-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UgT/NW8rzkpqm0bb1xty7ytXxbLIZuFAV4mb5RPBU8bvqGpf0zhtE2Q+kUiuT8G2 9ozO5NFaz80Z+Z3wWPku1g== 0000903100-02-000269.txt : 20020814 0000903100-02-000269.hdr.sgml : 20020814 20020814152529 ACCESSION NUMBER: 0000903100-02-000269 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COLLAGENEX PHARMACEUTICALS INC CENTRAL INDEX KEY: 0001012270 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 521758016 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-28308 FILM NUMBER: 02735745 BUSINESS ADDRESS: STREET 1: 41 UNIVERSITY DRIVE CITY: NEWTON STATE: PA ZIP: 18940 BUSINESS PHONE: 2155797388 MAIL ADDRESS: STREET 1: 41 UNIVERSITY DRIVE CITY: NEWTON STATE: PA ZIP: 18940 10-Q 1 form10q_063002.txt SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 Commission File Number 0-28308 COLLAGENEX PHARMACEUTICALS, INC. --------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Delaware 52-1758016 - ---------------------------------- -------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 41 University Drive, Newtown, PA 18940 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (215) 579-7388 ------------------------------- (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: X No: ----- ----- Indicate the number of shares outstanding of each of the Registrant's classes of Common Stock as of July 31, 2002: Class Number of Shares ----- ---------------- Common Stock $.01 par value 11,273,466 COLLAGENEX PHARMACEUTICALS, INC. TABLE OF CONTENTS ----------------- Page ---- PART I. FINANCIAL INFORMATION........................................... 1 Item 1. Financial Statements......................................... 1 Condensed Consolidated Balance Sheets as of December 31, 2001 and June 30, 2002 (unaudited)...................... 2 Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2001 and 2002 (unaudited)......... 3 Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 2001 and 2002 (unaudited) ........ 4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2002 (unaudited)......... 5 Notes to Condensed Consolidated Financial Statements (unaudited)............................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 11 Results of Operations........................................ 12 Liquidity and Capital Resources.............................. 21 Item 3. Quantitative and Qualitative Disclosures About Market Risk... 27 PART II. OTHER INFORMATION............................................... 28 Item 4. Submission of Matters to a Vote of Security Holders ......... 28 Item 5. Other Information............................................ 29 Item 6. Exhibits and Reports on Form 8-K............................. 30 SIGNATURES................................................................ 32 - i - PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. - 1 - COLLAGENEX PHARMACEUTICALS, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets December 31, 2001 and June 30, 2002 (dollars in thousands, except per share data)
DECEMBER 31, JUNE 30, ASSETS 2001 2002 ----------- ----------- (unaudited) Current assets: Cash and cash equivalents........................................... $ 6,171 $ 5,605 Accounts receivable, net of allowance of $950 and $1,217 at December 31, 2001 and June 30, 2002, respectively................. 4,478 4,643 Inventories......................................................... 1,402 1,522 Prepaid expenses and other current assets........................... 1,200 1,584 --------- --------- Total current assets.......................................... 13,251 13,354 Equipment and leasehold improvements, net.............................. 537 670 Other assets........................................................... 910 2,220 --------- --------- Total assets.................................................. $ 14,698 $ 16,244 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of note payable..................................... $ 35 $ -- Accounts payable.................................................... 3,769 3,684 Accrued expenses.................................................... 3,153 4,793 --------- --------- Total current liabilities..................................... 6,957 8,477 --------- --------- Deferred revenue....................................................... 614 537 Commitments Stockholders' equity: Preferred stock, $0.01 par value, 5,000,000 shares authorized; 200,000 shares of Series D cumulative convertible preferred stock issued and outstanding at December 31, 2001 and June 30, 2002 (liquidation value of $20,000 at June 30, 2002).............. 2 2 Common stock, $0.01 par value; 25,000,000 shares authorized, 10,999,573 and 11,273,466 shares issued and outstanding at December 31, 2001 and June 30, 2002, respectively................. 110 113 Common stock to be issued (103,196 shares at December 31, 2001 and 87,636 at June 30, 2002)...................................... 840 611 Additional paid in capital.......................................... 80,129 82,230 Accumulated deficit................................................. (73,954) (75,726) --------- --------- Total stockholders' equity.................................... 7,127 7,230 --------- --------- Total liabilities and stockholders' equity.................... $ 14,698 $ 16,244 ========= =========
See accompanying notes to unaudited condensed consolidated financial statements. - 2 - COLLAGENEX PHARMACEUTICALS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations For the Three Months Ended June 30, 2001 and 2002 (dollars in thousands, except per share data) (unaudited)
THREE MONTHS ENDED JUNE 30, --------------------------- 2001 2002 ---------- ---------- Revenues: Product sales........................................... $ 7,267 $ 10,377 Contract revenues....................................... 1,024 555 License revenues........................................ 420 35 ----------- ----------- Total revenues..................................... 8,711 10,967 ----------- ----------- Operating expenses: Cost of product sales................................... 1,516 1,598 Research and development................................ 874 870 Selling, general and administrative..................... 9,070 8,899 ----------- ----------- Total operating expenses.......................... 11,460 11,367 ----------- ----------- Operating loss.................................... (2,749) (400) Other income (expense): Interest income......................................... 74 15 Interest expense........................................ (2) (1) Other income (expense).................................. (4) 1 ----------- ----------- Net loss.......................................... (2,681) (385) Preferred stock dividend.................................. 420 409 ----------- ----------- Net loss allocable to common stockholders................. $ (3,101) $ (794) =========== =========== Basic and diluted net loss per share allocable to common stockholders............................................ $ (0.29) $ (0.07) =========== =========== Shares used in computing basic and diluted net loss per share allocable to common stockholders.................. 10,550,638 11,163,585 =========== ===========
See accompanying notes to unaudited condensed consolidated financial statements. - 3 - COLLAGENEX PHARMACEUTICALS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations For the Six Months Ended June 30, 2001 and 2002 (dollars in thousands, except per share data) (unaudited)
SIX MONTHS ENDED JUNE 30, ---------------------------- 2001 2002 ---------- ----------- Revenues: Product sales........................................... $ 13,381 $ 20,258 Contract revenues....................................... 1,899 1,347 License revenues........................................ 456 122 ---------- ----------- Total revenues..................................... 15,736 21,727 ---------- ----------- Operating expenses: Cost of product sales................................... 2,882 3,178 Research and development................................ 1,818 1,699 Selling, general and administrative..................... 16,547 17,827 ---------- ----------- Total operating expenses.......................... 21,247 22,704 ---------- ----------- Operating loss.................................... (5,511) (977) Other income (expense): Interest income......................................... 136 37 Interest expense........................................ (5) (2) Other income............................................ 8 -- ---------- ----------- Net loss.......................................... (5,372) (942) Preferred stock dividend.................................. 840 829 ---------- ----------- Net loss allocable to common stockholders................. $ (6,212) $ (1,771) ========== =========== Basic and diluted net loss per share allocable to common stockholders............................................ $ (0.62) $ (0.16) ========== =========== Shares used in computing basic and diluted net loss per share allocable to common stockholders.................. 9,946,992 11,122,041 ========== ===========
See accompanying notes to unaudited condensed consolidated financial statements. - 4 - COLLAGENEX PHARMACEUTICALS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2001 and 2002 (dollars in thousands) (unaudited)
SIX MONTHS ENDED JUNE 30, ---------------------------- 2001 2002 ------------ ------------ Cash flows from operating activities: Net loss.................................................. $ (5,372) $ (942) Adjustments to reconcile net loss to net cash used in operating activities: Noncash compensation expense.......................... 178 -- Depreciation and amortization expense................. 127 129 Change in assets and liabilities: Accounts receivable, net............................ (825) (165) Inventories......................................... (939) (120) Prepaid expenses and other assets................... (198) (1,942) Accounts payable.................................... 2,013 (85) Accrued expenses.................................... 64 1,640 Deferred revenue.................................... (31) (77) --------- --------- Net cash used in operating activities........ (4,983) (1,562) --------- --------- Cash flows from investing activities: Capital expenditures...................................... (49) (262) Proceeds from the sale of short term investments.......... 1,739 -- Purchase of short term investments........................ (296) -- --------- --------- Net cash provided by (used in) investing activities................................ 1,394 (262) --------- --------- Cash flows from financing activities: Net proceeds from issuance of common stock................ 6,814 1,293 Repayment of long-term debt............................... (37) (35) --------- --------- Net cash provided by financing activities.... 6,777 1,258 Net increase (decrease) in cash and cash equivalents........ 3,188 (566) Cash and cash equivalents at beginning of period............ 3,709 6,171 --------- --------- Cash and cash equivalents at end of period.................. $ 6,897 $ 5,605 ========= ========= Supplemental schedule of noncash financing activities: Common stock dividends issued or issuable on preferred stock...................................... $ 840 $ 611 ========= ========= Cash dividends declared................................. -- 218 ========= ========= Issuance of common stock to be issued................... 872 840 ========= ========= Issuance of warrants to purchase common stock in connection with equity line......................... -- 248 ========= ========= Supplemental disclosure of cash flow information: Cash paid during the period for interest................ $ 8 $ 2 ========= =========
See accompanying notes to unaudited condensed consolidated financial statements. - 5 - COLLAGENEX PHARMACEUTICALS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001 and 2002 (dollars in thousands) (Unaudited) NOTE 1 -- BASIS OF PRESENTATION: The unaudited condensed consolidated financial statements included herein have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's 2001 audited consolidated financial statements and footnotes included in its Form 10-K for the year ended December 31, 2001. The accompanying unaudited condensed consolidated financial statements include the results of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. In the opinion of the Company's management, the accompanying unaudited condensed consolidated financial statements have been prepared on a basis substantially consistent with the audited consolidated financial statements and contain adjustments, all of which are of a normal recurring nature, necessary to present fairly the Company's consolidated financial position as of June 30, 2002, their results of operations for the three and six months ended June 30, 2001 and 2002, and their cash flows for the six months ended June 30, 2001 and 2002. Interim results are not necessarily indicative of results anticipated for the full fiscal year. NOTE 2 -- INVENTORIES: Inventories at December 31, 2001 and June 30, 2002 consist of the following: 2001 2002 ---- ---- Raw materials........... $ 174 $ 196 Work-in-process......... 66 800 Finished goods.......... 1,162 526 ---------- ---------- $ 1,402 $ 1,522 ========== ========== NOTE 3 -- COMMON STOCK AND DEBT FINANCING: On March 19, 2001, the Company consummated a one-year revolving credit facility (the "Facility") with Silicon Valley Bank (the "Bank"). The Facility was subsequently amended on - 6 - March 22, 2002 to increase the amount available to the Company under the Facility to the lesser of $4,000 or 80% of eligible accounts receivable, as defined in the amendment. The amount available is also reduced by outstanding letters of credit which may be issued under this agreement in amounts totaling up to $1,500. The Facility may be used only for working capital purposes. The Company is not obligated to draw amounts under the Facility and any such draws under the Facility will bear interest at the then prevailing prime rate plus 1.0 to 1.5% per annum. The Company must also maintain (i) a tangible net worth of $5,000, subject to certain upward adjustments as defined in the amendment, as a result of profitable operation or additional debt or equity financings and (ii) a minimum of $2,000 in cash, net of borrowings under the facility, at all times during the term of the Facility, which expires March 15, 2004. Without the consent of the Bank, the Company, among other things, shall not (i) merge or consolidate with another entity; (ii) acquire assets outside the ordinary course of business; or (iii) pay or declare any cash dividends on the Company's Common Stock. In addition, the Company has secured its obligations under the Facility through the granting of a security interest in favor of the Bank with respect to all of the Company's assets, including its intellectual property. At June 30, 2002, there were no borrowings against the Facility, however, on March 26, 2002, the Company issued an irrevocable letter of credit under the Facility for $1,343. This letter of credit will be used to secure future purchases of inventory that the Company expects to make from a supplier. As the Company pays down amounts under the letter of credit, the amount available to the Company under the Facility will increase. On February 14, 2002, the Company entered into an equity line (the "Equity Line") arrangement under the terms of a Common Stock Purchase Agreement (the "Agreement") with Kingsbridge Capital Limited ("Kingsbridge"). Under the terms of the Agreement, the Company may, at its sole discretion and from time to time over the twelve month period that began February 14, 2002, sell shares of its Common Stock to Kingsbridge at a discount to market price of up to 10%, as determined prior to each such sale. The maximum amount of each draw down is based on the Company's market capitalization and may not exceed $3,000. Pursuant to the terms of the Agreement, the Company committed to: (i) draw down on the Equity Line an amount aggregating at least $1,500 in registered shares of Common Stock, prior to August 14, 2002 (the "Minimum Commitment Amount"), of which the Company has drawn down an aggregate of $1,266 as of June 30, 2002; or (ii) if the Company has not satisfied such Minimum Commitment Amount, pay to Kingsbridge an amount equal to 10% of the amount by which the Minimum Commitment Amount exceeds the aggregate of all amounts drawn down under the Equity Line in respect of the shares of Common Stock issued and sold thereunder, except if the price of the Company's Common Stock is below certain levels during this period. Kingsbridge and the Company have agreed to extend the date by which the Company must draw down the Minimum Commitment Amount to October 29, 2002. The Equity Line provides for the sale of up to an aggregate $8,500 in registered shares of Common Stock. In connection with the consummation of the Equity Line, the Company issued to Kingsbridge a warrant to purchase 40,000 shares of Common Stock at an exercise price of $9.38 per share. Such warrant is exercisable as of August 14, 2002, and will expire on August 13, 2007. The fair value of the warrants issued in connection with the Equity Line of approximately $248 has no net impact as the increase to additional paid in capital representing the value of the warrants issued is offset by the decrease in additional paid in capital representing a cost of the offering. On May 30, 2002, - 7 - the Company issued 119,335 shares of its Common Stock under the Equity Line for gross proceeds of approximately $1,000 and on June 28, 2002, the Company issued 32,187 shares of its Common Stock under the Equity Line for gross proceeds of approximately $266. NOTE 4 -- COMMITMENTS: During 1999, the Company entered into a three-year co-promotion agreement with Merck & Co., Inc. for Vioxx under which the Company is committed to spend up to $1,000 annually for promotional expenses, unless the agreement is earlier terminated pursuant to the terms of the agreement. The current agreement, which expires on September 22, 2002, may be renewable upon mutual agreement. The Company is currently evaluating its options with respect thereto. Pursuant to the Company's License and Marketing Agreement with Atrix Laboratories, the Company is committed to: (i) expend no less than $2,000 in advertising and selling expenses related to the Atrix products during the fiscal year beginning January 1, 2002; (ii) maintain, through 2003, a force of no less than ninety full time dental consultants and divisional and regional managers to make sales and product recommendation calls on dental professionals; and (iii) make the Atrix products the subject of a specific number of detail calls in the United States during 2002. The Company will also be required to make certain minimum expenditures for advertising and promotional activities after 2002, including: (i) the lesser of $4,000 or 30% of the Company's contribution margin, as defined in the agreement, relating to a specific Atrix product that the Company's markets, and (ii) the lesser of $2,000 or 30% of the Company's contribution margin, as defined in the agreement, relating to a separate Atrix product that the Company markets. For the six months ended June 30, 2002, the Company had fulfilled $1,079 of the $2,000 advertising and selling expense commitment for 2002. On February 11, 2002, the Company executed a Co-operation, Development and Licensing Agreement with Thomas Skold pursuant to which the Company was granted an exclusive, sublicenseable, transferable license with respect to the Restoraderm(TM) topical drug delivery system which the Company intends to develop for dermatological applications. Pursuant to the terms of such agreement, upon the occurrence of certain events, the Company will be required to pay certain consulting, royalty and milestone payments in the aggregate amount of up to $4,030, of which no more than $393, $950, $1,650 and $1,037 shall be payable prior to December 31, 2002, January 1, 2003, January 1, 2004 and January 1, 2005, respectively. The term of such agreement is for the life of any patent that may be issued to the Company for the first product the Company develops utilizing such technology, or, if the Company does not acquire any patentable products, seven years. On May 24, 2002, the Company executed a Sublicense Agreement with Altana Inc. ("Altana"), the United States subsidiary of Altana Pharma AG, pursuant to which the Company was granted the exclusive right to create improvements to, market, advertise, promote, distribute, offer for sale and sell, in the United States and Puerto Rico, Pandel(R) Cream, a mid-potency topical corticosteroid that is indicated for the relief of mild-to-moderate inflammatory disorders of the skin, such as atopic dermatitis and psoriasis. Altana currently licenses such rights from Taisho Pharmaceutical Co., Ltd., a company organized and existing under the laws of Japan. The Company will purchase from Altana all Pandel products to be sold. Pursuant to the terms of - 8 - such agreement, the Company agreed to pay Altana an aggregate sublicense fee of $1,700, of which $800 was payable on June 30, 2002 and $900 of which is due on May 31, 2003. The sublicense fee has been capitalized and will be amortized to cost of product sales over the estimated term of agreement. In addition, the Company is required to pay a royalty fee equal to a percentage of the net sales of the product, if any. The agreement may be terminated by the Company: (i) at any time, without cause, upon twelve months prior written notice; (ii) if Altana shall commit any uncured, willful or material breach of the provisions of the agreement; or (iii) if Altana shall cease to manufacture or supply the product to the Company. Altana may terminate the agreement: (i) at any time, without cause, upon twelve months written notice; (ii) if the Company shall commit any uncured, willful or material breach of the provisions of the agreement; (iii) if the Company shall cease to offer the product for distribution to its customers; or (iv) if the Company fails to make certain payments or fulfill certain invoicing obligations. In certain circumstances, all monies paid to the other party under the agreement shall be refunded to the paying party upon termination. On June 10, 2002, the Company executed a Development and Licensing Agreement with Shire Laboratories, Inc. ("Shire") pursuant to which the Company was granted an exclusive worldwide license (including the right to sublicense) to develop, make, have made, use, supply, export, import, register and sell products for the treatment of various inflammatory disorders using Shire's technology. In addition, under the agreement, Shire shall perform certain product development functions for the Company. Also under the agreement, the Company has committed to payments, in cash or at the Company's option, a combination of cash and the Company's Common Stock, upon the achievement of certain clinical and regulatory milestones in the event the Company pursues certain applications of the technology which could total up to $7,900 in the aggregate. Pursuant to the terms of such agreement, the Company shall also pay to Shire a percentage of certain net sales of products, if any, utilizing any part of Shire's technology. The Company may terminate the agreement upon sixty days notice. NOTE 5 -- STOCK OPTION PLANS: At the Company's 2002 Annual Meeting of Stockholders held on May 9, 2002, the stockholders of the Company approved a proposal to amend the Company's 1996 Stock Option Plan (the "1996 Stock Option Plan") to increase the maximum number of shares of the Company's Common Stock available for issuance under the 1996 Stock Option Plan from 2,000,000 to 2,500,000 shares and to reserve an additional 500,000 shares of the Company's Common Stock for issuance in connection with awards granted under the 1996 Stock Option Plan. NOTE 6 -- ADOPTION OF AMENDED AND RESTATED SHAREHOLDER PROTECTION RIGHTS AGREEMENT: On May 29, 2002, the Company's Board of Directors approved an Amended and Restated Shareholder Protection Rights Agreement (the "Rights Agreement"). The Rights Agreement amended and restated, in its entirety, the Company's then existing Shareholder Protection Rights Agreement (the "Prior Rights Agreement") dated September 15, 1997, as amended, by and between the Company and American Stock Transfer & Trust Company, as rights agent thereunder. American Stock Transfer & Trust Company remains as rights agent under the Rights Agreement. Each right previously authorized and distributed under the Prior Rights Agreement - 9 - was deemed to constitute a Right under the Rights Agreement effective May 29, 2002. The Board of Directors further authorized the issuance of one Right for each share of the Company's Common Stock issued between the date of the Rights Agreement and the earlier of the Distribution Date or the Expiration Date, as defined in the Rights Agreement. Each Right, once exercisable, entitles the holder to purchase from the Company one one-hundredth of a share of the Company's Series A Participating Preferred Stock at an exercise price of $65. All Rights expire on September 26, 2007 unless earlier redeemed. At June 30, 2002, the Rights were neither exercisable nor traded separately from the Company's Common Stock, and become exercisable only if a person or a group of affiliated or associated persons has acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the voting power of all outstanding shares of the Company's Common Stock and in certain other limited circumstances. Upon separation from the Common Stock, each Right will entitle the holder, other than the acquiring person that has triggered such separation, to effectively purchase certain shares of the Company's Common Stock equal in market value to two times the then applicable exercise price of the Right. If the Company is acquired in a merger or other business combination transaction, or 50% or more of the Company's assets or earning power are sold in one or more related transactions, the Rights will entitle holders, upon exercise of the Rights, to receive shares of Common Stock of the acquiring or surviving company with a market value equal to twice the exercise price of each Right. - 10 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW CollaGenex Pharmaceuticals, Inc. and subsidiaries is a specialty pharmaceutical company currently focused on providing innovative medical therapies to the dental and dermatology markets. Our first product, Periostat, is an orally administered, prescription pharmaceutical product that was approved by the United States Food and Drug Administration in September 1998 and is the first and only pharmaceutical to treat adult periodontitis by inhibiting the enzymes that destroy periodontal support tissues. We are marketing Periostat to the dental community through our own professional dental pharmaceutical sales force of approximately 120 sales representatives and managers. Pursuant to an exclusive License and Marketing Agreement with Atrix Laboratories, Inc., we began, in October 2001, to actively market Atrix's proprietary dental products, Atridox(R), Atrisorb FreeFlow(R) and Atrisorb-D(R), to the United States dental market. In May 2002, we executed a sublicense agreement with Altana Inc. to, among other things, market and distribute, in the United States and Puerto Rico, Pandel(R), a topical corticosteroid product developed by Altana Inc. and indicated for dermatologic use. We distribute Periostat and, effective July 1, 2002, Pandel, through drug wholesalers and large retail chains in the United States. Periostat is also sold through wholesalers in the United Kingdom. The Atrix dental products are distributed through a specialty distributor who sells these products directly to dental practitioners in the United States. Our sales force also currently co-promotes Vioxx, a prescription non-steroidal anti-inflammatory drug developed by Merck & Co., Inc., in the United States. We began operations in January 1992 and functioned primarily as a research and development company until 1998. During this period, we operated with a minimal number of employees, and substantially all of our pharmaceutical development activities were contracted to independent contract research and other organizations. Following FDA approval of Periostat in September 1998, we significantly increased our number of employees, primarily in the areas of sales and marketing. We continue to outsource the majority of our research and development activities as well as manufacturing, warehousing and distribution functions. We have incurred losses each year since inception and have an accumulated deficit of $75.7 million at June 30, 2002. Statements contained or incorporated by reference in this Quarterly Report on Form 10-Q that are not based on historical fact are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements may be identified by the use of forward-looking terminology such as "may," "will," "expect," "estimate," "anticipate," "continue," or similar terms, variations of such terms or the negative of those terms. This Form 10-Q contains forward-looking statements that involve risks and uncertainties. Our business of selling, marketing and developing pharmaceutical products is subject to a number of significant risks, including risks relating to the implementation of our sales and marketing plans for Periostat and other products that we market, risks inherent in research and development activities, risks associated with conducting business in a highly regulated environment and uncertainty relating to clinical trials of products under development. - 11 - Our success depends to a large degree upon the market acceptance of Periostat by periodontists, dental practitioners, other health care providers, patients and insurance companies. Periostat has been approved by the FDA for marketing in the United States, approved by the Medicines Control Agency for marketing in the United Kingdom and approved for marketing in Austria, Finland, Ireland, Israel, Italy, Luxembourg, the Netherlands and Portugal. There can be no assurance that any of our other product candidates will be approved by any regulatory authority for marketing in any jurisdiction or, if approved, that any such products will be successfully commercialized by us. In addition, there can be no assurance that we will successfully commercialize Vioxx, Pandel, Atridox, Atrisorb FreeFlow and Atrisorb-D. As a result of these risks, and others expressed from time to time in our filings with the Securities and Exchange Commission, our actual results may differ materially from the results discussed in the forward-looking statements contained herein. Periostat(R), Metastat(R), Dermostat(R), Nephrostat(R), Osteostat(R), Arthrostat(R), Rheumastat(R), Corneostat(R), Gingistat(R), IMPACS(TM), PS20(TM), The Whole Mouth Treatment(TM), Restoraderm(TM) and Dentaplex(R) are United States trademarks of CollaGenex Pharmaceuticals, Inc. Periostat(R), Nephrostat(R), Optistat(R), Xerostat(R), IMPACS(TM) and Dentaplex(TM) are European Community trademarks of CollaGenex Pharmaceuticals Inc. Periostat(R), Nephrostat(R), Optistat(R), Xerostat(R), IMPACS(R), Dentaplex(R), Restoraderm(R), Dermostat(R), Periocycline(R), Periostatus(R) are United Kingdom trade marks of our wholly-owned subsidiary, CollaGenex International Limited. And, CollaGenex(R), PS20(R), "C" Logo(R), The Whole Mouth Treatment(R) are both European Community trade marks and United Kingdom trade marks of CollaGenex International Limited. All other trade names, trademarks or service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners and are not property of CollaGenex Pharmaceuticals, Inc. or any of our subsidiaries. RESULTS OF OPERATIONS During the three months ended June 30, 2002, we achieved net product sales of $10.4 million. We launched each of Atridox and Atrisorb FreeFlow in October 2001, and launched Atrisorb-D in February 2002. In addition, during the three months ended June 30, 2002, we generated $555,000 in contract revenues from our two co-promotion agreements for Vioxx and Pandel, and $35,000 in licensing revenue. Critical Accounting Judgments and Estimates Management's discussion and analysis of its financial position and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Management believes the critical accounting policies and areas that require the most significant judgments and estimates to be used in the preparation of the consolidated financial statements pertain to revenue recognition. - 12 - We recognize product sales revenue upon shipment, net of estimated returns, provided that collection is determined to be probable and no significant obligations remain. Sales revenue from our customers is subject to agreements allowing limited rights of return, rebates and price protection. Accordingly, we reduce revenue recognized for estimated future returns, rebates and price protection at the time the related revenue is recorded. The estimates for returns are adjusted periodically based upon historical rates of returns, inventory levels in the distribution channel and other related factors. While management believes it can make reliable estimates for these matters, unsold products in these distribution channels may be exposed to expiration. Accordingly, it is possible that these estimates will change in the future or that the actual amounts could vary materially from our estimates and that the amounts of such changes could impact our results of operations, financial condition and our business. Since our inception, a portion of our revenue has been generated from license and distribution agreements for our products. We recognize nonrefundable signing or license fees that are not dependent on future performance under these agreements as revenue when received and over the term of the arrangement if we have continuing performance obligations. Any amounts deferred are amortized to revenue over the expected performance period of each underlying agreement. The expected performance period is based on management's best estimate and subject to change based on current market conditions. Deferred revenue represents the portion of up front license payments received that has not been earned. Milestone revenue from licensing arrangements is recognized upon completion of the milestone event or requirement if it represents the achievement of a significant step in the research, development or regulatory process. Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 REVENUES - -------------------------------------------------------------------------------- Revenues (dollars in thousands) 2002 CHANGE 2001 - -------------------------------------------------------------------------------- Product Sales................. $ 10,377 42.8% $ 7,267 - -------------------------------------------------------------------------------- Contract Revenues............. 555 (45.8)% 1,024 - -------------------------------------------------------------------------------- License Revenues.............. 35 (91.7)% 420 -------- -------- - -------------------------------------------------------------------------------- Total..................... $ 10,967 25.9% $ 8,711 - -------------------------------------------------------------------------------- Total revenues during the three months ended June 30, 2002 were $11.0 million, representing a 25.9% increase over total revenues of $8.7 million during the three months ended June 30, 2001. Such 2002 revenues included approximately $10.4 million in net product sales of Periostat, Atridox, Atrisorb FreeFlow and Atrisorb-D, $555,000 in contract revenues, which were derived from our co-promotion of Vioxx and Pandel, and $35,000 in previously deferred foreign license income and milestone revenues for Periostat. Product sales increased $3.1 million, or 42.8%, to $10.4 million during the three months ended June 30, 2002 compared to $7.3 million during the three months ended June 30, 2001 due to significantly higher prescriptions for Periostat and the addition of the Atrix dental products which we began marketing in October 2001. - 13 - Contract revenues for the three months ended June 30, 2002 declined 45.8% to $555,000 from $1.0 million during the three months ended June 30, 2001 as a result of the termination in April 2001 of our agreement with Novartis Pharmaceuticals to co-promote Denavir and a decline in contract revenues from Merck relating to our co-promotion of Vioxx. Contact revenues for the three months ended June 30, 2001 included $122,000 in co-promotion revenues for Denavir. There were no contract revenues for Denavir in the three months ended June 30, 2002. The decline in contract revenues from Merck was due to lower levels of prescriptions for Vioxx resulting from negative publicity relating to adverse cardiovascular events experienced by a small segment of patients who had been administered Vioxx. In accordance with SAB 101, which we adopted in 2000, we recorded $15,000 in licensing revenues during each of the three months ended June 30, 2002 and June 30, 2001. This revenue was attributable to our recognition of previously recognized up-front license fees received for various agreements that were deferred upon the adoption of SAB 101 and is being recognized as income over the expected performance period of these agreements. We also recorded milestone revenues from our foreign licensing partners of $20,000 and $405,000 during the three months ended June 30, 2002 and 2001, respectively. COST OF PRODUCT SALES - -------------------------------------------------------------------------------- Cost of Product Sales (dollars in thousands) 2002 CHANGE 2001 - -------------------------------------------------------------------------------- Cost of Product Sales......... $ 1,598 5.4% $ 1,516 - -------------------------------------------------------------------------------- Percent of Product Sales...... 15.4% 20.9% - -------------------------------------------------------------------------------- Cost of product sales includes product packaging, third-party royalties, amortization of product licensing fees, and the costs associated with the manufacturing, storage and stability of Periostat and the Atrix products. Cost of product sales were $1.6 million, or 15.4% of product sales during the three months ended June 30, 2002, compared to $1.5 million, or 20.9% of product sales during the three months ended June 30, 2001. Cost of product sales increased in absolute dollars but decreased as a percentage of product sales during such period in 2002 compared to 2001, primarily due to manufacturing cost savings for Periostat tablets, which we launched in July 2001, compared to Periostat capsules. RESEARCH AND DEVELOPMENT - -------------------------------------------------------------------------------- Research and Development (dollars in thousands) 2002 CHANGE 2001 - -------------------------------------------------------------------------------- Research and development...... $ 870 (0.5)% $ 874 - -------------------------------------------------------------------------------- Percentage of total revenue... 7.9% 10.0% - -------------------------------------------------------------------------------- Research and development expenses consist primarily of funds paid to third parties for the provision of services and materials for drug development, manufacturing and formulation enhancements, clinical trials, statistical analysis and report writing and regulatory compliance costs. - 14 - Research and development expenses decreased $4,000 to $870,000 during the three months ended June 30, 2002 from $874,000 during the three months ended June 30, 2001. Development projects conducted during the three months ended June 30, 2002 included our continuing formulation development work for a once-a-day formulation of Periostat and formulation and stability testing for several potential products utilizing our licensed Restoraderm technology, which totaled $92,000 and $140,000, respectively. Future development of the once-a-day technology will be contingent on the outcome of the initial phase of the project, which is expected to be determined by the end of 2002. Additional expenses ranging from approximately $1.0 million in 2002 to as much as $6.0 million through completion could be incurred if the project is successful. Clinical projects totaling $256,000 were conducted during the three months ended June 30, 2002 and included several Phase IV studies for Periostat in various dental indications, initiation of a 70-patient clinical study to evaluate the efficacy of Periostat to treat meibomiantis (an ocular condition) and clinical development work relating to Periostat in dermatological indications. In August 2002, we launched a Phase III trial to evaluate Periostat for the treatment of rosacea. Until the outcome of these trials are determined, it is premature to estimate the future costs associated with the development of Periostat for dermatological indications. Other expenses incurred during the three months ended June 30, 2002 included $55,000 in regulatory consulting and filing fees under the Mutual Recognition Procedure in Europe and $138,000 for various regulatory costs, including annual FDA filing fees, legal, and regulatory expenses in the United States. Direct salaries and other personnel expenses incurred during the three months ended June 30, 2002 were $122,000. Additionally, during such period we incurred $67,000 in consulting travel and other office expenses. Research and development expenses incurred during the three months ended June 30, 2001 included $73,000 in research grants to various academic institutions for conducting research related to our core technology, $5,000 in Periostat Phase IV clinical trial grants, $156,000 in contracted clinical and development expenses related to a safety and pharmacokinetic study for Metastat and other IMPACS compounds in the development stage. Other expenses incurred during the three months ended June 30, 2001 included $232,000 in regulatory consulting and filing fees under the Mutual Recognition Procedure in Europe and $149,000 for various regulatory costs, including annual FDA filing fees and legal and regulatory expenses in the United States related to obtaining FDA approval for Periostat tablets. Research and development expenses incurred during the three months ended June 30, 2001 also included $134,000 in direct salaries and other personnel related expenses, $164,000 related to stock compensation expense and an expense credit of $39,000 relating to consulting, travel and other office expenses. - 15 - SELLING, GENERAL AND ADMINISTRATIVE - -------------------------------------------------------------------------------- Selling, General and Administrative (dollars in thousands) 2002 CHANGE 2001 - -------------------------------------------------------------------------------- Selling, general and administrative.. $ 8,899 (1.9)% $ 9,070 - -------------------------------------------------------------------------------- Percentage of total revenue.......... 81.1% 104.1% - -------------------------------------------------------------------------------- Selling, general and administrative expenses consist primarily of personnel salaries and benefits, direct marketing costs, professional, legal and consulting fees, insurance and general office expenses. This decrease of $171,000, or 1.9%, from the three months ended June 30, 2001 to the three months ended June 30, 2002, was primarily the result of the reduction in our Direct-to-Consumer, or DTC, expenditures offset in part by additional promotional expenses for the Atrix dental products, Pandel and additional incentive compensation for our sales force. During the three months ended June 30, 2002 we incurred $1.3 million in DTC advertising expenses compared to $2.4 million during the same period in 2001. Selling, general and administrative expenses decreased 1.9% to $8.9 million during the three months ended June 30, 2002 from $9.1 million during the three months ended June 30, 2001. Significant components of selling, general and administrative expenses incurred during the three months ended June 30, 2002 included $3.8 million in direct selling and sales training expenses, $3.5 million in marketing expenses (including Periostat DTC advertising expenditures, launch expenditures for the Atrix products and co-promotion expenses relating to Vioxx and Pandel) and $1.6 million in general and administrative expenses, which include business development, finance and corporate activities. Significant components of selling, general and administrative expenses during the three months ended June 30, 2001 included $3.3 million in direct selling and training expenses, $4.5 million in marketing expenses (including Periostat DTC advertising expenditures and co-promotion expenses related to Vioxx) and $1.3 million in general and administrative expenses. OTHER INCOME/EXPENSE - -------------------------------------------------------------------------------- Other Income/Expense 2002 CHANGE 2001 - -------------------------------------------------------------------------------- Interest income............... $ 15,000 (79.7)% $ 74,000 - -------------------------------------------------------------------------------- Interest expense.............. $ 1,000 (50.0)% $ 2,000 - -------------------------------------------------------------------------------- Other Income (Expense)........ $ 1,000 N/A $ (4,000) - -------------------------------------------------------------------------------- Interest income decreased to $15,000 for the three months ended June 30, 2002 compared to $74,000 for the three months ended June 30, 2001. This decrease was due to lower average balances in cash and short-term investments and lower investment yields during the three months ended June 30, 2002. Interest expense for the three months ended June 30, 2002 was $1,000, compared to $2,000 for the three months ended June 30, 2001. Other income during the three months ended June 30, 2002 was $1,000. Other expense during the three months ended June 30, 2001 of $4,000 resulted from exchange rate changes on foreign currency transactions. - 16 - PREFERRED STOCK DIVIDEND Preferred stock dividends were $409,000 and $420,000 during each of the three months ended June 30, 2002 and June 30, 2001, respectively. Such preferred stock dividends, paid in shares of our Common Stock through May 11, 2002, and thereafter in cash, are the result of our obligations in connection with the issuance of our Series D Preferred Stock in May 1999. As more fully set forth in the Amended Certificate of Designation, Preferences and Rights of the Series D Cumulative Convertible Preferred Stock, after May 11, 2002, we no longer pay dividends on the Series D Preferred Stock in shares of our Common Stock, and we became obligated to pay such dividends in cash, at a rate equal to 8% per annum. Cash dividends accrued for the period May 12, 2002 to June 30, 2002 were approximately $218,000. Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001 REVENUES - -------------------------------------------------------------------------------- Revenues (dollars in thousands) 2002 CHANGE 2001 - -------------------------------------------------------------------------------- Product Sales................. $ 20,258 51.4% $ 13,381 - -------------------------------------------------------------------------------- Contract Revenues............. 1,347 (29.1)% 1,899 - -------------------------------------------------------------------------------- License Revenues.............. 122 (73.2)% 456 -------- --------- - -------------------------------------------------------------------------------- Total..................... $ 21,727 38.1% $ 15,736 - -------------------------------------------------------------------------------- Total revenues during the six months ended June 30, 2002 were $21.7 million, representing a 38.1% increase over total revenues of $15.7 million during the six months ended June 30, 2001. Such 2002 revenues included approximately $20.3 million in net product sales of Periostat, Atridox, Atrisorb FreeFlow, Atrisorb-D and Dentaplex, $1.3 million in contract revenues, which were derived from our co-promotion of Vioxx and Pandel, and $122,000 in deferred foreign license and milestone revenues for Periostat. Product sales increased $6.9 million, or 51.4%, during the six months ended June 30, 2002 to $20.3 million compared to $13.4 million during the six months ended June 30, 2001, mainly due to significantly higher prescriptions for Periostat and the addition of the Atrix dental products, which we began marketing in October 2001. Contract revenues for the six months ended June 30, 2002 declined 29.1% to $1.3 million from $1.9 million during the six months ended June 30, 2001 as a result of the termination in April 2001 of our agreement with Novartis Pharmaceuticals to co-promote Denavir and a decline in contract revenues from Merck relating to our co-promotion of Vioxx. Contract revenues for the six months ended June 30, 2001 included $297,000 in co-promotion revenues for Denavir. There were no contract revenues for Denavir in the six months ended June 30, 2002. The decline in contract revenues from Merck was due to lower levels of prescriptions for Vioxx resulting from negative publicity relating to adverse cardiovascular events experienced by a small segment of patients who had been administered Vioxx. In accordance with SAB 101, which we adopted in 2000, we recorded $30,000 in licensing revenues during each of the six months ended June 30, 2002 and June 30, 2001. This revenue was attributable to our recognition of previously recognized up-front license fees - 17 - received for various agreements that were deferred upon the adoption of SAB 101 and is being recognized as income over the expected performance period of these agreements. We also recorded milestone revenues from our foreign licensing partners of $92,000 and $426,000 during the six months ended June 30, 2002 and 2001, respectively. COST OF PRODUCT SALES - -------------------------------------------------------------------------------- Cost of Product Sales (dollars in thousands) 2002 CHANGE 2001 - -------------------------------------------------------------------------------- Cost of Product Sales......... $ 3,178 10.3% $ 2,882 - -------------------------------------------------------------------------------- Percent of Product Sales...... 15.7% 21.5% - -------------------------------------------------------------------------------- Cost of product sales includes product packaging, third-party royalties, amortization of new product licensing fees, and the costs associated with the manufacturing, storage and stability of Periostat and the Atrix products. Cost of product sales were $3.2 million, or 15.7% of product sales during the six months ended June 30, 2002, compared to $2.9 million, or 21.5% of product sales during the six months ended June 30, 2001. Cost of product sales increased in absolute dollars but decreased as a percentage of product sales during such period in 2002 compared to 2001, primarily due to manufacturing cost savings for Periostat tablets, which we launched in July 2001, compared to Periostat capsules. RESEARCH AND DEVELOPMENT - -------------------------------------------------------------------------------- Research and Development (dollars in thousands) 2002 CHANGE 2001 - -------------------------------------------------------------------------------- Research and development...... $ 1,699 (6.5)% $ 1,818 - -------------------------------------------------------------------------------- Percentage of total revenue... 7.8% 11.6% - -------------------------------------------------------------------------------- Research and development expenses consist primarily of funds paid to third parties for the provision of services and materials for drug development, manufacturing and formulation enhancements, clinical trials, statistical analysis and report writing and regulatory compliance costs. Research and development expenses decreased to $1.7 million during the six months ended June 30, 2002 from $1.8 million during the six months ended June 30, 2001. This decrease of $119,000, or 6.5%, was mainly the result of higher research and clinical development expenses incurred exclusively in 2001 for Metastat, our antiangiogenesis drug, and Dentaplex, a nutritional supplement, as well as European regulatory expenses for Periostat. This was partially offset by the initial spending in 2002 for clinical trials for Periostat in dermatologic and ophthalmologic indications. Development projects conducted during the six months ended June 30, 2002 included our continuing formulation development work for a once-a-day formulation of Periostat and formulation and stability testing for several potential products utilizing our licensed Restoraderm technology, which totaled $247,000 and $210,000, respectively. Future development of the - 18 - once-a-day technology will be contingent on the outcome of the initial phase of the project, which is expected to be determined by the end of 2002. Additional expenses ranging from approximately $1.0 million in 2002 to as much as $6.0 million through completion could be incurred if the project is successful. Clinical projects totaling $528,000 were conducted during the six months ended June 30, 2001 and included several Phase IV studies for Periostat in various dental indications, initiation of a 70-patient clinical study to evaluate the efficacy of Periostat to treat meibomiantis (an ocular condition) and clinical development work relating to Periostat in dermatological indications. In August 2002, we launched a Phase III trial to evaluate Periostat for the treatment of rosacea. Until the outcome of these trials are determined, it is premature to estimate the future costs associated with the development of Periostat for dermatological indications. Other expenses incurred during the six months ended June 30, 2002 included $99,000 in regulatory consulting and filing fees under the Mutual Recognition Procedure in Europe and $198,000 for various regulatory costs, including annual FDA filing fees, legal, and regulatory expenses in the United States. Direct salaries and other personnel expenses incurred during the six months ended June 30, 2002 were $266,000. Additionally, during such period we incurred $151,000 in travel and other office expenses. Research and development expenses incurred during the six months ended June 30, 2001 included $175,000 in research grants to various academic institutions for conducting research related to our core technology, $110,000 in Periostat Phase IV clinical trial grants, $335,000 in contracted clinical and development expenses related to a safety and pharmacokinetic study for Metastat and other IMPACS compounds in the development stage and $71,000 in manufacturing development and validation expenses for Dentaplex. Other expenses incurred during the six months ended June 30, 2001 included $322,000 in regulatory consulting and filing fees under the Mutual Recognition Procedure in Europe and $240,000 for various regulatory costs, including annual FDA filing fees and legal and regulatory expenses in the United States related to obtaining FDA approval for Periostat tablets. Research and development expenses incurred during the six months ended June 30, 2001 also included $229,000 in direct salaries and other personnel related expenses, $164,000 related to stock compensation expense and $172,000 in consulting, travel and other office expenses. SELLING, GENERAL AND ADMINISTRATIVE - -------------------------------------------------------------------------------- Selling, General and Administrative 2002 CHANGE 2001 (dollars in thousands) - -------------------------------------------------------------------------------- Selling, general and administrative..... $ 17,827 7.7% $ 16,547 - -------------------------------------------------------------------------------- Percentage of total revenue............. 82.0% 105.2% - -------------------------------------------------------------------------------- Selling, general and administrative expenses consist primarily of personnel salaries and benefits, direct marketing costs, professional, legal and consulting fees, insurance and general office expenses. - 19 - The increase of $1.3 million in selling, general and administrative expenses, or 7.7%, from the six months ended June 30, 2001 to the six months ended June 30, 2002, was primarily the result of the reduction in our DTC expenditures offset by additional promoting expenses for the Atrix dental products, Pandel and additional incentive compensation for our sales force. Additionally, we incurred an incremental $1.3 million in selling expenses associated with our Atrix dental products and our Pandel co-promotion which we began in 2002. During the six months ended June 30, 2002 we incurred $2.8 million in DTC advertising expenses compared to $3.8 million during the same period in 2001. Selling, general and administrative expenses increased 7.7% to $17.8 million during the six months ended June 30, 2002 from $16.5 million during the six months ended June 30, 2001. Significant components of selling, general and administrative expenses incurred during the six months ended June 30, 2002 included $8.2 million in direct selling and sales training expenses, $6.7 million in marketing expenses (including Periostat DTC advertising expenditures, launch expenditures for the Atrix products and co-promotion expenses relating to Vioxx and Pandel) and $2.9 million in general and administrative expenses, which include business development, finance and corporate activities. Significant components of selling, general and administrative expenses during the six months ended June 30, 2001 included $6.7 million in direct selling and training expenses, $7.5 million in marketing expenses (including Periostat DTC advertising expenditures and co-promotion expenses related to Vioxx) and $2.3 million in general and administrative expenses. OTHER INCOME/EXPENSE - -------------------------------------------------------------------------------- Other Income/Expense 2002 CHANGE 2001 - -------------------------------------------------------------------------------- Interest income............... $ 37,000 (72.8)% $ 136,000 - -------------------------------------------------------------------------------- Interest expense.............. $ 2,000 (60.0)% $ 5,000 - -------------------------------------------------------------------------------- Other income.................. $ -- N/A $ 8,000 - -------------------------------------------------------------------------------- Interest income decreased to $37,000 for the six months ended June 30, 2002 compared to $136,000 for the six months ended June 30, 2001. This decrease was due to lower average balances in cash and short-term investments and lower investment yields during the six months ended June 30, 2002. Interest expense for the six months ended June 30, 2002 was $2,000, compared to $5,000 for the six months ended June 30, 2001. Other income during the six months ended June 30, 2001 of $8,000 was recognized as a result of foreign currency transactions. PREFERRED STOCK DIVIDEND Preferred stock dividends were $829,000 and $840,000 during each of the six months ended June 30, 2002 and June 30, 2001, respectively. Such preferred stock dividends, paid in shares of our Common Stock through May 11, 2002, and thereafter in cash, were the result of our obligations in connection with the issuance of our Series D Preferred Stock in May 1999. As more fully set forth in the Amended Certificate of Designation, Preferences and Rights of the Series D Cumulative Convertible Preferred Stock, after May 11, 2002, we no longer pay dividends on the Series D Preferred Stock in shares of our Common Stock, and we became - 20 - obligated to pay such dividends in cash, at a rate equal to 8% per annum. Cash dividends accrued for the period May 12, 2002 to June 30, 2002 were approximately $218,000. LIQUIDITY AND CAPITAL RESOURCES Since our origin in January 1992, we have financed our operations through private placements of our preferred and Common Stock, an initial public offering of 2,000,000 shares of Common Stock, which generated net proceeds to us of approximately $18.0 million after underwriting fees and related expenses, and a subsequent public offering of 1,000,000 shares of Common Stock, which generated net proceeds to us of approximately $11.6 million after underwriting fees and related expenses. On May 12, 1999, we consummated a $20.0 million financing through the issuance of our Series D Preferred Stock, which generated net proceeds to us of $18.5 million. The issuance of the Series D Preferred Stock was approved by a majority of our stockholders at our Annual Meeting of Stockholders on May 11, 1999. A portion of the proceeds of the Series D Preferred Stock financing consummated in May 1999 were used to repay a $10.0 million senior secured convertible note provided by one of the investors on March 19, 1999 in connection with such financing. The remaining proceeds have been and will be used for general working capital purposes. The Series D Preferred Stock is convertible at any time into shares of our Common Stock at a current conversion price of $9.91 per share, which conversion price reflects a decrease from the initial conversion price of $11.00 per share as a result of both a Common Stock financing in March 2001 and the sale of shares of our Common Stock to Atrix Laboratories, Inc. in August 2001. Such conversion price is not subject to reset except in the event that we should fail to declare and pay dividends when due or we should issue new equity securities or convertible securities at a price per share or having a conversion price per share lower than the then applicable conversion price of the Series D Preferred Stock. During the first three years following issuance, holders of the Series D Preferred Stock received dividends payable in shares of fully registered Common Stock at a rate of 8.4% per annum. Thereafter, and beginning on May 12, 2002, we began paying such dividends in cash at a rate of 8.0% per annum. All or a portion of the shares of Series D Preferred Stock shall, at our option (as determined by our board of directors), automatically be converted into fully paid, registered and non-assessable shares of Common Stock, if the following two conditions are met: (i) the last sale price, or, in case no such sale takes place on such day, the average of the closing bid and asked prices on the Nasdaq National Market is at least 200% of the conversion price then in effect (as of June 30, 2002, such conversion price was $9.91 per share) for forty consecutive trading days; and (ii) a shelf registration statement is in effect for the shares of Common Stock to be issued upon conversion of the Series D Preferred Stock. Without written approval of a majority of the holders of record of the Series D Preferred Stock, we, among other things, shall not: (i) declare or pay any dividend or distribution on any shares of our capital stock other than dividends on the Series D Preferred Stock; (ii) make any loans, incur any indebtedness or guarantee any indebtedness, advance capital contributions to, or investments in any person, issue or sell any securities or warrants or other rights to acquire our debt securities, except that we may incur such indebtedness in any amount not to exceed $10.0 million in the aggregate outstanding at any time for working capital requirements in the ordinary course of business; or (iii) make research and development expenditures in excess of $7.0 million in any continuous twelve month - 21 - period, unless we have reported positive net income for four consecutive quarters immediately prior to such twelve month period. In April 1999, we received $219,000 in proceeds from our issuance of a note payable. We used the proceeds of such note to fund the purchase of equipment, fixtures and furniture for our corporate offices in Newtown, Pennsylvania. The term of the note was three years at 9.54% per annum, with monthly minimum payments of principal and interest. We repaid such note on May 1, 2002. On March 12, 2001, we consummated a private equity offering of 1,500,000 shares of Common Stock for an aggregate purchase price of $7.5 million, which generated net proceeds to us of approximately $6.8 million. We are using such proceeds primarily for our DTC advertising campaign and for general working capital purposes. In addition, the investors in such financing were also issued an aggregate of 400,000 warrants which are exercisable for up to three years from the date of such financing into 400,000 shares of our Common Stock at an exercise price per share of $6.00. The consideration received for such warrants is included in the aggregate proceeds received in such financing. We also issued to our financial advisor in such financing warrants to purchase an aggregate of 150,000 shares of our Common Stock exercisable for up to three years at an exercise price of $5.70 per share, as partial consideration for services rendered in connection with the financing. Such warrants may be deemed automatically exercised in certain circumstances based upon our stock price. In connection with the March 2001 financing, we are obligated to maintain the effectiveness of a shelf registration statement with respect to all such shares of Common Stock issued and shares underlying all such warrants for a continuous 24 month period, or we will be required to issue to the investors and the financial advisor an additional 27,500 shares of our Common Stock, in the aggregate, for no additional consideration. On March 19, 2001, we consummated a revolving credit facility with Silicon Valley Bank, which was subsequently amended in March 2002. The credit facility, as amended, extends through March 15, 2004. We may borrow up to the lesser of $4.0 million or 80% of eligible accounts receivable, as defined under the credit facility. The amount available to us is also reduced by outstanding letters of credit which may be issued under the credit facility in amounts totaling up to $1.5 million. On March 26, 2002, we secured our expected purchase order commitments for Periostat from Pharmaceutical Manufacturing Research Services, Inc., a contract manufacturing company, with a letter of credit under the credit facility for approximately $1.3 million. As we pay down amounts under the letter of credit, the amount available to us under the Facility will increase. We are not obligated to draw amounts and any such borrowings bear interest, payable monthly, currently at the prime rate plus 1.0 to 1.5% per annum and may be used only for working capital purposes. Without the consent of the Silicon Valley Bank, we, among other things, shall not (i) merge or consolidate with another entity; (ii) acquire assets outside the ordinary course of business; or (iii) pay or declare any cash dividends on our Common Stock. We must also maintain a certain tangible net worth and a minimum of $2.0 million in cash at Silicon Valley Bank, net of borrowings under the credit facility, at all times during the term thereto. In addition, we have secured our obligations under the credit facility through the granting of a security interest in favor of the bank with respect to all of our assets, including our intellectual property. As of June 30, 2002, we had no current borrowings outstanding against the credit facility. - 22 - On August 24, 2001, we signed a License and Marketing Agreement with Atrix Laboratories, Inc. to market Atrix's proprietary dental products, Atridox, Atrisorb FreeFlow and Atrisorb-D, to the United States dental market. Pursuant to the terms of this agreement, among other things: (i) Atrix will manufacture the dental products for us at an agreed upon transfer price and will receive royalties on future net sales of the products each calendar year; (ii) we paid to Atrix a $1.0 million licensing fee to market such products; (iii) we have committed to no less than $2.0 million in advertising and selling expenses related to the Atrix products during the fiscal year beginning January 1, 2002 ($1.1 million of which we have expended as of June 30, 2002); (iv) we have agreed to maintain, for a period of 24 months, a force of no less than ninety full time dental consultants and divisional and regional managers to make sales and product recommendation calls on dental professionals; and (v) we have agreed that the Atrix products will be the subject of a specific number of detail calls in the United States during 2002. We will also be required to make certain minimum expenditures for advertising and promotional activities beginning January 1, 2003, including: (i) the lesser of $4,000,000 or 30% of our contribution margin relating to a specific Atrix product that we market, and (ii) the lesser of $2,000,000 or 30% of our contribution margin relating to a separate Atrix product that we market. In addition, pursuant to the terms of a Stock Purchase Agreement that we executed with Atrix, dated August 24, 2001, Atrix purchased 330,556 unregistered shares of our Common Stock for an aggregate purchase price of approximately $3.0 million. As a result of the sale of such shares to Atrix, the conversion price of our Series D Preferred Stock was reduced from $9.94 to $9.91 per share. On February 14, 2002, we entered into an equity line arrangement under the terms of a Common Stock Purchase Agreement with Kingsbridge Capital Limited. Pursuant to this agreement, we may, at our sole discretion and from time to time through February 13, 2003, sell shares of our Common Stock to Kingsbridge at a discount to market price, as determined prior to each such sale. Under the terms of the agreement, we committed to: (i) draw down on this equity line, an amount aggregating at least $1.5 million in registered shares of Common Stock, prior to August 14, 2002; or (ii) if, prior to August 14, 2002, we had not drawn down an amount aggregating at least $1.5 million in registered shares of Common Stock, we were obligated to pay Kingsbridge, in cash, an amount equal to 10% of the amount by which $1.5 million exceeds the aggregate of all amounts drawn down by us under the equity line up to that date. We and Kingsbridge have agreed to extend the date by which we must draw down such minimum commitment amount to October 29, 2002. The equity line provides for the sale of up to $8.5 million in registered shares of our Common Stock to Kingsbridge. As of June 30, 2002, we had drawn down and issued an aggregate of approximately $1.3 million in registered shares of Common Stock under such equity line arrangement. Additionally, in connection with the consummation of the equity line and pursuant to the terms of a warrant agreement executed by us, we issued Kingsbridge a warrant to purchase 40,000 shares of our Common Stock at an exercise price of $9.38 per share. The conversion price of our Series D Preferred Stock was not reduced as a result of such issuance. Such warrant is exercisable as of August 14, 2002, and will expire on August 13, 2007. We have registered the shares of our Common Stock which may be issued by us under the equity line and upon any exercise of the warrant by Kingsbridge under a shelf registration statement on Form S-3 which - 23 - registered an aggregate of 964,880 shares of our Common Stock. On April 29, 2002, the Securities and Exchange Commission declared such shelf registration statement on Form S-3 effective. At June 30, 2002, we had cash and cash equivalents of approximately $5.6 million, a decrease of $566,000 from the $6.2 million balance at December 31, 2001. In accordance with investment guidelines approved by our Board of Directors, cash balances in excess of those required to fund operations have been invested in short-term United States Treasury securities and commercial paper with a credit rating no lower than A1/P1. Our working capital at June 30, 2002 was $4.9 million, a decrease of $1.4 million from $6.3 million at December 31, 2001. This decrease primarily reflects our current obligation to Altana for the sublicensing rights for Pandel acquired in June 2002. We anticipate that our existing working capital will be sufficient to fund our current operations through at least the end of 2002 and that existing cash and cash equivalents, internally generated funds from operations and the anticipated cash inflows from both our equity line of credit with Kingsbridge and our revolving credit facility with Silicon Valley Bank will be sufficient to support our operations through the end of 2003. Our actual future cash requirements, however, will depend on many factors, including market acceptance of our products and technology. We believe that other key factors that could affect our internal and external sources of cash are: o Revenues and margins from sales of Periostat and other products and contracted services; o The success of our dermatology franchise; o The success of our pre-clinical, clinical and development programs; o The receptivity of the capital markets to future financings and our ability to draw down on our equity line at desired price levels; o Our ability to enter into additional strategic collaborations and to maintain existing and new collaborations and the success of such collaborations; and o Our ability to meet the covenant requirements under our revolving credit facility. CONTRACTUAL OBLIGATIONS Our major outstanding contractual obligations relate to cash dividends on our outstanding Series D Preferred Stock, operating leases for our office space and other contractual commitments with our marketing partners for certain selling and promotional expenses associated with the products we are currently detailing. Additionally, we also expect to make certain inventory purchases from our contract manufacturer of Periostat, guaranteed by our irrevocable Letter of Credit with Silicon Valley Bank. - 24 - Our Series D Preferred Stock paid dividends in Common Stock at a rate of 8.4% per annum from the date of issuance of such Series D Preferred Stock through May 11, 2002. After May 11, 2002, the Series D Preferred Stock pays dividends in cash at a rate of 8.0% per annum. The Series D Preferred Stock is convertible into our Common Stock at a current conversion price of $9.91 per share, subject to adjustment, at any time by the holder and under certain conditions by us. The conversion price of the Series D Preferred Stock is subject to adjustment in the event we fail to declare or pay dividends when due or should we issue new equity securities or convertible securities at a price per share or having a conversion price per share lower than the applicable conversion price of the Series D Preferred Stock. In May 1999, we entered into a lease agreement relating to our office space in Newtown, Pennsylvania. The lease has an initial term of ten years. Rent is expected to be approximately $318,000 per year and is subject to market adjustments at the end of the fifth year. During 1999, we entered into a three-year co-promotion agreement with Merck & Co., Inc. for Vioxx under which we are committed to spend up to $1.0 million annually for promotional expenses, unless the agreement is earlier terminated. The current agreement, which expires on September 22, 2002, may be renewable upon mutual agreement. We are currently evaluating our options with respect thereto. Pursuant to our License and Marketing Agreement with Atrix Laboratories, we have committed to: (i) expend no less than $2.0 million in advertising and selling expenses related to the Atrix products during the fiscal year beginning January 1, 2002; (ii) maintain, through 2003, a force of no less than ninety full time dental consultants and divisional and regional managers to make sales and product recommendation calls on dental professionals; and (iii) make the Atrix products the subject of a specific number of detail calls in the United States during 2002. We will also be required to make certain minimum expenditures for advertising and promotional activities after 2002, including: (i) the lesser of $4.0 million or 30% of our contribution margin, as defined in the agreement, relating to a specific Atrix product that we market, and (ii) the lesser of $2.0 million or 30% of our contribution margin, as defined in the agreement, relating to a separate Atrix product that we market. For the six months ended June 30, 2002, we had fulfilled $1.1 million of the $2.0 million advertising and selling expense commitment for 2002. On February 11, 2002, we executed a Co-operation, Development and Licensing Agreement with Thomas Skold pursuant to which we were granted an exclusive, sublicenseable, transferable license with respect to the Restoraderm(TM) topical drug delivery system which we intend to develop for dermatological applications. Pursuant to the terms of such agreement, upon the occurrence of certain events, we will be required to pay certain consulting, royalty and milestone payments in the aggregate amount of up to $4.0 million, of which no more than $393,000, $950,000, $1,650,000 and $1,037,000 shall be payable prior to December 31, 2002, January 1, 2003, January 1, 2004 and January 1, 2005, respectively. The term of such agreement is for the life of any patent that may be issued to us for the first product we develop utilizing such technology, or, if we do not acquire any patentable products, seven years. On June 10, 2002, we executed a Development and Licensing Agreement with Shire Laboratories, Inc. pursuant to which we were granted an exclusive worldwide license (including the right to sublicense) to develop, make, have made, use, supply, export, import, register and - 25 - sell products for the treatment of various inflammatory disorders using Shire's technology. In addition, under the agreement, Shire shall perform certain product development functions for us. Pursuant to the terms of such agreement, we will pay to Shire a percentage of certain net sales of products utilizing any part of Shire's technology. Also under the agreement, we have committed to payments, in cash or at our option, a combination of cash and our Common Stock, upon the achievement of certain clinical and regulatory milestones in the event we pursue certain applications of the technology which could total up to $7.9 million in the aggregate. Below is a table which presents our contractual obligations and commercial commitments as of June 30, 2002:
- ---------------------------------------------------------------------------------------------------------- PAYMENTS DUE BY PERIOD --------------------------------------------------------------------------------- SIX MONTHS ENDING CONTRACTUAL DECEMBER 31, 2003 AND 2007 AND OBLIGATIONS TOTAL 2002 2004 2005 AND 2006 AFTER - ---------------------------------------------------------------------------------------------------------- OPERATING LEASES(1).. $ 2,364,000 $ 167,000 $ 667,000 $ 668,000 $862,000 - ---------------------------------------------------------------------------------------------------------- UNCONDITIONAL $ 341,000(2) PURCHASE $ 870,000(3) OBLIGATIONS........ $ 2,132,000 $ 921,000(4) $ --(4) $ --(4) $ --(4) - ---------------------------------------------------------------------------------------------------------- CASH DIVIDENDS ON SERIES D PREFERRED STOCK.... $ 7,200,000(5) $ 800,000(5) $ 3,200,000(5) $ 3,200,000(5) $ --(5) - ---------------------------------------------------------------------------------------------------------- TOTAL CONTRACTUAL OBLIGATIONS........ $ 11,696,000 $ 3,099,000 $ 3,867,000 $ 3,868,000 $862,000 - ----------------------------------------------------------------------------------------------------------
(1) Such amounts primarily include minimum rental payments for our office lease in Newtown, Pennsylvania. (2) Such amount represents committed inventory purchases on a purchase order under the terms of our Agreement with Pharmaceutical Research Manufacturing Services, Inc. (3) Such amount represents the maximum amounts payable under the terms of our Co-Promotion Agreement with Merck & Co., Inc. for Vioxx. (4) Such amounts are payable under the terms of our Agreement with Atrix Pharmaceuticals. As of June 30, 2002, we will be required to expend $921,000 in advertising and selling expenses related to the Atrix products in 2002, and to make certain minimum expenditures for advertising and promotional activities after 2002, including: (i) the lesser of $4,000,000 or 30% of our contribution margin (as defined in the agreement) relating to a specific Atrix product that we market, and (ii) the lesser of $2,000,000 or 30% of our contribution margin (as defined in the agreement) relating to a separate Atrix product that we market. (5) Pursuant to the terms of our Series D Cumulative Convertible Preferred Stock issued in May 1999, and unless earlier converted pursuant to its terms, the holders of the Series D Preferred Stock are entitled to dividends payable in cash at a rate of 8.0% per annum. - 26 - ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company believes that it is not subject to a material impact to its financial position or results of operations relating to market risk. - 27 - PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Annual Meeting of Stockholders was held on May 9, 2002. There were present at the Annual Meeting in person or by proxy stockholders holding an aggregate of 8,236,579 shares of Common Stock and 199,000 shares of Series D Stock, which shares of Series D Stock account for an additional 2,007,771 shares of Common Stock on an as converted to Common Stock basis. The results of the vote taken at such Annual Meeting with respect to the election of the nominees to be the Common Stock directors were as follows: COMMON STOCK NOMINEES FOR WITHHELD --------------------- --- -------- Brian M. Gallagher, Ph.D. 7,923,356 Shares 313,223 Shares Peter R. Barnett, D.M.D. 7,923,356 Shares 313,223 Shares Robert C. Black 7,923,356 Shares 313,223 Shares James E. Daverman 7,923,356 Shares 313,223 Shares Robert J. Easton 7,923,356 Shares 313,223 Shares W. James O'Shea 7,923,356 Shares 313,223 Shares The results of the vote taken at such Annual Meeting with respect to the election of the nominee to be the Series D Director, Stephen A. Kaplan, were as follows: 2,007,771 shares of Series D Stock (on an as converted to Common Stock basis) were voted for the Series D Stock nominee, with no shares voting against or abstaining. A vote of the stockholders was taken at such Annual Meeting with respect to the proposal to amend the Company's 1996 Stock Option Plan to increase the maximum aggregate number of shares of Common Stock available for issuance thereunder from 2,000,000 to 2,500,000 shares and to reserve an additional 500,000 shares of Common Stock of the Company for issuance in connection with awards granted under the 1996 Stock Option Plan. For the purposes of such vote, the holders of shares of Common Stock and the holders of Series D Stock (on an as converted to Common Stock basis) voted together as a single class. Of such shares, 9,547,107 shares voted in favor of such proposal, 692,637 shares were voted against such proposal and 4,606 shares abstained from voting. In addition, a vote of the stockholders was taken at the Annual Meeting on the proposal to ratify the appointment of KPMG LLP as the independent auditors of the Company for the fiscal year ending December 31, 2002. For the purpose of such vote, the holders of shares of Common Stock and the holders of Series D Stock (on an as converted to Common Stock basis) voted together as a single class. Of such shares, 10,211,544 shares voted in favor of such proposal, 29,580 shares were voted against such proposal and 3,266 shares abstained from voting. - 28 - ITEM 5. OTHER INFORMATION. Sublicense Agreement On May 24, 2002, we executed a Sublicense Agreement with Altana Inc. ("Altana"), the United States subsidiary of Altana Pharma AG, pursuant to which we were granted the exclusive right to create improvements to, market, advertise, promote, distribute, offer for sale and sell, in the United States and Puerto Rico, Pandel Cream, a mid-potency topical corticosteroid that is indicated for the relief of mild-to-moderate inflammatory disorders of the skin, such as atopic dermatitis and psoriasis. Altana currently licenses such rights from Taisho Pharmaceutical Co., Ltd., a company organized and existing under the laws of Japan. We will purchase from Altana all Pandel products to be sold. Pursuant to the terms of such agreement, we agreed to pay Altana an aggregate sublicense fee of $1,700,000, $800,000 of which was payable on June 30, 2002 and $900,000 of which is due on May 31, 2003. In addition, we are required to pay a royalty fee equal to a percentage of the net sales of the product, if any. Shareholder Protection Rights Agreement On June 5, 2002, we announced that our Board of Directors had adopted an Amended and Restated Shareholder Protection Rights Agreement which superceded in its entirety our then existing Shareholder Protection Rights Agreement, as amended. Rights attached to outstanding shares of Common Stock under the original plan and rights attached to shares of Common Stock issued by us after the date of adoption are governed pursuant to the terms of the amended and restated plan. The amended and restated plan was not adopted in response to any specific effort to acquire control of CollaGenex, but rather to continue to ensure that all of our stockholders are treated fairly in the event of an unsolicited takeover of CollaGenex or other tactics intended to gain control of CollaGenex without maximizing stockholder value. Development and Licensing Agreement On June 10, 2002, we executed a Development and Licensing Agreement with Shire Laboratories, Inc. ("Shire") pursuant to which we were granted an exclusive worldwide license (including the right to sub-license) to develop, make, have made, use, supply, export, import, register and sell products for the treatment of various inflammatory disorders using Shire's technology. In addition, under the agreement, Shire shall perform certain product development functions for us. Pursuant to the terms of such agreement, we will pay to Shire a percentage of certain net sales of products utilizing any part of Shire's technology. Also under the agreement, we have committed to payments, in cash or at our option, a combination of cash and our Common Stock, upon the achievement of certain clinical and regulatory milestones in the event we pursue certain applications of the technology which could total up to $7.9 million in the aggregate. - 29 - Initiation of Clinical Studies On June 17, 2002, we announced that we had initiated a multi-center, double-blinded, placebo-controlled clinical study to evaluate the efficacy of Periostat for the treatment of meibomianitis, also known as ocular rosacea and characterized by symptoms of "dry eye." On August 13, 2002, we announced that we had initiated a multi-center, double-blinded, placebo-controlled Phase III clinical study to evaluate the efficacy of Periostat for the treatment of rosacea, a chronic inflammatory skin disease. Receipt of Marketing Authorization On June 25, 2002, we announced that we had received final Marketing Authorizations for our lead product, Periostat, from the Ministries of Health in the Netherlands and Portugal. Both the Netherlands and Portugal will be supplied product by CollaGenex International Ltd., our wholly-owned United Kingdom subsidiary. We will partner in Portugal with the Portuguese affiliate of our Spanish partner, ISDIN S.A. We are currently in discussions with potential partners in the Netherlands. Publication of Clinical Data On July 11, 2002, we announced that data with respect to new evidence from a Phase IV clinical trial of the adjunctive use of Periostat would be published in the July 2002 issue of the Journal of Periodontology. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits * 10.1 Agreement between Altana Inc. and CollaGenex Pharmaceuticals, Inc., dated May 24, 2002. 99.1 Certification Pursuant to 18 U.S.C. Section 1350 (b) Reports on Form 8-K. On May 20, 2002, the Company filed a current report on Form 8-K with the Securities and Exchange Commission relating to an amendment to the Company's Shareholder Protection Rights Agreement. On May 30, 2002, the Company filed a current report on Form 8-K with the Securities and Exchange Commission relating to the issuance of 119,335 shares of Common Stock under its existing Equity Line arrangement. On June 5, 2002, the Company filed a current report on Form 8-K with the Securities and Exchange Commission relating to the Company's adoption of an Amended and Restated Shareholder Protection Rights Agreement. - 30 - On June 28, 2002, the Company filed a current report on Form 8-K with the Securities and Exchange Commission relating to the issuance of 32,187 shares of Common Stock under its existing Equity Line arrangement. *Confidential Treatment has been sought for a portion of this Exhibit. - 31 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CollaGenex Pharmaceuticals, Inc. Date: August 14, 2002 By: /s/ Brian M. Gallagher, Ph.D. -------------------------------------- Brian M. Gallagher, Ph.D. President and Chief Executive Officer (Principal Executive Officer) Date: August 14, 2002 By: /s/ Nancy C. Broadbent -------------------------------------- Nancy C. Broadbent Chief Financial Officer (Principal Financial and Accounting Officer) EX-10 4 exh10-1_form10q63002.txt EXHIBIT 10-1 Exhibit 10.1 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. AGREEMENT between ALTANA INC. and COLLAGENEX PHARMACEUTICALS, INC. May 24, 2002 TABLE OF CONTENTS PAGE Article I DEFINITIONS 1 Article II LICENSE GRANTS 6 Section 2.01. Exclusive License Grant.................................6 Section 2.02. Non-Exclusive License Grant.............................6 Section 2.03. Disclosure of Information...............................6 Section 2.04. Extension of Patent Life................................7 Section 2.05. Improvements............................................7 Article III PAYMENTS AND ROYALTIES 7 Section 3.01. License Fee.............................................7 Section 3.02. Royalty Payments........................................7 Section 3.03. Reports, Exchange Rates.................................7 Section 3.04. Records and Audits......................................7 Section 3.05. Taxes...................................................8 Section 3.06. Payment Terms...........................................8 Section 3.07. Payment Method..........................................8 Section 3.08. No Assurances...........................................8 Article IV TERM AND TERMINATION 10 Section 4.01. Term...................................................10 Section 4.02. Termination By CollaGenex..............................10 Section 4.03. Termination By Altana..................................10 Section 4.04. Termination Upon Certain Events........................10 Section 4.05. Remedies...............................................10 Section 4.06. Effect of Termination..................................10 Article V COMMERCIALIZATION OF THE PRODUCT 11 Section 5.01. CollaGenex's Obligations...............................11 Article VI MANUFACTURE AND SUPPLY 12 Section 6.01. Agreement to Supply Products...........................12 Section 6.02. Quality Assurance......................................12 Section 6.03. Altana's Duties........................................12 Section 6.04. Failure to Supply......................................13 Article VII PURCHASE AND SALE 13 Section 7.01. Purchase Price and Payment.............................13 Section 7.02. Labeling...............................................13 Section 7.03. Purchase Forms.........................................14 Section 7.04. Forecasts and Orders...................................14 Section 7.05. Confirmation...........................................14 Section 7.06. Delivery...............................................14 i TABLE OF CONTENTS PAGE Section 7.07. Professional Samples...................................15 Section 7.08. Return of Products.....................................15 Article VIII WARRANTY, REJECTION AND INSPECTIONS OF SHIPMENTS 15 Section 8.01. Altana Warranty........................................15 Section 8.02. Rejection of Product or Professional Samples for Failure to Conform to Specifications...................15 Section 8.03. CollaGenex Inspections.................................16 Article IX REGULATORY COMPLIANCE 16 Section 9.01. Maintenance of Regulatory Approvals....................16 Section 9.02. Adverse Drug Event Reporting...........................17 Section 9.03. Assistance.............................................17 Section 9.04. Compliance.............................................17 Article X PATENTS AND TRADEMARKS 18 Section 10.01. Maintenance of Patents or Marks.......................18 Section 10.02. Cooperation...........................................18 Section 10.03. Altana to Prosecute Infringement......................18 Section 10.04. Infringement Claimed by Third Parties.................18 Article XI REPRESENTATIONS AND WARRANTIES 19 Section 11.01. Corporate Power.......................................19 Section 11.02. Due Authorization.....................................19 Section 11.03. Binding Obligation....................................19 Section 11.04. Ownership of Patent Rights............................20 Section 11.05. Patent Proceedings....................................20 Section 11.06. Adverse Properties....................................20 Section 11.07. Governmental Approvals................................20 Section 11.08. Protection of the Marks...............................20 Section 11.09. SOP Conformance.......................................20 Section 11.10. Further Actions.......................................20 Section 11.11. Limitation of Liability...............................21 Article XII COVENANTS OF COLLAGENEX 21 Section 12.01. Limitation to the Territory...........................21 Section 12.02. Marketing and Instructional Materials.................21 Section 12.03. Marketing Expenses....................................21 Article XIII PRODUCT RECALL 21 Section 13.01. Product Recalls.......................................21 Section 13.02. Recall Costs..........................................22 Section 13.03. Notification of Complaints............................22 Section 13.04. Notification of Threatened Action.....................23 Article XIV INDEMNIFICATION AND INSURANCE 23 Section 14.01. CollaGenex Indemnified by Altana......................23 ii TABLE OF CONTENTS PAGE Section 14.02. Altana Indemnified by CollaGenex......................23 Section 14.03. Prompt Notice Required................................23 Section 14.04. Indemnitor May Settle.................................24 Section 14.05. Insurance.............................................24 Article XV DISPUTE RESOLUTION 25 Section 15.01. Disputes..............................................25 Section 15.02. Mediation.............................................25 Section 15.03. Trial Without Jury....................................25 Section 15.04. Performance to Continue...............................25 Section 15.05. Provisional Remedies..................................26 Section 15.06. Determination of Patents and Other Intellectual Property..............................................26 Article XVI CONFIDENTIALITY 26 Section 16.01. Confidentiality.......................................26 Section 16.02. Publicity Review......................................26 Article XVII MISCELLANEOUS 27 Section 17.01. Non-Solicitation and Non-Compete......................27 Section 17.02. Commercially Reasonable Efforts.......................28 Section 17.03. No Right to Use Names.................................28 Section 17.04. Notices...............................................28 Section 17.05. Section Headings......................................29 Section 17.06. Severability..........................................29 Section 17.07. Entire Agreement/Merger...............................30 Section 17.08. Amendment.............................................30 Section 17.09. Equitable Relief......................................30 Section 17.10. Counterparts..........................................30 Section 17.11. No Waiver of Rights...................................30 Section 17.12. Force Majeure.........................................30 Section 17.13. Further Assurances....................................30 Section 17.14. Assignment............................................30 Section 17.15. Expenses..............................................31 Section 17.16. Binding Effect........................................31 Section 17.17. Governing Law.........................................31 Section 17.18. No Strict Construction................................31 Section 17.19. US Dollars............................................31 Section 17.20. Independent Contractors...............................31 Exhibit A -- Patent Rights...........................................A-1 Exhibit B -- Standard Operating Procedures - Recall..................B-1 Exhibit C -- Specifications..........................................C-1 Exhibit D -- Marks...................................................D-1 Exhibit E -- Standard Operating Procedures - ADE.....................E-1 Exhibit F -- Product Fixed Price Schedule ...........................F-1 Exhibit G -- Standard Altana Production Quantities...................G-1 Exhibit H -- Memorandum..............................................H-1 iii AGREEMENT This Agreement ("Agreement") is made as of May 24, 2002, by and between Altana Inc., a New York corporation ("Altana"), with its principal place of business located at 60 Baylis Road, Melville, New York 11747 and CollaGenex Pharmaceuticals, Inc., a Delaware corporation ("CollaGenex"), with its principal place of business located at 41 University Drive, Newtown, Pennsylvania 18940. Altana and CollaGenex are sometimes referred to collectively herein as the "Parties" and individually as a "Party." WHEREAS, Altana licenses certain proprietary information, intellectual property, Patents Rights (as defined below) and Know-How (as defined below), and possesses manufacturing capabilities for the Product (as defined below), and subject to the terms of this Agreement, Altana desires to grant to CollaGenex an exclusive sublicense to market and sell the Product for use in the Territory (as defined below); and WHEREAS, CollaGenex desires to obtain from Altana an exclusive sublicense to advertise, promote, market, distribute, detail and sell the Products. NOW, THEREFORE, in consideration of the mutual promises, covenants and agreements hereinafter set forth, the Parties mutually agree to be legally bound as follows: ARTICLE I DEFINITIONS The following terms as used in the Agreement shall, unless the context clearly indicates to the contrary, have the meaning set forth below: "Act" means the United States Food, Drug and Cosmetic Act, as amended, and all regulations thereunder. "ADE" means any serious or unexpected adverse event (including adverse drug experiences, as defined in Applicable Laws) involving the Product or the Professional Samples. "Affiliate" means any entity which directly or indirectly controls, is controlled by or is under common control with either CollaGenex or Altana. The term "control" means the power to direct or control the affairs of such entity by reason of ownership of at least fifty percent (50%) of such entity by voting stock, equity interest, contract or otherwise. "Agreement" means this Agreement and any written amendments, addendum or modifications hereto. "Applicable Laws" means all applicable laws, including but not limited to the Act, rules, regulations and guidelines within or outside the Territory that may apply to the import, export, development, manufacturing, storage, marketing or sale of the Product or the performance of either Party's obligations under this Agreement including all cGMP or current Good Clinical Practices standards or guidelines promulgated by the FDA or the Governmental Authorities and 1 including trade association guidelines, where applicable, as well as U.S. export control laws and the U.S. Foreign Corrupt Practices Act. "Altana Technology" means the Patent Rights and the Know-How. "Collaboration" means the activities of the Parties carried out in performance of, and the relationship between the Parties established by, this Agreement. "Generic Products" means any compound or treatment with identical or similar structure that would substitute for, eliminate the need for, which competes with or which would constitute barriers for the Product. "Confidential Information" means any confidential information of a Party relating to any use, process, method, compound, research project, work in process, future development, scientific, engineering, manufacturing, marketing, business plan, financial or personnel matter relating to the disclosing Party, its present or future products, sales, suppliers, customers, employees, investors or business, whether in oral, written, graphic or electronic form. Confidential Information shall not include any information which the receiving Party can prove by competent evidence: (a) is now, or hereafter becomes, through no act or failure to act on the part of the receiving Party, generally known or available; (b) is known by the receiving Party at the time of receiving such information, as evidenced by its written records maintained in the ordinary course of business; (c) is hereafter furnished to the receiving Party by a Third Party, as a matter of right and without restriction on disclosure; (d) is independently developed by the receiving Party, as evidenced by its written records, without knowledge of, and without the aid, application or use of, the disclosing Party's Confidential Information; or (e) is the subject of a written permission to disclose provided by the disclosing Party. "Effective Date" means the date specified above in the preamble. "FDA" means the United States Food and Drug Administration. "First Commercial Sale" means the first sale for use, consumption or resale of the Product by CollaGenex in the Territory (excluding providing the Product for clinical trials or the distribution of Professional Samples). A sale to an Affiliate shall not constitute a First Commercial Sale unless the Affiliate is the end user of the Product. "GAAP" means generally accepted accounting principles, consistently applied in accordance with past practice. 2 "Good Clinical Practices" means good clinical practices as defined in 21 CFR ss.50 et. seq. and ss.312 et. seq., as may be amended. "cGMP" means current good manufacturing practices as defined in 21 CFR ss.110 et. seq., as may be amended. "Governmental Approval" means all permits, licenses and authorizations, including but not limited to a NDA and other Regulatory Approvals, required by the FDA or any other Governmental Authority as a prerequisite to the Manufacturing, packaging, marketing and selling of the Product or Professional Samples. "Governmental Authority" means any foreign, federal, state, local or other government, administrative or regulatory agency, authority, body, commission, court, tribunal or similar entity within the Territory. "Improved Product" means Products which are derived from or arise out of any Improvements. "Improvement" means any enhancements, reformulations or modifications to the Altana Technology or Product, which include but not limited to, preparation, presentation, means of delivery, dosage, packaging or any new or expanded therapeutic indications and which are made by CollaGenex or any agent of CollaGenex. "Know-How" means all know-how, trade secrets, inventions, data, processes, techniques, procedures, compositions, devices, methods, formulas, protocols and information, whether or not patentable, which are not generally publicly known, including, without limitation, all chemical, biochemical, toxicological, and scientific research information, whether in written, graphic or video form or any other form or format. "Manufacture" or "Manufacturing Process" means the storage, handling, production, processing and packaging of the Product or a Professional Sample, in accordance with this Agreement and Applicable Laws. "Marks" means any trademark(s) proposed, chosen, used, owned, licensed or controlled by Altana in connection with the Product, alone or accompanied by any logo or design and any foreign language equivalents in sound or meaning, whether registered or not. "Net Sales" means the invoice amounts actually received for sales of each Product and/or Improved Product by CollaGenex or its Affiliates to a Third Party in a bona fide arm's length transaction, less the following items (a) cash discounts and trade allowances actually granted, (b) rebates and chargebacks required by Applicable Laws or made pursuant to agreements with customers, (c) credits or allowances actually granted upon claims, damaged goods, outdated goods, rejections or returns of such Product and/or Improved Product, including recalls, (d) taxes, tariffs and similar obligations, duties or other governmental charges (other than income taxes) levied on, absorbed or otherwise imposed on sales of such Product and/or Improved Product in the Territory. Components of Net Sales shall be determined in the ordinary course of 3 business in accordance with historical practice and using the accrual method of accounting in accordance with GAAP. "NDA" means a New Drug Application, as defined in the Act, that is required to be approved by the FDA before marketing a Product and which is held under the name of Savage Laboratories. "Packaging Specifications" means the packaging and labeling specifications for the Product or Professional Sample as mutually determined by Altana and CollaGenex from time to time, and in compliance with Applicable Laws. "Patent Rights" means all rights under patents and patent applications, and any and all patents issuing therefrom (including utility, model and design patents and certificates of invention), together with any and all substitutions, extensions (including supplemental protection certificates), registrations, confirmations, reissues, divisionals, continuations, continuations-in-part, re-examinations, renewals and foreign counterparts of the foregoing and all improvements, supplements, modifications or additions. The Patent Rights as of the Effective Date are set forth in Exhibit A, which is incorporated by reference. "Product" means Pandel(R) Cream. The Product shall include all three sizes of the Pandel(R) Cream which is comprised of, fifteen (15) grams, forty five (45) grams and eighty (80) grams. "Professional Samples" means samples used to demonstrate the manner in which Product is prepared and used, and which are labeled "professional sample for trial purposes only, not for resale." "Regulatory Approval" means all necessary and appropriate regulatory approvals to place the Product on the market in the Territory. "Shipment" or "Shipped" means each individual group of Product received by CollaGenex from Altana. "Specifications" means the specifications for each Product attached hereto as Exhibit C, which is incorporated by reference. "Standard Operating Procedure" or "SOP" means Altana's company policies and procedures which have been implemented by Altana detailing Altana's response, responsibilities and obligations in day to day management of Altana and in the event of certain occurrences, including but not limited to ADE reporting and Recalls. "Taisho" means Taisho Corporation, a Japanese corporation with its headquarters located at 24-1, Takata 3-chome, Toshima-ku, Tokyo 171, Japan. "Territory" means the United States and Puerto Rico. "Third Party" means any entity other than Altana or CollaGenex or an Affiliate of Altana or CollaGenex. 4 Each of the following terms is defined in the Section set forth opposite such term below: Force Majeure..........................................Section 17.12 Indemnitee.............................................Section 14.03 Indemnitor.............................................Section 14.03 Initiating Group.......................................Section 17.01 Inventory Stock.........................................Section 7.06 Loss...................................................Section 14.01 Marketing Materials....................................Section 12.02 Purchase Price..........................................Section 7.01 Other Group............................................Section 17.01 Recall.................................................Section 13.01 Representatives........................................Section 16.01 Royalty Payment Date....................................Section 3.06 Royalty Statement.......................................Section 3.03 SEC....................................................Section 16.02 Supply Failure..........................................Section 6.04 Term....................................................Section 4.01 (a) Interpretation. The Section headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. Except where the context clearly requires to the contrary: (i) each reference in this Agreement to a designated "Section" or "Exhibit" is to the corresponding Section or Exhibit of or to this Agreement; (ii) instances of gender or entity-specific usage (e.g., "his" "her" "its" "person" or "individual") shall not be interpreted to preclude the application of any provision of this Agreement to any individual or entity; (iii) the word "or" shall not be applied in its exclusive sense; (iv) "including" shall mean "including, without limitation"; (v) references to laws, regulations and other governmental rules, as well as to contracts, agreements and other instruments, shall mean such rules and instruments as in effect at the time of determination (taking into account any amendments thereto effective at such time without regard to whether such amendments were enacted or adopted after the effective date of this Agreement) and shall include all successor rules and instruments thereto; (vi) references to "$" or "dollars" shall mean the lawful currency of the United States; (vii) references to "Federal" or "federal" shall be to laws, agencies or other attributes of the United States (and not to any State or locality thereof); (viii) the meaning of the terms "domestic" and "foreign" shall be determined by reference to the United States; (ix) references to "days" shall mean calendar days; (x) references to months or years shall be to the actual calendar months or years at issue (taking into account the actual number of days in any such month or year); (xi) days, Business Days and times of day shall be determined by reference to local time in Newtown, Pennsylvania; (xii) the English language version of this Agreement shall govern all questions of interpretation relating to this Agreement, notwithstanding that this Agreement may have been translated into, and executed in, other languages; and (xiii) the terms "Product" and "Products" shall refer to each individual formulation of the Product and all formulations of the Product collectively, unless the context clearly indicates otherwise. 5 ARTICLE II LICENSE GRANTS SECTION 2.01. EXCLUSIVE LICENSE GRANT. (a) Subject to the terms of this Agreement, Altana hereby grants to CollaGenex an exclusive sublicense (exclusive even as to Altana) under the Altana Technology to create Improvements, use, market, advertise, promote, distribute, offer for sale and sell the Product in the Territory. (b) Subject to the terms and conditions of this Agreement, Altana hereby grants to CollaGenex an exclusive royalty-free sublicense to use the Marks solely in connection with the use, detail and sale of the Product. (c) CollaGenex acknowledges that the Marks being sublicensed to CollaGenex belong to Altana or Taisho and that CollaGenex shall have no rights in such Marks except pursuant to the sublicense. CollaGenex shall use the Marks as depicted on Exhibit D, which is incorporated by reference, or otherwise in the exact form used by Altana, including without limitation, the (R) symbol or (TM) symbol, as applicable. Any other use of the Marks shall be subject to the prior written approval of Altana. (d) CollaGenex shall have the right to use Third Party distributors and sales force organizations under this Agreement and such Third Party distributors and sales force organizations shall not be considered CollaGenex's sublicensees but independent Third Party service providers. Further, CollaGenex shall have a right to use the services of Third Parties to create Improvement and such Third Parties shall not be deemed CollaGenex's sublicensees but independent Third Party service providers. SECTION 2.02. NON-EXCLUSIVE LICENSE GRANT. In the event that the use, advertising, distribution, marketing, promotion, offering for sale or sale of the Product would infringe a claim of an issued patent, and/or any patent rights which Altana or Taisho own or have the rights to license or sublicense, as applicable, and which patents are not covered by the grant in Section 2.01, Altana hereby grants a non-exclusive, royalty-free sublicense in the Territory under such issued patents or patent rights to use, market, advertise, promote, distribute, offer for sale and sell the Product or shall ensure that Taisho grants CollaGenex the same. SECTION 2.03. DISCLOSURE OF INFORMATION. Upon CollaGenex's request, but not more than once per year, Altana shall disclose to CollaGenex in writing, or via electronic media acceptable to CollaGenex, sales information, marketing information, protocols, processes, formulation information, or scientific information that might assist CollaGenex in the marketing of the Product or in the development of an Improved Product. 6 SECTION 2.04. EXTENSION OF PATENT LIFE The Parties agree to use commercially reasonable efforts to work together to extend the life of the Patent Rights under the Altana Technology. SECTION 2.05. IMPROVEMENTS Altana agrees to discuss payment of license fees to CollaGenex, or a reduction in CollaGenex's Pandel royalty payment on sales of the Improved Product, for the rights to market Improved Product made by CollaGenex, if any, for Altana and/or Third Party licensees of the Product. Taisho also agrees to discuss with CollaGenex the payment of license fees or royalties to CollaGenex for the rights to market Improved Product made by CollaGenex, if any, so long as the fees or royalties are consistent with the terms set forth in the Memorandum by Taisho and Altana, referenced herein under Exhibit H. ARTICLE III PAYMENTS AND ROYALTIES SECTION 3.01. LICENSE FEE. In partial consideration for the sublicenses granted under Section 2.01, CollaGenex shall pay to Altana two (2) sublicense fee payments totaling One Million Seven Hundred Thousand Dollars ($1,700,000) by wire transfer of available funds to an account designated by Altana to CollaGenex prior to the initial payment date and in accordance with the following schedule: a payment of Eight Hundred Thousand Dollars ($800,000) on May 31, 2002 and payment of Nine Hundred Thousand Dollars ($900,000) on May 31, 2003. SECTION 3.02. ROYALTY PAYMENTS. During the Term, CollaGenex will pay Altana a royalty of (i) [**] percent ([**]%) of the Net Sales on the Product. CollaGenex shall make such payments in accordance with this Article III. SECTION 3.03. REPORTS, EXCHANGE RATES. CollaGenex shall furnish to Altana a quarterly written report (in sufficient detail to determine the relevant amounts and dates specified in this Section 3.03) on (a) the calculation of Net Sales; (b) royalties payable in U.S. dollars, if any, which shall have accrued hereunder based upon Net Sales; (c) withholding taxes, if any, required by law to be deducted with respect to such sales; and (d) the date of the First Commercial Sale of the Product (the "Royalty Statement"). Reports shall be due on the sixtieth (60) day following the close of each quarter. SECTION 3.04. RECORDS AND AUDITS. During the Term and for a period of two (2) years thereafter, CollaGenex shall keep complete and accurate records in sufficient detail to permit Altana to confirm the completeness and accuracy of: (i) the information presented in each Royalty Statement and all payments due 7 hereunder; and (ii) the calculation of Net Sales. CollaGenex shall permit an independent, certified public accountant reasonably acceptable to CollaGenex to audit and/or inspect those records of CollaGenex (including financial records) that relate to Net Sales and Royalty Statements for the sole purpose of: (A) verifying the completeness and accuracy of the Royalty Statements; and (B) verifying the calculation of Net Sales. Such inspection shall be conducted during CollaGenex's normal business hours, no more than once in any twelve (12) month period and upon at least fifteen (15) days prior written notice by Altana to CollaGenex. If such accounting firm concludes that such payments were underpaid for the preceding year, CollaGenex shall pay Altana the amount of any such underpayments for the preceding year within thirty (30) days of the date Altana delivers to CollaGenex such accounting firm's report so concluding that such payments were underpaid for the preceding year. If such accounting firm concludes that such payments were overpaid for the preceding year, Altana shall pay to CollaGenex the amount of any such overpayments for the preceding year within thirty (30) days of the date Altana delivers to CollaGenex such accounting firm's report so concluding that such payments were overpaid for the preceding year. Altana shall bear the full cost of such audit unless such audit discloses an underpayment by more than ten percent (10%) of the amount due for the preceding year. In such case, CollaGenex shall bear the full cost of such audit. In the event CollaGenex receives royalty payments from Altana pursuant to Section 4.06(a), CollaGenex shall be entitled to perform audits of Altana's records pursuant to this Section 3.04. SECTION 3.05. TAXES. All taxes levied on account of the payments accruing to Altana under this Agreement shall be paid by Altana for its own account, including taxes levied thereon as income to Altana. If provision is made in law or regulation for withholding, such tax shall be deducted from the payment made by CollaGenex, paid to the proper taxing authority and a receipt of payment of the tax secured and promptly delivered to Altana. Each Party agrees to assist the other Party in claiming exemption from such deductions or withholdings under any double taxation or similar agreement or treaty from time to time in force. SECTION 3.06. PAYMENT TERMS. Royalties shown to have accrued by each Royalty Statement provided for under Section 3.03 shall be due and payable sixty (60) days after the end of each calendar quarter (each a "Royalty Payment Date"). SECTION 3.07. PAYMENT METHOD. Except as otherwise agreed between the Parties, all royalties and other payments due hereunder shall be paid in U.S. dollars and shall be originated from an United States bank located in the United States and shall be made by bank wire transfer in available funds to such account as Altana shall designate before such payment is due. SECTION 3.08. NO ASSURANCES COLLAGENEX MAKES NO REPRESENTATION OR WARRANTY, EITHER EXPRESS OR IMPLIED, THAT (i) IT WILL BE ABLE TO SUCCESSFULLY 8 COMMERCIALIZE ANY PRODUCT OR IMPROVED PRODUCTS, OR (ii) THAT THE PRODUCTS OR IMPROVED PRODUCTS, IF ANY, WILL ACHIEVE ANY PARTICULAR SALES LEVEL. ARTICLE IV TERM AND TERMINATION SECTION 4.01. TERM. This Agreement will take effect on the Effective Date and shall continue until terminated in accordance with the terms contained herein (the "Term"). SECTION 4.02. TERMINATION BY COLLAGENEX. CollaGenex may terminate the Agreement by notice to Altana as follows: (a) at any time, without cause, upon twelve (12) months prior written notice to Altana; (b) if Altana shall commit any willful or material breach of the provisions of this Agreement; or (c) if Altana shall cease to Manufacture or supply the Product to CollaGenex pursuant to this Agreement, except as otherwise set forth herein; provided however, that with respect to Sections 4.02(b) and (c) that: (i) CollaGenex has first given Altana notice specifying the details of the breach, and (ii) Altana has not cured such breach within ninety (90) days of the receipt of notice of such breach. SECTION 4.03. TERMINATION BY ALTANA. Altana may terminate this Agreement by notice to CollaGenex, upon any of the following conditions: (a) if CollaGenex shall fail to make any payments to Altana on the date on which such payments are due hereunder and such failure continues for more than thirty (30) business days after notice; (b) if CollaGenex shall fail to deliver to Altana a Royalty Statement by the Royalty Payment Date and shall fail to cure such default within thirty (30) days after notice from Altana with respect thereto; (c) if CollaGenex shall commit any willful or material breach of the provisions of this Agreement; 9 (d) if CollaGenex shall cease to offer the Product for distribution to its customers, except as may be provided for herein; or (e) at any time, without cause, upon twelve (12) months prior written notice to CollaGenex; provided however, that with respect to Sections 4.03(c) and (d), Altana has first given CollaGenex notice specifying the details of the breach, and CollaGenex has not cured such breach within ninety (90) days of the receipt of notice of such breach. SECTION 4.04. TERMINATION UPON CERTAIN EVENTS. This Agreement may be terminated by the Party specified below forthwith upon prior written notice to the other Party of the occurrence of either of the following events: (a) by either Party upon a cessation of operations of the other Party or the institution by or against such Party as debtor of any proceeding (whether voluntary or involuntary) in bankruptcy or for dissolution, liquidation, reorganization, arrangement or the appointment of a receiver, trustee or judicial administrator (or the equivalent thereof in the jurisdiction in question) or any other proceeding under the law for the relief of debtors, if, in the case of an involuntary proceeding, the same shall not have been dismissed or stayed within sixty (60) days after its institution; or (b) by either Party if the other Party makes an assignment for the benefit of, or arrangement with, its creditors or becomes unable to pay its debts as they become due. A Party's failure to terminate this Agreement for any of the reasons specified in this Section 4.04 shall not in any way be deemed a waiver of such Party's rights in respect thereof or otherwise limit its rights to enforce the obligations hereunder. SECTION 4.05. REMEDIES. All of the non-breaching Party's remedies shall be cumulative, and the exercise of one remedy hereunder by the non-defaulting Party shall not be deemed to be an election of remedies. These remedies shall include the non-breaching Party's right to sue for damages for such breach without terminating this Agreement. SECTION 4.06. EFFECT OF TERMINATION. (a) In the event CollaGenex terminates this Agreement prior to the expiration of the US patent for the Product pursuant to Section 4.02 (other than according to subsection 4.02(a)) or Section 6.04 or Altana terminates pursuant to Section 4.03(e), all monies paid by CollaGenex to Altana (other than royalty payments pursuant to Section 3.02) shall immediately be refunded to CollaGenex, including the fees paid by CollaGenex in Section 3.01. In the event CollaGenex terminates this agreement prior to the expiration of the US patent for the Product pursuant to 4.02 (a), none of the monies paid by CollaGenex to Altana, pursuant to Sections 3.01 and 3.02, shall be refunded to CollaGenex. 10 (b) In the event Altana terminates this Agreement under Section 4.03 (other than pursuant to subsection 4.03(e)) or CollaGenex terminates pursuant to Section 4.02(a), all rights to the Altana Technology shall revert to Altana; provided, however, CollaGenex may, in its sole discretion, elect to sell off or distribute, as applicable, its existing inventory of Product and Professional Sample in accordance with the terms of this Agreement, including CollaGenex's payment obligation to Altana; provided, however, Altana shall have a first right to purchase all of the existing inventory at fair market value. (c) In the event CollaGenex terminates this Agreement under Section 4.04 or this Agreement is otherwise terminated under Section 4.04, the Parties agree that CollaGenex, as a licensee of rights to "intellectual property" under this Agreement, shall retain and may fully exercise all of its rights and obligations under this Agreement. (d) Except as otherwise provided in this Agreement, expiration or termination of this Agreement shall not relieve the Parties of any obligation accruing prior to such expiration or termination. Except as set forth below or elsewhere in this Agreement, the obligations and rights of the Parties under Sections 3.03, 3.06, 10.04 and Articles IV, VIII, IX, XI, XII, XIII, XIV, XV, XVI and XVII shall survive expiration or termination of this Agreement. (e) Subject to the provision of Article XVI, within thirty (30) days following the expiration or termination of this Agreement, each Party shall return to the other Party, or destroy, upon the written request of the other Party, any and all Confidential Information of the other Party in its possession and upon a Party's request, such destruction (or delivery) shall be confirmed in writing to such Party by a responsible officer of the other Party. ARTICLE V COMMERCIALIZATION OF THE PRODUCT SECTION 5.01. COLLAGENEX'S OBLIGATIONS. (a) Marketing Efforts. CollaGenex agrees to use commercially reasonable efforts to timely promote the sale, marketing and distribution of the Product in the Territory, consistent with accepted business practices, devoting the same level of efforts as it devotes to its own products of comparable market potential. "Comparable market potential" shall be fairly determined by CollaGenex in good faith and without limitation may be based upon market size, price, competition, patent rights, product liability issues and general marketing parameters. CollaGenex shall promptly advise Altana of any issues that materially and adversely affect CollaGenex's ability to market the Product in the Territory. In such event, senior executives of CollaGenex and Altana shall meet and in good faith discuss what actions should be taken in light of such issues. (b) Packaging. Packaging and labeling of the Product and the Professional Samples shall comply with the Packaging Specifications and Applicable Laws. Altana 11 shall be responsible for assuring that such packaging and labeling conform with all Applicable Laws of the FDA for selling the Product and distributing the Professional Samples in the United States, and that the Professional Samples comply with the Packaging Specifications and Applicable Laws where such Product is to be distributed for sale. All additional incremental costs resulting from changes to the Packaging Specifications, including artwork and labeling made at the request of CollaGenex shall be borne by CollaGenex. (c) Customer Leads. Promptly after the Effective date, Altana shall provide to CollaGenex all customer lists for the Product and all known customer leads. To the extent practical, Altana shall assign to CollaGenex any customer contracts and purchase orders for the Product as soon as reasonably practical after the Effective Date. During the Term, Altana shall promptly forward to CollaGenex any customer leads Altana develops or receives related to the Product. ARTICLE VI MANUFACTURE AND SUPPLY SECTION 6.01. AGREEMENT TO SUPPLY PRODUCTS. Subject to the terms of this Agreement, CollaGenex agrees to purchase exclusively from Altana, and Altana agrees to Manufacture for, and sell exclusively to CollaGenex during the Term, CollaGenex's total requirements for the Product and the Professional Samples in the Territory on the terms and conditions set forth herein. Altana may subcontract any part of the Manufacturing Process for the Product and the Professional Samples to Third Parties provided the Product, the Professional Samples and the facilities continue to meet the requirements as defined in this Agreement. Altana will bear the cost of validation and necessary stability work for all such subcontracting. SECTION 6.02. QUALITY ASSURANCE. Altana shall Manufacture the Product in accordance with the Specifications. Altana shall promptly notify CollaGenex in writing of any changes required by a Governmental Authority in the Specifications or Altana's quality assurance procedures that would render Altana unable to supply the Product and/or Professional Samples in accordance with the terms of this Agreement. The Parties agree to develop and execute an appropriate action plan in such situation. Altana shall be solely responsible for the costs of any changes required by such Governmental Authority. SECTION 6.03. ALTANA'S DUTIES. Altana agrees to furnish every Shipment of Product and the Professional Samples in accordance with all Applicable Laws and all other regulatory requirements specified in the NDA. 12 SECTION 6.04. SECOND MANUFACTURING SOURCE Altana shall have the right to validate, qualify and obtain all requisite Government Approvals for a Third Party as a second source (the "Second Source") to manufacture and label the Product for sale in the Territory. Upon prior written notice to Altana, CollaGenex shall have the right, at its sole cost and expense, to inspect and audit the Second Source's facilities used to manufacture the Product to confirm that such facilities are in compliance with Applicable Laws and Governmental Approvals. Altana, at its sole cost and expense, may have a representative(s) accompany CollaGenex's representative(s) on any such inspection or audit. SECTION 6.05. FAILURE TO SUPPLY. Altana shall immediately notify CollaGenex if Altana is unable to fill any order placed by CollaGenex pursuant to Section 7.05 and advise CollaGenex of the revised delivery date. CollaGenex shall then have the option of terminating the Purchase Order without obligation of payment or of accepting the revised delivery date. If Altana is unable to cure such failure within fifteen (15) business days after such notice, Altana may outsource to the Second Source to satisfy CollaGenex's supply requirements. If Altana elects to use the Second Source, Altana shall, within five (5) business days after the expiration of such cure period, make arrangements with the Second Source to take commercially reasonable steps to commence the manufacture of the Product and to sell to Altana (for resale to CollaGenex) the Product until such time as Altana is again able to Manufacture the Product; provided however any consequent incremental costs which result by reason of the use of the Second Source under this Article 6 shall be the sole cost and liability of Altana. ARTICLE VII PURCHASE AND SALE SECTION 7.01. PURCHASE PRICE AND PAYMENT. Altana shall sell and CollaGenex shall purchase the Product at the prices, including possible price increases, set forth on the Price Schedule, attached hereto as Exhibit F (the "Purchase Price"). Altana shall invoice CollaGenex upon shipment for all Products and Professional Samples shipped by Altana to CollaGenex and payment, without cash discounts, shall be due sixty (60) days from the receipt of the invoice. SECTION 7.02. LABELING. Altana will be solely responsible for generating all prescribing information included with the Product and labeling of the Product and artwork included on the Product and/or packages. Altana will be solely responsible for obtaining all Governmental Approval for prescribing information, artwork and labeling. The prescribing information and labeling shall comply with all Applicable Laws. CollaGenex shall have a right to modify the prescribing information, artwork and labeling and shall inform Altana of such modifications. Altana shall obtain all Governmental Approvals for such modifications, at CollaGenex' expense Upon expiration of the 13 Term, CollaGenex shall have a fully paid and perpetual right to use such prescribing information, artwork and labeling. SECTION 7.03. PURCHASE FORMS. Purchase orders, purchase order releases, confirmations, acceptances and similar documents submitted by a Party in conducting the activities contemplated under this Agreement are for administrative purposes only and shall not add to or modify the terms of the Agreement. To the extent of any conflict or inconsistency between this Agreement and any such document, the terms of this Agreement shall govern. SECTION 7.04. FORECASTS AND ORDERS. (a) All Product and Professional Sample forecasts will be made by CollaGenex to Altana in good faith based upon standard Altana production batch sizes, as set forth in Exhibit G, attached hereto and incorporated herein by reference. On or prior to the Effective Date, CollaGenex will provide Altana with 2-year forecasts of CollaGenex's requirement of the Product, on a formulation-by-formulation basis, including Professional Samples. The 2-year forecasts shall be provided quarterly, no later than 7 days after the start of each calendar quarter. Calendar quarters begin on January 1, April 1, July and October 1. Changes to the forecast can be made more frequently than every quarter , as needed, to meet demand. Any changes to the forecast and corresponding purchase orders must accommodate the 9-month (270-day) lead time needed by Altana to acquire Product and Professional sample manufacturing components. Although Altana will attempt to fill purchase order changes that are submitted by CollaGenex with less than a 9-month (270-day) lead time, Altana is under no obligation to do so. Said requirements will be based on standard production planning parameters including sales forecasts, sales demand forecasts, promotional forecasts, inventory requirements, and the like. (b) It is understood that Altana will not maintain Product or Professional Sample inventory, but will produce Products or Professional Sample upon receipt of that portion of CollaGenex's forecasts that constitute firm orders to purchase. SECTION 7.05. CONFIRMATION. Altana shall confirm each purchase order within ten (10) business days from the date of receipt of a purchase order and shall supply the Product within a maximum of two hundred seventy (270) days from the date of acceptance of a purchase order, or later if so specified in the purchase order. Failure of Altana to confirm any purchase order shall not relieve Altana of its obligation to supply Products ordered by CollaGenex in conformity with this Agreement. SECTION 7.06. DELIVERY. Delivery terms for the Product and Professional Samples shall be FOB Melville, NY, in the relevant purchase order. Altana shall ship the Product and Professional Samples in accordance with CollaGenex's purchase order form, plus or minus ten percent (10%) of the 14 original purchase order quantity, or as otherwise directed by CollaGenex in writing. Title to any Product or Professional Samples purchased by CollaGenex shall pass to CollaGenex or its agent upon the delivery of such Product to the facility requested by CollaGenex in the relevant Purchase Order. When delivered to a common carrier, the Product shall have an expiration date of no less than twenty one (21) months. Within three (3) months after the Effective Date, Altana shall, free of charge, provide all Product that was manufactured for sale in the Territory and which is in Altana's and its Affiliates' and agent's inventory ("Inventory Stock"). CollaGenex shall accept the Inventory Stock; provided, however, acceptance shall be subject to Sections 8.01 and 8.02 and all units of the Product have at least a one (1) year expiration date from the date of receipt of the Product by CollaGenex. SECTION 7.07. PROFESSIONAL SAMPLES. Altana shall supply to CollaGenex free of charge Fourteen Thousand Nine Hundred (14,900) packets of Professional Samples on a yearly basis to be used solely for promotional purposes (and not for sale). CollaGenex shall specify the percentage of each sample that will comprise the aforementioned quantity. Professional Samples in excess of the aforementioned quantity shall be sold by Altana to CollaGenex at the price specified in Exhibit F. CollaGenex shall not use the Professional Samples for any purpose other than as set forth in this Section 7.07. SECTION 7.08. RETURN OF PRODUCTS. Each party shall be liable for the costs associated with the return of any Product sold by such party to its customers, wholesalers, distributors or other entities to whom such party has sold the Product. CollaGenex shall be responsible for the costs associated with refunds of any Product sold by CollaGenex after the Effective Date, including any sales of the Inventory Stock. Altana shall be responsible for the costs associated with the refunds of any Product sold by Altana prior to the Effective Date. This Section 7.08 applies to all sales made within the Territory only. ARTICLE VIII WARRANTY, REJECTION AND INSPECTIONS OF SHIPMENTS SECTION 8.01. ALTANA WARRANTY. Altana represents and warrants to CollaGenex that (i) the Product delivered pursuant to this Agreement shall comply with the Specifications, Governmental Approval, Applicable Laws and conform to the certificate of analysis for such Product; (ii) are not adulterated or misbranded under Applicable Laws; (iii) at the time of Manufacture and delivery to CollaGenex, the Product and Professional Samples will be free from any failure or defects; and (iv) Altana has not received the right from Taisho to permit Altana's sublicensees to grant further sublicenses to the Altana Technology and Marks. SECTION 8.02. REJECTION OF PRODUCT OR PROFESSIONAL SAMPLES FOR FAILURE TO CONFORM TO SPECIFICATIONS. 15 CollaGenex shall have a right to test or have a Third Party test any Shipment to determine conformity of the Shipment to the Specifications and/or Applicable Laws. If CollaGenex exercises such right, it shall promptly notify Altana of its decision and shall have forty-five (45) days after the receipt of any Shipment to conduct such testing. If testing of such Shipment shows a failure of the Shipment to meet the Specifications and/or Applicable Laws, CollaGenex may return the entire Shipment, or any portion thereof, to Altana at Altana's expense within a reasonable time following the above described testing, provided that notice of non-conformity is received by Altana from CollaGenex within forty-five (45) days of CollaGenex's receipt of said Shipment. CollaGenex shall have the right to request that Altana provide to CollaGenex, within thirty (30) days after such notice is received by it, Product or Professional Samples that meet the Specifications and Applicable Laws or to promptly provide CollaGenex with full credit for the Purchase Price paid by CollaGenex for the returned Product or Professional Samples. The cost of freight and handling to return or replace the goods shall be at the expense of Altana. If CollaGenex does not notify Altana of the non-conformity of the Product or Professional Samples within forty-five (45) days of receipt of said Shipment, the Product or Professional Samples shall be deemed to meet the Specifications, the Packaging Specifications and Applicable Laws. Notwithstanding anything in this Agreement to the contrary, the Parties may agree to a return of the Product or Professional Samples or an adjustment in the Purchase Price in the event of any failure or defect in the Product or Professional Samples. Should there be a discrepancy between CollaGenex's test results and the results of testing performed by Altana, such discrepancies shall be finally resolved by testing performed by an independent Third Party mutually agreed upon by CollaGenex and Altana. The costs of such testing shall be borne by the Party against whom the discrepancy is resolved. In the event the Product or Professional Samples have been previously returned to Altana and an independent Third Party determines that the Product or Professional Samples meet the Specifications, CollaGenex shall be responsible for all costs associated with the return. SECTION 8.03. COLLAGENEX INSPECTIONS. Altana shall upon reasonable (but not less than ten (10) days) prior written notice by CollaGenex and during normal business hours, allow CollaGenex to inspect and audit Altana's facilities used to Manufacture the Product and the Professional Samples, twice annually, to confirm that the Altana's facilities and the equipment, personnel and operating and testing procedures used by Altana in the Manufacture, testing, storage and distribution of the Product are in compliance with Applicable Laws and Governmental Approvals; provided that such inspection does not interfere with Altana's normal operations. ARTICLE IX REGULATORY COMPLIANCE SECTION 9.01. MAINTENANCE OF REGULATORY APPROVALS. Altana will own all Regulatory Approvals in the Territory. Altana agrees, at its sole cost and expense, to maintain the Regulatory Approvals including obtaining any variations or renewals thereof, including all fees and licenses, including user fees, related to the Manufacture 16 of the Product by Altana. Each Party agrees that neither it nor its Affiliates will do anything to adversely affect a Regulatory Approval. SECTION 9.02. ADVERSE DRUG EVENT REPORTING. The Parties agree that Altana Inc. will be responsible for reporting Pandel-related adverse drug events (ADE) to the FDA and that CollaGenex will be responsible for communicating in a reasonable time to Altana Inc. any customer complaints or ADE reports that CollaGenex may receive, according to the procedures attached hereto as Exhibit E, which is incorporated by reference. SECTION 9.03. ASSISTANCE. Each Party shall provide reasonable assistance to the other at the other's request, in connection with their obligations pursuant to this Article IX, subject to reimbursement of all of its out-of-pocket costs by the requesting Party; provided, however, Altana shall free of charge, upon CollaGenex's request, provide CollaGenex's personnel with training regarding Altana's policies and procedures specified in the SOP regarding an ADE, including but not limited to reporting and filing for an ADE. SECTION 9.04. COMPLIANCE. CollaGenex shall be responsible for compliance with Applicable Laws and the Government Approvals relating to the possession, promotion, marketing, sale, advertising and distribution of the Product and distribution of the Professional Samples, as applicable, including (i) obtaining all necessary permits, licenses and any other requirements relating to CollaGenex's sale and distribution of the Product and Professional Samples, (ii) arranging for CollaGenex's warehousing and distribution of the Product, and (iii) all billing and collection activities with respect to the Product. Altana shall be responsible for compliance with Applicable Laws and Government Approvals relating to the Regulatory Approval, clinical trials, Manufacture, design and production of the Product and the Professional Samples, as applicable, and with cGMP relating to the Manufacture and testing of the Product and the Professional Samples, as applicable. CollaGenex and Altana shall comply with all Applicable Laws, including the provision of information by CollaGenex and Altana to each other necessary for Altana and CollaGenex to comply with any applicable reporting requirements. Each Party shall promptly notify the other Party of any comments, responses or notices received from, or inspections by, the FDA, or other applicable Governmental Authorities, which relate to or may impact the Product or the Manufacture of the Product or the sales and marketing of the Product, and shall promptly inform the other Party of any responses to such comments, responses, notices or inspections and the resolution of any issue raised by the FDA or other Governmental Authorities. 17 ARTICLE X PATENTS AND TRADEMARKS SECTION 10.01. MAINTENANCE OF PATENTS OR MARKS. Altana shall, at Altana's expense, (i) maintain and protect the Patent Rights and the Marks in the Territory, or (ii) ensure that Taisho maintains and protects the Patent Rights and Marks in the Territory; provided however, that upon written request by Altana, CollaGenex shall, at no cost or expense to CollaGenex, provide such assistance as may be necessary to enable Altana to comply with the administrative formalities necessary to maintain any Patent Rights or the Marks. SECTION 10.02. COOPERATION. CollaGenex shall, at Altana's expense, reasonably make available to Altana or its authorized attorneys, agents or representatives, its employees, agents or consultants necessary or appropriate to enable Altana to file, prosecute and maintain patent applications for a period of time sufficient for Altana to obtain the assistance it needs from such personnel. SECTION 10.03. ALTANA TO PROSECUTE INFRINGEMENT. During the Term, each Party shall give prompt notice to the other of any Third Party act which may infringe the Patent Rights or Marks and shall cooperate with each other to terminate such infringement without litigation. Altana shall, at its sole expense, (i) prosecute the judicial or administrative proceedings against such Third Party infringement, or (ii) ensure that Taisho prosecutes the judicial or administrative proceedings against such Third Party infringement. CollaGenex shall provide such assistance and cooperation to Altana as may be necessary to successfully prosecute any action against Third Party infringement at Altana's expense and may deduct the expenses thereof from any amounts payable to Altana under this Agreement. In the event Altana fails or cannot compel Taisho to institute legal proceedings to terminate any Third Party infringement of the Patent Rights or Marks, CollaGenex may take such action as it deems appropriate, including without limitation, the filing of a lawsuit against such Third Party, in CollaGenex's own name and at its own cost and expense. Should CollaGenex file any such suit, Altana will cooperate fully in the prosecution of such suit and any damages awarded or costs recovered in connection with such suit will be for the account of CollaGenex. SECTION 10.04. INFRINGEMENT CLAIMED BY THIRD PARTIES. In the event a Third Party commences, or threatens to commence, a judicial or administrative proceeding against a Party to this Agreement and such proceeding claims that the Altana Technology or the Marks infringes such Third Party's intellectual property rights, the Party against whom such proceeding is threatened or commenced shall give prompt notice to the other Party. Altana shall, at its sole expense, defend, indemnify and hold CollaGenex harmless against such claims or proceedings and CollaGenex shall provide such assistance and cooperation to Altana as may be necessary to successfully defend, indemnify and hold 18 CollaGenex harmless against any such claim or proceeding at Altana's expense. Altana may settle any such claim so long as the terms of such settlement do not impair CollaGenex's rights hereunder, or increase the costs to CollaGenex hereunder. ARTICLE XI REPRESENTATIONS AND WARRANTIES SECTION 11.01. CORPORATE POWER. Each Party hereby represents and warrants that such Party is duly organized and validly existing under the laws of the state of its incorporation and has full corporate power and authority to enter into this Agreement and to carry out the provisions hereof. SECTION 11.02. DUE AUTHORIZATION. Each Party hereby represents and warrants that such Party is duly authorized to execute and deliver this Agreement and to perform its obligations hereunder. SECTION 11.03. BINDING OBLIGATION. Each Party hereby represents and warrants that this Agreement is a legal and valid obligation binding upon it and is enforceable in accordance with its terms. The execution, delivery and performance of this Agreement by such Party does not conflict with any agreement, instrument or understanding, oral or written, to which it is a party or by which it may be bound, nor violate any law or regulation of any court, governmental body or administrative or other agency having authority over it. SECTION 11.04. OWNERSHIP OF PATENT RIGHTS. As of the Effective Date, Altana represents and warrants that (a) it is the exclusive licensee of all right, title and interest in and to the Altana Technology and Marks in the Territory, (b) except to CollaGenex, Altana has not granted any sublicense under the Altana Technology or Mark in the Territory to any Third Party and is under no obligation to grant any such sublicense, (c) Taisho has not granted any licenses other than to Altana, to the Altana Technology and Marks in the Territory, and (d) there are no outstanding liens, encumbrances, agreements or understanding of any kind, either written, oral or implied, regarding the Altana Technology or Marks which are inconsistent or in conflict with this Agreement. As of the Effective Date and to the best of Altana's knowledge, Taisho is the sole owner of all right, title and interest in and to the Altana Technology and Marks. SECTION 11.05. PATENT PROCEEDINGS. Altana represents and warrants that (a) no patent application within the Altana Technology is the subject of any pending interference, opposition, cancellation or other protest proceeding, and (b) the Altana Technology or Marks do not infringe the intellectual property rights of any Third Party. 19 SECTION 11.06. ADVERSE PROPERTIES. Altana represents and warrants that it knows of no adverse effects or other properties that may raise objections from the FDA or other health registration authorities or may affect the use, effectiveness or merchantability of the Product. SECTION 11.07. GOVERNMENTAL APPROVALS. Altana represents and warrants that it has obtained all required and necessary Governmental Approvals for the use, marketing and sale of the Product in the Territory. SECTION 11.08. PROTECTION OF THE MARKS. The Parties covenant and agree that neither Party nor their Affiliates shall publish, employ nor cooperate in the publication of, any misleading or deceptive advertising material with regard to the Parties, or the Marks or CollaGenex's trademarks for the Product. SECTION 11.09. SOP CONFORMANCE. Altana represents and warrants that the SOPs will be in conformance with all Applicable Laws and be in conformance with all Governmental Approvals. SECTION 11.10. FURTHER ACTIONS. Upon the terms and subject to the conditions hereof, each of the Parties hereto shall use its commercially reasonable efforts to (i) take, or cause to be taken, all appropriate action and do, or cause to be done, all things necessary, proper or advisable under Applicable Law or otherwise to consummate and make effective the transactions contemplated by this Agreement, (ii) obtain from Governmental Authorities any consents, licenses, permits, waivers, approvals, authorizations or orders required to be obtained or made by the Parties in connection with the authorization, execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement and (iii) make all necessary filings, and thereafter make any other required submissions, with respect to this transaction under any Applicable Law, including the Hart Scott Rodino Act. The Parties hereto shall cooperate with each other in connection with the making of all such filings, including by providing copies of all such documents to the other Party's counsel (subject to appropriate confidentiality restrictions) prior to filing and, if requested, by accepting all reasonable additions, deletions or changes suggested in connection therewith. Without limiting the generality of the foregoing, each Party shall take or omit to take such action as the other Party shall reasonably request to cause the Parties to obtain any material Governmental Approvals and/or the expiration of applicable waiting periods, provided that the foregoing shall not obligate either Party to take or to omit to take any action (including, without limitation, the expenditure of funds or any holding separate and agreeing to sell or otherwise dispose of assets, categories of assets or businesses) as in the good faith opinion of such Party, would cause a material adverse effect on a Party. 20 SECTION 11.11. LIMITATION OF LIABILITY. NEITHER PARTY SHALL BE ENTITLED TO RECOVER FROM THE OTHER PARTY ANY SPECIAL, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES IN CONNECTION WITH THIS AGREEMENT OR ANY SUBLICENSE GRANTED HEREUNDER. ARTICLE XII COVENANTS OF COLLAGENEX SECTION 12.01. LIMITATION TO THE TERRITORY. CollaGenex hereby covenants that it will not, without the prior written authorization of Altana: (i) promote or actively solicit sale of the Product or advertise the Product, outside of the Territory; (ii) contact the Governmental Authorities or other entity about the Product, except as required by Applicable Laws or as may be necessary or appropriate to carry out its obligations hereunder; and (iii) knowingly sell or distribute for resale the Product purchased hereunder to a Third Party who intends to sell outside of the Territory. SECTION 12.02. MARKETING AND INSTRUCTIONAL MATERIALS. Altana shall cooperate with CollaGenex in the creation of instructional materials for the customers of CollaGenex to enable the customers of CollaGenex to use the Product correctly. Altana also agrees to assist CollaGenex in the training of CollaGenex's sales force. In addition, on the Effective Date, Altana shall transfer to CollaGenex all marketing, promotional and advertising materials ("Marketing Materials") for the Product in Altana's control. The copyright for all materials developed by CollaGenex shall be owned exclusively by CollaGenex; however, Altana or Taisho, as applicable, shall retain the exclusive copyright to all Marketing Materials transferred to CollaGenex. SECTION 12.03. MARKETING EXPENSES. CollaGenex acknowledges that, except as otherwise specified in this Agreement, CollaGenex shall be solely responsible for the cost and implementation of all marketing, sales, promotional and related activities concerning the marketing, sale and promotion of the Product and the distribution of the Professional Samples. ARTICLE XIII PRODUCT RECALL SECTION 13.01. PRODUCT RECALLS. If at any time or from time to time any Governmental Authority of any country within the Territory requests a Party to recall the Product or if a voluntary recall of the Product is contemplated by either Party (collectively, a "Recall"), then the Party to whom such request is made or the Party contemplating such Recall, as the case may be, shall immediately notify the 21 other Party. A voluntary recall of Product shall be Altana's sole decision. Any Recall in the Territory shall be carried out pursuant to Altana's SOP regarding Recalls and in as expeditious a manner as reasonably possible to preserve the goodwill and reputation of the Product and the goodwill and reputation of the Parties. A copy of the Recall SOP is attached hereto as Exhibit B. Altana shall free of charge, upon CollaGenex's request, and at a time convenient for Altana's personnel, provide CollaGenex's personnel with one (1) training session regarding Altana's policies and procedures specified in the SOP regarding any Recall. SECTION 13.02. RECALL COSTS. Unless otherwise specified in the SOP, CollaGenex shall be responsible for conducting any Recall in the Territory and the cost and expense of a Recall shall be allocated as follows: (a) if such Recall is a voluntary Recall or shall be due to tampering or other cause, other than a manufacturer's defect, but not due to the negligence or misconduct of the Parties, or the breach by a Party of its warranties or obligations hereunder, then CollaGenex and Altana shall each bear fifty percent (50%) of the costs and expenses incurred by CollaGenex in connection with such Recall, including, without limitation, all product credits and returns, freight and shipping costs and product disposal expenses. In such event, Altana agrees to pay CollaGenex within ten (10) days after its receipt from CollaGenex of any invoice(s) assessing Altana its 50% share of these said costs, as listed above; (b) if such Recall shall be due to Manufacturing defect or the negligence or the breach by Altana of its warranties or obligations hereunder or the misconduct of Altana, all such costs and expenses shall be borne and paid solely by Altana and Altana will reimburse CollaGenex for any such costs and expenses paid by CollaGenex within ten (10) days of receipt of an invoice for such costs and expenses from CollaGenex, and if not so paid CollaGenex shall have the right to offset such amounts against amounts otherwise due by CollaGenex to Altana hereunder; and (c) if such Recall is due to the negligence or the breach by CollaGenex of its warranties or obligations hereunder or the misconduct of CollaGenex, all such costs and expenses shall be borne and paid solely by CollaGenex and CollaGenex will reimburse Altana for any such costs and expenses paid by Altana within thirty (30) days of receipt of an invoice and appropriate documentation for such costs and expenses from Altana. SECTION 13.03. NOTIFICATION OF COMPLAINTS. Each Party agrees that throughout the Term, and with respect to all Products or Professional Samples supplied or purchased under this Agreement, after the termination of this Agreement, it will (i) notify the other Party immediately of all available information concerning any complaint, Product defect reports, and similar notices received by either Party with respect to the Product or Professional Samples, whether or not determined to be attributable to the Product or Professional Samples and (ii) with respect to an ADE, comply with the provisions of Section 9.02. 22 SECTION 13.04. NOTIFICATION OF THREATENED ACTION. Throughout the duration of this Agreement and with respect to all Products or Professional Samples supplied or purchased under this Agreement, after the termination of this Agreement, each Party shall immediately notify the other Party of any information it receives regarding any threatened or pending action, inspection or communication by or from a concerned Governmental Authority which may affect the safety or efficacy claims of the Product or Professional Samples or the continued marketing of the Product or distribution of the Professional Samples. Upon receipt of such information, the Parties shall consult with each other in an effort to arrive at a mutually acceptable procedure for taking appropriate action. ARTICLE XIV INDEMNIFICATION AND INSURANCE SECTION 14.01. COLLAGENEX INDEMNIFIED BY ALTANA. Altana shall indemnify and hold CollaGenex harmless from and against any liabilities or obligations, damages, losses, claims, encumbrances, costs or expenses (including reasonable attorneys' fees) (any or all of the foregoing herein referred to as "Loss") insofar as a Loss or actions in respect thereof, whether existing or occurring prior to, on or subsequent to the Effective Date, arises out of or is based upon (a) any misrepresentation or breach of any of the warranties, covenants or agreements made by Altana in this Agreement; (b) the Manufacture of any Product or Professional Sample that is identifiable as having been Manufactured by or on behalf of Altana; (c) not limiting Section 14.01(a), any claims that the Product (as a result of the use of Altana Technology therein) or its Manufacture (as a result of the use of Altana Technology therein), use or sale infringes the patent, trademark or proprietary right of a Third Party. SECTION 14.02. ALTANA INDEMNIFIED BY COLLAGENEX. CollaGenex shall indemnify and hold harmless Altana from and against any Loss insofar as such Loss or actions in respect thereof occurs subsequent to the Effective Date, whether existing or occurring prior to, on or subsequent to the date hereof, arises out of or is based upon (a) any misrepresentation or breach of any of the warranties, covenants or agreements made by CollaGenex in this Agreement; (b) CollaGenex's marketing, sale, distribution or promotion of the Product or the Professional Samples (except if such Loss arises as a result of matters described in Section 14.01); (c) the use of CollaGenex's name and trademark in the (i) packaging and labeling of the Product or Professional Samples; and (ii) marketing, sale, distribution or promotion of the Product or Professional Samples. SECTION 14.03. PROMPT NOTICE REQUIRED. No claim for indemnification hereunder shall be valid unless notice of the matter which may give rise to such claim is given in writing by the (the "Indemnitee") to the persons against whom indemnification may be sought (the "Indemnitor") as soon as reasonably practical after such Indemnitee becomes aware of such claim; provided that the failure to notify the Indemnitor 23 shall not relieve it from any liability which it may have to the Indemnitee otherwise than under this Article XIV. Such notice shall state that the Indemnitor is required to indemnify the Indemnitee for a Loss and shall specify the amount of Loss and relevant details thereof. The Indemnitor shall notify Indemnitee no later than sixty (60) days from such notice of its intention to assume the defense of any such claim. In the event the Indemnitor fails to give such notice within that time the Indemnitor shall no longer be entitled to assume such defense. SECTION 14.04. INDEMNITOR MAY SETTLE. The Indemnitor shall at its expense, have the right to settle and defend any action which may be brought in connection with all matters for which indemnification is available. In such event the Indemnitee of the Loss in question and any successor thereto shall permit the Indemnitor full and free access to its books and records and otherwise fully cooperate with the Indemnitor in connection with such action; provided that this Indemnitee shall have the right fully to participate in such defense at its own expense. The defense by the Indemnitor of any such actions shall not be deemed a waiver by the Indemnitor of its right to assert a claim with respect to the responsibility of the Indemnitor with respect to the Loss in question. The Indemnitor shall have the right to settle or compromise any claim against the Indemnitee without the consent of the Indemnitee provided that the terms thereof: (a) provide for the unconditional release of the Indemnitee; (b) require the payment of compensatory monetary damages by Indemnitor only; and (c) expressly state that neither the fact of settlement nor the settlement agreement shall constitute, or be construed or interpreted as, an admission by the Indemnitee of any issue, fact, allegation or any other aspect of the claim being settled. No Indemnitee shall pay or voluntarily permit the determination of any liability which is subject to any such action while the Indemnitor is negotiating the settlement thereof or contesting the matter, except with the prior written consent of the Indemnitor, which consent shall not be unreasonably withheld or delayed. If the Indemnitor fails to give Indemnitee notice of its intention to defend any such action as provided herein, the Indemnitee involved shall have the right to assume the defense thereof with counsel of its choice, at the Indemnitor's expense, and defend, settle or otherwise dispose of such action. With respect to any such action which the Indemnitor shall fail to promptly defend, the Indemnitor shall not thereafter question the liability of the Indemnitor hereunder to the Indemnitee for any Loss (including counsel fees and other expenses of defense). SECTION 14.05. INSURANCE. Each Party shall, at its sole cost and expense, obtain and keep in force comprehensive liability insurance, with bodily injury, death and property damage limits of Five Million and 00/100 ($5,000,000.00) per occurrence and Ten Million and 00/100 Dollars ($10,000,000.00) in the aggregate, including contractual liability and product liability coverage. Upon execution of this Agreement, each Party shall furnish the other with a certificate of insurance signed by an authorized representative of such Party's insurance underwriter evidencing the insurance coverage required by this Agreement and providing for at least thirty (30) days prior written notice to the other Party of any cancellation, termination or reduction of such insurance coverage. 24 ARTICLE XV DISPUTE RESOLUTION SECTION 15.01. DISPUTES. The Parties recognize that disputes as to certain matters may from time to time arise during the Term, which relate to either Party's rights and/or obligations hereunder. It is the objective of the Parties to establish procedures to facilitate the resolution of disputes arising under this Agreement in an expedient manner by mutual cooperation and without resort to litigation. To accomplish this objective, the Parties agree to follow the procedures set forth in this Article XV if and when a dispute arises under this Agreement. Unless otherwise specifically recited in this Agreement, disputes among the Parties will be resolved as recited in this Article XV. Any disputes relating to the Collaboration hereunder shall be first referred to the Director Business Development of each Party at any time after such dispute has arisen. If the Vice Presidents are unable to resolve such a dispute within fifteen (15) days of commencement of discussions, the matter shall be presented to the chief executive officers of Altana and CollaGenex, or their respective designees, for resolution. In the event that the chief executive officers of Altana and CollaGenex, or their respective designees, cannot resolve the dispute within ten (10) days of being requested by a Party to resolve a dispute, either Party may, by written notice to the other, invoke the provisions of Section 15.02. SECTION 15.02. MEDIATION. If a dispute under this Agreement is not resolved in accordance with Section 15.01, the Parties agree to submit the dispute to mediation in accordance with the Commercial Mediation Rules of the American Arbitration Association. The Parties will jointly appoint a mutually acceptable mediator, seeking assistance in such regard from the American Arbitration Association, if they have been unable to agree to upon such appointment within ten (10) days from the conclusion of the negotiation period (as provided in this Agreement). The Parties agree to participate in good faith in the mediation and the negotiations related thereto for a period of thirty (30) days. The costs of the mediation, including fees and expenses, shall be borne equally by the Parties. SECTION 15.03. TRIAL WITHOUT JURY. If the Parties fail to resolve the dispute through negotiation and mediation in accordance with Sections 15.01 or 15.02, each Party shall have the right to pursue any of the remedies legally available to resolve the dispute; provided, however, that the Parties expressly waive any right to a jury trial in any legal proceedings under this Article XV. SECTION 15.04. PERFORMANCE TO CONTINUE. Each Party shall continue to perform its obligations under this Agreement pending final resolution of any dispute arising out of or related to this Agreement; provided, however, that a 25 Party may suspend performance of its obligations during any period in which the other Party fails or refuses to perform its obligations. SECTION 15.05. PROVISIONAL REMEDIES. Although the procedures specified in this Article XV are the sole and exclusive procedures for the resolution of disputes arising out of or related to this Agreement, either Party may seek a preliminary injunction or other provisional equitable relief, if, in its reasonable judgment, such action is necessary to avoid irreparable harm to itself or to preserve its rights under this Agreement. SECTION 15.06. DETERMINATION OF PATENTS AND OTHER INTELLECTUAL PROPERTY. Notwithstanding the foregoing, any dispute relating to the determination of validity of claims, infringement or claim interpretation relating to a Party's patents shall be submitted exclusively to federal court. ARTICLE XVI CONFIDENTIALITY SECTION 16.01. CONFIDENTIALITY. During the Term and for a period of five (5) years thereafter, each Party shall maintain all Confidential Information of the other Party as confidential and shall not disclose any such Confidential Information to any Third Party or use any such Confidential Information for any purpose, except (a) as expressly authorized by this Agreement, (b) as required by law, rule, regulation or court order (provided that the disclosing Party shall first notify the other Party and shall use commercially reasonable efforts to obtain confidential treatment of any such information required to be disclosed), or (c) to its Affiliates and its employees, agents, consultants and other representatives ("Representatives") to accomplish the purposes of this Agreement, so long as such persons are under an obligation of confidentiality no less stringent than as set forth herein. Each Party may use such Confidential Information only to the extent required to accomplish the purposes of this Agreement. Each Party shall use at least the same standard of care as it uses to protect its own Confidential Information to ensure that it and its Affiliates and Representatives do not disclose or make any unauthorized use of the other Party's Confidential Information. Each Party shall be responsible for any breach of this Agreement by its Representatives. Each Party shall promptly notify the other Party upon discovery of any unauthorized use or disclosure of the other Party's Confidential Information. SECTION 16.02. PUBLICITY REVIEW. The Parties agree that the public announcement of the execution of this Agreement shall be in the form of a press release to be agreed upon on or before the Effective Date and thereafter each Party shall be entitled to make or publish any public statement consistent with the contents thereof. Thereafter, the Parties will jointly discuss and agree, based on the principles of this Section 16.02, on any statement to the public regarding this Agreement or any aspect of this 26 Agreement, subject in each case to disclosure otherwise required by law or regulation as determined in good faith by each Party. When a Party elects to make any such statement it will give the other Party at least three (3) days notice to review and comment on such statement. In the event of a public disclosure required by law prior to the end of such three (3) day period, the Party required to make such disclosure, if it legally may, shall give the other Party at least two (2) business days to review and comment on such disclosure. If a Party was not legally able to give notice under the previous sentence, it will furnish the other Party with a copy of its disclosure as soon as practical after the making thereof. The Parties acknowledge the importance of supporting each other's efforts to publicly disclose results and significant developments regarding the Product. The principles to be observed by Altana and CollaGenex in such public disclosures will be: accuracy, the requirements for confidentiality under Section 16.01, compliance with FDA regulations and other FDA guidance documents, the advantage a competitor of Altana or CollaGenex may gain from any public statements under this Section 16.02, and the standards and customs in the biotechnology and pharmaceutical industries for such disclosures by companies comparable to Altana and CollaGenex. The terms of this Agreement may also be disclosed to: (a) government agencies where required by law, including filings required to be made by law with the United States Securities and Exchange Commission ("SEC"), national securities exchanges or the Nasdaq Stock Market, (b) Third Parties with the prior written consent of the other Party, which consent shall not be unreasonably withheld, or (c) lenders, investment bankers and other financial institutions of its choice solely for purposes of financing the business operations of such Party, so long as such disclosure in (b) and (c) above is made under a binder of confidentiality at least as restrictive as the confidentiality provisions in Section 16.01, so long as highly sensitive terms and conditions such as financial terms are extracted from the Agreement (including in any disclosure required by law or the SEC) or deleted upon the request of the other Party, and so long as the disclosing Party gives reasonable advance notice of the disclosure under the circumstances requiring the disclosure. ARTICLE XVII MISCELLANEOUS SECTION 17.01. NON-SOLICITATION AND NON-COMPETE. (a) Neither Party nor its Affiliates (collectively, the "Initiating Group") shall, directly or through its representatives, solicit for employment any officer, director, employee or consultant of the other Party or its subsidiaries or controlled affiliates (collectively, the "Other Group") with whom the Initiating Group has contact in connection with, or who otherwise is known by the Initiating Group to participate in, the transactions contemplated by this Agreement. The Initiating Group shall not be precluded from hiring any such person who has been terminated by the Other Group prior to commencement of employment discussions between such person and the Initiating Group or its representatives. "Solicitation" shall not include any generalized public advertisement or any other solicitation by the Initiating Group or its representatives that is not specifically directed toward any such employee of the Other Group or toward any group of such employees of the Other Group. 27 (b) Altana agrees, during the Term and for a period of two (2) years thereafter, not to, directly or indirectly, Manufacture, market, advertise, promote, distribute, offer for sale, import or export any Generic Product in the Territory. SECTION 17.02. COMMERCIALLY REASONABLE EFFORTS. Each Party shall use commercially reasonable and diligent efforts to perform its responsibilities under this Agreement. As used herein, the term "commercially reasonable and diligent efforts" means, unless the Parties agree otherwise, those efforts consistent with the exercise of prudent scientific and business judgment, as applied to other products of similar scientific and commercial potential within the relevant product lines of the Parties. SECTION 17.03. NO RIGHT TO USE NAMES. Except as otherwise provided herein, no right, express or implied, is granted by the Agreement to use in any manner the name "Altana," "CollaGenex" or any other trade name or trademark of the other Party or its Affiliates in connection with the performance of the Agreement. SECTION 17.04. NOTICES. All notices, requests and other communications to any party hereunder shall be in writing and shall be deemed to have been given if delivered personally, mailed by certified mail (return receipt requested) or sent by cable, telegram or recognized overnight delivery service to the parties at the following addresses or at such other addresses as, specified by the parties by like notice: If to CollaGenex: Mr. Jeff Day CollaGenex Pharmaceuticals, Inc. 41 University Drive Newtown, Pennsylvania 18940 Facsimile: (215) 579-7388 Telephone: (215) 579-8577 If to Altana: Mr. George Cole Altana Inc. 60 Baylis Road Melville, New York 11747 Facsimile: (631) 454-6389 Telephone: (631) 454-7677, extension 2002 Notice so given shall be deemed given and received (i) if by international mail on the seventh (7th) day after posting; (ii) by cable, telegram, telex or personal delivery on the date of actual transmission, with evidence of transmission acceptance, or (as the case may be) personal or other delivery; and (iii) if by international courier, on the fourth (4th) business day following 28 the day such notice is delivered to the international courier service, or such earlier delivery date as may be confirmed to the sender by such courier service. SECTION 17.05. SECTION HEADINGS. The titles, headings or captions of sections and paragraphs in this Agreement do not define, limit, extend, explain or describe the scope or extent of this Agreement or any of its terms or conditions and therefore shall not be considered in the interpretation, construction or application of this Agreement. SECTION 17.06. SEVERABILITY. Whenever possible, each clause, subclause, provision or condition of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any clause, subclause, provision or condition of this Agreement should be prohibited or invalid under applicable law, such clause, subclause, provision or condition shall be considered separate and severable from this Agreement to the extent of such prohibition or invalidity without invalidating the remaining clauses, subclauses, provisions and conditions of this Agreement. SECTION 17.07. ENTIRE AGREEMENT/MERGER. This Agreement sets forth the entire agreement between the Parties hereto pertaining to the subject matter hereof and supersedes all negotiations, preliminary agreements, memoranda or letters of proposal or intent, discussions and understandings of the Parties hereto in connection with the subject matter hereof. All discussions between the Parties have been merged into this Agreement, and neither Party shall be bound by any definition, condition, understanding, representation, warranty, covenant or provision other than as expressly stated in or contemplated by this Agreement or as subsequently shall be set forth in writing and executed by a duly authorized representative of the Party to be bound thereby. In the event of any conflict between the terms of this Agreement and any attachment hereto, the terms of this Agreement shall govern. SECTION 17.08. AMENDMENT. No amendment, change or modification of any of the terms, provisions or conditions of this Agreement shall be effective unless made in writing and signed on behalf of the Parties hereto by their duly authorized representatives. SECTION 17.09. EQUITABLE RELIEF. The Parties understand and agree that because of the difficulty of measuring economic losses to the non-breaching Party as a result of a breach of the covenants set forth in Article XVI and Section 17.01, and because of the immediate and irreparable damage that may be caused to the non-breaching Party for which monetary damages would not be a sufficient remedy, the Parties agree that the non-breaching Party will be entitled to seek specific performance, temporary and permanent injunctive relief, and such other equitable remedies to which it may then be entitled against the breaching Party. This Section 17.09 shall not limit any other legal or 29 equitable remedies that the non-breaching Party may have against the breaching Party for violation of the covenants set forth in Article XVI and Section 17.01. The Parties agree that the non-breaching Party shall have the right to seek relief for any violation or threatened violation of Article XVI and Section 17.01 by the breaching Party from any court of competent jurisdiction in any jurisdiction authorized to grant the relief necessary to prohibit the violation or threatened violation of Article XVI and Section 17.01. This Section 17.09 shall apply with equal force to the breaching Party's Affiliates. SECTION 17.10. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original document, but all such separate counterparts shall constitute only one and the same instrument. This Agreement may be signed and delivered to the other Party by facsimile signature; such transmission shall be deemed a valid signature. SECTION 17.11. NO WAIVER OF RIGHTS. No waiver of any term, provision, or condition of this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such term, provision, or condition of this Agreement. SECTION 17.12. FORCE MAJEURE. Neither Party shall be liable hereunder to the other Party nor shall be in breach for failure to deliver, provided failure to deliver is no greater than the delay in time caused by circumstances beyond control for either Party, including acts of God, fires, floods, riots, wars, civil disturbances, sabotage, accidents, labor disputes, shortages, government actions (including priorities, requisitions, allocations and price adjustment restrictions) and inability to obtain material, equipment, labor or transportation (collectively, "Force Majeure"). SECTION 17.13. FURTHER ASSURANCES. The Parties hereto shall each perform such acts, execute and deliver such instruments and documents and do all such other things as may be reasonably necessary to accomplish the transactions contemplated in this Agreement. SECTION 17.14. ASSIGNMENT. Neither this Agreement nor any of the rights, interests, options or obligations hereunder may be assigned or delegated by either of the Parties without the prior written consent of the other Party, provided, however, that either CollaGenex or Altana may, without such consent, assign this Agreement and its rights and obligations hereunder in connection with the transfer or sale of all or substantially all of its business pertaining to this Agreement, or in the event of its merger or consolidation or change in control or similar transaction. Any permitted assignee shall assume all obligations of its assignor under this Agreement or that Party may assign or sublicense any and all of its rights, interests, options, and delegate all obligations hereunder, to any Affiliate of such Party (and such Affiliate may further assign or sublicense this Agreement to 30 such Party or any other Affiliate of such Party) without the consent of the other Party. In the event of an assignment or sublicense to an Affiliate, the assigning Party shall guarantee the performance of such assignee or sublicensee. The assignment or sublicense to an Affiliate shall not operate to discharge the assignor or sublicensor from any obligation under this Agreement. Any assignment which contravenes this Section 17.14 shall be null and void. SECTION 17.15. EXPENSES. The Parties hereto shall each bear their own costs and expenses (including attorneys' fees) incurred in connection with the negotiation and preparation of this Agreement and consummation of the transactions contemplated hereby. SECTION 17.16. BINDING EFFECT. This Agreement, and all of the terms, provisions and conditions hereof, shall be binding upon and shall inure to the benefit of the Parties hereto and their respective permitted successors and assigns. SECTION 17.17. GOVERNING LAW. This Agreement shall be construed and interpreted accordance with the laws of the State of New York, without regard to conflicts of law provisions. SECTION 17.18. NO STRICT CONSTRUCTION. This Agreement has been prepared jointly and shall not be strictly construed against either Party. SECTION 17.19. US DOLLARS. All dollar amounts referred to in this Agreement are United States dollars. SECTION 17.20. INDEPENDENT CONTRACTORS. The status of the Parties under this Agreement shall be that of independent contractor. No Party shall have the right to enter into any agreements on behalf of the other Party nor shall it represent to any Person that it has such right or authority. ******** 31 IN WITNESS WHEREOF the Parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the Effective Date. COLLAGENEX PHARMACEUTICALS, INC. ALTANA INC. By:/s/ Jeffrey Day By: /s/ George Cole ------------------------------ --------------------------- Name: Jeffrey Day Name: George Cole --------------------------- -------------------------- Title: Vice President Dermatology Title: President -------------------------- ------------------------ /s/ Christopher Powala /s/ Arthur Dulik Senior Director Senior Vice PResident 32 EXHIBIT A PATENT RIGHTS U.S. Patent 4,794,106 A-1 EXHIBIT B STANDARD OPERATING PROCEDURES - RECALLS To be provided. B-1 EXHIBIT C SPECIFICATIONS To be provided. C-1 EXHIBIT D MARKS UNITED STATES PATENT AND TRADEMARK OFFICE PANDEL Word Mark PANDEL Translations THE FOREIGN CHARTERS IN THE MARK TRANSLITERATE TO PANDEL. Goods and IC 005. US 018.G & S: TOPICAL CORTICOSTEROID PREPARATIONS FOR Services USE AS ANTI-INFLAMMATORY AGENTS SOLD ONLY ON PRESCRIPTION Mark Drawing Code (3) DESIGN PLUS WORDS, LETTERS, AND/OR NUMBERS Design Search Code 280103 Serial Number 73506106 Filing Date October 29, 1984 Published for Opposition April 9, 1985 Registration Number 1439767 Registration Date May 19, 1987 Owner (REGISTRANT) TAISHO PHARMACEUTICAL CO., LTD. CORPORATION JAPAN NO. 24-1 TAKATA 3-CHOME TOSHIMA-KU, TOKYO JAPAN Attorney of JESS M. COLLEN Record Section 44 SECT44 Indicator Type of Mark TRADEMARK Register PRINCIPAL Affidavit Text SECT 8 (6-YR) Live/Dead Indicator LIVE D-1 EXHIBIT E STANDARD OPERATING PROCEDURES - ADE To be provided. E-1 EXHIBIT F PRODUCT FIXED PRICE SCHEDULE PRODUCT PURCHASE PRICE Strength Price 15g $[**]/tube 45g $[**]/tube 80g $[**]/tube PROFESSIONAL SAMPLE PURCHASE PRICE Strength Price 2g X 36 tubes $[**]/box These Pandel prices to CollaGenex are based directly [**]. Price increases to CollaGenex, if any, will be based on any increases [**], if any, not to exceed [**]% per year. Pandel price increases to CollaGenex may [**], on a percentage basis, than the increases [**]. Altana agrees to provide CollaGenex with Pandel standard cost information, including the bases on which the Pandel standard costs were calculated. F-1 EXHIBIT G STANDARD ALTANA PRODUCTION QUANTITIES PRODUCT ORDER QUANTITIES The minimum order quantity for Product, whether for a single size or for any combination of the three (3) Product sizes, is based on a 1000kg batch size. They yields from a 1000kg batch for each of the three (3) Product sizes are as follows: 15g: [**] tubes 45g: [**] tubes 80g: [**] tubes Purchase orders by CollaGenex to Altana must be in quantities for each Product size such that the total amount of Product ordered in any single purchase order is based on a 1000kg batch size, or a 2000kg batch size. PROFESSIONAL SAMPLE ORDER QUANTITIES The minimum order quantity for Professional Samples is based on a 1000kg batch size. The yield from a 1000kg batch size for the Professional Sample is as follows: 2g X 36 tubes: [**] Boxes Purchase orders by CollaGenex to Atlanta must be in quantities of [**] boxes for Professional Samples. G-1 EXHIBIT H MEMORANDUM To be provided. H-1 EX-99 5 form10q_063002exh99-1.txt EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of CollaGenex Pharmaceuticals, Inc. (the "Company") for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, Brian M. Gallagher, Ph.D., Chief Executive Officer of the Company, and Nancy C. Broadbent, Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Brian M. Gallagher, Ph.D. ---------------------------------- Dated: August 14, 2002 Brian M. Gallagher, Ph.D. Chief Executive Officer /s/ Nancy C. Broadbent ---------------------------------- Dated: August 14, 2002 Nancy C. Broadbent Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----