10-Q 1 f72583e10-q.txt QUARTERLY REPORT ENDING 3/31/2001 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 Commission file number: 0-27406 CONNETICS CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 94-3173928 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 3400 WEST BAYSHORE ROAD PALO ALTO, CALIFORNIA 94303 (Address of principal executive offices) Registrant's telephone number, including area code: (650) 843-2800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes [X} No [ ] As of May 09, 2001, 29,778,546 shares of the Registrant's common stock were outstanding, at $0.001 par value. 2 CONNETICS CORPORATION TABLE OF CONTENTS
Page ---- PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets at March 31, 2001 and December 31, 2000............................................ 3 Condensed Consolidated Statements of Operations for the three months ended March 31, 2001 and 2000........................ 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and 2000......................... 5 Notes to Condensed Consolidated Financial Statements......... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 9 Item 3. Quantitative and Qualitative Disclosures About Market Risks.. 24 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K............................. 24 (a) Exhibits................................................. 24 (b) Reports on Form 8-K...................................... 24
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONNETICS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
March 31, December 31, 2001 2000 (unaudited) ------------------------- ASSETS Current assets: Cash and cash equivalents $ 47,950 $ 58,577 Short-term investments 22,616 21,607 Accounts receivable, net 1,299 2,749 Other current assets 547 545 ------------------------- Total current assets 72,412 83,478 Property and equipment, net 1,765 1,807 Deposits and other assets 322 428 ------------------------- Total assets $ 74,499 $ 85,713 ========================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,653 $ 5,115 Accrued liabilities 2,629 2,715 Current portion of deferred revenue 132 132 Accrued process development expenses 1,017 1,389 Accrued payroll and related expenses 1,382 1,797 Current portion of notes payable -- 750 Other current liabilities 700 513 Current portion of capital lease obligations 25 37 ------------------------- Total current liabilities 9,538 12,448 Deferred revenue 626 659 Stockholders' equity: Preferred stock -- -- Common stock and additional paid-in capital 159,421 159,242 Deferred compensation (16) (21) Accumulated deficit (97,643) (92,756) Accumulated other comprehensive income 2,573 6,141 ------------------------- Total stockholders' equity 64,335 72,606 ------------------------- Total liabilities and stockholders' equity $ 74,499 $ 85,713 =========================
See accompanying notes to condensed consolidated financial statements. -3- 4 CONNETICS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Three Months Ended March 31 ----------------------- 2001 2000 ----------------------- Revenues: Product $ 7,655 $ 5,666 Contract 804 7,937 ----------------------- Total revenues 8,459 13,603 ----------------------- Operating costs and expenses: Cost of product revenues 1,105 1,799 Research and development 4,352 6,145 Selling, general and administrative 7,612 5,519 ----------------------- Total operating costs and expenses 13,069 13,463 ----------------------- Income (loss) from operations (4,610) 140 Interest and other income 1,001 297 Gain on sale of investment 122 448 Interest and other expense (1,401) (100) ----------------------- Income (loss) before cumulative effect of change in accounting principle $ (4,888) $ 785 ======================= Cumulative effect of change in accounting principle -- (5,192) ----------------------- Net loss $ (4,888) $ (4,407) ======================= Basic earnings per share: Income (loss) per share before cumulative effect of change in accounting principle $ (0.16) $ 0.03 Cumulative effect of change in accounting principle -- $ (0.19) ----------------------- Net loss per share $ (0.16) $ (0.16) Diluted earnings per share: Income (loss) per share before cumulative effect of change in accounting principle $ (0.16) $ 0.03 Cumulative effect of change in accounting principle -- $ (0.18) ----------------------- Net loss per share $ (0.16) $ (0.15) Basic shares used to calculate net income (loss) 29,705 26,627 ======================= Diluted shares used to calculate net income (loss) 29,705 28,412 ======================
See accompanying notes to condensed consolidated financial statements. -4- 5 CONNETICS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Three Months Ended March 31, 2001 2000 ----------------------- Cash flows from operating activities: Net loss $ (4,888) $ (4,407) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 213 170 Gain on sale of investment (122) (448) Stock compensation expense 61 715 Amortization of deferred compensation 5 5 Loss on foreign currency exchange contract 1,394 Changes in assets and liabilities: Accounts receivable 1,450 282 Current and other assets 104 (165) Accounts payable (1,462) (2,025) Current and other liabilities (2,080) (1,022) Deferred revenue (33) 5,006 ----------------------- Net cash used in operating activities (5,358) (1,889) ----------------------- Cash flows from investing activities: Purchases of short-term investments (12,464) (1,458) Sales and maturities of short-term investments 8,009 7,393 Purchases of property and equipment (171) (79) ----------------------- Net cash provided by (used in) investing activities (4,626) 5,856 ----------------------- Cash flows from financing activities: Payment of notes payable (750) (989) Payments on obligations under capital leases and capital loans (12) (135) Proceeds from issuance of common stock, net issuance cost 119 1,218 ----------------------- Net cash provided by (used in) financing activities (643) 94 ----------------------- Net change in cash and cash equivalents (10,627) 4,061 Cash and cash equivalents at beginning of period 58,577 8,460 ----------------------- Cash and cash equivalents at end of period $ 47,950 $ 12,521 ======================= Supplementary information: Interest paid $ 6 $ 53
See accompanying notes to condensed consolidated financial statements. -5- 6 CONNETICS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) 1. BASIS OF PRESENTATION AND POLICIES We have prepared the accompanying unaudited condensed consolidated financial statements of Connetics Corporation ("Connetics") in accordance with generally accepted accounting principles for interim financial information and pursuant to 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. In our opinion, all adjustments, consisting of normal recurring accrual adjustments, considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. Certain prior year balances have been reclassified for comparative purposes. These condensed, consolidated financial statements and notes should be read in conjunction with audited financial statements and notes to those financial statements for the year ended December 31, 2000 included in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission. Revenue Recognition Product Sales and Royalty Revenue. We recognize revenue from product sales when there is persuasive evidence that an arrangement exists, when title has passed upon shipment, the price is fixed and determinable, and collectibility is reasonably assured. We establish allowances for estimated returns, rebates, and chargebacks. We are obligated to accept from customers the return of pharmaceuticals that have reached their expiration date. To date we have not experienced significant returns of expired product. Contract revenue. We record contract revenue for research and development as it is earned based on the performance requirements of the contract. We recognize non-refundable contract fees for which no further performance obligation exists, and for which Connetics has no continuing involvement, on the earlier of when the payments are received or when collection is assured. We recognize revenue from non-refundable upfront license fees under collaborative agreements ratably over the development period when, at the time the agreement is executed, the development period involves significant risk due to the incomplete stage of the product's development. Revenue associated with performance milestones is recognized based upon the achievement of the milestones, as defined in the respective agreements. Royalty expense directly related to product sales is classified in cost of sales. We recorded royalty expense of $0.7 million for the quarter ended March 31, 2001, and $1.0 million for the quarter ended March 31, 2000. -6- 7 Recent Accounting Pronouncements As of January 1, 2001, Connetics adopted Financial Accounting Standards Board Statements No. 133, "Accounting for Derivative Instruments and Hedging Activities -- An Executive Overview of FASB Statement 133, as amended by FASB 137 and 138." As a result of the adoption of FAS 133, we recognize derivative financial instruments in our financial statements at their fair value, regardless of the purpose or intent for holding the instrument. Changes in the fair value of derivative financial instruments are either recognized periodically in income or in shareholders' equity as a component of comprehensive income (loss) depending on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it qualifies as a fair value hedge or cash flow hedge. Connetics entered into a foreign currency exchange contract related to our acquisition of Soltec Research Pty Ltd. ("Soltec"). That contract was entered into in relation to a business combination and does not qualify as a hedge under FAS 133; it expired on April 19, 2001, the closing date of the acquisition. The purpose of the contract was to lock in to the purchase price paid for Soltec. As of March 31, 2001, the loss on this contract was $1.4 million, which we recorded in the balance sheet and through the statement of operations through interest and other expense. As the contract does not qualify as a hedge, changes in fair value are recorded in the statement of operations. The fair value was determined using the difference in the contract forward rate and the current forward contract rate for a similar maturity discounted to present value. 2. NET LOSS PER SHARE We compute basic net income (loss) per common share using the weighted average number of shares outstanding during the period. We compute diluted net income per share using the weighted average of common and diluted equivalent stock options and warrants outstanding during the period. We excluded all stock option and warrants from the calculation of diluted loss per common share for the three months ended March 31, 2001 because these securities are anti-dilutive during this period. The following table sets forth the computations for basic and diluted earnings per share.
Three months ended 31, March --------------------- (In thousand, except per share amounts) 2001 2000 --------------------- Numerator for basic and diluted earnings- per share- Net loss $ (4,888) $ (4,407) Denominator for basic earnings per share Weighted average shares 29,705 26,627 Effect of dilutive securities - Stock options and warrants -- 1,785 -------------------- Denominator for diluted earnings per share 29,705 28,412 Net loss per share: Basic $ (0.16) $ (0.16) ==================== Diluted $ (0.16) $ (0.15) ====================
-7- 8 3. COMPREHENSIVE INCOME (LOSS) During the three month period ended March 31, 2001, total comprehensive loss amounted to $8.5 million, compared to comprehensive income of $16.5 million for the same period in 2000. The components of comprehensive income (loss) for the three month period ended March 31, 2001 and March 31, 2000 are as follows:
Three months ended March 31, ----------------------- (In thousands) 2001 2000 ----------------------- Net loss $ (4,888) $ (4,407) Unrealized gain (loss) on securities (3,568) 20,920 ----------------------- Comprehensive income (loss) (8,456) $ 16,513 =======================
4. ACTIMMUNE In 1998, we licensed from Genentech exclusive rights to Actimmune, interferon gamma, for the United States and Japan. Interferon gamma is one of a family of proteins involved in the regulation of the immune system and has been shown to reduce the frequency and severity of certain infections. We formed a subsidiary, InterMune Pharmaceuticals, Inc., to develop Actimmune for various infections and fungal diseases. In April 1999, InterMune became an independent company, and in March 2000, InterMune became a public company. Effective April 1, 2000, we assigned to InterMune our remaining rights and obligations under the license with Genentech and the corresponding supply agreement. In exchange, InterMune paid us approximately $5.2 million; and additional $0.9 million was paid to us at the end of March 2001. InterMune is obligated to pay us a royalty on Actimmune sales beginning January 1, 2002. In addition, we have retained the product rights for potential dermatological applications. We recorded sales of Actimmune of approximately $1.8 million during the first quarter of 2000; commencing in the second quarter of 2000, InterMune acquired our remaining rights to sell Actimmune. 5. SUBSEQUENT EVENTS On April 19, 2001, Connetics completed the acquisition of Soltec Research Pty. Ltd., a division of Australia based F.H. Faulding & Co Limited for Australian $32 million or approximately U.S. $16.9 million. Connetics' two marketed dermatology products and current development programs are based on technology developed by Soltec. Soltec is a profitable company that possesses broad intellectual property and patents on innovative topical delivery technologies. In addition, Soltec has numerous license agreements with pharmaceutical companies around the world. The acquisition of Soltec is expected to provide Connetics with powerful product innovation and development capabilities, fuel an extensive new product pipeline, and contribute revenue and profits to Connetics' financial results. On April 30, 2001, Connetics sold its rights to Ridaura(R) to Prometheus Laboratories Inc., a private company based in San Diego, for $9.0 million plus a royalty on annual sales in excess of $4.0 million for the next five years. Ridaura(R) is a prescription product for the treatment of rheumatoid arthritis. -8- 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This MD&A should be read in conjunction with the MD&A included in our Annual Report on Form 10-K for the year ended December 31, 2000, and with the unaudited condensed consolidated financial statements and notes to financial statements included in this report. Except for historical information, the discussion in this report contains forward-looking statements that involve risks and uncertainties. When used in this report, the words "anticipate," "believe," "estimate," "will," "intend" and "expect" and similar expressions identify forward-looking statements. Although we believe that our plans, intentions and expectations reflected in these forward-looking statements are reasonable, these plans, intentions, or expectations may not be achieved. Some of the factors that, in our view, could cause actual results to differ are discussed under the caption "Factors That May Affect Future-Results, Financial Condition and the Market Price of Securities" and in our Annual Report on Form 10-K. Our historical operating results are not necessarily indicative of the results to be expected in any future period. OVERVIEW Through the end of the first quarter of 2001 we marketed three pharmaceutical products. In May 2000, the FDA granted us clearance to market OLUX(TM) Foam (clobetasol propionate), 0.05% for the treatment of moderate to severe scalp dermatoses. We launched OLUX on November 6, 2000. Our commercial business is focused on the dermatology marketplace, which is characterized by a large patient population that is served by relatively small, and therefore more accessible, groups of treating physicians. We are offering two dermatology products with clinically proven therapeutic advantages and are providing quality customer service to physicians through our experienced sales and marketing staff. We also sell a third product Ridaura, a product to treat rheumatoid arthritis. In addition to our commercial business, we are developing a biotechnology product that has the potential to treat multiple diseases. Our product is a recombinant form of a natural hormone called relaxin. Relaxin reduces the hardening, or fibrosis, of skin and organ tissue, dilates existing blood vessels and stimulates new blood vessel growth. We currently have clinical trials underway with relaxin for infertility. We intend to develop relaxin for other indications. On October 8, 2000, we announced that our pivotal trial for relaxin for the treatment of scleroderma failed to reach its primary endpoint. We have discontinued our development program related to relaxin for scleroderma. We are conducting an earlier stage clinical trial of relaxin for the treatment of infertility. We maintain North American rights for relaxin and have entered into collaborative relationships for this program for markets outside of the United States. In October 2000, our partners in Japan and Europe notified us that they would terminate our relaxin development agreements with them in accordance with the termination provisions of the respective agreements and as of December 31, 2000, we have no further development obligations under either agreement. Consequently, the rights for relaxin in Japan have reverted to us, and the European rights will revert to us in April 2001. Following the end of the first quarter, we completed the acquisition of Soltec Research Pty. Ltd., from Australian based F.H. Faulding & Co Limited and the sale of our Ridaura product line to Prometheus Laboratories Inc. The acquisition of Soltec was announced on March 20, 2001, and was completed on April 19, 2001. The sale of the Ridaura product line was completed on April 30, 2001. -9- 10 RESULTS OF OPERATIONS REVENUES
Three Months Ended March 31, -------------------- Revenues (In thousands) 2001 2000 -------------------- Product: Luxiq $ 3,895 $ 2,259 Ridaura 2,021 1,650 Olux 1,739 -- Actimmune -- 1,757 -------------------- Total product revenues 7,655 5,666 Contract: Celltech -- 6,127 Suntory Ltd. -- 47 F.H. Faulding & Co., Ltd. 20 -- Paladin Labs, Inc. 13 213 InterMune 771 1,500 Immune Response Corp. -- 50 -------------------- Total contract revenues 804 7,937 -------------------- Total revenues $ 8,459 $13,603 ====================
Our product revenues for the three months ended March 31, 2001, were $7.7 million, compared to $5.7 million for the three months ended March 31, 2000. The increase in total product revenues was due to continued sales growth of Luxiq and Olux, which we began marketing in April 1999 and November 2000, respectively. As part of the agreement with InterMune, effective April 1, 2000 we did not record Actimmune sales beginning with the second quarter of 2000. Contract revenues for the three month period ended March 31, 2001 were $0.8 million, compared to $7.9 million the three month period ended March 31, 2000. The decrease in contract revenue for the three month period ended March 31, 2001, is mainly due to the receipt of one-time license payments in the first quarter of 2000, a milestone payment of $5.0 million from a former collaborative partner for relaxin, in the first quarter of 2000, and $1.5 million paid by InterMune, for relaxin, in the first quarter of 2000 in conjunction with our sublicense agreement. We do not expect to receive contract revenues in the foreseeable future. InterMune purchased the remaining United States commercial rights and revenue to Actimmune effective April 1, 2000. As part of the transaction, InterMune paid $5.2 million in 2000 which included the prepayment of a $1.0 million obligation owed in 2002. In March 2001 Intermune made a final payment on this arrangement to Connetics in the amount $ 0.9 million which has been offset by related rebates and chargebacks of $0.1 million. Our cost of product revenues for 2001 includes the costs of Luxiq, Ridaura and Olux, royalty payments on these products based on a percentage of our product revenues, and product freight and distribution costs from our distributor. We recorded cost of product revenues of $1.1 million for the three months ended March 31, 2001, compared to $1.8 million for the three months ended March 31, 2000. The decrease in cost of product revenues for the first three months of 2001 over the first three months of 2000 is primarily due to the sale of our remaining rights to Actimmune sales, effective April 1, 2000 under the agreement with Intermune. -10- 11 RESEARCH AND DEVELOPMENT Research and development expenses were $4.4 million for the three month period ended March 31, 2001, compared to $6.1 million for the comparable period in 2000. The decrease in expenses was due to prior year expenses including costs for manufacturing scale up for relaxin; and little clinical trial activity going on compared with 2000 Phase III trial activity for scleroderma. We expect research and development expenses to remain consistent over the next few quarters, due to the impact of the removal of the majority of expenses related to the development of relaxin for scleroderma and the ramp up of relaxin clinical trial activities for new disease indications. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased to $7.7 million for the three month period ended March 31, 2001, compared to $5.5 million for the comparable period in 2000. The increase in expenses was due to increased headcount and increased market research and sales promotions costs related to the Olux launch. We expect selling, general and administrative expenses to increase slightly during the remainder of fiscal 2001 due to expansion of dermatology sales force in Q2 2001. INTEREST INCOME (EXPENSE) Interest and other income were $1.0 million for the three month period ended March 31, 2001, compared with $0.3 million for the comparable period in 2000. The increase in interest income was due to higher cash and short-term investment balances for the period ended March 31, 2001 compared to the same period in 2000. Interest and other expense was $1.4 million for the three month period ended March 31, 2001, compared with $0.1 million for the comparable period in 2000. The increase in interest and other expense resulted from the loss of $1.4 million on a foreign currency exchange contract that was entered into in February 2001 in connection with the Soltec acquisition and was partially offset by lower interest expense associated with lower balances outstanding for obligations under capital leases and notes payable. NET LOSS Net loss was $4.9 million for the three month period ended March 31, 2001, compared to a net loss of $4.4 million for the comparable period in 2000. The increase in net losses was primarily attributable to the net effect of the following; - an at-risk milestone payment of $5.0 million and a $1.0 million quarterly development payment received from Celltech in 2000 in connection with our agreement for the development of relaxin, partially offset by; - increased product revenues in 2001 primarily due to sales growth of Luxiq and Qlux, which we began marketing in April 1999 and November 2000, respectively; - loss on the foreign currency exchange contract of $1.4 million entered into in February 2001; - payment of $0.9 million from InterMune in connection with our revenue adjustment agreement with InterMune. - reduced research and development expenses in 2001 as a result of decreased clinical trial activity and manufacturing scale up costs associated with relaxin, partially offset by; - increased selling, general and administrative expenses in 2001 related to increased headcount and market research and sales promotions costs associated with the Olux launch. -11- 12 We expect to incur losses for the remainder of 2001 and the foreseeable future. These losses are expected to fluctuate from period to period based on timing of product revenues, clinical material purchases, clinical trial expenses, and possible acquisitions of new products and technologies. LIQUIDITY AND CAPITAL RESOURCES We have financed our operations to date primarily through proceeds from equity financings, collaborative arrangements with corporate partners and bank loans. At March 31, 2001, cash, cash equivalents and short-term investments totaled $70.6 million compared to $80.2 million at December 31, 2000. Our investments are held in a variety of interest-bearing instruments including high-grade corporate bonds, commercial paper and money market accounts. Cash flows from operating activities. Cash used in operations for the three month period ended March 31, 2001 and 2000, was $5.4 million and $1.9 million, respectively. Net loss of $4.9 million for the first three months of 2001 was affected by non-cash charges of $0.2 million of depreciation and amortization expense and $1.4 million in other expense related to the to Soltec foreign currency exchange contract. Cash outflow for the first three months of 2001 was primarily for operating activities which included a decrease of $1.5 million in accounts payable and reduction of $2.0 million in other current liabilities. Cash flows from investing activities. Investing activities used $4.6 million in cash during the three month period ended March 31, 2001, due in part to sales of $8.0 million of short-term investments offset by $12.5 million of short term investment purchases. Cash flows from financing activities. Cash used by financing activities of $0.6 million for the three months ended March 31, 2001 included a $0.8 million bank loan payment, offset by $0.1 million in proceeds from issuance of common stock. Working Capital. Working capital decreased by $8.1 million to $62.9 million at March 31, 2001 from $71.0 million at December 31, 2000. The decrease in working capital was due to use of our cash in operations, and payment of debt obligations We believe our existing cash, cash equivalents and short-term investments generated from product sales and collaborative arrangements with corporate partners, will be sufficient to fund our operating expenses, debt obligations and capital requirements through at least the next 12 months. FACTORS THAT MAY AFFECT FUTURE RESULTS, FINANCIAL CONDITION AND THE MARKET PRICE OF SECURITIES Please also read Items 1 and 3 in our 2000 Annual Report on Form 10-K where we have described our business and the challenges and risks we may face in the future. Our results of operation have varied widely in the past, and they could continue to vary significantly from quarter to quarter due to a number of factors, including those listed below. Any shortfall in revenues would have an immediate impact on our earnings per share, which could adversely affect the market price of our common stock. Our operating expenses, which -12- 13 include sales and marketing, research and development and general and administrative expenses, are based on our expectations of future revenues and are relatively fixed in the short term. Accordingly, if revenues fall below our expectations, we will not be able to reduce our spending rapidly in response to such a shortfall. Due to the foregoing factors, we believe that quarter-to-quarter comparisons of our results of operations are not a good indication of our future performance. RISKS RELATED TO OUR BUSINESS If we do not sustain profitability, stockholders may lose their investment. Until the first quarter of fiscal year 2000, we lost money every year since our inception. We had net losses of $27.3 million in 1999, net income of $27.0 million in 2000. If we exclude a gain of $43.0 million on sales of stock we held in InterMune, and the associated income tax, our net loss for 2000 would have been $15.0 million. We also had 2000 a net loss of 4.9 million for the three months ended March 31, 2001. Our accumulated deficit was $97.6 million at March 31, 2001. We may incur additional losses during the next few years. If we do not sustain the profitability we achieved in 2000, our stock price may decline. If we do not obtain the capital necessary to fund our operations, we will be unable to develop or market our products. We currently believe that our available cash resources will be sufficient to fund our operating and working capital requirements for the next 18 months. Accordingly, we may need to raise additional funds through public or private financings, strategic relationships or other arrangements. If we are unable to raise additional funds when needed, we may not be able to market our products as planned or continue development of our other products. If we are unable to successfully complete development and commercialization of relaxin, we may never achieve profitability. 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. Our commercial success depends in part on our ability and the ability of our licensors to protect our technology and processes. The foam technology used in our Luxiq(R) and OLUX(TM) products is covered by one issued patent. In addition, the patents in our relaxin patent portfolio begin to expire in 2002 in foreign countries and 2005 in the United States. Patent expiration dates range from 2002 to 2017. We are pursuing several U. S. patent applications, although we cannot be sure that any of these patents will ever be issued. We also have acquired rights under certain patents and patent applications in connection with our licenses to distribute products and from the assignment of rights 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 for the marketing and distribution of 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. -13- 14 The cost of responding to these challenges and the inherent costs to defend the validity of our 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. A judgment adverse to us in any patent interference, litigation or other proceeding arising in connection with these patent applications could materially harm our business. The ownership of a patent or an interest in a patent 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 obtain a license to such intellectual property on favorable terms, if at all. We may not succeed in any attempt to redesign our products or processes to avoid infringement. Our current product revenue will not cover the cost of fully developing and commercializing relaxin. Product revenue from sales of our marketed products does not cover the full cost of developing relaxin and other products in our pipeline. Historically, we have depended on licensing agreements with our corporate partners to successfully develop and commercialize our products. We also generate revenue 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: - a product development contract may expire or a relationship may be terminated, and we will not be able to attract a satisfactory alternative corporate partner within a reasonable time; - a corporate partner involved in the development of our products does not commit sufficient capital to successfully develop our products; and - we may be contractually bound to terms that, in the future, are not commercially favorable to us. If any of these risks occurs, we may not be able to successfully develop our products. We depend on third parties to protect and maintain our patent portfolio. Nearly our entire patent portfolio is licensed from third parties, who are responsible to varying degrees for the prosecution and maintenance of those patents. Our success will depend on our ability, or 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. It is possible that before any of our products in development can be commercialized, the related patents may have expired or be close to expiration, thus reducing any advantage of the patent. -14- 15 Moreover, composition of matter patent protection, which gives patent protection for a compound or a composition, may not be available for some of our product candidates. If we do not successfully commercialize relaxin, we may lose fundamental intellectual property rights to the product. Licenses with Genentech, Inc. and The Howard Florey Institute of Experimental Physiology and Medicine require us to use our best efforts to commercialize relaxin. Our failure to successfully commercialize relaxin may result in the reversion of our rights under these licenses to Genentech and the Florey Institute. The termination of these agreements and subsequent reversion of rights could cause us to lose fundamental intellectual property rights to relaxin. This would prohibit us from continuing our relaxin development programs. We are subject to foreign exchange risks which may increase our operational expenses. We make payments to Boehringer Ingelheim for the production of relaxin in Austrian schillings, and to CCL Pharmaceuticals for the production of Luxiq and OLUX in pounds sterling. If the U.S. dollar depreciates against the schilling or the pound, the payments that we must make will increase, which will increase our expenses. We do not currently hedge our foreign currency exposure related to these Agreements. 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 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, shall be our exclusive property, other than inventions unrelated to us and developed entirely on the individual's own time. Nevertheless, these agreements may not provide meaningful protection of our trade secrets and proprietary know-how if they are 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, 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. In the event of accidental contamination or injury from these materials, 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. -15- 16 RISKS RELATED TO OUR PRODUCTS Manufacturing difficulties could delay commercialization of our products or future revenues from product sales. We depend on third parties to manufacture our products, and each product is manufactured by a sole source manufacturer. Boehringer Ingelheim Austria GmbH, GlaxoSmithKline, and CCL Pharmaceuticals are our sole source manufacturers for our products. All of our contractors must comply with the applicable FDA good manufacturing practice regulations, which include quality control and quality assurance requirements as well as the corresponding maintenance of records and documentation. Manufacturing facilities are subject to ongoing periodic inspection by the FDA and corresponding state agencies, including unannounced inspections, and must be licensed before they can be used in commercial manufacturing of our products. If our sole source manufacturers cannot provide us with our product requirements in a timely and cost-effective manner, if the product they are able to supply cannot meet commercial requirements for shelf life, or if they are not able to comply with the applicable good manufacturing practice regulations and other FDA regulatory requirements, our sales of marketed products could be reduced and we could suffer delays in the progress of clinical trials for products under development. We do not have control over our third-party manufacturers' compliance with these regulations and standards. In addition, any commercial dispute with any of our sole source suppliers could result in delays in the manufacture of product, and affect our ability to commercialize our products. If we are unable to contract with third parties to manufacture and distribute our products in sufficient quantities, on a timely basis, or at an acceptable cost, we may be unable to meet demand for our products and may lose potential revenues. We have no manufacturing or distribution facilities for any of our products. Instead, we contract with third parties to manufacture our products for us. We have manufacturing agreements with the following companies: - CCL Pharmaceuticals, a Division of CCL Industries Limited, a U.K. corporation, for Luxiq and OLUX; - Boehringer Ingelheim Austria GmbH for relaxin; and - GlaxoSmithKline for Ridaura. Typically, these manufacturing contracts are short-term. We are dependent upon renewing agreements with our existing manufacturers or finding replacement manufacturers to satisfy our requirements. As a result, 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. Any loss of a manufacturer or any difficulties which could arise in the manufacturing process could significantly affect our inventories and supply of products available for sale. In each case, our products are made by a sole source of supply. If these third parties are unable or unwilling to produce our products in sufficient quantities, with appropriate quality, and under commercially reasonably terms, it could have a negative effect on our sales margins and market share, as well -16- 17 as our overall business and financial results. 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 cGMP regulations, we may be unable to meet demand for our products and may lose potential revenue. The FDA requires that all manufacturers used by pharmaceutical companies comply with the FDA's regulations, including those cGMP regulations applicable to manufacturing processes. The cGMP validation of a new facility and the approval of that manufacturer for a new drug product may take a year or more before manufacture can begin at the facility. Delays in obtaining FDA validation of a replacement manufacturing facility could cause an interruption in the supply of our products. Although we have business interruption insurance covering the loss of income for up to $6.0 million, which may mitigate the harm to our business from the interruption of the manufacturing of products caused by certain events, 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. 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. We cannot be certain that supply interruptions will not occur or that our inventory will 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 obtain replacement manufacturers as needed and conditions effecting the cost and availability of raw materials. If we do not obtain and maintain governmental approvals for our products, we cannot sell these products for their intended diseases. Pharmaceutical companies are subject to heavy regulation by a number of national, state and local agencies. Of particular importance is the FDA in the United States. It 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. Failure to comply with applicable regulatory requirements could, among other things, result in 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 and biological drug 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 are subject to continuing FDA and foreign regulatory review, and later discovery of previously unknown problems with a product, manufacturing process or facility may -17- 18 result in restrictions, including withdrawal of the product from the market. Our products receive FDA review regarding their safety and effectiveness. However, the FDA is permitted to revisit and change its prior determinations and we cannot be sure that the FDA will not change its position with regard to the safety or effectiveness of our products. If the FDA's position changes, we may be required to change our labeling or formulations, or cease to manufacture and market the challenged products. Even before any formal regulatory action, we could voluntarily decide to cease distribution and sale or recall any of our products if concerns about the safety or effectiveness develop. To market our products in countries outside of the United States, we and our partners must obtain similar 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. The process of obtaining these approvals is time consuming and requires the expenditure of substantial resources. 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 of the broad and expanding legislative and regulatory requirements affecting us. We may spend a significant amount of money to obtain FDA and other regulatory approvals, which may never be granted. The process of obtaining FDA and other regulatory approvals is lengthy and expensive. To obtain approval, we must show in preclinical and clinical trials that our products are safe and effective, and the marketing and manufacturing of pharmaceutical products are subject to rigorous testing procedures. The FDA approval processes require substantial time and effort, the FDA continues to modify product development guidelines, and the FDA may not grant approval on a timely basis or at all. 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 and biologics license applications, or longer if significant questions arise during the review process. 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. 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 performance and financial results. Even if we obtain approval from the FDA, the FDA is authorized to impose post-marketing requirements such as: - testing and surveillance to monitor the product and its continued compliance with regulatory requirements; - submitting products for inspection and, if any inspection reveals that the product is not in compliance, the prohibition of the sale of all products from the same lot; - suspending manufacturing; - recalling products; and -18- 19 - withdrawing marketing clearance. 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 the receipt of correspondence from the FDA alleging these practices can result in the following: - incurring substantial expenses, including fines, penalties, legal fees and costs to comply with the FDA's requirements; - changes in the methods of marketing and selling products; - taking FDA-mandated corrective action, which may include placing advertisements or sending letters to physicians rescinding previous advertisements or promotion; and - disruption in the distribution of products and loss of sales until compliance with the FDA's position is obtained. If Luxiq and OLUX do not achieve or sustain market acceptance, our revenues will not increase and may not cover our operating expenses. Our future revenues will depend upon dermatologist and patient acceptance of Luxiq and OLUX. Factors that could affect acceptance of Luxiq and OLUX include: - satisfaction with existing alternative therapies; - the effectiveness of our sales and marketing efforts; - undesirable and unforeseeable side effects; and - the cost of the product as compared with alternative therapies. Since we have only had approval to sell Luxiq for two years, and we only began selling OLUX in November 2000, we cannot predict the potential long-term patient acceptance of either product. If we are unable to develop alternative delivery systems for relaxin, patients that do not suffer from severe diseases may not be willing to use the current drug delivery system. In addition to demonstrating that relaxin is safe and effective in our current clinical trials, we must meet several additional major development objectives for relaxin. In particular, we may need to develop an alternative means of delivering the drug. In our current clinical trials, relaxin is being delivered through the use of an infusion pump. For a serious and life threatening condition, this method of delivery may be acceptable. However, for the indications we are studying, such as treatment of infertility and peripheral arterial disease, we may need to develop an alternative delivery system. The known biological properties of the relaxin molecule may decrease the availability of certain delivery systems. If we are not able to develop a suitable alternative delivery system for relaxin, we may be unable to market relaxin effectively for indications that are not life threatening, such as infertility, and the commercial potential of -19- 20 relaxin would be seriously harmed. Our inability to develop relaxin to its full commercial potential would harm our future prospects and revenue growth and our stock price would likely decline. We rely on third parties to conduct clinical trials for our products, and those third parties may not perform satisfactorily. We do not have the ability to independently conduct clinical studies, and we rely on third parties to perform this function. 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 at all. If we are unable to rely on clinical data collected by others, we could be required to repeat clinical trials, which could significantly delay commercialization and require significantly greater capital. If we are unable to develop new products, our expenses may increase without any immediate 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, which must be completed before commercial quantities of these developments can be sold, will require significant commitments of personnel and financial resources. Delays in the research, development, testing or approval processes will cause a corresponding delay in revenue generation from those products. Regardless of whether they are ever released to the market, the expense of such processes will have already been incurred. We reevaluate our research and development efforts regularly to assess whether our efforts to develop a particular product or technology are progressing at a rate that justifies our continued expenditures. On the basis of these reevaluations, we have abandoned in the past, and may abandon in the future, our efforts on a particular product or technology. There can be no certainty that any product we are researching or developing will ever be successfully released to the market. If we fail to take a product or technology from the development stage to market on a timely basis, we may incur significant expenses without a near-term financial return. If we do not successfully integrate new products, 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 these products or product lines are not integrated 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 and obtain market acceptance in any new product categories. After acquiring or developing a new product, we may need 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, many of these expenses could be incurred prior to the actual distribution of new products. Because of this timing, if the new products are not accepted by the market or if they are not competitive with similar products distributed by others, the ultimate success of the acquisition or development could be substantially diminished. -20- 21 RISKS RELATED TO OUR INDUSTRY We face intense competition, which may limit our commercial opportunities and our ability to become profitable. The pharmaceutical and biotechnology industries are highly competitive. Competition in our industry occurs on a variety of 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 and developing new products to provide benefits superior to those of existing products. 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 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. It is possible that our competitors may develop new or improved products to treat the same conditions as our products treat or make technological advances reducing 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 and market products that are more effective, have fewer or less severe adverse side effects or are less expensive than our products. These competitors also may develop 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. Physicians may not adopt our products over competing products, and our products may not offer an economically feasible alternative to existing modes of therapy. Our products compete with generic pharmaceuticals, which claim to offer equivalent benefit at a lower cost. In some cases, insurers and other health care payment organizations try to encourage the use of these less expensive generic brands through their prescription benefits coverages 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. If third party payors will not provide coverage or reimburse patients for the use of our products, our revenues and profitability will suffer. Our products' commercial success is substantially dependent on whether third-party reimbursement is available for the use of our products by hospitals, clinics and doctors. Medicare, Medicaid, health maintenance organizations and other third-party payors may not authorize or otherwise budget for the reimbursement of our products. In addition, they may not view our products as cost-effective and reimbursement may not be available to consumers or may -21- 22 not be sufficient to allow our products to be marketed on a competitive basis. Likewise, legislative proposals to reform health care or reduce government programs could result in lower prices for or rejection of our products. Changes in reimbursement policies or health care cost containment initiatives that limit or restrict reimbursement for our products may cause our revenues to decline. If managed care organizations and other third-party reimbursement policies do not cover our products, we may not increase our market share and our revenues and profitability will suffer. Our operating results and business success depends in large part on the availability of adequate third-party payor reimbursement to patients for our prescription-brand products. These third-party payors include governmental entities (such as Medicaid), private health insurers and managed care organizations. Over 70% of the U.S. population now participates in some version of managed care. Because of the size of the patient population covered by managed care organizations, marketing of prescription drugs to them and the pharmacy benefit managers that serve many of these organizations has become important to our business. 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. 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. Exclusion of a product from a formulary can lead to its sharply reduced usage in the managed care organization patient population. Payment or reimbursement of only a portion of the cost of our prescription products could make our products less attractive, from a net-cost perspective, to patients, suppliers and prescribing physicians. We cannot be certain that the reimbursement policies of these entities will be adequate for our products to compete on a price basis. 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. If product liability lawsuits are brought against us, we may incur substantial costs. Our industry faces and inherent risk of product liability claims from allegations that our products resulted in adverse effects to the patient 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. Our insurance may not provide adequate coverage against potential product liability claims or losses. 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 adverse publicity, all of which would impair our ability to generate sales. If we were found liable for any product liability claims in excess of our coverage or outside of our coverage, the cost and expense of such liability could severely damage our business, financial condition and profitability. -22- 23 RISKS RELATED TO OUR STOCK Our stock price is volatile and the value of your investment in our stock could decline in value. The market prices for securities of biotechnology companies like our company have been and are likely to continue to be highly volatile. As a result, investors in these companies often buy at very high prices only to see the price drop substantially a short time later, resulting in an extreme drop in value in the stock holdings of these investors. In addition, the volatility could result in securities class action litigation. Any litigation would likely result in substantial costs, and divert our management's attention and resources. If our officers, directors and principal stockholders act together, they may be able to control our management and operations and they may make decisions that are not in the best interests of other stockholders. Our directors, executive officers and principal stockholders and their affiliates currently beneficially own in the aggregate approximately 55% of our outstanding common stock. Accordingly, they collectively have the ability to substantially influence the outcome of all matters requiring stockholder approval, including the election of directors, and any merger, consolidation, or sale of all or substantially all of our assets. They may exercise this ability in a manner that advances their best interests and not necessarily those of other stockholders. This concentration of ownership may also have the effect of delaying, deferring or preventing a change in control of our company, even if the change in control would be beneficial to other stockholders. Our charter documents and Delaware law contain provisions that could delay or prevent an acquisition of us, even if the acquisition 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. The existence of the rights plan could delay, prevent, or make more difficult a merger or tender offer or proxy contest involving us. Other provisions of Delaware law and of our charter documents, including a provision eliminating the ability of stockholders to take actions by written consent, could also delay or make difficult 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. -23- 24 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the reported market risks since December 31, 2000 except for the foreign currency exchange risk related to the foreign currency exchange contract Connetics entered into during the quarter ended March 31, 2001. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. None (b) Reports on Form 8-K. (i) We filed a Current Report on Form 8-K on April 2, 2001, as amended by a filing on May 4, 2001, in connection with our acquisition of Soltec Research Pty Ltd. (ii) We filed a Current Report on Form 8-K on May 11, 2001, in connection with the sale of our Ridaura(R) product line to Prometheus Laboratories, Inc. -24- 25 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. CONNETICS CORPORATION By: /s/ JOHN L. HIGGINS ------------------------- John L. Higgins Exec. Vice President, Finance and Administration and Chief Financial Officer Date: May 15, 2001 -25-