prospectus.
Sales of notes and shares may be effected by selling
securityholders from time to time in one or more types of
transactions (which may include block transactions) on the
PORTAL, Nasdaq National Market or on any other market or
quotation system on which our securities may then be trading, in
negotiated transactions, through put or call options
transactions relating to the shares, through short sales of
shares, or a combination of such methods of sale, at market
prices prevailing at the time of sale, or at negotiated prices.
Such transactions may or may not involve brokers, dealers or
underwriters. The selling securityholders have advised us that
they have not entered into any agreements, understandings or
arrangements with any underwriters or broker-dealers regarding
the sale of their shares. The selling securityholders have also
advised us that no underwriter or coordinating broker is acting
in connection with the proposed sale of shares by the selling
securityholders, however, the selling securityholders may enter
into agreements, understandings or arrangements with an
underwriter or broker-dealer regarding the sale of their shares
in the future.
The selling securityholders may effect sales by selling
securities directly to purchasers or to or through
broker-dealers and underwriters, which may act as agents or
principals. These broker-dealers and underwriters may receive
compensation in the form of discounts, concessions, or
commissions from the selling securityholders and/or the
purchasers of shares for whom the broker-dealers and
underwriters may act as agents or to whom they sell as
principal, or both. This compensation to a particular
broker-dealer or underwriter might be in excess of customary
commissions.
The selling securityholders may enter into hedging transactions
with broker-dealers or other financial institutions. In
connection with such transactions, broker-dealers or other
financial institutions may engage in short sales of our common
stock in the course of hedging the positions they assume with
the selling securityholders. The selling securityholders may
also enter into options or other transactions with
broker-dealers or other financial institutions which require the
delivery to such broker-dealers or other financial institutions
of securities offered hereby, which securities such
broker-dealers or other financial institutions may resell
pursuant to this prospectus (as supplemented or amended to
reflect such transaction).
The selling securityholders and any broker-dealers or
underwriters that act in connection with the sale of securities
may be deemed to be “underwriters” within the meaning
of Section 2(11) of the Securities Act, and any commissions
received by broker-dealers or underwriters and any profit on the
resale of the securities sold by them while acting as principals
may be deemed to be underwriting discounts or commissions under
the Securities Act. The selling securityholders may agree to
indemnify any agent, dealer, broker-dealer or underwriter that
participates in transactions involving sales of the shares
against certain liabilities, including liabilities arising under
the Securities Act.
Because selling securityholders may be deemed to be
“underwriters” within the meaning of
Section 2(11) of the Securities Act, the selling
securityholders will be subject to the prospectus delivery
requirements of the Securities Act and the rules promulgated
thereunder. We have informed the selling securityholders that
the anti-manipulative provisions of Regulation M
promulgated under the Exchange Act may apply to their sales in
the market.
The following Selling Securityholders have identified themselves
as broker-dealers and are, therefore, deemed to be underwriters:
CIBC World Markets, DBAG London, and KBC Financial Products USA
Inc.
111
Selling securityholders also may resell all or a portion of the
shares in open market transactions in reliance upon
Rule 144 of the Securities Act, provided they meet the
criteria and conform to the requirements of that rule.
All or any part of the shares offered hereby may or may not be
sold by the selling securityholders.
We will file a post effective amendment to include any material
information with respect to the plan of distribution not
previously disclosed in the registration statement or any
material change to such information in the registration
statement.
We have agreed to maintain the effectiveness of this
registration statement until all remaining shares may be sold
within any three-month period under Rule 144 of the
Securities Act. We may suspend sales under the registration
statement upon notice to the selling securityholders in order to
update the registration statement or otherwise comply with
federal securities laws.
LEGAL MATTERS
The validity of the shares of the notes and common stock offered
hereby will be passed upon for us by Skadden, Arps, Slate,
Meagher & Flom LLP, Palo Alto, California.
EXPERTS
The consolidated financial statements of Connetics Corporation
at December 31, 2004 and 2003, and for each of the three
years in the period ended December 31, 2004, appearing in
this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent registered public
accounting firm, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report
given on the authority of such firm as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission
(SEC) a registration statement on Form S-1 under the
Securities Act with respect to the shares of our notes and
common stock issuable upon conversion of the notes offered
hereby. This prospectus, which constitutes a part of the
registration statement, does not contain all of the information
set forth in the registration statement or the exhibits and
schedules filed therewith. For further information about us and
the notes and common stock issuable upon conversion of the notes
offered hereby, reference is made to the registration statement
and the exhibits and schedules filed therewith. Statements
contained in this prospectus regarding the contents of any
contract or any other document that is filed as an exhibit to
the registration statement are not necessarily complete, and
each such statement is qualified in all respects by reference to
the full text of such contract or other document filed as an
exhibit to the registration statement. A copy of the
registration statement and the exhibits and schedules filed
therewith may be inspected without charge at the public
reference room maintained by the SEC, located at 450 Fifth
Street, N.W., Room 1200, Washington, D.C. 20549, and
copies of all or any part of the registration statement may be
obtained from such offices upon the payment of the fees
prescribed by the SEC. Please call the SEC at 1-800-SEC-0330 for
further information about the public reference room. The SEC
also maintains an Internet web site that contains reports, proxy
and information statements and other information regarding
registrants that file electronically with the SEC. The address
of the site is http://www.sec.gov. We are subject to the
informational requirements of the Securities Exchange Act of
1934 and, therefore, we file annual, quarterly and current
reports, proxy statements and other information with the SEC.
Such periodic reports, proxy statements and other information is
available for inspection and copying at the public reference
room and web site of the SEC referred to above. Our common stock
is quoted on the Nasdaq National Market, and you may also
inspect and copy our SEC filings at the offices of the National
Association of Securities Dealers, Inc. located at
1735 K Street, N.W., Washington, D.C. 20549. You
should rely only on the information provided in this prospectus
and the registration statement. We have not authorized anyone
else to provide you with different information. These securities
are not being offered in any state where the offer is not
permitted. You should assume that the information in this
prospectus is accurate only as of the dates of those documents.
Our business, financial condition, results of operations and
prospects may have changed since those dates.
112
CONNETICS CORPORATION
INDEX TO FINANCIAL STATEMENTS
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Page | |
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Consolidated Financial Statements for the Year Ended
December 31, 2004:
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|
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F-2 |
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|
|
|
|
F-3 |
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|
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F-4 |
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|
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|
|
F-5 |
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F-6 |
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|
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F-7 |
|
|
Financial Statement Schedule:
|
|
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|
|
|
|
|
|
F-28 |
|
|
Condensed Consolidated Financial Statements for the Three
Months Ended March 31, 2005 (Unaudited):
|
|
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|
|
|
|
|
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F-30 |
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|
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|
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F-31 |
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F-32 |
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F-33 |
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| |
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Connetics Corporation
We have audited the accompanying consolidated balance sheets of
Connetics Corporation as of December 31, 2004 and 2003, and
the related consolidated statements of operations,
stockholders’ equity and cash flows for each of the three
years in the period ended December 31, 2004. Our audits
also included the financial statement schedule listed in the
Index to Financial Statements. These financial statements and
schedule are the responsibility of Connetics Corporation’s
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Connetics Corporation as of
December 31, 2004 and 2003, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2004, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
Palo Alto, California
March 11, 2005
F-2
CONNETICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
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|
|
|
|
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|
|
| | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| | |
|
Assets
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
18,261 |
|
|
$ |
17,946 |
|
| |
Marketable securities
|
|
|
54,122 |
|
|
|
96,716 |
|
| |
Restricted cash — current
|
|
|
1,000 |
|
|
|
304 |
|
| |
Accounts receivable, net of allowances of $18,256 and $5,033 in
2004 and 2003, respectively
|
|
|
10,642 |
|
|
|
2,594 |
|
| |
Inventory
|
|
|
4,605 |
|
|
|
1,035 |
|
| |
Prepaid expenses
|
|
|
7,776 |
|
|
|
2,892 |
|
| |
Other current assets
|
|
|
2,076 |
|
|
|
887 |
|
| |
| |
|
|
Total current assets
|
|
|
98,482 |
|
|
|
122,374 |
|
|
Property and equipment, net
|
|
|
11,830 |
|
|
|
5,628 |
|
|
Restricted cash — long term
|
|
|
2,963 |
|
|
|
— |
|
|
Debt issuance costs, deposits and other assets
|
|
|
3,794 |
|
|
|
5,418 |
|
|
Goodwill
|
|
|
6,271 |
|
|
|
6,271 |
|
|
Other intangible assets, net
|
|
|
122,388 |
|
|
|
6,206 |
|
| |
|
Total assets
|
|
$ |
245,728 |
|
|
$ |
145,897 |
|
| |
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
| |
Accounts payable
|
|
$ |
14,531 |
|
|
$ |
3,884 |
|
| |
Accrued liabilities related to acquisition of product rights
|
|
|
2,710 |
|
|
|
— |
|
| |
Accrued payroll and related expenses
|
|
|
5,746 |
|
|
|
3,792 |
|
| |
Accrued clinical trial costs
|
|
|
751 |
|
|
|
857 |
|
| |
Other accrued liabilities
|
|
|
3,650 |
|
|
|
1,594 |
|
| |
| |
|
|
Total current liabilities
|
|
|
27,388 |
|
|
|
10,127 |
|
|
Convertible senior notes
|
|
|
90,000 |
|
|
|
90,000 |
|
|
Other non-current liabilities
|
|
|
420 |
|
|
|
16 |
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
| |
Preferred stock, $0.001 par value:
5,000,000 shares authorized; none issued or outstanding
|
|
|
— |
|
|
|
— |
|
| |
Common stock, $0.001 par value; 50,000,000 shares
authorized; 35,792,730 and 31,885,404 shares issued and
outstanding at December 31, 2004 and 2003, respectively
|
|
|
36 |
|
|
|
32 |
|
| |
Additional paid-in capital
|
|
|
237,666 |
|
|
|
174,080 |
|
| |
Deferred stock compensation
|
|
|
(13 |
) |
|
|
(31 |
) |
| |
Accumulated deficit
|
|
|
(111,173 |
) |
|
|
(130,188 |
) |
| |
Accumulated other comprehensive income
|
|
|
1,404 |
|
|
|
1,861 |
|
| |
| |
|
Total stockholders’ equity
|
|
|
127,920 |
|
|
|
45,754 |
|
| |
|
Total liabilities and stockholders’ equity
|
|
$ |
245,728 |
|
|
$ |
145,897 |
|
| |
See accompanying Notes to Consolidated Financial
Statements.
F-3
CONNETICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Product
|
|
$ |
142,059 |
|
|
$ |
66,606 |
|
|
$ |
47,573 |
|
| |
Royalty and contract
|
|
|
2,296 |
|
|
|
8,725 |
|
|
|
5,190 |
|
| |
| |
|
|
Total revenues
|
|
|
144,355 |
|
|
|
75,331 |
|
|
|
52,763 |
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cost of product revenues
|
|
|
12,656 |
|
|
|
5,129 |
|
|
|
4,190 |
|
| |
Amortization of intangible assets
|
|
|
11,471 |
|
|
|
819 |
|
|
|
805 |
|
| |
Research and development
|
|
|
21,539 |
|
|
|
30,109 |
|
|
|
25,821 |
|
| |
Selling, general and administrative
|
|
|
73,206 |
|
|
|
41,781 |
|
|
|
36,819 |
|
| |
In-process research and development and milestone payments
|
|
|
3,500 |
|
|
|
— |
|
|
|
4,350 |
|
| |
Loss on program termination
|
|
|
— |
|
|
|
— |
|
|
|
312 |
|
| |
| |
|
Total operating costs and expenses
|
|
|
122,372 |
|
|
|
77,838 |
|
|
|
72,297 |
|
| |
|
Income (loss) from operations
|
|
|
21,983 |
|
|
|
(2,507 |
) |
|
|
(19,534 |
) |
|
Interest and other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest income
|
|
|
1,194 |
|
|
|
972 |
|
|
|
823 |
|
| |
Gain on sale of investment
|
|
|
— |
|
|
|
— |
|
|
|
2,086 |
|
| |
Interest expense
|
|
|
(2,778 |
) |
|
|
(1,632 |
) |
|
|
(11 |
) |
| |
Other income (expense), net
|
|
|
109 |
|
|
|
234 |
|
|
|
227 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Income (loss) before income taxes
|
|
|
20,508 |
|
|
|
(2,933 |
) |
|
|
(16,409 |
) |
| |
Income tax provision
|
|
|
1,493 |
|
|
|
1,167 |
|
|
|
181 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Net income (loss)
|
|
$ |
19,015 |
|
|
$ |
(4,100 |
) |
|
$ |
(16,590 |
) |
| |
|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.54 |
|
|
$ |
(0.13 |
) |
|
$ |
(0.54 |
) |
| |
Diluted
|
|
$ |
0.51 |
|
|
$ |
(0.13 |
) |
|
$ |
(0.54 |
) |
| |
|
Shares used to compute basic and diluted net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
35,036 |
|
|
|
31,559 |
|
|
|
30,757 |
|
| |
Diluted
|
|
|
37,443 |
|
|
|
31,559 |
|
|
|
30,757 |
|
| |
See accompanying Notes to Consolidated Financial
Statements.
F-4
CONNETICS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Number of | |
|
|
|
Accumulated | |
|
|
| |
|
Common | |
|
Common | |
|
Additional | |
|
Deferred | |
|
|
|
Other | |
|
Total | |
| |
|
Shares | |
|
Stock | |
|
Paid-In | |
|
Stock | |
|
Accumulated | |
|
Comprehensive | |
|
Stockholders’ | |
| |
|
Outstanding | |
|
Amount | |
|
Capital | |
|
Compensation | |
|
Deficit | |
|
Income | |
|
Equity | |
| | |
|
Balance at December 31, 2001
|
|
|
30,257 |
|
|
$ |
30 |
|
|
$ |
164,270 |
|
|
$ |
(69 |
) |
|
$ |
(109,498 |
) |
|
$ |
6,621 |
|
|
$ |
61,354 |
|
|
Common stock issued under stock option and purchase plans
|
|
|
659 |
|
|
|
1 |
|
|
|
3,449 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,450 |
|
|
Issuance of common stock pursuant to license agreements
|
|
|
1 |
|
|
|
— |
|
|
|
12 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
12 |
|
|
Exercise of warrants
|
|
|
263 |
|
|
|
— |
|
|
|
1,683 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,683 |
|
|
Stock compensation expense
|
|
|
— |
|
|
|
— |
|
|
|
355 |
|
|
|
21 |
|
|
|
— |
|
|
|
— |
|
|
|
376 |
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(16,590 |
) |
|
|
— |
|
|
|
(16,590 |
) |
|
Reclassification adjustment for realized gain on sale of equity
security
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,086 |
) |
|
|
(2,086 |
) |
|
Unrealized gain on investments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,532 |
) |
|
|
(3,532 |
) |
|
Foreign currency translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
76 |
|
|
|
76 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,132 |
) |
| |
|
Balance at December 31, 2002
|
|
|
31,180 |
|
|
|
31 |
|
|
|
169,769 |
|
|
|
(48 |
) |
|
|
(126,088 |
) |
|
|
1,079 |
|
|
|
44,743 |
|
|
Common stock issued under stock option and purchase plans
|
|
|
674 |
|
|
|
1 |
|
|
|
4,158 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,159 |
|
|
Exercise of warrants
|
|
|
31 |
|
|
|
— |
|
|
|
153 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
153 |
|
|
Stock compensation expense
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
17 |
|
|
|
— |
|
|
|
— |
|
|
|
17 |
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,100 |
) |
|
|
— |
|
|
|
(4,100 |
) |
|
Unrealized loss on investments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(167 |
) |
|
|
(167 |
) |
|
Foreign currency translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
949 |
|
|
|
949 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,318 |
) |
| |
|
Balance at December 31, 2003
|
|
|
31,885 |
|
|
|
32 |
|
|
|
174,080 |
|
|
|
(31 |
) |
|
|
(130,188 |
) |
|
|
1,861 |
|
|
|
45,754 |
|
|
Common stock issued under stock option and purchase plans
|
|
|
858 |
|
|
|
1 |
|
|
|
6,347 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,348 |
|
|
Tax benefit on stock options
|
|
|
— |
|
|
|
— |
|
|
|
213 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
213 |
|
|
Issuance of common stock through private placement
|
|
|
3,000 |
|
|
|
3 |
|
|
|
56,901 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
56,904 |
|
|
Exercise of warrants
|
|
|
50 |
|
|
|
— |
|
|
|
125 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
125 |
|
|
Stock compensation expense
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
18 |
|
|
|
— |
|
|
|
— |
|
|
|
18 |
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
19,015 |
|
|
|
— |
|
|
|
19,015 |
|
|
Unrealized loss on investments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(583 |
) |
|
|
(583 |
) |
|
Foreign currency translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
126 |
|
|
|
126 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,558 |
|
| |
|
Balance at December 31, 2004
|
|
|
35,793 |
|
|
$ |
36 |
|
|
$ |
237,666 |
|
|
$ |
(13 |
) |
|
$ |
(111,173 |
) |
|
$ |
1,404 |
|
|
$ |
127,920 |
|
| |
See accompanying Notes to Consolidated Financial
Statements.
F-5
CONNETICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income (loss)
|
|
$ |
19,015 |
|
|
$ |
(4,100 |
) |
|
$ |
(16,590 |
) |
| |
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Depreciation
|
|
|
1,433 |
|
|
|
1,422 |
|
|
|
1,285 |
|
| |
|
Amortization of intangible assets
|
|
|
11,471 |
|
|
|
819 |
|
|
|
810 |
|
| |
|
Amortization of debt issuance costs
|
|
|
708 |
|
|
|
430 |
|
|
|
— |
|
| |
|
Allowances for discounts, returns, rebates and chargebacks
|
|
|
12,725 |
|
|
|
2,994 |
|
|
|
1,173 |
|
| |
|
Gain on sale of investment
|
|
|
— |
|
|
|
— |
|
|
|
(2,086 |
) |
| |
Stock compensation expense
|
|
|
18 |
|
|
|
17 |
|
|
|
388 |
|
| |
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accounts receivable
|
|
|
(21,179 |
) |
|
|
(1,236 |
) |
|
|
(70 |
) |
| |
|
Inventory
|
|
|
(3,526 |
) |
|
|
(334 |
) |
|
|
29 |
|
| |
|
Other assets
|
|
|
(4,810 |
) |
|
|
(3,439 |
) |
|
|
(960 |
) |
| |
|
Accounts payable
|
|
|
10,740 |
|
|
|
(4,199 |
) |
|
|
4,119 |
|
| |
|
Accrued and other current liabilities
|
|
|
2,633 |
|
|
|
(146 |
) |
|
|
(3 |
) |
| |
|
Deferred revenue
|
|
|
89 |
|
|
|
(739 |
) |
|
|
(600 |
) |
| |
|
Other non-current liabilities
|
|
|
404 |
|
|
|
— |
|
|
|
— |
|
| |
| |
Net cash provided by (used in) operating activities
|
|
|
29,721 |
|
|
|
(8,511 |
) |
|
|
(12,505 |
) |
| |
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Purchases of marketable securities
|
|
|
(62,472 |
) |
|
|
(135,352 |
) |
|
|
(32,573 |
) |
| |
Sales and maturities of marketable securities
|
|
|
104,483 |
|
|
|
62,909 |
|
|
|
47,335 |
|
| |
Purchases of property and equipment
|
|
|
(7,638 |
) |
|
|
(959 |
) |
|
|
(3,907 |
) |
| |
Acquisition of patent and product rights
|
|
|
(123,529 |
) |
|
|
(200 |
) |
|
|
— |
|
| |
| |
Net cash provided by (used in) investing activities
|
|
|
(89,156 |
) |
|
|
(73,602 |
) |
|
|
10,855 |
|
| |
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Transfer from (to) restricted cash
|
|
|
(3,659 |
) |
|
|
420 |
|
|
|
1,415 |
|
| |
Proceeds from issuance of convertible senior notes, net of
issuance costs
|
|
|
— |
|
|
|
86,316 |
|
|
|
— |
|
| |
Proceeds from issuance of common stock in private placement, net
of issuance costs
|
|
|
56,901 |
|
|
|
— |
|
|
|
— |
|
| |
Proceeds from issuance of common stock from the exercise of
stock options and employee stock purchase plan, net of
repurchases of unvested shares
|
|
|
6,476 |
|
|
|
4,312 |
|
|
|
5,133 |
|
| |
| |
Net cash provided by financing activities
|
|
|
59,718 |
|
|
|
91,048 |
|
|
|
6,548 |
|
| |
Effect of foreign currency exchange rates on cash and cash
equivalents
|
|
|
32 |
|
|
|
387 |
|
|
|
123 |
|
| |
| |
Net change in cash and cash equivalents
|
|
|
315 |
|
|
|
9,322 |
|
|
|
5,021 |
|
| |
Cash and cash equivalents at beginning of year
|
|
|
17,946 |
|
|
|
8,624 |
|
|
|
3,603 |
|
| |
| |
Cash and cash equivalents at end of year
|
|
$ |
18,261 |
|
|
$ |
17,946 |
|
|
$ |
8,624 |
|
| |
|
Supplementary information:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest paid
|
|
$ |
2,030 |
|
|
$ |
1,028 |
|
|
$ |
11 |
|
| |
Income taxes paid
|
|
$ |
1,061 |
|
|
$ |
1,541 |
|
|
$ |
654 |
|
| |
See accompanying Notes to Consolidated Financial
Statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
|
|
| Note 1. |
Organization and Development of the Company |
Connetics Corporation, or Connetics, was incorporated in the
State of Delaware on February 8, 1993. Connetics is a
specialty pharmaceutical company focusing exclusively on the
treatment of dermatological conditions. We currently market four
pharmaceutical products in the United States, OLUX®
(clobetasol propionate) Foam, 0.05%,
Luxíq®(betamethasone valerate) Foam, 0.12%,
Soriatane® (acitretin) capsules, and
Evoclintm
(clindamycin) Foam, 1%. We acquired exclusive U.S. rights
to Soriatane effective March 4, 2004 (see Note 4). We
also have several product candidates under development. Our
commercial business is focused on the dermatology marketplace,
which is characterized by a large patient population that is
served by a relatively small number of treating physicians. We
cannot assure you that any of our other potential products will
be successfully developed, receive the necessary regulatory
approvals, or be successfully commercialized.
|
|
| Note 2. |
Summary of Significant Accounting Policies |
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Connetics, as well as its subsidiaries, Connetics
Holdings Pty Ltd. and Connetics Australia Pty Ltd. We have
eliminated all intercompany accounts and transactions in
consolidation. We reclassified certain amounts in our prior year
consolidated balance sheets, consolidated statements of
operations and consolidated statements of cash flows to conform
to the current period presentation. On the consolidated balance
sheets, inventory was reclassified from prepaid and other
current assets and shown separately for the year ended
December 31, 2003. On the consolidated statements of
operations, amortization of intangible assets was reclassified
from selling, general and administrative expense and shown
separately for the years ended December 31, 2003 and 2002.
On the consolidated statements of cash flows, the amortization
of debt issuance costs and amortization of intangible assets,
which had been combined, were shown separately for the year
ended December 31, 2003, and inventory was reclassified
from other assets and shown separately for the years ended
December 31, 2003 and 2002.
Use of Estimates
To prepare financial statements in conformity with accounting
principles generally accepted in the United States, management
must make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Future events could cause our actual results to differ.
We evaluate our estimates on an on-going basis. In particular,
we regularly evaluate estimates related to recoverability of
accounts receivable and inventory, revenue reserves, assumed
liabilities related to acquired product rights and accrued
liabilities for clinical trial activities and indirect
promotional expenses. We base our estimates on historical
experience and on various other specific assumptions that we
believe to be reasonable under the circumstances. Those
estimates and assumptions form the basis for making judgments
about the carrying value of assets and liabilities that are not
readily apparent from other sources.
Revenue Recognition
Product Revenues. We recognize revenue from product sales
when there is persuasive evidence that an arrangement exists,
when title has passed, the price is fixed or determinable, and
we are reasonably assured of collecting the resulting
receivable. We recognize product revenues net of revenue
reserves which consist of allowances for discounts, returns,
rebates, and chargebacks. We accept from customers the return of
pharmaceuticals that are within six months before their
expiration date. We authorize returns for damaged products and
exchanges for expired products in accordance with our return
goods policy and procedures, and we establish reserves for such
amounts at the time of sale. To date we have not
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
experienced significant returns of damaged or expired product.
We include product shipping and handling costs in the cost of
product revenues. We also recognize revenue net of fees paid to
wholesalers under distribution service agreements in exchange
for certain product distribution, inventory, information, return
goods processing, and administrative services. We record
accounts receivable net of allowances for discounts, returns,
rebates and chargebacks.
During the first half of 2004, we made a decision to bring in
house the function of Contract Administration responsibility for
the calculation and related reporting of all allowances and
discounts for which Managed care plans and Medicaid programs are
eligible. Previously we utilized third parties to perform the
allowance calculation and related reporting. In connection with
this change we performed a comprehensive review of our
calculation for Medicaid product pricing allowances, which
resulted in an adjustment to reserves recorded in prior periods.
As a result, we recorded a one-time reduction of product
revenues in the amount of $564,000 in the second quarter of
2004. We have determined that the effect of this change in
estimate would not have had a material impact on our previously
issued financial statements.
Royalty Revenues. We collect royalties from our
third-party licensees based on their sales. We recognize
royalties either in the quarter in which we receive the royalty
payment from the licensee or in which we can reasonably estimate
the royalty, which is typically one quarter following the
related sale by the licensee.
Contract Revenues. We record contract revenue for
research and development, or R&D, and milestone payments as
earned based on the performance requirements of the contract. We
recognize non-refundable contract fees for which no further
performance obligations exist, and for which Connetics has no
continuing involvement, on the date we receive the payments or
the date when collection is assured, whichever is earlier.
If, at the time an agreement is executed, there remains
significant risk due to the incomplete state of the
product’s development, we recognize revenue from
non-refundable upfront license fees ratably over the period in
which we have continuing development obligations. We recognize
revenue associated with substantial “at risk”
performance milestones, as defined in the respective agreements,
based upon the achievement of the milestones. When we receive
advance payments in excess of amounts earned, we classify them
as deferred revenue until they are earned.
Cash Equivalents and Marketable Securities
Cash and cash equivalents consist of cash on deposit with banks,
money market and other debt instruments with original maturities
of 90 days or less. Investments with maturities beyond
90 days are included in marketable securities. We classify
marketable securities as available for sale at the time of
purchase and we carry them at fair value. We report unrealized
gains and losses on marketable securities as a component of
other comprehensive income (loss) in stockholders’ equity.
We use the specific identification method to determine the cost
of securities sold.
Cash, cash equivalents and marketable securities are financial
instruments that potentially subject us to concentration of risk
to the extent we record them on our balance sheet. We believe we
have established guidelines for investing our excess cash in a
way that will maintain safety and liquidity with respect to
diversification and maturities. We invest our excess cash in
debt instruments of the U.S. Government and its agencies,
and high-quality corporate issuers. By policy, we restrict our
exposure to any single corporate issuer by imposing
concentration limits. To minimize the exposure due to adverse
shifts in interest rates, we maintain investments at an average
maturity of generally less than one year.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
Restricted Cash
Restricted cash reflects certificates of deposit used to secure
letter of credit arrangements. Restricted cash —
current includes deposits of $1.0 million as required by
our insurance policy and restricted cash — long term
includes deposits of $3.0 million as required by two office
facility leases and two vehicle fleet services leases.
Foreign Currency
Connetics Australia’s functional currency is the Australian
dollar. We translate Connetics Australia’s local currency
balance sheet into U.S. dollars using the exchange rates in
effect at the balance sheet date. For revenue and expense
accounts, we use a weighted average exchange rate during the
period. We record foreign currency translation adjustments in
other comprehensive income (loss). Net gains and losses that
result from foreign exchange transactions are included in the
consolidated statements of operations and were immaterial for
all periods presented.
Income Taxes
We account for income taxes using the asset and liability
method. Under this method, we recognize deferred tax assets and
liabilities for the future tax consequences attributable to
differences between (1) the financial statement carrying
amounts of existing assets and liabilities and their respective
tax bases, and (2) operating loss and tax credit
carryforwards. We measure deferred tax assets and liabilities
using enacted tax rates that are expected to apply to taxable
income in the years in which we anticipate those temporary
differences will be recovered or settled. When the timing of the
realization is uncertain, we establish a valuation allowance for
the net deferred tax assets. Historically, our income tax
provision related primarily to the operations of our Australian
subsidiary. In 2004, however, the income tax provision is
primarily related to the profitability of our domestic
operations.
Property and Equipment
We state property and equipment at cost less accumulated
depreciation. We calculate depreciation using the straight-line
method over the estimated useful lives of the assets, generally
three to five years. We are depreciating equipment we have
purchased on behalf of our contract manufacturer using the units
of production method based on contractual minimum quantities to
be produced over the term of the agreement. We amortize
leasehold improvements over the shorter of the estimated useful
lives of the assets or the lease term.
Inventory
Inventory consists primarily of finished goods. We state
inventory at the lower of cost (determined on a first-in
first-out method) or market.
Before January 1, 2004, inventory and cost of goods sold
only captured third party product manufacturing costs,
depreciation on Connetics-owned equipment at our third-party
manufacturers, product freight and distribution costs from the
third party that handles all of our product distribution
activities and royalties. Effective January 1, 2004, we
began including certain manufacturing support and quality
assurance costs in the cost of finished goods inventory and
samples inventory which had previously been classified as
research and development expense. Those activities include
overseeing third party manufacturing, process development,
quality assurance and quality control activities. We have
determined that the effect of this change in accounting would
not have had a material impact on our financial statements in
any prior quarterly or annual period. For the year ended
December 31, 2004, we allocated $4.6 million of costs
which in previous years would have been included in R&D
expense as follows: (1) $1.1 million to cost of goods
sold; (2) $1.0 million to selling expense;
(3) $2.1 million to the value of
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
commercial inventory; and, (4) $324,000 to the value of
samples inventory, which is a component of prepaid expenses.
Goodwill and Other Intangible Assets
We have in the past made acquisitions of products and businesses
that include goodwill, license agreements, product rights, and
other identifiable intangible assets. We assess goodwill for
impairment in accordance with Statement of Financial Accounting
Standards No. 142, “Goodwill and other Intangible
Assets”, or SFAS 142, which requires that goodwill
be tested for impairment at the “reporting unit level”
(“reporting unit”) at least annually and more
frequently upon the occurrence of certain events, as defined by
SFAS 142. We have determined that there is only one
reporting unit, specifically the sale of specialty
pharmaceutical products for dermatological diseases. We test
goodwill for impairment in the annual impairment test on
October 1 using the two-step process required by
SFAS 142. First, we review the carrying amount of the
reporting unit compared to the “fair value” of the
reporting unit based on quoted market prices of our common stock
and, if necessary, the cash flows based on analyses prepared by
management. An excess carrying value compared to fair value
would indicate that goodwill may be impaired. Second, if we
determine that goodwill may be impaired, then we compare the
“implied fair value” of the goodwill, as defined by
SFAS 142, to its carrying amount to determine the
impairment loss, if any. Based on these estimates, we determined
that as of October 1, 2004 there was no impairment of
goodwill. Since October 1, 2004, there have been no
indications of impairment and the next annual impairment test
will occur as of October 1, 2005.
In accordance with Statement of Financial Accounting Standards
No. 144, “Accounting for Impairment or Disposal of
Long-Lived Assets,” or SFAS 144, we evaluate
purchased intangibles and other long-lived assets, other than
goodwill, for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may
not be recoverable based on expected undiscounted cash flows
attributable to that asset. The amount of any impairment is
measured as the difference between the carrying value and the
fair value of the impaired asset. We have not recorded any
impairment charges for long-lived intangible assets for the
three years ended December 31, 2004.
Fair Value of Financial Instruments
The fair value of our cash equivalents and marketable securities
is based on quoted market prices. The carrying amount of cash
equivalents and marketable securities are equal to their
respective fair values at December 31, 2004 and 2003.
Other financial instruments, including accounts receivable,
accounts payable and accrued liabilities, are carried at cost,
which we believe approximates fair value because of the
short-term maturity of these instruments. The fair value of our
convertible subordinated debt was $113.3 million at
December 31, 2004, which we determined using available
market information.
Research and Development
Research and development expenses include related salaries and
benefits, laboratory supplies, external research programs,
clinical studies and allocated overhead costs such as rent,
supplies and utilities. All such costs are charged to research
and development expense as incurred. Beginning in 2004, certain
costs related to internal manufacturing support and quality
assurance are allocated to commercial and samples and inventory.
Certain Concentrations
Financial instruments that potentially subject us to
concentration of credit risk consist principally of investments
in debt securities and trade receivables. Management believes
the financial risks associated
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
with these financial instruments are minimal. We maintain our
cash, cash equivalents and investments with high-quality
financial institutions. We perform credit evaluations of our
customers’ financial condition and limit the amount of
credit extended when necessary, but generally we do not require
collateral on accounts receivable.
We contract with independent sources to manufacture our
products. We currently rely on three vendors to manufacture our
products. If these manufacturers are unable to fulfill our
supply requirements, our future results could be negatively
impacted.
We promote our products to dermatologists, but we sell our
products primarily to wholesalers and retail chain drug stores,
and our product revenues and trade accounts receivable are
concentrated with a few customers. In December 2004 we entered
into a distribution agreement with each of Cardinal Health, Inc.
and McKesson Corporation under which we agreed to pay a fee to
each of these distributors in exchange for certain product
distribution, inventory management, return goods processing, and
administrative services. The following tables detail our
customer concentrations in gross product sales and trade
accounts receivable that are greater than 10% of the relative
total, for each of the years ended December 31, 2004, 2003
and 2002.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Percentage of Product Revenues | |
| |
|
Years Ended December 31, | |
| |
|
| |
| Customer |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
McKesson
|
|
|
29% |
|
|
|
30% |
|
|
|
26% |
|
|
Cardinal Health
|
|
|
27% |
|
|
|
36% |
|
|
|
43% |
|
|
AmerisourceBergen
|
|
|
16% |
|
|
|
15% |
|
|
|
23% |
|
|
Walgreens
|
|
|
* |
|
|
|
11% |
|
|
|
* |
|
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Percentage of Outstanding Accounts | |
| |
|
Receivable as of December 31, | |
| |
|
| |
| Customer |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
McKesson
|
|
|
36% |
|
|
|
28% |
|
|
|
6% |
|
|
Cardinal Health
|
|
|
21% |
|
|
|
36% |
|
|
|
54% |
|
|
AmerisourceBergen
|
|
|
22% |
|
|
|
17% |
|
|
|
37% |
|
|
Walgreens
|
|
|
15% |
|
|
|
* |
|
|
|
* |
|
| |
Comprehensive Income (Loss)
Comprehensive income (loss) represents net income (loss),
unrealized gains (losses) on our available-for-sale securities,
and foreign currency translation adjustments, all net of taxes.
Accumulated other comprehensive income included $276,000 of net
unrealized gains on investments and $1.1 million of foreign
currency translation adjustments as of December 31, 2004
and $859,000 of net unrealized gains on investments and
$1.0 million of foreign currency translation adjustments as
of December 31, 2003. Comprehensive income (loss) is
disclosed in the Consolidated Statement of Stockholders’
Equity.
Advertising
We expense advertising costs as we incur them. Advertising costs
were $2.1 million, $380,000 and $362,000 in the years ended
December 31, 2004, 2003 and 2002, respectively.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
Stock-Based Compensation
At December 31, 2004, we had six stock-based compensation
plans, which are more fully described in Note 11. We use
the intrinsic-value method of accounting for stock-based awards
granted to employees, as allowed under Accounting Principles
Board Opinion No. 25, “Accounting for Stock Issued to
Employees”, or APB 25, and related interpretations.
Accordingly, we do not recognize any compensation in our
financial statements in connection with stock options granted to
employees when those options have exercise prices equal to or
greater than fair market value of our common stock on the date
of grant. We also do not record any compensation expense in
connection with our Employee Stock Purchase Plan as long as the
purchase price is not less than 85% of the fair market value at
the beginning or end of each offering period, whichever is lower.
For options granted to non-employees, we have recorded
compensation expense in accordance with SFAS No. 123
“Accounting for Stock-Based Compensation,” or
SFAS 123, as amended, and Emerging Issues Task Force
No. 96-18, “Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction
with Selling Goods or Services.” By those criteria, we
quantify compensation expense as the fair value of the
consideration received or the fair value of the equity
instruments issued, whichever is more reliably measured.
Although SFAS 123 allows us to continue to follow the
APB 25 guidelines, we are required to disclose pro forma
net income (loss) and basic and diluted income (loss) per
share as if we had applied the fair value based method to all
awards. Because the estimated value is determined as of the date
of grant, the actual value ultimately realized by the employee
may be significantly different.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Years Ended December 31, | |
| |
|
| |
| (In thousands except per share amounts): |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
Net income (loss), as reported
|
|
$ |
19,015 |
|
|
$ |
(4,100 |
) |
|
$ |
(16,590 |
) |
|
Add: stock-based employee compensation expense, net of tax
|
|
|
17 |
|
|
|
17 |
|
|
|
21 |
|
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
tax
|
|
|
(11,355 |
) |
|
|
(9,834 |
) |
|
|
(4,535 |
) |
| |
|
Pro forma net income (loss)
|
|
$ |
7,677 |
|
|
$ |
(13,917 |
) |
|
$ |
(21,104 |
) |
| |
|
Net income (loss per) share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic — as reported
|
|
$ |
0.54 |
|
|
$ |
(0.13 |
) |
|
$ |
(0.54 |
) |
| |
Diluted — as reported
|
|
$ |
0.51 |
|
|
$ |
(0.13 |
) |
|
$ |
(0.54 |
) |
| |
Basic — pro forma
|
|
$ |
0.22 |
|
|
$ |
(0.44 |
) |
|
$ |
(0.69 |
) |
| |
Diluted — pro forma
|
|
$ |
0.21 |
|
|
$ |
(0.44 |
) |
|
$ |
(0.69 |
) |
| |
For purposes of this analysis, we estimate the fair value of
each option on the date of grant using the Black-Scholes
option-pricing model. The weighted average assumptions used in
the model were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Stock Option Plans | |
|
Stock Purchase Plan | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
Expected stock volatility
|
|
|
57.2% |
|
|
|
60.6% |
|
|
|
65.3% |
|
|
|
54.7% |
|
|
|
57.5% |
|
|
|
77.3% |
|
|
Risk-free interest rate
|
|
|
3.2% |
|
|
|
4.1% |
|
|
|
4.6% |
|
|
|
1.1% |
|
|
|
4.4% |
|
|
|
5.6% |
|
|
Expected life (in years)
|
|
|
3.4 |
|
|
|
3.2 |
|
|
|
3.5 |
|
|
|
1.5 |
|
|
|
1.4 |
|
|
|
1.3 |
|
|
Expected dividend yield
|
|
|
0.0% |
|
|
|
0.0% |
|
|
|
0.0% |
|
|
|
0.0% |
|
|
|
0.0% |
|
|
|
0.0% |
|
| |
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. This model also
requires us to make highly subjective assumptions, including the
expected volatility of our stock. Because our stock options have
characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, we do not believe
that the
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
existing models necessarily provide a reliable single measure of
the fair value of our options. The weighted average fair value
of options granted, determined using the Black-Scholes model,
was $8.64, $5.83 and $5.74 in the years ended December 31,
2004, 2003 and 2002, respectively.
The effects on pro forma disclosures of applying
SFAS 123 are not likely to be representative of the effects
on reported results of future years.
Net Income (Loss) Per Share
We compute basic net income (loss) per common share by dividing
net income (loss) by the weighted average number of common
shares outstanding during the period. We compute diluted net
income (loss) per share using the weighted average of all
potential shares of common stock outstanding during the period.
We included all stock options and warrants in the calculation of
diluted loss per common share for the year ended
December 31, 2004, but excluded them for the years ended
December 31, 2003 and 2002 because these securities were
anti-dilutive in those years. We excluded convertible debt for
the years ended December 31, 2003 and 2004 because its
effect is also anti-dilutive.
The calculation of basic and diluted net income (loss) per share
is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Years Ended December 31, | |
| |
|
| |
| (In thousands except per share amounts): |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
Net income (loss)
|
|
$ |
19,015 |
|
|
$ |
(4,100 |
) |
|
$ |
(16,590 |
) |
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic common shares
|
|
|
35,036 |
|
|
|
31,559 |
|
|
|
30,757 |
|
| |
Effect of dilutive options
|
|
|
2,383 |
|
|
|
— |
|
|
|
— |
|
| |
Effect of dilutive warrants
|
|
|
24 |
|
|
|
— |
|
|
|
— |
|
| |
|
Total weighted average diluted common shares
|
|
|
37,443 |
|
|
|
31,559 |
|
|
|
30,757 |
|
| |
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.54 |
|
|
$ |
(0.13 |
) |
|
$ |
(0.54 |
) |
| |
Diluted
|
|
$ |
0.51 |
|
|
$ |
(0.13 |
) |
|
$ |
(0.54 |
) |
| |
Warrants, options and convertible debt excluded from the
calculation of diluted net income (loss) per share are as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
Warrants
|
|
|
— |
|
|
|
59,177 |
|
|
|
90,427 |
|
|
Options
|
|
|
262,750 |
|
|
|
5,986,257 |
|
|
|
4,883,966 |
|
|
Convertible Debt
|
|
|
4,203,450 |
|
|
|
4,203,450 |
|
|
|
— |
|
| |
Disclosure about Segments of an Enterprise and Related
Information
SFAS No. 131, “Disclosures About Segments of an
Enterprise and Related Information,” requires us to
identify the segment or segments we operate in. Based on the
standards set forth in SFAS 131, we operate in one segment:
the development and commercialization of specialty
pharmaceuticals in the field of dermatology. For each of the
years ended December 31, 2004 and 2003, approximately 99%
of our total revenues were derived from customers in the United
States. For the year ended December 31, 2002, approximately
98% of our total revenues were derived from customers in the
United States.
We do not have a material amount of long-lived assets outside of
the United States.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123
(revised 2004), “Share-Based Payment,” or
SFAS 123R, which requires companies to measure and
recognize compensation expense for all stock-based payments at
fair value. Stock-based payments include grants of employee
stock options. SFAS 123R replaces SFAS No. 123,
“Accounting for Stock-Based Compensation,” or
SFAS 123, and supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees.”
SFAS 123R requires companies to recognize all stock-based
payments to employees in the financial statements based on their
fair values. SFAS 123R is effective for all interim or
annual periods beginning after June 15, 2005. The pro forma
disclosures previously permitted under SFAS 123 will no
longer be an alternative to financial statement recognition. We
are required to adopt SFAS 123R in our third quarter of
fiscal 2005, beginning July 1, 2005. Under SFAS 123R,
we must determine the appropriate fair value model to be used
for valuing share-based payments, the amortization method for
compensation cost and the transition method to be used at date
of adoption. The transition methods include prospective and
retroactive adoption options. Under the retroactive options, we
may restate prior periods either as of the beginning of the year
of adoption or for all periods presented. The prospective method
requires that we record compensation expense for all unvested
stock options and restricted stock at the beginning of the first
quarter of adoption of SFAS 123R, while the retroactive
methods would record compensation expense for all unvested stock
options and restricted stock beginning with the first period
restated. We are evaluating the requirements of SFAS 123R
and we expect that the adoption of SFAS 123R will have a
material impact on our consolidated results of operations and
earnings per share. We have not yet determined the method of
adoption or the effect of adopting SFAS 123R, and we have
not determined whether the adoption will result in amounts that
are similar to the current pro forma disclosures under
SFAS 123.
|
|
| Note 3. |
Cash Equivalents and Marketable Securities |
The following tables summarize our available-for-sale
investments (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
December 31, 2004 | |
| |
|
| |
| |
|
|
|
Gross | |
|
Gross | |
|
|
| |
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
Estimated | |
| |
|
Cost | |
|
Gains | |
|
Losses | |
|
Fair Value | |
| | |
|
Corporate debt
|
|
$ |
32,971 |
|
|
$ |
3 |
|
|
$ |
(72 |
) |
|
$ |
32,902 |
|
|
Government securities
|
|
|
13,318 |
|
|
|
— |
|
|
|
(23 |
) |
|
|
13,295 |
|
|
Asset backed securities
|
|
|
7,268 |
|
|
|
1 |
|
|
|
(24 |
) |
|
|
7,245 |
|
|
Equity securities
|
|
|
289 |
|
|
|
391 |
|
|
|
— |
|
|
|
680 |
|
|
Money market funds
|
|
|
1,114 |
|
|
|
— |
|
|
|
— |
|
|
|
1,114 |
|
| |
| |
Total
|
|
|
54,960 |
|
|
|
395 |
|
|
|
(119 |
) |
|
|
55,236 |
|
|
Less amount classified as cash equivalents
|
|
|
(1,114 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1,114 |
) |
| |
| |
Total marketable securities
|
|
$ |
53,846 |
|
|
$ |
395 |
|
|
$ |
(119 |
) |
|
$ |
54,122 |
|
| |
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
December 31, 2003 | |
| |
|
| |
| |
|
|
|
Gross | |
|
Gross | |
|
|
| |
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
Estimated | |
| |
|
Cost | |
|
Gains | |
|
Losses | |
|
Fair Value | |
| | |
|
Corporate debt
|
|
$ |
53,165 |
|
|
$ |
17 |
|
|
$ |
(41 |
) |
|
$ |
53,141 |
|
|
Government securities
|
|
|
35,387 |
|
|
|
7 |
|
|
|
(11 |
) |
|
|
35,383 |
|
|
Asset backed securities
|
|
|
7,016 |
|
|
|
7 |
|
|
|
(2 |
) |
|
|
7,021 |
|
|
Equity securities
|
|
|
289 |
|
|
|
882 |
|
|
|
— |
|
|
|
1,171 |
|
|
Money market funds
|
|
|
12,894 |
|
|
|
— |
|
|
|
— |
|
|
|
12,894 |
|
| |
| |
Total
|
|
|
108,751 |
|
|
|
913 |
|
|
|
(54 |
) |
|
|
109,610 |
|
|
Less amount classified as cash equivalents
|
|
|
(12,894 |
) |
|
|
— |
|
|
|
— |
|
|
|
(12,894 |
) |
| |
| |
Total marketable securities
|
|
$ |
95,857 |
|
|
$ |
913 |
|
|
$ |
(54 |
) |
|
$ |
96,716 |
|
| |
The following table summarizes the amortized cost of the
estimated fair value of available-for-sale debt securities at
December 31, by contract maturity (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
Amortized | |
|
Estimated | |
|
Amortized | |
|
Estimated | |
| |
|
Cost | |
|
Fair Value | |
|
Cost | |
|
Fair Value | |
| | |
|
Mature in less than one year
|
|
$ |
21,076 |
|
|
$ |
21,013 |
|
|
$ |
50,550 |
|
|
$ |
50,971 |
|
|
Mature in one to three years
|
|
|
19,264 |
|
|
|
19,221 |
|
|
|
20,590 |
|
|
|
20,746 |
|
|
Mature in over three years
|
|
|
13,217 |
|
|
|
13,208 |
|
|
|
23,797 |
|
|
|
23,828 |
|
| |
| |
Total
|
|
$ |
53,557 |
|
|
$ |
53,442 |
|
|
$ |
94,937 |
|
|
$ |
95,545 |
|
| |
The table above also includes amounts related to asset-backed
and mortgage-backed securities that are allocated between
maturity groupings based on their final maturities. The gross
realized gains and losses on sales of available-for-sale
investments were immaterial for all periods presented except for
2002 in which we recognized a gain of $2.1 million related
to the sale of an equity security we had been holding.
We monitor our investment portfolio for impairment on a periodic
basis in accordance with Emerging Issues Task Force Issue
No. 03-1. In the event that the carrying value of an
investment exceeds its fair value and the decline in value is
determined to be other-than-temporary, an impairment charge is
recorded and a new cost basis for the investment is established.
In order to determine whether a decline in value is
other-than-temporary, we evaluate, among other factors: the
duration and extent to which the fair value has been less than
the carrying value; our financial condition and business
outlook, including key operational and cash flow metrics,
current market conditions and future trends in the our industry;
our relative competitive position within the industry; and our
intent and ability to retain the investment for a period of time
sufficient to allow for any anticipated recovery in fair value.
The decline in value of these investments, shown in the table
above as “Gross Unrealized Losses”, is primarily
related to changes in interest rates and is considered to be
temporary in nature.
|
|
| Note 4. |
Soriatane® Product Line Acquisition and Distribution
Agreement |
On February 6, 2004, we entered into a binding agreement
with Hoffmann-La Roche Inc., or Roche, to acquire exclusive
U.S. rights to Soriatane-brand acitretin, an approved oral
therapy for the treatment of severe psoriasis in adults. The
transaction closed on March 4, 2004, and we have recognized
revenue, net of applicable reserves, for all sales of the
product from that date. Under the terms of the purchase
agreement, we paid Roche a total of $123.0 million in cash
at the closing to acquire Soriatane. We also assumed certain
liabilities in connection with returns, rebates and chargebacks
associated with prior sales of Soriatane by Roche totaling
$4.1 million, and purchased Roche’s existing inventory
of Soriatane at a cost of approximately $1.5 million. In
addition, we incurred transaction costs of $529,000 during the
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
second quarter of 2004. Including the cash paid to acquire the
rights, liabilities assumed and transactions costs, the total
value of the acquired product rights for accounting purposes is
$127.7 million. We are amortizing this amount over the
ten-year estimated useful life of the Soriatane asset. As of
December 31, 2004, the balance of the returns, rebates, and
chargebacks reserve assumed at acquisition was $2.1 million.
In July 2004, we entered into a multi-year consent with Roche to
sell Soriatane to a U.S.-based distributor that exports branded
pharmaceutical products to select international markets. Product
sold to this distributor is not permitted to be resold in the
U.S. Under the terms of the agreement, we will pay a
royalty to Roche on Soriatane sales made during the term of the
agreement to this distributor.
|
|
| Note 5. |
Yamanouchi License Agreement |
In 2002, we entered into an agreement with Yamanouchi Europe
B.V. to license Velac (a first in class combination of 1%
clindamycin, and 0.025% tretinoin). We have licensed exclusive
rights to develop and commercialize the product in the U.S. and
Canada, and have licensed non-exclusive rights in Mexico. Under
the terms of the agreement, we paid Yamanouchi an initial
$2.0 million licensing fee and an additional
$2.0 million when we reached a milestone by initiating a
Phase III trial for Velac, both paid and recorded in 2002.
In August 2004, we reached a third milestone when we submitted a
New Drug Application (NDA) for Velac with the Food and Drug
Administration (FDA) and received notification that the FDA
had accepted the NDA for filing. We recorded a $3.5 million
milestone payment due to the licensor upon the filing of the
NDA. All payments were recorded as in-process research and
development and milestone expense as the product has not yet
been approved and has no alternative future use.
|
|
| Note 6. |
Royalty-Bearing Agreements |
Pfizer License Agreement
In December 2001, we entered into an agreement granting
Pharmacia Corporation (now Pfizer) exclusive global rights,
excluding Japan, to our proprietary foam drug-delivery
technology for use with Pfizer’s Rogaine® hair loss
treatment. Under the agreement, Pfizer paid us an initial
licensing fee, and agreed to pay us additional amounts when it
achieves specified milestones, plus a royalty on product sales.
We recognized $1.0 million under the agreement related to
license fees, milestone payments and contract revenue through
December 31, 2002. Our obligation to incur development
expenses in connection with the agreement ended in 2002. We
provided additional development support to Pfizer at their
request in 2004 and 2003 and we recognized $11,000 and $86,000,
respectively, in related fees.
Other Licenses for Foam Technology
We have entered into a number of agreements for our foam drug
delivery technology. We have licensed the technology to
betamethasone valerate foam to Celltech Group plc in Europe, and
Celltech has licensed the worldwide rights to their patent on
the technology to us. We pay Celltech royalties on all sales
worldwide of foam formulations containing steroids. Celltech
markets their product as Bettamousse (the product equivalent of
Luxíq). We also have license agreements with Bayer (in the
U.S.) and Pfizer and Mipharm (internationally) for the use
of pyrethrin foam for head lice. That product is marketed in the
U.S. as RID®, as Banlice® in Australia, and as
Milice® in Italy. We receive royalties on sales of those
products.
For the years ended December 31, 2004, 2003 and 2002, we
recorded royalty revenues of $244,000, $267,000, and $305,000,
respectively, for our foam-based technology. We have also
entered into development agreements with other companies to
develop the foam for specific indications.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
Licenses for Liquipatch Technology
In June 2001, we entered into a global licensing agreement with
Novartis Consumer Health SA for the Liquipatch drug-delivery
system for use in topical antifungal applications. The agreement
gives Novartis the exclusive, worldwide rights to use the
Liquipatch technology in the topical antifungal field. In March
2002, Novartis paid us $580,000 to exercise its then-existing
option to expand the license agreement. Novartis will be
responsible for all development costs, and will be obligated to
pay license fees, milestone payments and royalties on future
product sales. In 2004, we received a milestone payment from
Novartis of $81,000.
S.C. Johnson License Agreement
We have licensed to S.C. Johnson & Son, Inc. the
rights to a super-concentrated aerosol spray that is marketed in
the U.S. and internationally. In 2002 and 2003, we received
$2.4 million and $7.0 million, respectively, in
royalties in connection with this agreement, which included a
one-time royalty payment of $2.9 million in 2003. On
January 5, 2004, we reached an agreement with
S.C. Johnson to terminate the license agreement. We
received an additional $1.2 million under the agreement in
2004, after which S.C. Johnson had a fully paid-up,
royalty-free license to the technology.
InterMune
We have an agreement with InterMune, Inc. pursuant to which we
receive royalties for sales of Actimmune. In addition, we have
retained the product rights to Actimmune for certain potential
dermatological applications. For the years ended
December 31, 2004, 2003 and 2002, we received $330,000,
$358,000 and $172,000, respectively, for our foam-based
technology. We recorded gains on the sale of InterMune stock
totaling $2.1 million in 2002. We did not sell any
InterMune stock in 2004 or 2003. As of December 31, 2004,
we owned 50,000 shares of common stock of InterMune.
Relaxin Agreement
On July 15, 2003, we assigned our rights to recombinant
human relaxin to BAS Medical, Inc. (BAS Medical), a private,
development-stage company focused on the development and
marketing of novel medical treatments. As part of the
transaction, we may receive up to $1.0 million in licensing
and milestone fees, plus royalties on future product sales. Upon
the execution of the definitive agreement, we received a
$100,000 upfront assignment fee that we recognized as license
revenue in the third quarter of 2003. We will receive the
remaining $900,000 if BAS Medical achieves various milestones.
BAS Medical assumed the rights to develop and commercialize
relaxin for all indications of use. All of our obligations under
existing contracts related to relaxin, including those with
Paladin Labs, Inc., and F.H. Faulding & Co. Ltd.,
were also transferred to BAS Medical as part of this
transaction, and as a result, in the third quarter of 2003, we
recognized $661,000 in deferred revenue relating to previous
relaxin license agreements.
|
|
| Note 7. |
UCB Pharma Agreement |
In March 2004, we entered into an agreement with UCB Pharma, or
UCB, a subsidiary of UCB Group, pursuant to which we authorized
UCB to promote OLUX and Luxíq to a segment of
U.S. primary care physicians, or(PCP’s. In July 2004,
UCB acquired Celltech plc, and in connection with the other
post-acquisition changes, UCB notified us that it intended to
discontinue the co-promotion agreement effective March 31,
2005. UCB will continue to promote OLUX and Luxíq until
then. Through the end of the promotion period, UCB’s focus
will be on the approximately 10% of PCP’s who are active
prescribers of dermatology products, including OLUX and
Luxíq. The purpose of the co-promotion agreement is
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
ensure appropriate use of OLUX and Luxíq with the current
PCP users and to build value for the OLUX and Luxíq brands.
We record 100% of the revenue from sales generated by
promotional efforts of UCB and pay UCB a portion of revenue as a
promotion expense, which is included in selling, general and
administrative expense. UCB bears the marketing costs for
promoting the products (including product samples, marketing
materials, etc.). We will not have any financial obligation to
UCB on prescriptions generated by PCP’s after
March 31, 2005.
|
|
| Note 8. |
Property and Equipment |
Property and equipment consist of the following (in
thousands):
| |
|
|
|
|
|
|
|
|
|
| | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| | |
|
Laboratory and manufacturing equipment
|
|
$ |
5,952 |
|
|
$ |
5,073 |
|
|
Leasehold improvements
|
|
|
7,705 |
|
|
|
2,982 |
|
|
Computer equipment
|
|
|
2,324 |
|
|
|
2,250 |
|
|
Furniture, fixtures and office equipment
|
|
|
1,333 |
|
|
|
1,284 |
|
|
Land, building and building improvements
|
|
|
785 |
|
|
|
736 |
|
| |
| |
Total
|
|
|
18,099 |
|
|
|
12,325 |
|
|
Less accumulated depreciation and amortization
|
|
|
(6,269 |
) |
|
|
(6,697 |
) |
| |
|
Property and equipment, net
|
|
$ |
11,830 |
|
|
$ |
5,628 |
|
| |
Depreciation expense for the years ended December 31, 2004,
2003 and 2002 was $1.4 million, $1.4 million, and
$1.3 million, respectively.
|
|
| Note 9. |
Goodwill and Other Intangible Assets |
There was no change in the carrying amount of goodwill for the
years ended December 31, 2004 and 2003. The components of
our other intangible assets at December 31 are as follows
(in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
December 31, 2004 | |
|
December 31, 2003 | |
| |
|
| |
|
| |
| |
|
Gross | |
|
|
|
Gross | |
|
|
| |
|
Useful Life | |
|
Carrying | |
|
Accumulated | |
|
|
|
Carrying | |
|
Accumulated | |
|
|
| |
|
in Years | |
|
Amount | |
|
Amortization | |
|
Net | |
|
Amount | |
|
Amortization | |
|
Net | |
| | |
|
Acquired product rights
|
|
|
10 |
|
|
$ |
127,652 |
|
|
$ |
(10,638 |
) |
|
$ |
117,014 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Existing technology
|
|
|
10 |
|
|
|
6,810 |
|
|
|
(2,525 |
) |
|
|
4,285 |
|
|
|
6,810 |
|
|
|
(1,844 |
) |
|
|
4,966 |
|
|
Patents
|
|
|
10-13 |
|
|
|
1,661 |
|
|
|
(572 |
) |
|
|
1,089 |
|
|
|
1,590 |
|
|
|
(350 |
) |
|
|
1,240 |
|
| |
|
Total
|
|
|
|
|
|
$ |
136,123 |
|
|
$ |
(13,735 |
) |
|
$ |
122,388 |
|
|
$ |
8,400 |
|
|
$ |
(2,194 |
) |
|
$ |
6,206 |
|
| |
Amortization expense for our other intangible assets was
$11.5 million, $819,000 and $810,000 for the years ended
December 31, 2004, 2003 and 2002, respectively.
The expected future amortization expense of our other intangible
assets is as follows (in thousands):
| |
|
|
|
|
| | |
|
For the year ending December 31, 2005
|
|
$ |
13,598 |
|
|
For the year ending December 31, 2006
|
|
|
13,598 |
|
|
For the year ending December 31, 2007
|
|
|
13,598 |
|
|
For the year ending December 31, 2008
|
|
|
13,598 |
|
|
For the year ending December 31, 2009
|
|
|
13,598 |
|
|
Thereafter
|
|
|
54,398 |
|
| |
|
|
|
|
|
Total
|
|
$ |
122,388 |
|
| |
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
|
|
| Note 10. |
Convertible Senior Notes |
On May 28, 2003, we issued $90 million of
2.25% convertible senior notes due May 30, 2008 in a
private placement exempt from registration under the Securities
Act of 1933. The notes are senior, unsecured obligations and
rank equal in right of payment with any of our existing and
future unsecured and unsubordinated debt. The notes are
convertible into our shares of common stock at any time at the
option of the note holder at a conversion rate of
46.705 shares of common stock per $1,000 principal amount
of notes, subject to adjustment in certain circumstances, which
is equivalent to a conversion price of approximately
$21.41 per share of common stock. This conversion price is
higher than the price of our common stock on the date the notes
were issued. The notes bear interest at a rate of 2.25% per
annum, which is payable semi-annually in arrears on May 30
and November 30 of each year, beginning November 30,
2003. As of December 31, 2004, the fair value of these
notes was approximately $113.3 million.
The notes cannot be redeemed before May 30, 2005. On or
after May 30, 2005 and before May 30, 2007, we may
redeem all or a portion of the notes at our option at a
redemption price equal to 100% of the principal amount of the
notes to be redeemed, plus accrued and unpaid interest if the
closing price of our common stock has exceeded 140% of the
conversion price then in effect for at least 20 trading days
within a period of 30 consecutive trading days ending on the
trading day before the date of mailing of the redemption notice.
We may redeem all or a portion of the notes at any time on or
after May 30, 2007 at a redemption price equal to 100.45%
of the principal amount of the notes to be redeemed, plus
accrued and unpaid interest. Holders of the notes may require us
to repurchase all or a portion of their notes upon a change in
control, as defined in the indenture governing the notes, at
100% of the principal amount of the notes to be repurchased,
plus accrued and unpaid interest.
Offering expenses of $3.7 million related to the issuance
of these notes have been included in other assets and are
amortized on a straight-line basis to interest expense over the
contractual term of the notes. Amortization expense for the
years ended December 31, 2004 and 2003 was $737,000 and
$430,000, respectively.
|
|
| Note 11. |
Stockholders’ Equity |
Equity Issuance
On February 13, 2004, we completed a private placement of
3.0 million shares of our common stock to accredited
institutional investors at a price of $20.25 per share, for
net proceeds of approximately $56.9 million.
Warrants
In July 1999, we issued a warrant to a third party to
purchase 15,000 shares of common stock as partial
compensation for financial advice pertaining to investor and
media relations. The warrant had an exercise price of $6.063 and
was exercised in the year ended December 31, 2004.
In connection with an equity line arrangement, we issued
warrants in December 1999 for 25,000 shares at a purchase
price of $6.875, and in December 2000 for 25,427 shares at
a purchase price of $5.3625, both of which were exercised in the
year ended December 31, 2004.
We have a commitment to a third party to issue a warrant to
purchase 30,000 shares of our common stock when and if
relaxin is approved for a commercial indication. As of
December 31, 2004, the warrant had not been issued.
Although we sold the relaxin program to BAS Medical in 2003, the
warrant obligation was not transferred. We have not reserved any
shares for issuance of common stock pursuant to this commitment.
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
1995 Director Stock Option Plan
The Board adopted the 1995 Director Stock Option Plan, or
the Directors’ Plan, in December 1995, and amended the Plan
in 1999, 2001 and 2003. We have reserved a total of
850,000 shares of common stock for issuance under the
Directors’ Plan. The Directors’ Plan provides for the
grant of non-statutory stock options to non-employee directors
of Connetics.
The Directors’ Plan provides that each person who first
becomes a non-employee director is granted a non-statutory stock
option to purchase 30,000 shares of common stock (the
First Option) on the date on which he or she first becomes a
non-employee director. Thereafter, on the date of each annual
meeting of our stockholders, each non-employee director is
granted an additional option to purchase 15,000 shares
of common stock (a Subsequent Option) if he or she has served on
the Board for at least six months as of the annual meeting date.
Under the Directors’ Plan, the First Option is exercisable
in installments as to 25% of the total number of shares subject
to the First Option on each of the first, second, third and
fourth anniversaries of the date of grant of the First Option;
each Subsequent Option becomes exercisable in full on the first
anniversary of the date of grant of that Subsequent Option. The
exercise price of all stock options granted under the
Directors’ Plan is equal to the fair market value of a
share of our common stock on the date of grant of the option.
Options granted under the Directors’ Plan have a term of
ten years.
Employee Stock Plans
We have six plans pursuant to which we have granted stock
options to employees, directors, and consultants. In general,
all of the plans authorize the grant of stock options vesting at
a rate to be set by the Board or the Compensation Committee.
Generally, stock options under all of our employee stock plans
become exercisable at a rate of 25% per year for a period
of four (4) years from date of grant. The plans require
that the options be exercisable at a rate no less than
20% per year. The exercise price of stock options under the
employee stock plans generally meets the following criteria:
exercise price of incentive stock options must be at least 100%
of the fair market value on the grant date, exercise price of
non-statutory stock options must be at least 85% of the fair
market value on the grant date, and exercise price of options
granted to 10% (or greater) stockholders must be at least 110%
of the fair market value on the grant date. The 2000 Non-Officer
Plan, the 2002 Employee Stock Plan and the International Plan do
not permit the grant of incentive stock options. Stock options
under all of our employee stock plans have a term of ten years
from date of grant. Below is a general description of the plans
from which we are still granting stock options.
2000 Stock Plan. Our 2000 Stock Plan (the 2000 Plan) was
approved by the Board and our stockholders in 1999. The 2000
Plan became available on January 1, 2000, and was initially
funded with 808,512 shares. On the first day of each new
calendar year during the term of the 2000 Plan, the number of
shares available will be increased (with no further action
needed by the Board or the stockholders) by a number of shares
equal to the lesser of three percent (3%) of the number of
shares of common stock outstanding on the last preceding
business day, or an amount determined by the Board. In 2004, the
increase in authorized shares was 958,501.
Non-Officer Stock Option Plans. The 2000 Non-Officer
Stock Plan was funded with 500,000 shares. No additional
shares will be added to this plan, although shares may be
granted if they become available through cancellation. The 2002
Employee Stock Plan was initially funded with
500,000 shares. In 2003, the 2002 Employee Stock Plan was
amended to increase the shares available for issuance by
750,000 shares, for a total of 1,250,000 shares, and
to permit the issuance of options under the plan to officers of
Connetics who are not executive officers within the meaning of
Section 16 of the Securities Exchange Act of 1934. Our
stockholders approved those amendments in 2003. The options
granted under both plans are nonstatutory stock options.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
International Stock Incentive Plan. In 2001, the Board
approved an International Stock Incentive Plan, which provided
for the grant of Connetics’ stock options to employees of
Connetics or its subsidiaries where the employees are based
outside of the United States. The plan was funded with
250,000 shares. The options granted under the plan are
nonstatutory stock options.
Summary of All Option Plans. The following table
summarizes information concerning stock options outstanding
under all of our stock option plans and certain grants of
options outside of our plans. Options canceled under terminated
plans are no longer available for grant.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Outstanding Options | |
| |
|
| |
| |
|
|
|
Weighted | |
| |
|
Shares | |
|
|
|
Average | |
| |
|
Available for | |
|
Number of | |
|
Exercise | |
| |
|
Grant | |
|
Shares | |
|
Price | |
| | |
|
Balance, December 31, 2001
|
|
|
981,846 |
|
|
|
4,221,556 |
|
|
$ |
6.10 |
|
| |
| |
Additional shares authorized
|
|
|
909,312 |
|
|
|
— |
|
|
|
— |
|
| |
Options granted
|
|
|
(1,400,378 |
) |
|
|
1,400,378 |
|
|
|
11.71 |
|
| |
Options exercised
|
|
|
— |
|
|
|
(469,246 |
) |
|
|
5.20 |
|
| |
Options canceled
|
|
|
248,411 |
|
|
|
(268,722 |
) |
|
|
7.60 |
|
| |
|
Balance, December 31, 2002
|
|
|
739,191 |
|
|
|
4,883,966 |
|
|
|
7.72 |
|
| |
| |
Additional shares authorized
|
|
|
1,937,016 |
|
|
|
— |
|
|
|
— |
|
| |
Options granted
|
|
|
(1,759,888 |
) |
|
|
1,759,888 |
|
|
|
14.20 |
|
| |
Options exercised
|
|
|
— |
|
|
|
(554,274 |
) |
|
|
5.69 |
|
| |
Options canceled
|
|
|
102,260 |
|
|
|
(103,323 |
) |
|
|
9.97 |
|
| |
|
Balance, December 31, 2003
|
|
|
1,018,579 |
|
|
|
5,986,257 |
|
|
|
9.77 |
|
| |
| |
Additional shares authorized
|
|
|
958,501 |
|
|
|
— |
|
|
|
— |
|
| |
Options granted
|
|
|
(1,777,968 |
) |
|
|
1,777,968 |
|
|
|
19.98 |
|
| |
Options exercised
|
|
|
— |
|
|
|
(753,346 |
) |
|
|
6.83 |
|
| |
Options canceled
|
|
|
172,970 |
|
|
|
(172,970 |
) |
|
|
14.01 |
|
| |
|
Balance, December 31, 2004
|
|
|
372,082 |
|
|
|
6,837,909 |
|
|
$ |
12.64 |
|
| |
The following table summarizes information concerning
outstanding and exercisable options at December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Options Outstanding | |
|
Options Exercisable | |
| |
|
| |
| |
|
|
|
Weighted | |
|
|
| |
|
|
|
Average | |
|
Weighted | |
|
|
|
Weighted | |
| Range |
|
|
|
Remaining | |
|
Average | |
|
|
|
Average | |
| of |
|
Number of | |
|
Life (in | |
|
Exercise | |
|
Number of | |
|
Exercise | |
| Exercise Prices |
|
Shares | |
|
years) | |
|
Price | |
|
Shares | |
|
Price | |
| | |
|
$ 0.44 — $ 5.84
|
|
|
880,350 |
|
|
|
5.4 |
|
|
$ |
4.40 |
|
|
|
866,412 |
|
|
$ |
4.40 |
|
|
$ 5.85 — $11.67
|
|
|
1,693,297 |
|
|
|
5.0 |
|
|
$ |
8.29 |
|
|
|
1,543,329 |
|
|
$ |
8.21 |
|
|
$11.68 — $17.51
|
|
|
2,312,224 |
|
|
|
7.7 |
|
|
$ |
12.94 |
|
|
|
1,236,021 |
|
|
$ |
12.66 |
|
|
$17.52 — $23.34
|
|
|
1,691,788 |
|
|
|
9.0 |
|
|
$ |
18.71 |
|
|
|
153,636 |
|
|
$ |
18.38 |
|
|
$23.35 — $29.18
|
|
|
260,250 |
|
|
|
9.8 |
|
|
$ |
26.74 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.44 — $29.18
|
|
|
6,837,909 |
|
|
|
7.1 |
|
|
$ |
12.64 |
|
|
|
3,799,398 |
|
|
$ |
9.20 |
|
| |
1995 Employee Stock Purchase Plan. The Board adopted the
1995 Employee Stock Purchase Plan (the Purchase Plan) in
December 1995, and amended the Purchase Plan in February and
November 2000 and December 2002. We have reserved
1,593,683 shares of common stock for issuance under the
Purchase Plan. The Purchase Plan has an evergreen feature
pursuant to which, on November 30 of each year, the number
of shares available is increased automatically by a number of
shares equal to the lesser of one half of one percent (0.5%) of
the number of shares of common stock outstanding on that date,
or an amount
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
determined by the Board of Directors. The Compensation Committee
of the Board administers the Purchase Plan. Employees (including
officers and employee directors) of Connetics are eligible to
participate if they are employed for at least 20 hours per
week and more than five months per year. The Purchase Plan
permits eligible employees to purchase common stock through
payroll deductions, which may not exceed 15% of an
employee’s compensation, at a price equal to the lower of
85% of the fair market value of our common stock at the
beginning or end of the offering period. We issued
131,742 shares under the Purchase Plan in 2004.
Common Shares Reserved for Future Issuance
We have reserved shares of common stock for issuance as follows:
| |
|
|
|
|
|
|
|
|
| | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| | |
|
1994 Stock Plan
|
|
|
721,042 |
|
|
|
980,617 |
|
|
1995 Employee Stock Purchase Plan
|
|
|
423,251 |
|
|
|
216,320 |
|
|
1995 Directors Stock Option Plan
|
|
|
757,800 |
|
|
|
815,000 |
|
|
1998 Supplemental Stock Plan
|
|
|
39,883 |
|
|
|
52,383 |
|
|
2000 Stock Plan
|
|
|
3,994,623 |
|
|
|
3,285,396 |
|
|
2000 Non-Officer Stock Plan
|
|
|
293,856 |
|
|
|
367,612 |
|
|
International Stock Incentive Plan
|
|
|
229,010 |
|
|
|
246,155 |
|
|
2002 Employee Stock Plan
|
|
|
1,144,281 |
|
|
|
1,228,177 |
|
|
Non-plan stock options
|
|
|
29,496 |
|
|
|
29,496 |
|
|
Common stock warrants
|
|
|
— |
|
|
|
59,177 |
|
|
Convertible senior notes
|
|
|
4,203,450 |
|
|
|
4,203,450 |
|
| |
|
Total
|
|
|
11,836,692 |
|
|
|
11,483,783 |
|
| |
Stockholder Rights Plan
We adopted a stockholder rights plan (the Rights Plan) in May
1997, as amended and restated in November 2001. The Rights Plan
entitles existing stockholders to purchase from Connetics one
preferred share purchase right, or Right, for each share of
common stock they own. If the Rights become exercisable, each
Right entitles the holder to buy one one-thousandth of a share
of Series B Participating Preferred stock for $80.00. The
Rights attach to and trade only together with our common stock
and do not have voting rights. Rights Certificates will be
issued and the Rights will become exercisable on the
“Distribution Date,” which is defined as the earlier
of the tenth business day (or such later date as may be
determined by our Board of Directors) after a person or group of
affiliated or associated persons (“Acquiring Person”)
(a) has acquired, or obtained the right to acquire,
beneficial ownership of 15% or more of the common shares then
outstanding or (b) announces a tender or exchange offer,
the consummation of which would result in ownership by a person
or group of 15% or more of our then outstanding common shares.
Unless the Rights are earlier redeemed, if an Acquiring Person
obtains 15% or more of our then outstanding common shares, then
any Rights held by the Acquiring Person are void, and each other
holder of a Right which has not been exercised will have the
right to receive, upon exercise, common shares having a value
equal to two times the purchase price. The Rights are redeemable
for $0.001 per Right at the direction of our Board. The
purchase price payable, the number of Rights, and the number of
Series B Participating Preferred Stock or common shares or
other securities or property issuable upon exercise of the
Rights are subject to adjustment from time to time in connection
with the dilutive issuances by Connetics as set forth in the
Rights Plan. At December 31, 2004, a total of
90,000 shares were designated as Series B
Participating Preferred Stock and no shares were issued and
outstanding.
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
The provision for income taxes consists of the following (in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Foreign
|
|
$ |
150 |
|
|
$ |
1,017 |
|
|
$ |
467 |
|
| |
Federal
|
|
|
1,171 |
|
|
|
330 |
|
|
|
(211 |
) |
| |
State
|
|
|
426 |
|
|
|
— |
|
|
|
(75 |
) |
| |
|
Total Current
|
|
|
1,747 |
|
|
|
1,347 |
|
|
|
181 |
|
| |
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Foreign
|
|
|
(254 |
) |
|
|
(180 |
) |
|
|
— |
|
| |
Federal
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
State
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
Total Deferred
|
|
|
(254 |
) |
|
|
(180 |
) |
|
|
— |
|
| |
|
Total
|
|
$ |
1,493 |
|
|
$ |
1,167 |
|
|
$ |
181 |
|
| |
The provision for income taxes differs from the federal
statutory rate as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
Provision (benefit) at U.S. federal statutory rate
|
|
$ |
7,108 |
|
|
$ |
(960 |
) |
|
$ |
(5,600 |
) |
|
Unbenefited losses (utilization of net operating losses)
|
|
|
(14,066 |
) |
|
|
450 |
|
|
|
4,900 |
|
|
Timing differences not currently benefited
|
|
|
6,814 |
|
|
|
— |
|
|
|
— |
|
|
State taxes, net of federal benefit
|
|
|
281 |
|
|
|
— |
|
|
|
(75 |
) |
|
Non-deductible stock based compensation
|
|
|
6 |
|
|
|
10 |
|
|
|
100 |
|
|
Non-deductible amortization
|
|
|
274 |
|
|
|
270 |
|
|
|
300 |
|
|
Alternative minimum tax
|
|
|
827 |
|
|
|
— |
|
|
|
(542 |
) |
|
Foreign taxes
|
|
|
(104 |
) |
|
|
837 |
|
|
|
467 |
|
|
US withholding tax
|
|
|
334 |
|
|
|
330 |
|
|
|
331 |
|
|
Other
|
|
|
19 |
|
|
|
230 |
|
|
|
300 |
|
| |
|
Total
|
|
$ |
1,493 |
|
|
$ |
1,167 |
|
|
$ |
181 |
|
| |
Pretax income from foreign operations was approximately
$600,000, $4.0 million, and $2.2 million for the years
ended December 31, 2004, 2003 and 2002, respectively.
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of our deferred tax assets for federal,
state and foreign income taxes as of December 31 are
approximately as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
| | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| | |
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
| |
Net operating loss carryforwards
|
|
$ |
24,200 |
|
|
$ |
38,200 |
|
| |
Research and other tax credits
|
|
|
6,400 |
|
|
|
5,200 |
|
| |
Capitalized research expenses
|
|
|
4,000 |
|
|
|
5,200 |
|
| |
Capitalized license and acquired technology
|
|
|
4,700 |
|
|
|
2,100 |
|
| |
Accruals and reserves
|
|
|
8,800 |
|
|
|
2,600 |
|
| |
Foreign currency translation
|
|
|
700 |
|
|
|
485 |
|
| |
Other
|
|
|
800 |
|
|
|
1,100 |
|
| |
|
Total deferred tax assets
|
|
|
49,600 |
|
|
|
54,885 |
|
|
Valuation allowance
|
|
|
(46,800 |
) |
|
|
(53,600 |
) |
| |
|
Net deferred tax assets
|
|
|
2,800 |
|
|
|
1,285 |
|
| |
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
| |
Prepaid expenses
|
|
|
(400 |
) |
|
|
(200 |
) |
| |
Soriatane property acquisition
|
|
|
(1,100 |
) |
|
|
— |
|
| |
Unrealized gain on marketable securities
|
|
|
(100 |
) |
|
|
(300 |
) |
| |
|
Net deferred tax liabilities
|
|
|
(1,600 |
) |
|
|
(500 |
) |
| |
|
Total net deferred tax assets
|
|
$ |
1,200 |
|
|
$ |
785 |
|
| |
The net U.S. deferred tax assets have been fully offset by
a valuation allowance. The valuation allowance decreased by
$6.8 million during the year ended December 31, 2004,
decreased by $0.8 million during the year ended
December 31, 2003 and increased by $13.6 million
during the year ended December 31, 2002. Due to a history
of earnings in Australia, the foreign deferred tax assets of
$1.2 million have not been offset with a valuation
allowance.
As of December 31, 2004, we had federal net operating loss
carryforwards of approximately $71.3 million. We also had
federal and California research and other tax credit
carryforwards of approximately $6.4 million. The federal
net operating loss and credit carryforwards will expire in the
years 2008 through 2024 if not utilized. State tax credit
carryforwards may be carried forward indefinitely.
The annual utilization of the federal and state net operating
loss and tax credit carryforwards is limited for tax purposes
under the Internal Revenue Code of 1986. The annual limitation
may result in the expiration of net operating losses and credits
before we are able to utilize them.
Tax benefits associated with employee stock options provide a
deferred benefit of approximately $7.4 million, which has
been offset by the valuation allowance. The deferred tax benefit
associated with the employee stock options will be credited to
additional paid-in capital when realized.
We lease two facilities under non-cancelable operating leases,
the last of which expires in April 2005. One of the operating
leases required an irrevocable standby letter of credit that was
secured by a certificate of deposit with our bank. The amount of
the letter of credit included an automatic annual reduction
feature and expired on January 1, 2004.
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
In June 2004, we signed a series of non-cancelable facility
lease agreements with Incyte Corporation and The Board of
Trustees of the Leland Stanford Junior University, or Stanford,
in Palo Alto, California. The leases collectively expire in ten
years and the lease with Stanford includes two three-year
optional renewal periods. We moved into the new facility in
February 2005. In accordance with the new facility lease
agreement, we entered into a $2.0 million letter of credit
arrangement, which is secured by certificates of deposit. The
certificates of deposit are classified as restricted cash,
non-current, at December 31, 2004.
We also lease automobiles under two operating leases in which we
guarantee certain residual values for the vehicles. In
accordance with the automobile lease agreements, in 2004 we
entered into two letters of credit arrangements, which are
secured by certificates of deposit, totaling $300,000. The
certificates of deposit are classified as restricted cash,
non-current, at December 31, 2004. We also lease office
equipment under various operating leases that expire in 2009.
In March 2002 we entered into a manufacturing and supply
agreement with DPT that requires minimum purchase commitments,
beginning in August 2003 and continuing for 10 years.
Additionally in 2002 we entered into a license agreement that
requires minimum royalty payments beginning in 2005 and
continuing for 15 years, unless the agreement is terminated
earlier at the discretion of either party. In 2003, we entered
into a five-year service agreement for prescription information
that requires minimum fees.
The future minimum rental payments under non-cancelable
operating leases and contractual commitments as of
December 31, 2004 are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| Years Ending | |
|
Contractual | |
|
|
| December 31: |
|
Operating Leases | |
|
Commitments | |
|
Total | |
| | |
|
2005
|
|
$ |
4,965 |
|
|
$ |
1,875 |
|
|
$ |
6,840 |
|
|
2006
|
|
|
2,788 |
|
|
|
2,172 |
|
|
|
4,960 |
|
|
2007
|
|
|
2,476 |
|
|
|
2,172 |
|
|
|
4,648 |
|
|
2008
|
|
|
1,402 |
|
|
|
850 |
|
|
|
2,252 |
|
|
2009
|
|
|
1,383 |
|
|
|
850 |
|
|
|
2,233 |
|
|
Thereafter
|
|
|
8,175 |
|
|
|
2,225 |
|
|
|
10,400 |
|
| |
| |
|
$ |
21,189 |
|
|
$ |
10,144 |
|
|
$ |
31,333 |
|
| |
We recognize facilities rent expense on a straight-line basis
over the term of each lease. Facilities rent expense under
operating leases was approximately $1.7 million (net of
sublease income of $376,000), $1.4 million (net of sublease
income of $490,000) and $1.5 million (net of sublease
income of $742,000) for the years ended December 31, 2004,
2003 and 2002, respectively. The operating lease obligations set
forth above for 2005 are shown net of $94,000 to be received as
a result of a subleasing arrangement with a third party that
expires on March 31, 2005.
Pursuant to our manufacturing and supply agreements with our
three suppliers, AccraPac, DPT and Roche, we may incur
significant penalties related to cancellation of purchase
orders, including paying an amount equal to the entire cancelled
purchase order. We had approximately $9.6 million in
outstanding open purchase orders to our suppliers at
December 31, 2004 that are not included in the table above.
|
|
| Note 14. |
Guarantees and Indemnifications |
In November 2002, the FASB issued Interpretation No. 45,
“Guarantor’s Accounting and Disclosure Requirements
for Guarantees, including Indirect Guarantees of Indebtedness of
Others” (FIN No. 45). FIN No. 45
requires that upon issuance of a guarantee, the guarantor must
recognize a liability for the fair value of the obligations it
assumes under that guarantee.
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
We enter into indemnification provisions under our agreements
with other companies in the ordinary course of our business,
typically with business partners, contractors, clinical sites,
insurers, and customers. Under these provisions we generally
indemnify and hold harmless the indemnified party for losses
suffered or incurred by the indemnified party as a result of our
activities. These indemnification provisions generally survive
termination of the underlying agreement. In some cases, the
maximum potential amount of future payments Connetics could be
required to make under these indemnification provisions is
unlimited. The estimated fair value of the indemnity obligations
of these agreements is minimal. Accordingly, we have no
liabilities recorded for these agreements as of
December 31, 2004. We have not incurred any costs to defend
lawsuits or settle claims related to these indemnification
arrangements.
|
|
| Note 15. |
Retirement Savings Plan |
We have a retirement savings plan, commonly known as a 401(k)
plan that allows all full-time employees to contribute from 1%
to 60% of their pretax salary, subject to IRS limits. Before
2003, the company match of employee contributions was
discretionary, and the Board authorized the match based on a
“pool” calculated using a formula tied to
Connetics’ annual product sales and the employee’s
actual contribution. Beginning in 2003, we match all
employees’ contributions in an amount equal to 25% of each
participant’s deferral contributions made during the year.
Before 2003 the company contribution vested in relation to each
employee’s tenure with Connetics (40% after the second year
and 100% vested after five years with Connetics). In 2003 we
changed the vesting schedule for company contributions to 100%
vesting at the time the contributions are made. Our
contributions to the 401(k) plan were $387,000, $308,000 and
$238,000 for the years ended December 31, 2004, 2003 and
2002, respectively.
|
|
| Note 16. |
Related Party Transactions |
In February 2000, the Board authorized a loan to our Chief
Executive Officer in the amount of $250,000, at an interest rate
equal to 6.2%. The loan is to be forgiven at a rate of
$50,000 per year plus accrued interest, on each anniversary
of the loan on which our Chief Executive Officer is still
employed by Connetics. As of December 31, 2004 and 2003,
the outstanding balance of this loan, including accrued
interest, was $53,000 and $105,000, respectively.
|
|
| Note 17. |
Quarterly Financial Data (unaudited) |
The following tables summarize the quarterly results of
operations for the years ended December 31, 2004 and 2003
(in thousands, except per share amounts):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
2004 Quarters | |
| |
|
| |
| |
|
First(1) | |
|
Second(2) | |
|
Third(3) | |
|
Fourth | |
| | |
|
Total revenues
|
|
$ |
24,982 |
|
|
$ |
38,253 |
|
|
$ |
37,344 |
|
|
$ |
43,776 |
|
|
Cost of product revenues
|
|
|
1,568 |
|
|
|
3,578 |
|
|
|
3,067 |
|
|
|
4,443 |
|
|
Operating expenses
|
|
|
21,006 |
|
|
|
25,963 |
|
|
|
30,065 |
|
|
|
32,682 |
|
|
Operating income
|
|
|
2,408 |
|
|
|
8,712 |
|
|
|
4,212 |
|
|
|
6,651 |
|
| |
Net income
|
|
|
1,873 |
|
|
|
7,457 |
|
|
|
3,695 |
|
|
|
5,990 |
|
|
Basic net income per share
|
|
|
0.06 |
|
|
|
0.21 |
|
|
|
0.10 |
|
|
|
0.17 |
|
|
Diluted net income per share
|
|
|
0.05 |
|
|
|
0.19 |
|
|
|
0.10 |
|
|
|
0.16 |
|
|
Shares used to calculate basic net income per share
|
|
|
33,587 |
|
|
|
35,242 |
|
|
|
35,510 |
|
|
|
35,695 |
|
|
Shares used to calculate fully diluted net income per share
|
|
|
35,887 |
|
|
|
41,627 |
|
|
|
38,064 |
|
|
|
38,172 |
|
| |
|
|
| (1) |
In the first quarter of 2004, we received a one-time royalty
payment in the amount of $1.2 million in connection with
the S.C. Johnson license agreement, which we also reached
agreement to terminate in the first quarter. |
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
|
|
| (2) |
In early March of 2004, we acquired exclusive
U.S. rights to Soriatane. Sales of Soriatane accounted for
most of the increase in sales over the first quarter. Operating
expenses increased in the second quarter compared to the first,
primarily related to the Soriatane acquisition and in support of
the increased Soriatane sales, including a $2.1 million
increase in amortization of intangible assets resulting from the
acquisition and $2.4 million for selling, general, and
administrative expenses. |
| |
| (3) |
In the third quarter of 2004, operating expenses included a
$3.5 million milestone payment due under our license
agreement for Velac upon our filing an NDA with the FDA. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
2003 Quarters | |
| |
|
| |
| |
|
First | |
|
Second(1) | |
|
Third(2)(3) | |
|
Fourth | |
| | |
|
Total revenues
|
|
$ |
15,311 |
|
|
$ |
19,970 |
|
|
$ |
19,712 |
|
|
$ |
20,338 |
|
|
Cost of product revenues
|
|
|
1,072 |
|
|
|
1,185 |
|
|
|
1,388 |
|
|
|
1,484 |
|
|
Operating expenses
|
|
|
19,721 |
|
|
|
19,411 |
|
|
|
16,374 |
|
|
|
17,203 |
|
|
Operating income (loss)
|
|
|
(5,482 |
) |
|
|
(626 |
) |
|
|
1,950 |
|
|
|
1,651 |
|
| |
Net income (loss)
|
|
|
(5,381 |
) |
|
|
(1,856 |
) |
|
|
1,616 |
|
|
|
1,521 |
|
|
Basic net income (loss) per share
|
|
|
(0.17 |
) |
|
|
(0.06 |
) |
|
|
0.05 |
|
|
|
0.05 |
|
|
Diluted net income (loss) per share
|
|
|
(0.17 |
) |
|
|
(0.06 |
) |
|
|
0.05 |
|
|
|
0.05 |
|
|
Shares used to calculate basic net income (loss) per share
|
|
|
31,286 |
|
|
|
31,519 |
|
|
|
31,648 |
|
|
|
31,781 |
|
|
Shares used to calculate fully diluted net income (loss) per
share
|
|
|
31,286 |
|
|
|
31,519 |
|
|
|
33,607 |
|
|
|
33,759 |
|
| |
|
|
| (1) |
In the second quarter of 2003, we received a one-time royalty
payment from S.C. Johnson in the amount of $2.9 million in
connection with the S.C. Johnson license agreement. |
| |
| (2) |
In the third quarter of 2003, we recognized $761,000 of
relaxin related revenue associated with the execution of the
agreement with BAS Medical in July 2003. Of the relaxin related
revenue $661,000 represented previously deferred revenue
associated with relaxin license agreements with other parties
that was fully recognized upon the execution of the BAS Medical
agreement. |
| |
| (3) |
Operating expenses decreased in the third quarter of 2003
when compared to the second quarter of 2003 mainly due to
decreased clinical trial activity of $712,000, decreased
manufacturing expenses of $977,000 primarily related to a
one-time reversal of a previously recorded liability of $576,000
for clinical trial materials, as well as the timing of various
process and product development activities, a $416,000 decrease
in QA/ QC expenses due to the timing of stability and release
testing, and a $605,000 decrease in product samples and sales
promotion expenses related to the timing of the programs. |
F-27
FINANCIAL STATEMENT SCHEDULE
The following additional consolidated financial statement
schedule should be considered in conjunction with our
Consolidated Financial Statements for the year ended
December 31, 2004. All other schedules have been omitted
because the required information is either not applicable, not
sufficiently material to require submission of the schedule, or
is included in the consolidated financial statements or the
notes to the consolidated financial statements.
Schedule II — Valuation and Qualifying Accounts
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Additions | |
|
|
| |
|
Balance at | |
|
Charged to | |
|
|
| Allowance for Doubtful Accounts, Discounts, |
|
Start of | |
|
Expense/Revenue | |
|
|
|
Balance at | |
| Returns, Rebates and Chargebacks |
|
Period | |
|
Net of Reversals | |
|
Utilizations | |
|
End of Period | |
| |
|
| |
|
| |
|
| |
|
| |
| | |
|
Year ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
2004
|
|
$ |
5,032,977 |
|
|
$ |
29,793,533 |
|
|
$ |
(16,570,595 |
) |
|
$ |
18,255,915 |
|
| |
2003
|
|
$ |
2,041,507 |
|
|
$ |
10,909,819 |
|
|
$ |
(7,918,349 |
) |
|
$ |
5,032,977 |
|
| |
2002
|
|
$ |
975,318 |
|
|
$ |
5,353,368 |
|
|
$ |
(4,287,179 |
) |
|
$ |
2,041,507 |
|
| |
F-28
This Page Intentionally Left Blank
CONNETICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
March 31, | |
|
December 31, | |
| |
|
2005 | |
|
2004 | |
| | |
|
Assets
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
181,480 |
|
|
$ |
18,261 |
|
| |
Marketable securities
|
|
|
52,225 |
|
|
|
54,122 |
|
| |
Restricted cash — current
|
|
|
1,000 |
|
|
|
1,000 |
|
| |
Accounts receivable, net of allowances
|
|
|
10,558 |
|
|
|
10,642 |
|
| |
Inventory
|
|
|
7,567 |
|
|
|
5,020 |
|
| |
Prepaid expenses
|
|
|
6,088 |
|
|
|
7,561 |
|
| |
Other current assets
|
|
|
2,634 |
|
|
|
1,963 |
|
| |
| |
|
|
Total current assets
|
|
|
261,552 |
|
|
|
98,569 |
|
|
Property and equipment, net
|
|
|
12,813 |
|
|
|
11,830 |
|
|
Restricted cash — long term
|
|
|
3,109 |
|
|
|
2,963 |
|
|
Debt issuance costs, deposits and other assets
|
|
|
11,608 |
|
|
|
3,707 |
|
|
Goodwill, net
|
|
|
6,271 |
|
|
|
6,271 |
|
|
Other intangible assets, net
|
|
|
118,988 |
|
|
|
122,388 |
|
| |
|
Total assets
|
|
$ |
414,341 |
|
|
$ |
245,728 |
|
| |
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
| |
Accounts payable
|
|
$ |
14,985 |
|
|
$ |
14,531 |
|
| |
Assumed liabilities related to acquisition of product rights
|
|
|
2,402 |
|
|
|
2,710 |
|
| |
Accrued payroll and related expenses
|
|
|
4,954 |
|
|
|
5,746 |
|
| |
Accrued clinical trial costs
|
|
|
733 |
|
|
|
751 |
|
| |
Other accrued liabilities
|
|
|
5,364 |
|
|
|
3,650 |
|
| |
| |
|
|
Total current liabilities
|
|
|
28,438 |
|
|
|
27,388 |
|
|
Convertible senior notes
|
|
|
290,000 |
|
|
|
90,000 |
|
|
Other non-current liabilities
|
|
|
446 |
|
|
|
420 |
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
| |
Preferred stock
|
|
|
— |
|
|
|
— |
|
| |
Common stock
|
|
|
36 |
|
|
|
36 |
|
| |
Additional paid-in capital
|
|
|
204,462 |
|
|
|
237,666 |
|
| |
Deferred stock compensation
|
|
|
(9 |
) |
|
|
(13 |
) |
| |
Accumulated deficit
|
|
|
(110,131 |
) |
|
|
(111,173 |
) |
| |
Accumulated other comprehensive income
|
|
|
1,099 |
|
|
|
1,404 |
|
| |
| |
|
Total stockholders’ equity
|
|
|
95,457 |
|
|
|
127,920 |
|
| |
|
Total liabilities and stockholders’ equity
|
|
$ |
414,341 |
|
|
$ |
245,728 |
|
| |
See accompanying notes to condensed consolidated financial
statements.
F-30
CONNETICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Three Months Ended | |
| |
|
March 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
| | |
|
Revenues:
|
|
|
|
|
|
|
|
|
| |
Product
|
|
$ |
42,190 |
|
|
$ |
23,566 |
|
| |
Royalty and contract
|
|
|
181 |
|
|
|
1,416 |
|
| |
| |
|
|
Total revenues
|
|
|
42,371 |
|
|
|
24,982 |
|
| |
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
| |
Cost of product revenues
|
|
|
3,766 |
|
|
|
1,568 |
|
| |
Amortization of intangible assets
|
|
|
3,399 |
|
|
|
1,272 |
|
| |
Research and development
|
|
|
5,898 |
|
|
|
4,441 |
|
| |
Selling, general and administrative
|
|
|
27,809 |
|
|
|
15,293 |
|
| |
| |
|
Total operating costs and expenses
|
|
|
40,872 |
|
|
|
22,574 |
|
| |
|
Income from operations
|
|
|
1,499 |
|
|
|
2,408 |
|
| |
Interest income
|
|
|
477 |
|
|
|
348 |
|
| |
Interest expense
|
|
|
(771 |
) |
|
|
(691 |
) |
| |
Other income (expense), net
|
|
|
(59 |
) |
|
|
51 |
|
| |
| |
Income before income taxes
|
|
|
1,146 |
|
|
|
2,116 |
|
| |
Income tax provision
|
|
|
105 |
|
|
|
243 |
|
| |
|
Net income
|
|
$ |
1,041 |
|
|
$ |
1,873 |
|
| |
|
Net income per share:
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.03 |
|
|
$ |
0.06 |
|
| |
| |
Diluted
|
|
$ |
0.03 |
|
|
$ |
0.05 |
|
| |
|
Shares used to compute basic and diluted net income per share:
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
35,699 |
|
|
|
33,587 |
|
| |
| |
Diluted
|
|
|
38,014 |
|
|
|
35,887 |
|
| |
See accompanying notes to condensed consolidated financial
statements.
F-31
CONNETICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
Three Months Ended | |
| |
|
March 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
| | |
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
$ |
1,041 |
|
|
$ |
1,873 |
|
| |
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
| |
|
Depreciation
|
|
|
346 |
|
|
|
377 |
|
| |
|
Amortization of intangible assets
|
|
|
3,399 |
|
|
|
1,272 |
|
| |
|
Amortization of convertible debt issuance costs
|
|
|
196 |
|
|
|
184 |
|
| |
|
Allowance for discounts, rebates, returns and chargebacks
|
|
|
3,467 |
|
|
|
1,763 |
|
| |
Stock compensation expense
|
|
|
4 |
|
|
|
5 |
|
| |
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
| |
|
Accounts receivable
|
|
|
(3,389 |
) |
|
|
(9,291 |
) |
| |
|
Other assets
|
|
|
(621 |
) |
|
|
(2,122 |
) |
| |
|
Inventory
|
|
|
(2,521 |
) |
|
|
(1,426 |
) |
| |
|
Accounts payable
|
|
|
460 |
|
|
|
1,391 |
|
| |
|
Accrued and other current liabilities
|
|
|
(66 |
) |
|
|
748 |
|
| |
|
Other non-current liabilities
|
|
|
26 |
|
|
|
— |
|
| |
| |
Net cash provided by (used in) operating activities
|
|
|
2,342 |
|
|
|
(5,226 |
) |
| |
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
| |
Purchases of marketable securities
|
|
|
(15,980 |
) |
|
|
(1,712 |
) |
| |
Sales and maturities of marketable securities
|
|
|
17,655 |
|
|
|
84,351 |
|
| |
Purchases of property and equipment
|
|
|
(1,369 |
) |
|
|
(356 |
) |
| |
Acquisition of product rights
|
|
|
— |
|
|
|
(123,212 |
) |
| |
| |
Net cash provided by (used in) investing activities
|
|
|
306 |
|
|
|
(40,929 |
) |
| |
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
| |
Transfer (to) from restricted cash
|
|
|
(146 |
) |
|
|
304 |
|
| |
Proceeds from issuance of convertible senior notes, net of
issuance costs
|
|
|
194,000 |
|
|
|
— |
|
| |
Proceeds from issuance of common stock, net of issuance costs
|
|
|
— |
|
|
|
57,007 |
|
| |
Repurchase of common stock
|
|
|
(35,000 |
) |
|
|
— |
|
| |
Proceeds from exercise of stock options and employee stock
purchase plan, net of repurchases of unvested shares
|
|
|
1,756 |
|
|
|
1,093 |
|
| |
| |
Net cash provided by financing activities
|
|
|
160,610 |
|
|
|
58,404 |
|
| |
|
Effect of foreign currency exchange rate changes on cash and
cash equivalents
|
|
|
(39 |
) |
|
|
(12 |
) |
| |
|
Net change in cash and cash equivalents
|
|
|
163,219 |
|
|
|
12,237 |
|
| |
Cash and cash equivalents at beginning of period
|
|
|
18,261 |
|
|
|
17,946 |
|
| |
| |
Cash and cash equivalents at end of period
|
|
$ |
181,480 |
|
|
$ |
30,183 |
|
| |
See accompanying notes to condensed consolidated financial
statements.
F-32
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
|
|
| 1. |
Basis of Presentation and Policies |
We prepared the accompanying unaudited condensed consolidated
financial statements of Connetics Corporation, or Connetics, in
accordance with accounting principles generally accepted in the
United States for interim financial information and in
compliance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, the
financial statements do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. We believe that we have
included all adjustments, consisting of normal recurring
adjustments, considered necessary for a fair presentation.
Operating results for the three months ended March 31, 2005
are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005. For a
better understanding of Connetics and its financial statements,
we recommend reading these unaudited condensed consolidated
financial statements and notes in conjunction with the audited
consolidated financial statements and notes to those financial
statements for the year ended December 31, 2004, which are
included in our Annual Report on Form 10-K as filed with
the Securities and Exchange Commission, or SEC.
Principles of Consolidation
The accompanying condensed consolidated financial statements
include the accounts of Connetics and its subsidiaries,
Connetics Holdings Pty Ltd., and Connetics Australia Pty Ltd.
Connetics owns 100% of the outstanding stock of its
subsidiaries. We eliminated all significant intercompany
accounts and transactions in consolidation. We reclassified
certain prior year amounts and balances to conform to the
current year presentation. On the condensed consolidated balance
sheets, raw material inventory balances that were previously
included in prepaid expenses, other current assets, and other
assets as of December 31, 2004 have been reclassified to
inventory. On the condensed consolidated statements of
operations, certain expense for the three months ended
March 31, 2004 was reclassified from interest expense to
selling, general and administrative expense to conform to
amounts reported for the six month period ended June 30,
2004.
Use of Estimates
To prepare financial statements in conformity with accounting
principles generally accepted in the United States, management
must make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Future events could cause our actual results to differ.
We evaluate our estimates on an ongoing basis. In particular, we
regularly evaluate estimates related to recoverability of
accounts receivable and inventory, revenue reserves, assumed
liabilities related to acquired product rights, and accrued
liabilities for clinical trial activities and indirect
promotional expenses. We base our estimates on historical
experience and on various other specific assumptions that we
believe are reasonable under the circumstances. Those estimates
and assumptions form the basis for making judgments about the
carrying value of assets and liabilities that are not readily
apparent from other sources.
Revenue Recognition
Product Revenues. We recognize revenue from product sales
when there is persuasive evidence that an arrangement exists,
when title has passed, the price is fixed or determinable, and
we are reasonably assured of collecting the resulting
receivable. We recognize product revenues net of revenue
reserves, which consist of allowances for discounts, returns,
rebates, and chargebacks. We accept from customers the return of
pharmaceuticals that are within six months before their
expiration date. We authorize returns for damaged products and
exchanges for expired products in accordance with our return
goods policy and
F-33
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
procedures, and we establish reserves for such amounts at the
time of sale. To date we have not experienced significant
returns of damaged or expired product. We include product
shipping and handling costs in the cost of product revenues. We
also recognize revenue net of fees paid to wholesalers under
distribution service agreements in exchange for certain product
distribution, inventory, management, information, return goods
processing, and administrative services. We record accounts
receivable net of revenue reserves.
During the first three months of 2005, we performed a detailed
analysis of our chargeback allowance. As a result of the
analysis of our actual chargeback history, we reduced our
estimated chargeback allowance by $445,000, which resulted in an
increase in revenue for the three months ended March 31,
2005 of the same amount.
Royalty Revenues. We collect royalties from our
third-party licensees based on their sales. We recognize
royalties either in the quarter in which we receive the royalty
payment from the licensee or in the quarter in which we can
reasonably estimate the royalty, which is typically one quarter
following the related sale by the licensee.
Contract Revenues. We record contract revenue for
research and development, or R&D, and milestone payments as
earned based on the performance requirements of the contract. We
recognize non-refundable contract fees for which no further
performance obligations exist, and for which Connetics has no
continuing involvement, on the date we receive the payments or
the date when collection is assured, whichever is earlier.
If, at the time an agreement is executed, there remains
significant risk due to the incomplete state of the
product’s development, we recognize revenue from
non-refundable upfront license fees ratably over the period in
which we have continuing development obligations. We recognize
revenue associated with substantial “at risk”
performance milestones, as defined in the respective agreements,
based upon the achievement of the milestones. When we receive
advance payments that exceed amounts earned, we classify them as
deferred revenue until they are earned.
Inventory
Inventory consists of raw materials and finished goods primarily
related to currently marketed products. In addition, inventory
may include similar costs for product candidates awaiting
regulatory approval, which are capitalized based on our
management’s judgment of probable near term
commercialization and alternative future uses. We state
inventory at the lower of cost (determined on a first-in
first-out method) or market. If inventory costs exceed expected
market value due to obsolescence or lack of demand, reserves are
recorded for the difference between the cost and the market
value. These reserves are based on significant estimates.
Stock-Based Compensation
We use the intrinsic-value method of accounting for stock-based
awards granted to employees, as allowed under Accounting
Principles Board Opinion No. 25, “Accounting for Stock
Issued to Employees,” or APB 25, and related
interpretations. Accordingly, we do not recognize any
compensation in our financial statements in connection with
stock options granted to employees when those options have
exercise prices equal to or greater than fair market value of
our common stock on the date of grant. We also do not record any
compensation expense in connection with our Employee Stock
Purchase Plan as long as the purchase price is not less than 85%
of the fair market value at the beginning or end of each
offering period, whichever is lower.
F-34
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
For options granted to non-employees, we have recorded
compensation expense in accordance with Statement of Financial
Accounting Standards No. 123 “Accounting for
Stock-Based Compensation,” or SFAS 123, as amended,
and Emerging Issues Task Force No. 96-18, “Accounting
for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling Goods or
Services.” By those criteria, we quantify compensation
expense as the fair value of the consideration received or the
fair value of the equity instruments issued, whichever is more
reliably measured.
Although SFAS 123 allows us to continue to follow the
APB 25 guidelines, we are required to disclose pro forma
net income (loss) and basic and diluted income (loss) per
share as if we had applied the fair value based method to all
awards. Because the estimated value is determined as of the date
of grant, the actual value ultimately realized by the employee
may be significantly different.
| |
|
|
|
|
|
|
|
|
|
| | |
| |
|
Three Months Ended | |
| |
|
March 31, | |
| |
|
| |
| (In thousands except per share amounts): |
|
2005 | |
|
2004 | |
| | |
|
Net income, as reported
|
|
$ |
1,041 |
|
|
$ |
1,873 |
|
|
Add: Stock–based compensation expense, net of related tax
effects
|
|
|
4 |
|
|
|
5 |
|
|
Deduct: Total stock-based employee compensation expense
determined under the fair value method for all awards, net of
related tax effects
|
|
|
(5,321 |
) |
|
|
(2,855 |
) |
| |
|
Pro forma net loss
|
|
$ |
(4,276 |
) |
|
$ |
(977 |
) |
| |
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
| |
Basic income — as reported
|
|
$ |
0.03 |
|
|
$ |
0.06 |
|
| |
Diluted income — as reported
|
|
$ |
0.03 |
|
|
$ |
0.05 |
|
| |
Basic loss — pro forma
|
|
$ |
(0.12 |
) |
|
$ |
(0.03 |
) |
| |
Diluted loss — pro forma
|
|
$ |
(0.12 |
) |
|
$ |
(0.03 |
) |
| |
For purposes of this analysis, we estimate the fair value of
each option grant on the date of grant using the Black-Scholes
option-pricing model. We used the following weighted average
assumptions in the model:
| |
|
|
|
|
|
|
|
|
| | |
| |
|
Stock Option | |
| |
|
Plans Three | |
| |
|
Months Ended | |
| |
|
March 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
| | |
|
Expected stock volatility
|
|
|
47.3% |
|
|
|
57.3% |
|
|
Risk-free interest rate
|
|
|
3.5% |
|
|
|
2.3% |
|
|
Expected life (in years)
|
|
|
4.0 |
|
|
|
3.4 |
|
|
Expected dividend yield
|
|
|
0.0% |
|
|
|
0.0% |
|
| |
| |
|
|
|
|
|
|
|
|
| | |
| |
|
Stock Purchase | |
| |
|
Plans Three | |
| |
|
Months Ended | |
| |
|
March 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
| | |
|
Expected stock volatility
|
|
|
45.9% |
|
|
|
52.0% |
|
|
Risk-free interest rate
|
|
|
1.6% |
|
|
|
1.6% |
|
|
Expected life (in years)
|
|
|
1.4 |
|
|
|
1.6 |
|
|
Expected dividend yield
|
|
|
0.0% |
|
|
|
0.0% |
|
| |
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. This model also
requires us to make
F-35
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
highly subjective assumptions, including the expected volatility
of our stock. Because our stock options have characteristics
significantly different from those of traded options, and
because changes in the subjective input assumptions can
materially affect the fair value estimate, we do not believe
that the existing models necessarily provide a reliable single
measure of the fair value of our options. The weighted average
fair value of the options granted, determined using the
Black-Scholes model, was $9.64 and $7.96, respectively, for the
three months ended March 31, 2005 and 2004.
The effects on pro forma disclosures of applying
SFAS 123 are not likely to be representative of the effects
on reported results of future periods.
|
|
|
Recent Accounting Pronouncements |
In December 2004, the Financial Accounting Standards Board, or
FASB, issued SFAS No. 123 (revised 2004),
“Share-Based Payment,” or SFAS 123R, which
requires companies to measure and recognize compensation expense
for all stock-based awards at fair value. Stock-based awards
include grants of employee stock options. SFAS 123R
replaces SFAS 123 and supersedes APB 25, which are
discussed above. SFAS 123R requires companies to recognize
all stock-based awards to employees and to reflect those awards
in the financial statements based on the fair values of the
awards. In April 2005, the SEC modified the effective date for
SFAS 123R, resulting in the pronouncement being effective
for all annual periods beginning after June 15, 2005. We
are required to adopt SFAS 123R in our fiscal year
beginning January 1, 2006, after which the pro forma
disclosures previously permitted under SFAS 123 will no
longer be an alternative to financial statement recognition.
Under SFAS 123R, we must determine the appropriate fair
value model to be used for valuing share-based awards, the
amortization method for compensation cost, and the transition
method to be used at date of adoption. The transition methods
include options for adopting the model retroactively or
prospectively. The prospective method requires that we record
compensation expense for all unvested stock options and
restricted stock at the beginning of the year we adopt
SFAS 123R. Under the retroactive method, we may restate
prior periods either as of the beginning of the year of adoption
or for all periods presented, and we would record compensation
expense for all unvested stock options and restricted stock
beginning with the first period restated. We are evaluating the
requirements of SFAS 123R and we expect that the adoption
of SFAS 123R will have a material impact on our
consolidated results of operations and earnings per share. We
have not yet determined which method of adoption we will use or
the effect of adopting SFAS 123R, and we have not
determined whether the adoption will result in amounts that are
similar to the current pro forma disclosures under SFAS 123.
On September 30, 2004, the Emerging Issues Task Force, or
EITF, reached a consensus on Issue No. 04-8, The Effect
of Contingently Convertible Debt on Diluted Earnings per Share,
concluding that contingently convertible debt instruments
should be included in diluted earnings per share computations
(if dilutive) regardless of whether the market price trigger (or
other contingent feature) has been met. This consensus is
effective for reporting periods ending after December 15,
2004, and requires companies to restate prior period earnings
per share amounts presented for comparative purposes utilizing a
transition method. As of December 31, 2004, we had no
outstanding contingently convertible debt. In March 2005, we
issued contingently convertible debt and adopted the consensus.
Our adoption of EITF No. 04-8 had no impact on diluted
earnings per share for the three months ended March 31,
2005 or for prior years.
We compute basic net income per share by dividing net income by
the weighted average number of common shares actually
outstanding during the period. We compute diluted net income per
share using the weighted average of all shares of common stock
outstanding and potentially outstanding during the period. For
the three months ended March 31, 2005 and 2004, we included
all dilutive stock options in the
F-36
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
calculation of diluted net income per share, and we excluded
convertible debt because its effect is anti-dilutive. For the
three months ended March 31, 2004 we also included all
warrants in the calculation. No warrants were outstanding in
2005.
The calculation of basic and diluted net income per share is as
follows (in thousands except per share amounts):
| |
|
|
|
|
|
|
|
|
|
| | |
| |
|
Three Months Ended | |
| |
|
March 31, | |
| |
|
| |
| 2005 |
|
2004 | |
|
|
| | |
|
Net income
|
|
$ |
1,041 |
|
|
$ |
1,873 |
|
| |
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
| |
Basic common shares
|
|
|
35,699 |
|
|
|
33,587 |
|
| |
Effect of dilutive options
|
|
|
2,315 |
|
|
|
2,262 |
|
| |
Effect of dilutive warrants
|
|
|
— |
|
|
|
38 |
|
| |
|
Total weighted average common shares
|
|
|
38,014 |
|
|
|
35,887 |
|
| |
|
Net income per share:
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.03 |
|
|
$ |
0.06 |
|
| |
| |
Dilutive
|
|
$ |
0.03 |
|
|
$ |
0.05 |
|
| |
We excluded the following weighted-average options and
convertible debt from the calculation of diluted net income per
share as their effect would be anti-dilutive (in
thousands):
| |
|
|
|
|
|
|
|
|
| | |
| |
|
Three Months | |
| |
|
Ended March 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
| | |
|
Options
|
|
|
255 |
|
|
|
19 |
|
|
Convertible Debt
|
|
|
4,203 |
|
|
|
4,203 |
|
| |
|
Convertible Debt
|
|
|
4,458 |
|
|
|
4,222 |
|
| |
In 2005 and subsequent years, our dilutive securities may
include incremental shares issuable upon conversion of all or
part of the $200 million in 2.00% convertible senior
notes. Since the $200 million principal amount can only be
redeemed for cash, it has no impact on the diluted earnings per
share calculation. The conversion feature of these notes, that
may result in our payment of a stock premium along with
redeeming the accreted principal amount for cash, is triggered
when our common stock reaches a certain market price. In
accordance with the consensus from EITF No. 04-8 we will
include the dilutive effect of our notes in the calculation of
income per diluted share when the impact is dilutive. As of
March 31, 2005, the conversion feature of these notes did
not have a dilutive affect as the weighted average market price
of our common stock did not exceed the initial conversion price
of $35.46 to trigger any shares to be issuable upon conversion.
Therefore, the notes had no effect on our dilutive securities or
our income per diluted share for the period ended March 31,
2005.
F-37
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
The components of comprehensive income are as follows (in
thousands):
| |
|
|
|
|
|
|
|
|
| | |
| |
|
Three Months | |
| |
|
Ended March 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
| | |
|
Net income
|
|
$ |
1,041 |
|
|
$ |
1,873 |
|
|
Foreign currency translation adjustment
|
|
|
(82 |
) |
|
|
(129 |
) |
|
Change in unrealized gain (loss) on securities, net of
reclassification adjustments for realized gain (loss)
|
|
|
(222 |
) |
|
|
(116 |
) |
| |
|
Comprehensive income
|
|
$ |
737 |
|
|
$ |
1,628 |
|
| |
Accumulated other comprehensive income recorded in
stockholders’ equity included $55,000 of net unrealized
gains on investments and $1.0 million of foreign currency
translation adjustments as of March 31, 2005 and, as of
December 31, 2004, included $276,000 of net unrealized
gains on investments and $1.1 million of foreign currency
translation adjustments.
|
|
| 4. |
Convertible Senior Notes and Stock Repurchase |
On March 23, 2005, we issued $150 million of
2.00% convertible senior notes due March 30, 2015 to
qualified institutional buyers in a private placement exempt
from registration pursuant to Rule 144A of the Securities
Act of 1933, as amended. The initial purchasers exercised in
full an option to purchase up to an additional $50 million
principal amount of notes with the same terms, and the sale was
completed on March 30, 2005. The notes were sold at par and
we received net cash proceeds of $159 million after
expenses of $6.0 million and net of approximately
$35.0 million used to repurchase our common stock. We
repurchased 1,332,300 shares of common stock at an average
price of $26.27 per share.
The notes are senior, unsecured obligations and rank equal in
right of payment with all of our existing and future unsecured
and unsubordinated debt. The notes are convertible into cash or,
under certain circumstances, cash and shares of our common
stock. The initial conversion rate of the note is
28.1972 shares of common stock per each $1,000 principal
amount of notes, subject to adjustment in certain circumstances,
which represents a conversion price of approximately
$35.46 per share. This conversion price is higher than the
prices of our common stock on the dates the notes were issued.
The notes bear interest at a rate of 2.00% per annum for
the initial five year period, which is payable in arrears on
March 30 and September 30 of each year until
March 30, 2010. The first interest payment will be made on
September 30, 2005. For the remaining five year period
commencing on March 30, 2010, we will pay contingent
interest for six-month periods if the average trading price of a
note is above a specified level for a specified period prior to
the six month period. In addition, beginning on March 30,
2010, the original principal amount shall be increased at a rate
that provides holders with an aggregate annual yield to maturity
of 2.00%.
The holders may convert the notes under the following
circumstances: (1) on or before March 30, 2009, if the
closing sale price of our common stock is above a specified
level, (2) at any time after March 30, 2009, or
(3) if a specified fundamental change occurs, such as a
merger or acquisition of the company. On or after March 30,
2010, holders of the notes may require us to repurchase all or a
portion of their notes at 100% of the principal amount of the
notes plus accrued and unpaid interest. On or after
April 4, 2010, at our option, we may redeem all or a
portion of the notes at a redemption price equal to the accreted
principal amount of the notes to be redeemed plus accrued and
unpaid interest. If we undergo a specified fundamental change,
holders will have the right, at their option, except in certain
defined circumstances, to require us to purchase for cash all or
any portion of their notes at a price equal to the accreted
principal amount plus accrued and unpaid interest. If a holder
elects to convert its notes in
F-38
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
connection with the occurrence of a specified fundamental
change, the holder will be entitled to receive additional shares
of common stock upon conversion in certain circumstances.
At March 31, 2005, we did not have a sufficient number of
shares of common stock to issue to a holder upon conversion of
the notes. Accordingly, if shares of common stock were not
provided pursuant to the exchange arrangement, then we were
permitted to issue shares of our newly created Series C
Preferred Stock in lieu of common stock. The Series C
Preferred Stock is convertible into shares of common stock at a
rate of 1,000 shares of common stock for every
1.1 shares of Series C Preferred Stock, contingent
upon the reservation of sufficient shares of common stock. At
our annual meeting held on April 22, 2005, our stockholders
approved the increase of our authorized shares of common stock
from 50 million to 100 million shares. As a result,
there are a sufficient number of shares of common stock to issue
to holders upon conversion and we have eliminated the previously
created shares of Series C Preferred Stock.
We included offering expenses estimated at $6.7 million
related to the issuance of these notes in debt issuance costs,
deposits, and other assets as of March 31, 2005. We are
amortizing those expenses on a straight-line basis over the ten
year contractual term of the notes.
The components of inventory are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
| | |
| |
|
March 31, | |
|
December 31, | |
| |
|
2005 | |
|
2004 | |
| | |
|
Raw materials
|
|
$ |
1,589 |
|
|
$ |
677 |
|
|
Finished goods
|
|
|
5,978 |
|
|
|
4,343 |
|
| |
|
Total inventory
|
|
$ |
7,567 |
|
|
$ |
5,020 |
|
| |
As of March 31, 2005, inventory included $636,000 in raw
materials for Velac, a product not yet approved by the Food and
Drug Administration, or FDA, for commercial use, but with a
planned launch in the second half of 2005.
|
|
| 6. |
Goodwill and Other Intangible Assets |
There were no changes in the carrying amount of goodwill during
the three months ended March 31, 2005. The components of
our other intangible assets are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| |
|
March 31, 2005 | |
|
December 31, 2004 | |
| |
|
Useful | |
|
| |
|
| |
| |
|
Life in | |
|
Gross Carrying | |
|
Accumulated | |
|
|
|
Gross Carrying | |
|
Accumulated | |
|
|
| |
|
Years | |
|
Amount | |
|
Amortization | |
|
Net | |
|
Amount | |
|
Amortization | |
|
Net | |
| | |
|
Acquired product rights
|
|
|
10 |
|
|
$ |
127,652 |
|
|
$ |
(13,829 |
) |
|
$ |
113,823 |
|
|
$ |
127,652 |
|
|
$ |
(10,638 |
) |
|
$ |
117,014 |
|
|
Existing technology
|
|
|
10 |
|
|
|
6,810 |
|
|
|
(2,696 |
) |
|
|
4,114 |
|
|
|
6,810 |
|
|
|
(2,525 |
) |
|
|
4,285 |
|
|
Patents
|
|
|
10-13 |
|
|
|
1,661 |
|
|
|
(610 |
) |
|
|
1,051 |
|
|
|
1,661 |
|
|
|
(572 |
) |
|
|
1,089 |
|
| |
|
Total
|
|
|
|
|
|
$ |
136,123 |
|
|
$ |
(17,135 |
) |
|
$ |
118,988 |
|
|
$ |
136,123 |
|
|
$ |
(13,735 |
) |
|
$ |
122,388 |
|
| |
Amortization expenses for our other intangible assets were
$3.4 million for the three months ended March 31,
2005, and $1.3 million for the three months ended
March 31, 2004.
F-39
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
The expected future amortization expense of our other intangible
assets is as follows (in thousands):
| |
|
|
|
|
| | |
| |
|
Amortization | |
| |
|
Expense | |
| | |
|
Remaining nine months in 2005
|
|
$ |
10,198 |
|
|
For the year ending December 31, 2006
|
|
|
13,598 |
|
|
For the year ending December 31, 2007
|
|
|
13,598 |
|
|
For the year ending December 31, 2008
|
|
|
13,598 |
|
|
For the year ending December 31, 2009
|
|
|
13,598 |
|
|
For the year ending December 31, 2010
|
|
|
13,598 |
|
|
Thereafter
|
|
|
40,800 |
|
| |
|
|
|
| |
|
$ |
118,988 |
|
| |
|
|
| 7. |
Guaranties and Indemnifications |
In November 2002, the FASB issued Interpretation No. 45,
“Guarantor’s Accounting and Disclosure Requirements
for Guarantees, including Indirect Guarantees of Indebtedness of
Others,” or FIN No. 45. FIN No. 45
requires that upon issuance of a guarantee, the guarantor must
recognize a liability for the fair value of the obligations it
assumes under that guarantee. FIN No. 45 also requires
the guarantor to make additional disclosures about the
obligations associated with its guarantees in its interim and
annual financial statements.
We enter into indemnification provisions under our agreements
with other companies in the ordinary course of our business,
typically with business partners, contractors, clinical sites,
insurers and customers. Under these provisions we generally
indemnify and hold harmless the indemnified party for losses
suffered or incurred by the indemnified party as a result of our
activities. These indemnification provisions generally survive
termination of the underlying agreement. In some cases, the
maximum potential amount of future payments we could be required
to make under these indemnification provisions is unlimited. The
estimated fair value of the indemnity obligations of these
agreements is insignificant. Accordingly, we have no liabilities
recorded for these agreements as of March 31, 2005. We have
not incurred material costs to defend lawsuits or settle claims
related to these indemnification provisions.
|
|
| 8. |
Acquisition of Soriatane Product Line |
On March 4, 2004, we acquired from Hoffmann-La Roche
Inc., or Roche, the exclusive U.S. rights to
Soriatane-brand acitretin, an approved oral therapy for the
treatment of severe psoriasis in adults. We have recognized
revenue, net of applicable reserves, for all sales of the
product from March 4, 2004. Under the terms of the purchase
agreement, we paid Roche a total of $123 million in cash to
acquire the rights to Soriatane. We also assumed certain
liabilities totaling $4.1 million in connection with
returns, rebates and chargebacks associated with Roche’s
prior sales of Soriatane and we purchased Roche’s existing
inventory of Soriatane at a cost of approximately
$1.5 million. The total value of the acquired product
rights for accounting purposes was $127 million, including
transaction related costs of approximately $500,000. This amount
is being amortized over the ten year estimated useful life of
Soriatane.
|
|
| 9. |
UCB Co-Promotion Agreement |
In March 2004, we entered into an agreement with UCB Pharma
Inc., or UCB, a subsidiary of UCB Group Inc., pursuant to which
we authorized UCB to promote OLUX and Luxíq to a segment of
U.S. primary care physicians, or PCP’s. In July 2004,
UCB acquired Celltech plc, and in connection with other
post-acquisition changes, UCB notified us that it intended to
discontinue the co-promotion agreement effective March 31,
2005. UCB continued to promote OLUX and Luxíq until that
date. We
F-40
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
recorded 100% of the revenue from sales generated by promotional
efforts of UCB and paid UCB a portion of revenue as a
promotional expense, which is included in selling, general and
administrative expense. UCB bore the marketing costs for
promoting the products (including product samples, marketing
materials, etc.). We do not have any financial obligation to UCB
on prescriptions generated by PCP’s after March 31,
2005.
Our commitments, including those disclosed in our Annual Report
on Form 10-K for the year ended December 31,
2004, consist primarily of operating lease agreements for our
facilities as well as minimum purchase commitments under one of
our contract manufacturing agreements, minimum royalty
commitments under one of our license agreements, and
noncancellable purchase orders as of December 31, 2004.
In March 2005, we received landlord approval for a sublease
signed in August 2004 for approximately 19,500 square feet
of office space in Palo Alto, California. Payments under the
sublease will commence on January 1, 2006.
As a result of this new leasing arrangement, our operating lease
payments will increase as follows (in thousands):
| |
|
|
|
|
| | |
| |
|
Increase in | |
| |
|
Operating Lease | |
| |
|
Payments | |
| | |
|
For the year ending December 31, 2006
|
|
$ |
339 |
|
|
For the year ending December 31, 2007
|
|
|
303 |
|
|
For the year ending December 31, 2008
|
|
|
315 |
|
|
For the year ending December 31, 2009
|
|
|
338 |
|
|
For the year ending December 31, 2010
|
|
|
88 |
|
|
Thereafter
|
|
|
— |
|
| |
|
|
|
| |
|
$ |
1,383 |
|
| |
In April 2005, we entered into an agreement with Ventiv Pharma
Services, LLC, or VPS, a subsidiary of Ventiv Health, Inc.,
under which VPS will provide sales support for certain of our
products to primary care physicians and pediatricians. Product
sales activities under this agreement commenced in mid-April.
VPS will promote OLUX, Luxíq and Evoclin. We will record
100% of the revenue from product sales generated by promotional
efforts of VPS. We will pay VPS a fee for the personnel
providing the promotional efforts and bear the marketing costs
for promoting the products including product samples and
marketing materials.
F-41
SUBJECT TO COMPLETION,
DATED JULY 7, 2005
PROSPECTUS
CONNETICS CORPORATION
$200,000,000 Principal Amount of 2.00% Convertible
Senior Notes
Due March 30, 2015
Dealer Prospectus Delivery Obligation
Until ,
all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required
to deliver a prospectus. This is in addition to the
dealers’ obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
|
|
| Item 13. |
Other Expenses of Issuance and Distribution |
The following are the estimated expenses to be incurred in
connection with the issuance and distribution of the securities
registered under this registration statement:
| |
|
|
|
|
|
| |
|
Securities and Exchange Commission registration fee
|
|
$ |
23,540 |
|
|
Printing fees and expenses
|
|
$ |
125,000 |
|
|
Accounting fees and expenses
|
|
$ |
231,000 |
|
|
Legal fees and expenses
|
|
$ |
200,000 |
|
|
Transfer Agent
|
|
$ |
50,000 |
|
|
NASDAQ fees(1)
|
|
$ |
45,000 |
|
|
Miscellaneous
|
|
$ |
— |
|
| |
|
|
|
| |
Total
|
|
$ |
674,540 |
|
| |
|
|
| (1) |
Nasdaq National Market bills companies for the listing of
additional shares on a quarterly basis, and the amount billed is
determined by the change in the Company’s total shares
outstanding from one quarter to the next. The total amount
billable in one year is capped at $45,000. Since all of the
Notes are convertible on the same basis, solely for the purpose
of estimating the expenses payable by Connetics in connection
with issuance and distribution of the Notes and underlying
common stock, we have assumed the conversion of all Notes into
shares of Connetics common stock during one year. |
We will pay all such expenses. All amounts are estimated except
the SEC registration fee.
|
|
| Item 14. |
Indemnification of Directors and Officers. |
Section 102 of the General Corporation Law of the State of
Delaware (the “DGCL”), as amended, allows a
corporation to eliminate or limit the personal liability of
directors of a corporation to the corporation or its
stockholders for monetary damages for a breach of fiduciary duty
as a director, except where the director breached his duty of
loyalty, failed to act in good faith, engaged in intentional
misconduct or knowingly violated a law, authorized the payment
of a dividend or approved a stock repurchase in violation of
Delaware corporate law or obtained an improper personal benefit.
Section 145 of the DGCL provides, among other things, that
we may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (other than an action by or
in our right) by reason of the fact that the person is or was
our director, officer, agent or employee or is or was serving at
our request as a director, officer, agent, or employee of
another corporation, partnership, joint venture, trust or other
enterprise, against expenses, including attorneys’ fees,
judgments, fines and amounts paid in settlement actually and
reasonably incurred by the person in connection with such
action, suit or proceeding. The power to indemnify applies
(a) if such person is successful on the merits or otherwise
in defense of any action, suit or proceeding, or (b) if
such person acted in good faith and in a manner he reasonably
believed to be in our best interest, or not opposed to our best
interest, and with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful.
The power to indemnify applies to actions brought by or in our
right as well, but only to the extent of expenses (including
attorneys’ fees) actually and reasonably incurred by the
person in connection with the defense or settlement of such
action or suit if the person acted in good faith and in a manner
the person reasonably believed to be in or not opposed to our
best interests, and with the further limitation that in such
actions no indemnification shall be made in respect of any
claim, issue or matter as to which such
II-1
person shall have been adjudged to be liable to us, unless the
court believes that in light of all the circumstances
indemnification should apply.
Section 174 of the DGCL provides, among other things, that
a director, who willfully or negligently approves of an unlawful
payment of dividends or an unlawful stock purchase or
redemption, may be held liable for such actions. A director who
was either absent when the unlawful actions were approved or
dissented at the time, may avoid liability by causing his or her
dissent to such actions to be entered in the books containing
the minutes of the meetings of our board of directors at the
time such action occurred or immediately after such absent
director receives notice of the unlawful acts.
Our Amended and Restated Certificate of Incorporation includes a
provision that eliminates the personal liability of our
directors for monetary damages for breach of fiduciary duty as a
director, except for liability:
|
|
|
| |
• |
for any breach of the director’s duty of loyalty to us or
our stockholders |
| |
| |
• |
for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, |
| |
| |
• |
under Section 174 of the DGCL regarding unlawful dividends
and stock purchases, or |
| |
| |
• |
for any transaction from which the director derived an improper
personal benefit. |
These provisions are permitted under Delaware law.
Our Amended and Restated Bylaws provide that we shall indemnify
our directors and officers and our employees, who serve as an
officer or director of any corporation at our request, to the
fullest extent permitted by Delaware law.
In addition to the indemnifications provided for in our Amended
and Restated Certificate of Incorporation and Amended and
Restated Bylaws, we have entered into Indemnification Agreements
with our directors and executive officers. These Indemnification
Agreements, among other things, provide for indemnification of
our directors and executive officers for expenses, judgments,
fines and amounts paid in settlement incurred by any such person
in any action or proceeding resulting from such person’s
services as a director or executive officer or at
Connetics’ request.
The indemnification provisions contained in our Amended and
Restated Certificate of Incorporation and Amended and Restated
Bylaws are not exclusive of any other rights to which a person
may be entitled by law, agreement, vote of stockholders or
disinterested directors or otherwise. We also maintain insurance
on behalf of our directors and executive officers insuring them
against any liability asserted against them in their capacities
as directors or officers or arising out of such status.
|
|
| Item 15. |
Recent Sales of Unregistered Securities |
On March 23, 2005, we sold $150.0 million in aggregate
principal amount of our 2.00% Convertible Senior Notes due
March 30, 2015 to Goldman, Sachs & Co., CIBC World
Markets Corp., Lazard Frères & Co. LLC, Piper
Jaffray & Co., and Roth Capital Partners, LLC, as
initial purchasers, in a private offering exempt from
registration under the Securities Act pursuant to
Section 4(2) as a transaction not involving a public
offering. The 2.00% Convertible Senior Notes were sold to
qualified institutional buyers in reliance on Rule 144A
under the Securities Act. Aggregate underwriting discounts
amounted to approximately $4.5 million.
On March 31, 2005, we sold an additional $50.0 million
in aggregate principal amount of our 2.00% Convertible
Senior Notes due March 30, 2015 to Goldman,
Sachs & Co., as initial purchaser, in a private
offering exempt from registration under the Securities Act
pursuant to Section 4(2) as a transaction not involving a
public offering. The 2.00% Convertible Senior Notes were
sold to qualified institutional buyers in reliance on
Rule 144A under the Securities Act. Aggregate underwriting
discounts amounted to approximately $1.5 million.
II-2
On February 13, 2004, we completed a private placement of
3.0 million shares of our common stock to accredited
institutional investors at a price of $20.25 per share, for
net proceeds of approximately $56.9 million.
On May 28, 2003, we sold $90.0 million in aggregate
principal amount of our 2.25% Convertible Senior Notes due
May 30, 2008 to Goldman, Sachs & Co., CIBC World
Markets, Thomas Weisel Partners LLC, C.E. Unterberg, Towbin, and
U.S. Bancorp Piper Jaffray, as initial purchasers, in a
private offering exempt from registration under the Securities
Act pursuant to Section 4(2) as a transaction not involving
a public offering. The 2.25% Convertible Senior Notes were
sold to qualified institutional buyers in reliance on
Rule 144A under the Securities Act. Aggregate underwriting
discounts amounted to approximately $3.15 million.
II-3
a. Exhibits
| |
|
|
|
|
| |
| Exhibit |
| Number |
|
Description |
| |
| |
3 |
.1* |
|
Amended and Restated Certificate of Incorporation (previously
filed as an exhibit to the Company’s Form S-1
Registration Statement No. 33-80261) |
| |
3 |
.2* |
|
Certificate of Amendment of the Company’s Amended and
Restated Certificate of Incorporation, as filed with the
Delaware Secretary of State on May 15, 1997 (previously
filed as Exhibit 3.7 to the Company’s Current Report
on Form 8-K dated and filed May 23, 1997) |
| |
3 |
.3* |
|
Certificate of Designation of Rights, Preferences and Privileges
of Series B Participating Preferred Stock, as filed with
the Delaware Secretary of State on May 15, 1997
(previously filed as Exhibit A to Exhibit 1 to the
Company’s Form 8-A filed on May 23, 1997) |
| |
3 |
.4* |
|
Amended and Restated Bylaws (previously filed as
Exhibit 3.2 to the Company’s Form 8-A/ A filed
November 28, 2001) |
| |
3 |
.5* |
|
Certificate of Elimination of Rights, Preferences and Privileges
of Connetics Corporation, as filed with the Delaware Secretary
of State on December 11, 2001 (previously filed as
Exhibit 3.5 to the Company’s Annual Report on
Form 10-K/ A for the year ended December 31, 2001) |
| |
3 |
.6* |
|
Certificate of Designation of Rights, Preferences and Privileges
of Series C Preferred Stock, as filed with the Delaware
Secretary of State on March 22, 2005 (previously filed
as Exhibit 3.1 to the Company’s Current Report on
Form 8-K filed on June 6, 2005) |
| |
3 |
.7* |
|
Certificate of Elimination of Rights, Preferences and Privileges
of Series C Preferred Stock of Connetics Corporation, as
filed with the Delaware Secretary of State on May 18, 2005
(previously filed as Exhibit 3.2 to the Company’s
Current Report on Form 8-K filed on June 6, 2005) |
| |
4 |
.1* |
|
Form of Common Stock Certificate (previously filed as
Exhibit 4.1 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 1998) |
| |
4 |
.2* |
|
Amended and Restated Preferred Stock Rights Agreement, dated as
of November 21, 2001, between the Company and EquiServe
Trust Company, N.A., including the form of Rights Certificate
and the Summary of Rights attached thereto as Exhibits A
and B, respectively (previously filed as Exhibit 4.1 to
the Company’s Form 8-A/ A filed November 28,
2001) |
| |
4 |
.3* |
|
Indenture, dated as of May 28, 2003, between Connetics and
J.P. Morgan Trust Company, National Association, including
therein the forms of the notes (previously filed as
Exhibit 4.1 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003) |
| |
4 |
.4* |
|
Indenture, dated March 23, 2005, between Connetics
Corporation and J.P. Morgan Trust Company, National
Association, as Trustee (previously filed as Exhibit 4.1
to the Company’s Current Report on Form 8-K filed on
March 25, 2005) |
| |
4 |
.5* |
|
Registration Rights Agreement, dated March 23, 2005,
between Connetics Corporation and Goldman, Sachs & Co.,
on behalf of itself, CIBC World Markets Corp., Lazard
Freres & Co. LLC, Piper Jaffray & Co. and Roth
Capital Partners, LLC (previously filed as Exhibit 4.2
to the Company’s Current Report on Form 8-K filed on
March 25, 2005) |
| |
4 |
.6* |
|
Registration Rights Agreement, dated as of May 28, 2003,
between Connetics and Goldman, Sachs & Co., C.E.
Unterberg, Towbin (a California Limited Partnership), CIBC World
Markets Corp., Thomas Weisel Partners LLC and U.S. Bancorp
Piper Jaffray Inc., as representatives (previously filed as
Exhibit 4.2 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003) |
| |
4 |
.7* |
|
Certificate of Amendment of the Amended and Restated Certificate
of Incorporation of Connetics Corporation (previously filed in
the Company’s Form S-1 Registration Statement
No. 333-125982) |
| |
5 |
.1* |
|
Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
(previously filed in the Company’s Form S-1 Registration
Statement No. 333-125982) |
II-4
| |
|
|
|
|
| |
| Exhibit |
| Number |
|
Description |
| |
|
Management and Consulting Agreements |
| |
10 |
.1*(M) |
|
Form of Indemnification Agreement with the Company’s
directors and officers (previously filed as an exhibit to the
Company’s Form S-1 Registration Statement
No. 33-80261) |
| |
10 |
.2*(M) |
|
Employment Agreement dated June 9, 1994 between Connetics
and Thomas Wiggans (previously filed as an exhibit to the
Company’s Form S-1 Registration Statement
No. 33-80261) |
| |
10 |
.3*(M) |
|
Letter Agreement with G. Kirk Raab dated October 1, 1995
(previously filed as an exhibit to the Company’s
Form S-1 Registration Statement No. 33-80261) |
| |
10 |
.4*(M) |
|
Form of Notice of Stock Option Grant to G. Kirk Raab dated
January 28, 1997 (previously filed as Exhibit 10.4
to the Company’s Annual Report on Form 10-K/ A for the
year ended December 31, 2001) |
| |
10 |
.5*(M) |
|
Form of Notice of Stock Option Grant to G. Kirk Raab dated
July 30, 1997 (previously filed as Exhibit 10.5 to
the Company’s Annual Report on Form 10-K/ A for the
year ended December 31, 2001) |
| |
10 |
.6*(M) |
|
Restricted Common Stock Purchase Agreement dated
November 5, 1998 between the Company and G. Kirk Raab
(previously filed as Exhibit 10.59 to the Company’s
Annual Report on Form 10-K for the year ended
December 31, 1998) |
| |
10 |
.7*(M) |
|
Restricted Common Stock Purchase Agreement dated March 9,
1999 between the Company and G. Kirk Raab (previously filed
as Exhibit 10.5 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999) |
| |
10 |
.8*(M) |
|
Restricted Common Stock Purchase Agreement dated March 9,
1999 between the Company and Thomas G. Wiggans (previously
filed as Exhibit 10.6 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended March 31,
1999) |
| |
10 |
.9*(M) |
|
Form of Change in Control Agreement between the Company and key
employees of the Company (previously filed as
Exhibit 10.12 to the Company’s Annual Report on
Form 10-K/ A for the year ended December 31, 2001) |
| |
10 |
.10*(M) |
|
Consulting Agreement dated January 1, 2002, as amended
effective January 1, 2003, between Connetics and Eugene
Bauer, M.D. (previously filed as Exhibit 10.12 to
the Company’s Annual Report on Form 10-K for the year
ended December 31, 2002) |
| |
10 |
.11*(M) |
|
Consulting Agreement dated January 1, 2002, as amended
effective December 31, 2003, between Connetics and Eugene
Bauer, M.D. (previously filed as Exhibit 10.12 to
the Company’s Annual Report on Form 10-K for the
period ended December 31, 2004) |
| |
10 |
.12*(M) |
|
Consulting Agreement dated January 1, 2002, as amended
effective December 31, 2004, between Connetics and Eugene
Bauer, M.D. (previously filed as Exhibit 10.13 to
the Company’s Annual Report on Form 10-K for the
period ended December 31, 2004) |
| |
10 |
.13* |
|
Form of Change in Control Agreement between the Company and
outside directors of the Company (previously filed in the
Company’s Form S-1 Registration Statement
No. 333-125982) |
| |
10 |
.14* |
|
Change of Control Agreement dated January 1, 2002 between
the Company and Thomas G. Wiggans (previously filed in the
Company’s Form S-1 Registration Statement
No. 333-125982) |
| |
10 |
.15* |
|
Change of Control Agreement dated January 1, 2002 between
the Company and G. Kirk Raab (previously filed in the
Company’s Form S-1 Registration Statement
No. 333-125982) |
|
Stock Plans and Equity Agreements |
| |
10 |
.16*(M) |
|
1994 Stock Plan (as amended through May 1999) and form of Option
Agreement (previously filed as Exhibit 4.1 to the
Company’s Form S-8 Registration Statement
No. 333-85155) |
| |
10 |
.17*(M) |
|
1995 Directors’ Stock Option Plan (as amended through
May 2003), and form of Option Agreement (previously filed as
Exhibit 99.2 to the Company’s Current Report on
Form 8-K dated February 9, 2004 and filed with the
Commission on March 8, 2004) |
II-5
| |
|
|
|
|
| |
| Exhibit |
| Number |
|
Description |
| |
| |
10 |
.18*(M) |
|
1998 Supplemental Stock Plan (previously filed as
Exhibit 10.60 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 1998) |
| |
10 |
.19*(M) |
|
Stock Plan (2000) and form of Option Agreement
(previously filed as Exhibit 4.4 to the Company’s
Form S-8 Registration Statement No. 333-85155) |
| |
10 |
.20* |
|
International Stock Incentive Plan (previously filed as
Exhibit 4.1 to the Company’s Form S-8
Registration Statement No. 333-61558) |
| |
10 |
.21* |
|
2000 Non-Officer Employee Stock Plan (previously filed as
Exhibit 4.3 to the Company’s Form S-8
Registration Statement No. 333-46562) |
| |
10 |
.22* |
|
2002 Non-Officer Employee Stock Plan (as amended through May
2003) (previously filed as Exhibit 99.1 to the
Company’s Current Report on Form 8-K dated
February 9, 2004 and filed with the Commission on
March 8, 2004) |
| |
10 |
.23* |
|
1995 Employee Stock Purchase Plan (as amended and restated
through May 7, 2004) and form of Subscription Agreement
(previously filed as Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended
June 30, 2004) |
| |
10 |
.24* |
|
Non-Qualified Stock Option Agreement between Connetics
Corporation and James A. Trah (previously filed as
Exhibit 10.3 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2005) |
| |
10 |
.25* |
|
Non-Qualified Stock Option Agreement between Connetics
Corporation and Michael Eison (previously filed in the
Company’s Form S-1 Registration Statement
No. 333-125982) |
|
License Agreements |
| |
10 |
.26*† |
|
Soltec License Agreement dated June 14, 1996 (previously
filed as Exhibit 10.28 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended June 30,
1996) |
| |
10 |
.27*† |
|
License Agreement dated January 1, 1998 between Connetics
and Soltec Research Pty Limited (previously filed as
Exhibit 10.57 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 1997) |
| |
10 |
.28*† |
|
License Agreement (Ketoconazole) dated July 14, 1999
between the Company and Soltec Research Pty Ltd. (previously
filed as Exhibit 10.4 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended June 30,
1999) |
| |
10 |
.29*(C) |
|
License Agreement with Pierre Fabre Dermatologie and Connetics
Corporation, dated September 29, 2004 (previously filed
as Exhibit 10.1 to our Current Report on Form 8-K
dated September 29, 2004 and filed with the Commission on
October 4, 2004) |
|
Real Property |
| |
10 |
.30* |
|
Lease between Connetics and Renault & Handley
Employee’s Investment Co., dated June 28, 1999
(previously filed as Exhibit 10.39 to the Company’s
Annual Report on Form 10-K/ A for the year ended
December 31, 2001) |
| |
10 |
.31* |
|
Industrial Building Lease dated December 16, 1999, between
Connetics and West Bayshore Associates (previously filed as
Exhibit 10.2 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2001) |
| |
10 |
.32* |
|
Assignment and Assumption of Lease between Connetics and
Respond.com, dated August 21, 2001 (previously filed as
Exhibit 10.3 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2001) |
| |
10 |
.33* |
|
Agreement dated August 21, 2001, between Connetics and
Respond.com (previously filed as Exhibit 10.4 to the
Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001) |
| |
10 |
.34* |
|
Sublease agreement between Connetics (sublessor) and
Tolerian, Inc., dated June 20, 2002 (previously filed as
Exhibit 10.1 to the Company’s Quarterly Report for the
quarter ended June 30, 2002) |
| |
10 |
.35* |
|
Sublease Agreement between the Board of Trustees of the Leland
Stanford Junior University and Incyte Pharmaceuticals, Inc.,
dated May 6, 2004 (previously filed as Exhibit 10.2
to the Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004) |
II-6
| |
|
|
|
|
| |
| Exhibit |
| Number |
|
Description |
| |
| |
10 |
.36* |
|
Sublease Consent between The Board of Trustees of the Leland
Stanford Junior University and Incyte Corporation and Connetics
Corporation, dated May 6, 2004 (previously filed as
Exhibit 10.3 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2004) |
| |
10 |
.37* |
|
Agreement Regarding Sublease and Lease between The Board of
Trustees of the Leland Stanford Junior University and Connetics
Corporation, dated May 6, 2004 (previously filed as
Exhibit 10.4 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2004) |
| |
10 |
.38* |
|
First Amendment to Lease between The Board of Trustees of the
Leland Stanford Junior University and Incyte Corporation, dated
May 6, 2004 (previously filed as Exhibit 10.5 to
the Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004) |
| |
10 |
.39* |
|
Sublease Agreement for 1841 Page Mill Road, Palo Alto,
California, dated August 9, 2004 and effective
April 4, 2005 (previously filed as Exhibit 10.2 to
the Company’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2005) |
| |
10 |
.40* |
|
Industrial Building Lease Between West Bayshore Associates and
Connetics Corporation, dated September 2004 (previously filed
as Exhibit 99.1 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2004) |
|
Other Agreements |
| |
10 |
.41*† |
|
Agreement dated December 9, 1999 between the Company and
Soltec Research Pty Ltd. (previously filed as
Exhibit 10.75 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 1999) |
| |
10 |
.42*† |
|
Share Sale Agreement dated March 21, 2001 among the
Company, F. H. Faulding & Co. Ltd., Faulding
Healthcare, and Connetics Australia Pty Ltd. (previously
filed as Exhibit 2.1 to the Company’s Current Report
on Form 8-K dated March 20, 2001 and filed with the
Commission on April 2, 2001) |
| |
10 |
.43*† |
|
Asset Purchase Agreement dated as of April 9, 2001, by and
between Connetics and Prometheus Laboratories, Inc.
(previously filed as Exhibit 2.1 to the Company’s
Current Report on Form 8-K dated April 30, 2001 and
filed with the Commission on May 11, 2001) |
| |
10 |
.44*† |
|
Facilities Contribution Agreement between Connetics and DPT
Laboratories, Ltd., with retroactive effect to November 1,
2001 (previously filed as Exhibit 10.55 to the
Company’s Annual Report on Form 10-K/ A (Amendment
No. 2) for the year ended December 31, 2001) |
| |
10 |
.45*† |
|
Manufacturing and Supply Agreement between Connetics and DPT
Laboratories, Ltd., dated March 12, 2002 (previously
filed as Exhibit 10.56 to the Company’s Annual Report
on Form 10-K/ A (Amendment No. 2) for the year ended
December 31, 2001) |
| |
10 |
.46*† |
|
License and Development Agreement between Connetics and
Pharmacia & Upjohn Company, dated December 21,
2001 (previously filed as Exhibit 99.1 to the
Company’s Current Report on Form 8-K/ A-2 dated
December 21, 2001, filed with the SEC on July 12,
2002) |
| |
10 |
.47*† |
|
License and Development Agreement between Connetics and
Yamanouchi Europe B.V., dated May 13, 2002 (previously
filed as Exhibit 10.2 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended June 30,
2002) |
| |
10 |
.48* |
|
Distribution Agreement between Connetics and CORD Logistics,
Inc., dated January 1, 2001, as amended September 1,
2001, September 3, 2003, and September 24, 2003
(previously filed as Exhibit 10.51 to the Company’s
Annual Report on Form 10-K/ A (Amendment No. 2) for
the year ended December 31, 2002) |
| |
10 |
.49*† |
|
Amended and Restated Manufacturing and Supply Agreement dated
April 24, 2003 between Connetics and AccraPac Group, Inc.
(previously filed as Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q/ A (Amendment No. 1) for
the quarter ended March 31, 2003) |
II-7
| |
|
|
|
|
| |
| Exhibit |
| Number |
|
Description |
| |
| |
10 |
.50* |
|
Credit and Guaranty Agreement dated as of February 6, 2004
between Connetics and Goldman Sachs Credit Partners L.P.
(previously filed as Exhibit 99.1 to the Company’s
Current Report on Form 8-K dated February 6, 2004,
filed with the Commission on February 9, 2004) |
| |
10 |
.51* |
|
Purchase and Sale Agreement dated February 2, 2004 between
Connetics and Hoffmann-La Roche Inc. (previously filed
as Exhibit 10.41 of the Company’s Annual Report on
Form 10-K for the year ended December 31, 2003) |
| |
10 |
.52* |
|
Stock Purchase Agreement dated as of February 11, 2004 by
and among and the Purchasers listed on Appendix A to the
Stock Purchase Agreement (previously filed as
Exhibit 99.1 to the Company’s Registration Statement
on Form S-3 (Registration No. 333-113894) filed on
March 24, 2004) |
| |
10 |
.53*(C) |
|
Amendment to Facilities Contribution Agreement between DPT
Laboratories, Ltd. and Connetics Corporation, dated
August 18, 2004 (previously filed at Exhibit 10.1
to the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004) |
| |
10 |
.54*(C) |
|
Amended and Restated Manufacturing and Supply Agreement between
DPT Laboratories, Ltd. and Connetics Corporation, dated
August 18, 2004 (previously filed as Exhibit 10.2
to the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004) |
| |
10 |
.55*(C) |
|
Distribution Services Agreement between Cardinal Health, Inc.
and Connetics Corporation dated December 1, 2004
(previously filed as Exhibit 10.53 to the Company’s
Annual Report on Form 10-K for the period ended
December 31, 2004) |
| |
10 |
.56*(C) |
|
Core Distribution Agreement between McKesson Corporation and
Connetics Corporation dated December 23, 2004
(previously filed as Exhibit 10.54 to the Company’s
Annual Report on Form 10-K for the period ended
December 31, 2004) |
| |
10 |
.57*(M) |
|
Summary Compensation Information for Named Executive Officers
and Directors (previously filed as Exhibit 10.55 to the
Company’s Annual Report on Form 10-K for the period
ended December 31, 2004) |
| |
10 |
.58*(C) |
|
Service Agreement between Ventiv Pharma Services, LLC and
Connetics Corporation, dated March 1, 2005 (previously
filed as Exhibit 10.1 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended March 31,
2005) |
| |
12 |
.1* |
|
Ratio of Earnings to Fixed Charges (previously filed in the
Company’s Form S-1 Registration Statement
No. 333-125982) |
| |
21 |
.1* |
|
Subsidiaries of the registrant (previously filed as
Exhibit 21.1 to the Company’s Annual Report on
Form 10-K for the period ended December 31, 2004) |
| |
23 |
.1* |
|
Consent of Independent Registered Public Accounting Firm
(previously filed in the Company’s Form S-1 Registration
Statement No. 333-125982) |
| |
23 |
.2* |
|
Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 5.1) (previously filed in the
Company’s Form S-1 Registration Statement
No. 333-125982) |
| |
25 |
.1* |
|
Form T-1 Statement of Eligibility (previously filed in the
Company’s Form S-1 Registration Statement
No. 333-125982) |
| |
The Commission file number for our Exchange Act filings
referenced above is 0-27406.
|
|
|
|
* |
|
Incorporated by this reference to the previous filing, as
indicated. |
| |
|
(M) |
|
This item is a management compensatory plan or arrangement
required to be listed as an exhibit to this Report pursuant to
Item 601(b)(10)(iii) of Regulation S-K. |
| |
|
(C) |
|
We have omitted certain portions of this Exhibit and have
requested confidential treatment of such portions from the
SEC. |
| |
|
† |
|
We have requested and the SEC has granted confidential
treatment for certain portions of this Exhibit. |
II-8
The undersigned registrant hereby undertakes:
|
|
| |
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement: |
|
|
|
| |
• |
To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933 (the “Act”), |
| |
| |
• |
To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the
low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes
in volume and price represent no more than a 20 percent
change in the maximum aggregate offering price set forth in the
“Calculation of Registration Fee” table in the
effective registration statement, and |
| |
| |
• |
To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement. |
|
|
| |
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof. |
| |
| |
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering. |
| |
| |
(4) Insofar as indemnification for liabilities arising
under the Act may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue. |
| |
| |
(5) For purposes of determining any liability under the
Act, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by
the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this
registration statement as of the time it was declared
effective, and |
| |
| |
(6) For the purpose of determining any liability under the
Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof. |
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on
Form S-1 and has duly caused this registration statement to
be signed on our behalf by the undersigned, thereunto duly
authorized, in the City of Palo Alto, State of California, on
July 6, 2005.
|
|
| |
CONNETICS CORPORATION |
| |
| |
By: /s/ John L.
Higgins
|
| |
|
| |
Name: John L. Higgins |
|
|
|
| |
Title: |
Chief Financial Officer, Executive Vice |
|
|
| |
President, Finance and Corporate |
|
|
| |
Development (Principal Accounting Officer) |
|
|
Each person whose signature appears below hereby constitutes and
appoints, jointly and severally, John L. Higgins and Katrina J.
Church, and each of them acting individually, as his or her
attorney-in-fact, each with full power of substitution, for him
or her in any and all capacities, to sign any and all amendments
to this Registration Statement (including post-effective
amendments), and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorney to any and
all amendments to said Registration Statement.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons
in the capacities indicated, as of July 6:
| |
|
|
|
|
| Name |
|
Title |
| |
|
|
| |
Thomas G. Wiggans*
Thomas
G. Wiggans |
|
Chief Executive Officer and Director (Principal Executive
Officer) |
| |
/s/ John L. Higgins
John
L. Higgins |
|
Chief Financial Officer; Executive Vice President, Finance and
Corporate Development (Principal Accounting Officer) |
| |
Eugene A. Bauer*
Eugene
A. Bauer |
|
Director |
| |
R. Andrew Eckert*
R.
Andrew Eckert |
|
Director |
| |
Carl B. Feldbaum*
Carl
B. Feldbaum |
|
Director |
| |
Denise M. Gilbert*
Denise
M. Gilbert |
|
Director |
| |
John C. Kane*
John
C. Kane |
|
Director |
II-10
| |
|
|
|
|
| Name |
|
Title |
| |
|
|
| |
Thomas D. Kiley*
Thomas
D. Kiley |
|
Director |
| |
Leon E. Panetta*
Leon
E. Panetta |
|
Director |
| |
G. Kirk Raab*
G.
Kirk Raab |
|
Director |
| |
*By:/s/ John L. Higgins
Attorney-In-Fact |
|
|
II-11
EXHIBIT INDEX
| |
|
|
|
|
| |
| Exhibit |
| Number |
|
Description |
| |
| |
3 |
.1* |
|
Amended and Restated Certificate of Incorporation (previously
filed as an exhibit to the Company’s Form S-1
Registration Statement No. 33-80261) |
| |
3 |
.2* |
|
Certificate of Amendment of the Company’s Amended and
Restated Certificate of Incorporation, as filed with the
Delaware Secretary of State on May 15, 1997 (previously
filed as Exhibit 3.7 to the Company’s Current Report
on Form 8-K dated and filed May 23, 1997) |
| |
3 |
.3* |
|
Certificate of Designation of Rights, Preferences and Privileges
of Series B Participating Preferred Stock, as filed with
the Delaware Secretary of State on May 15, 1997
(previously filed as Exhibit A to Exhibit 1 to the
Company’s Form 8-A filed on May 23, 1997) |
| |
3 |
.4* |
|
Amended and Restated Bylaws (previously filed as
Exhibit 3.2 to the Company’s Form 8-A/ A filed
November 28, 2001) |
| |
3 |
.5* |
|
Certificate of Elimination of Rights, Preferences and Privileges
of Connetics Corporation, as filed with the Delaware Secretary
of State on December 11, 2001 (previously filed as
Exhibit 3.5 to the Company’s Annual Report on
Form 10-K/ A for the year ended December 31, 2001) |
| |
3 |
.6* |
|
Certificate of Designation of Rights, Preferences and Privileges
of Series C Preferred Stock, as filed with the Delaware
Secretary of State on March 22, 2005 (previously filed
as Exhibit 3.1 to the Company’s Current Report on
Form 8-K filed on June 6, 2005) |
| |
3 |
.7* |
|
Certificate of Elimination of Rights, Preferences and Privileges
of Series C Preferred Stock of Connetics Corporation, as
filed with the Delaware Secretary of State on May 18, 2005
(previously filed as Exhibit 3.2 to the Company’s
Current Report on Form 8-K filed on June 6, 2005) |
| |
4 |
.1* |
|
Form of Common Stock Certificate (previously filed as
Exhibit 4.1 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 1998) |
| |
4 |
.2* |
|
Amended and Restated Preferred Stock Rights Agreement, dated as
of November 21, 2001, between the Company and EquiServe
Trust Company, N.A., including the form of Rights Certificate
and the Summary of Rights attached thereto as Exhibits A
and B, respectively (previously filed as Exhibit 4.1 to
the Company’s Form 8-A/ A filed November 28,
2001) |
| |
4 |
.3* |
|
Indenture, dated as of May 28, 2003, between Connetics and
J.P. Morgan Trust Company, National Association, including
therein the forms of the notes (previously filed as
Exhibit 4.1 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003) |
| |
4 |
.4* |
|
Indenture, dated March 23, 2005, between Connetics
Corporation and J.P. Morgan Trust Company, National
Association, as Trustee (previously filed as Exhibit 4.1
to the Company’s Current Report on Form 8-K filed on
March 25, 2005) |
| |
4 |
.5* |
|
Registration Rights Agreement, dated March 23, 2005,
between Connetics Corporation and Goldman, Sachs & Co.,
on behalf of itself, CIBC World Markets Corp., Lazard
Freres & Co. LLC, Piper Jaffray & Co. and Roth
Capital Partners, LLC (previously filed as Exhibit 4.2
to the Company’s Current Report on Form 8-K filed on
March 25, 2005) |
| |
4 |
.6* |
|
Registration Rights Agreement, dated as of May 28, 2003,
between Connetics and Goldman, Sachs & Co., C.E.
Unterberg, Towbin (a California Limited Partnership), CIBC World
Markets Corp., Thomas Weisel Partners LLC and U.S. Bancorp
Piper Jaffray Inc., as representatives (previously filed as
Exhibit 4.2 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003) |
| |
4 |
.7* |
|
Certificate of Amendment of the Amended and Restated Certificate
of Incorporation of Connetics Corporation (previously filed in
the Company’s Form S-1 Registration Statement
No. 333-125982) |
| |
5 |
.1* |
|
Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
(previously filed in the Company’s Form S-1 Registration
Statement No. 333-125982) |
|
Management and Consulting Agreements |
| |
10 |
.1*(M) |
|
Form of Indemnification Agreement with the Company’s
directors and officers (previously filed as an exhibit to the
Company’s Form S-1 Registration Statement
No. 33-80261) |
| |
|
|
|
|
| |
| Exhibit |
| Number |
|
Description |
| |
| |
10 |
.2*(M) |
|
Employment Agreement dated June 9, 1994 between Connetics
and Thomas Wiggans (previously filed as an exhibit to the
Company’s Form S-1 Registration Statement
No. 33-80261) |
| |
10 |
.3*(M) |
|
Letter Agreement with G. Kirk Raab dated October 1, 1995
(previously filed as an exhibit to the Company’s
Form S-1 Registration Statement No. 33-80261) |
| |
10 |
.4*(M) |
|
Form of Notice of Stock Option Grant to G. Kirk Raab dated
January 28, 1997 (previously filed as Exhibit 10.4
to the Company’s Annual Report on Form 10-K/ A for the
year ended December 31, 2001) |
| |
10 |
.5*(M) |
|
Form of Notice of Stock Option Grant to G. Kirk Raab dated
July 30, 1997 (previously filed as Exhibit 10.5 to
the Company’s Annual Report on Form 10-K/ A for the
year ended December 31, 2001) |
| |
10 |
.6*(M) |
|
Restricted Common Stock Purchase Agreement dated
November 5, 1998 between the Company and G. Kirk Raab
(previously filed as Exhibit 10.59 to the Company’s
Annual Report on Form 10-K for the year ended
December 31, 1998) |
| |
10 |
.7*(M) |
|
Restricted Common Stock Purchase Agreement dated March 9,
1999 between the Company and G. Kirk Raab (previously filed
as Exhibit 10.5 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999) |
| |
10 |
.8*(M) |
|
Restricted Common Stock Purchase Agreement dated March 9,
1999 between the Company and Thomas G. Wiggans (previously
filed as Exhibit 10.6 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended March 31,
1999) |
| |
10 |
.9*(M) |
|
Form of Change in Control Agreement between the Company and key
employees of the Company (previously filed as
Exhibit 10.12 to the Company’s Annual Report on
Form 10-K/ A for the year ended December 31, 2001) |
| |
10 |
.10*(M) |
|
Consulting Agreement dated January 1, 2002, as amended
effective January 1, 2003, between Connetics and Eugene
Bauer, M.D. (previously filed as Exhibit 10.12 to
the Company’s Annual Report on Form 10-K for the year
ended December 31, 2002) |
| |
10 |
.11*(M) |
|
Consulting Agreement dated January 1, 2002, as amended
effective December 31, 2003, between Connetics and Eugene
Bauer, M.D. (previously filed as Exhibit 10.12 to
the Company’s Annual Report on Form 10-K for the
period ended December 31, 2004) |
| |
10 |
.12*(M) |
|
Consulting Agreement dated January 1, 2002, as amended
effective December 31, 2004, between Connetics and Eugene
Bauer, M.D. (previously filed as Exhibit 10.13 to
the Company’s Annual Report on Form 10-K for the
period ended December 31, 2004) |
| |
10 |
.13* |
|
Form of Change in Control Agreement between the Company and
outside directors of the Company (previously filed in the
Company’s Form S-1 Registration Statement
No. 333-125982) |
| |
10 |
.14* |
|
Change of Control Agreement dated January 1, 2002 between
the Company and Thomas G. Wiggans (previously filed in the
Company’s Form S-1 Registration Statement
No. 333-125982) |
| |
10 |
.15* |
|
Change of Control Agreement dated January 1, 2002 between
the Company and G. Kirk Raab (previously filed in the
Company’s Form S-1 Registration Statement
No. 333-125982) |
|
Stock Plans and Equity Agreements |
| |
10 |
.16*(M) |
|
1994 Stock Plan (as amended through May 1999) and form of Option
Agreement (previously filed as Exhibit 4.1 to the
Company’s Form S-8 Registration Statement
No. 333-85155) |
| |
10 |
.17*(M) |
|
1995 Directors’ Stock Option Plan (as amended through
May 2003), and form of Option Agreement (previously filed as
Exhibit 99.2 to the Company’s Current Report on
Form 8-K dated February 9, 2004 and filed with the
Commission on March 8, 2004) |
| |
10 |
.18*(M) |
|
1998 Supplemental Stock Plan (previously filed as
Exhibit 10.60 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 1998) |
| |
10 |
.19*(M) |
|
Stock Plan (2000) and form of Option Agreement
(previously filed as Exhibit 4.4 to the Company’s
Form S-8 Registration Statement No. 333-85155) |
| |
|
|
|
|
| |
| Exhibit |
| Number |
|
Description |
| |
| |
10 |
.20* |
|
International Stock Incentive Plan (previously filed as
Exhibit 4.1 to the Company’s Form S-8
Registration Statement No. 333-61558) |
| |
10 |
.21* |
|
2000 Non-Officer Employee Stock Plan (previously filed as
Exhibit 4.3 to the Company’s Form S-8
Registration Statement No. 333-46562) |
| |
10 |
.22* |
|
2002 Non-Officer Employee Stock Plan (as amended through May
2003) (previously filed as Exhibit 99.1 to the
Company’s Current Report on Form 8-K dated
February 9, 2004 and filed with the Commission on
March 8, 2004) |
| |
10 |
.23* |
|
1995 Employee Stock Purchase Plan (as amended and restated
through May 7, 2004) and form of Subscription Agreement
(previously filed as Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended
June 30, 2004) |
| |
10 |
.24* |
|
Non-Qualified Stock Option Agreement between Connetics
Corporation and James A. Trah (previously filed as
Exhibit 10.3 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2005) |
| |
10 |
.25* |
|
Non-Qualified Stock Option Agreement between Connetics
Corporation and Michael Eison (previously filed in the
Company’s Form S-1 Registration Statement
No. 333-125982) |
|
License Agreements |
| |
10 |
.26*† |
|
Soltec License Agreement dated June 14, 1996 (previously
filed as Exhibit 10.28 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended June 30,
1996) |
| |
10 |
.27*† |
|
License Agreement dated January 1, 1998 between Connetics
and Soltec Research Pty Limited (previously filed as
Exhibit 10.57 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 1997) |
| |
10 |
.28*† |
|
License Agreement (Ketoconazole) dated July 14, 1999
between the Company and Soltec Research Pty Ltd. (previously
filed as Exhibit 10.4 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended June 30,
1999) |
| |
10 |
.29*(C) |
|
License Agreement with Pierre Fabre Dermatologie and Connetics
Corporation, dated September 29, 2004 (previously filed
as Exhibit 10.1 to our Current Report on Form 8-K
dated September 29, 2004 and filed with the Commission on
October 4, 2004) |
|
Real Property |
| |
10 |
.30* |
|
Lease between Connetics and Renault & Handley
Employee’s Investment Co., dated June 28, 1999
(previously filed as Exhibit 10.39 to the Company’s
Annual Report on Form 10-K/ A for the year ended
December 31, 2001) |
| |
10 |
.31* |
|
Industrial Building Lease dated December 16, 1999, between
Connetics and West Bayshore Associates (previously filed as
Exhibit 10.2 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2001) |
| |
10 |
.32* |
|
Assignment and Assumption of Lease between Connetics and
Respond.com, dated August 21, 2001 (previously filed as
Exhibit 10.3 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2001) |
| |
10 |
.33* |
|
Agreement dated August 21, 2001, between Connetics and
Respond.com (previously filed as Exhibit 10.4 to the
Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001) |
| |
10 |
.34* |
|
Sublease agreement between Connetics (sublessor) and
Tolerian, Inc., dated June 20, 2002 (previously filed as
Exhibit 10.1 to the Company’s Quarterly Report for the
quarter ended June 30, 2002) |
| |
10 |
.35* |
|
Sublease Agreement between the Board of Trustees of the Leland
Stanford Junior University and Incyte Pharmaceuticals, Inc.,
dated May 6, 2004 (previously filed as Exhibit 10.2
to the Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004) |
| |
10 |
.36* |
|
Sublease Consent between The Board of Trustees of the Leland
Stanford Junior University and Incyte Corporation and Connetics
Corporation, dated May 6, 2004 (previously filed as
Exhibit 10.3 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2004) |
| |
|
|
|
|
| |
| Exhibit |
| Number |
|
Description |
| |
| |
10 |
.37* |
|
Agreement Regarding Sublease and Lease between The Board of
Trustees of the Leland Stanford Junior University and Connetics
Corporation, dated May 6, 2004 (previously filed as
Exhibit 10.4 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2004) |
| |
10 |
.38* |
|
First Amendment to Lease between The Board of Trustees of the
Leland Stanford Junior University and Incyte Corporation, dated
May 6, 2004 (previously filed as Exhibit 10.5 to
the Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004) |
| |
10 |
.39* |
|
Sublease Agreement for 1841 Page Mill Road, Palo Alto,
California, dated August 9, 2004 and effective
April 4, 2005 (previously filed as Exhibit 10.2 to
the Company’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2005) |
| |
10 |
.40* |
|
Industrial Building Lease Between West Bayshore Associates and
Connetics Corporation, dated September 2004 (previously filed
as Exhibit 99.1 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2004) |
|
Other Agreements |
| |
10 |
.41*† |
|
Agreement dated December 9, 1999 between the Company and
Soltec Research Pty Ltd. (previously filed as
Exhibit 10.75 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 1999) |
| |
10 |
.42*† |
|
Share Sale Agreement dated March 21, 2001 among the
Company, F. H. Faulding & Co. Ltd., Faulding
Healthcare, and Connetics Australia Pty Ltd. (previously
filed as Exhibit 2.1 to the Company’s Current Report
on Form 8-K dated March 20, 2001 and filed with the
Commission on April 2, 2001) |
| |
10 |
.43*† |
|
Asset Purchase Agreement dated as of April 9, 2001, by and
between Connetics and Prometheus Laboratories, Inc.
(previously filed as Exhibit 2.1 to the Company’s
Current Report on Form 8-K dated April 30, 2001 and
filed with the Commission on May 11, 2001) |
| |
10 |
.44*† |
|
Facilities Contribution Agreement between Connetics and DPT
Laboratories, Ltd., with retroactive effect to November 1,
2001 (previously filed as Exhibit 10.55 to the
Company’s Annual Report on Form 10-K/ A (Amendment
No. 2) for the year ended December 31, 2001) |
| |
10 |
.45*† |
|
Manufacturing and Supply Agreement between Connetics and DPT
Laboratories, Ltd., dated March 12, 2002 (previously
filed as Exhibit 10.56 to the Company’s Annual Report
on Form 10-K/ A (Amendment No. 2) for the year ended
December 31, 2001) |
| |
10 |
.46*† |
|
License and Development Agreement between Connetics and
Pharmacia & Upjohn Company, dated December 21,
2001 (previously filed as Exhibit 99.1 to the
Company’s Current Report on Form 8-K/ A-2 dated
December 21, 2001, filed with the SEC on July 12,
2002) |
| |
10 |
.47*† |
|
License and Development Agreement between Connetics and
Yamanouchi Europe B.V., dated May 13, 2002 (previously
filed as Exhibit 10.2 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended June 30,
2002) |
| |
10 |
.48* |
|
Distribution Agreement between Connetics and CORD Logistics,
Inc., dated January 1, 2001, as amended September 1,
2001, September 3, 2003, and September 24, 2003
(previously filed as Exhibit 10.51 to the Company’s
Annual Report on Form 10-K/ A (Amendment No. 2) for
the year ended December 31, 2002) |
| |
10 |
.49*† |
|
Amended and Restated Manufacturing and Supply Agreement dated
April 24, 2003 between Connetics and AccraPac Group, Inc.
(previously filed as Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q/ A (Amendment No. 1) for
the quarter ended March 31, 2003) |
| |
10 |
.50* |
|
Credit and Guaranty Agreement dated as of February 6, 2004
between Connetics and Goldman Sachs Credit Partners L.P.
(previously filed as Exhibit 99.1 to the Company’s
Current Report on Form 8-K dated February 6, 2004,
filed with the Commission on February 9, 2004) |
| |
10 |
.51* |
|
Purchase and Sale Agreement dated February 2, 2004 between
Connetics and Hoffmann-La Roche Inc. (previously filed
as Exhibit 10.41 of the Company’s Annual Report on
Form 10-K for the year ended December 31, 2003) |
| |
|
|
|
|
| |
| Exhibit |
| Number |
|
Description |
| |
| |
10 |
.52* |
|
Stock Purchase Agreement dated as of February 11, 2004 by
and among and the Purchasers listed on Appendix A to the
Stock Purchase Agreement (previously filed as
Exhibit 99.1 to the Company’s Registration Statement
on Form S-3 (Registration No. 333-113894) filed on
March 24, 2004) |
| |
10 |
.53*(C) |
|
Amendment to Facilities Contribution Agreement between DPT
Laboratories, Ltd. and Connetics Corporation, dated
August 18, 2004 (previously filed at Exhibit 10.1
to the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004) |
| |
10 |
.54*(C) |
|
Amended and Restated Manufacturing and Supply Agreement between
DPT Laboratories, Ltd. and Connetics Corporation, dated
August 18, 2004 (previously filed as Exhibit 10.2
to the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004) |
| |
10 |
.55*(C) |
|
Distribution Services Agreement between Cardinal Health, Inc.
and Connetics Corporation dated December 1, 2004
(previously filed as Exhibit 10.53 to the Company’s
Annual Report on Form 10-K for the period ended
December 31, 2004) |
| |
10 |
.56*(C) |
|
Core Distribution Agreement between McKesson Corporation and
Connetics Corporation dated December 23, 2004
(previously filed as Exhibit 10.54 to the Company’s
Annual Report on Form 10-K for the period ended
December 31, 2004) |
| |
10 |
.57*(M) |
|
Summary Compensation Information for Named Executive Officers
and Directors (previously filed as Exhibit 10.55 to the
Company’s Annual Report on Form 10-K for the period
ended December 31, 2004) |
| |
10 |
.58*(C) |
|
Service Agreement between Ventiv Pharma Services, LLC and
Connetics Corporation, dated March 1, 2005 (previously
filed as Exhibit 10.1 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended March 31,
2005) |
| |
12 |
.1* |
|
Ratio of Earnings to Fixed Charges (previously filed in the
Company’s Form S-1 Registration Statement
No. 333-125982) |
| |
21 |
.1* |
|
Subsidiaries of the registrant (previously filed as
Exhibit 21.1 to the Company’s Annual Report on
Form 10-K for the period ended December 31, 2004) |
| |
23 |
.1* |
|
Consent of Independent Registered Public Accounting Firm
(previously filed in the Company’s Form S-1 Registration
Statement No. 333-125982) |
| |
23 |
.2* |
|
Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 5.1) (previously filed in the
Company’s Form S-1 Registration Statement
No. 333-125982) |
| |
25 |
.1* |
|
Form T-1 Statement of Eligibility (previously filed in the
Company’s Form S-1 Registration Statement
No. 333-125982) |
| |
The Commission file number for our Exchange Act filings
referenced above is 0-27406.
|
|
|
|
* |
|
Incorporated by this reference to the previous filing, as
indicated. |
| |
|
(M) |
|
This item is a management compensatory plan or arrangement
required to be listed as an exhibit to this Report pursuant to
Item 601(b)(10)(iii) of Regulation S-K. |
| |
|
(C) |
|
We have omitted certain portions of this Exhibit and have
requested confidential treatment of such portions from the
SEC. |
| |
|
† |
|
We have requested and the SEC has granted confidential
treatment for certain portions of this Exhibit. |