-----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, KBUbof9jJ5NjqY2+uedwhLAH6C4Qde5A65K2EJO6s/MOpE9buOGIt/r08yUIMgyB Kkh7uhtYsGzCJantpEdb2w== 0000891618-98-003301.txt : 19980720 0000891618-98-003301.hdr.sgml : 19980720 ACCESSION NUMBER: 0000891618-98-003301 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980714 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CELTRIX PHARMACEUTICALS INC CENTRAL INDEX KEY: 0000871395 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 943121462 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-18976 FILM NUMBER: 98665719 BUSINESS ADDRESS: STREET 1: 3055 PATRICK HENRY DR CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: 4089882500 MAIL ADDRESS: STREET 2: 3055 PATRICK HENRY DRIVE CITY: SANTA CLARA STATE: CA ZIP: 95054 FORMER COMPANY: FORMER CONFORMED NAME: CELTRIX LABORATORIES INC DATE OF NAME CHANGE: 19600201 10-K405 1 FORM 10-K 1 UNITED STATES, SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ( X ) Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee required) For the fiscal year ended March 31, 1998 or ( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No fee required) For the transition period from to . ------------- ------------- Commission File Number: 0-18976 CELTRIX PHARMACEUTICALS, INC. (Exact name of Registrant as specified in its charter) DELAWARE 94-3121462 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 3055 PATRICK HENRY DRIVE, SANTA CLARA, CA 95054-1815 (Address of principal executive offices and zip code) Registrant's Telephone Number: (408) 988-2500 Securities registered pursuant to Section 12(b) of the Act: Title of each class: NONE Name of each exchange on which registered: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( X ) The aggregate market value of the voting stock held by nonaffiliates of the registrant based upon the closing price of the Common Stock on June 29, 1998 in the Nasdaq National Market was approximately $22.2 million as of such date. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of June 29, 1998, the Registrant had outstanding 21,061,053 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Parts of the following document are incorporated by reference in Part III of this Form 10-K Report: the Proxy Statement for the Registrant's 1998 Annual Meeting of Stockholders scheduled to be held on September 10, 1998. 2 PART I ITEM 1. BUSINESS FORWARD-LOOKING STATEMENTS This annual report on Form 10-K, and in particular the Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events or the future performance of the Company that involve certain risks and uncertainties including those discussed in "Risk Factors" below. In this report, the words "anticipates", "believes", "expects", "future", "plans" and similar expressions identify forward-looking statements. Actual events or the actual future results of the Company may differ materially from any forward-looking statements due to a variety of factors including, but not limited to, (i) the ability to enter into collaborative arrangements with corporate partners for osteoporosis, hip fractures, diabetes, and protein wasting conditions, (ii) the efficacy and safety of SomatoKine and other of the Company's products, (iii) results of clinical trials, (iv) the ability to timely enroll patients in the Company's clinical studies, (v) significant unforeseen delays in the regulatory approval process, (vi) complications relating to the use of SomatoKine(R), (vii) competitive products and technology, (viii) the ability to raise additional working capital, and (ix) other risk factors described herein. The Company assumes no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking assumptions. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revision to these forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. GENERAL Celtrix Pharmaceuticals, Inc. ("Celtrix" or the "Company") is a biopharmaceutical company developing novel therapeutics for the treatment of seriously debilitating, degenerative conditions primarily associated with aging, chronic diseases and severe trauma. The Company's focus is on restoring lost tissues and metabolic processes essential for the patient's health and quality of life. Product development programs target severe osteoporosis, including hip fracture surgery in the elderly, diabetes, and acute traumatic injury as in severe burns. Other potential indications include protein wasting diseases associated with cancer, AIDS, advanced kidney failure, and other life-threatening conditions. The Company's leading drug candidate is SomatoKine, a naturally occurring complex comprised of the anabolic hormone insulin-like growth factor-I (IGF-I) and its primary binding protein, BP3. IGF-I is known to play a major role in diverse biological processes, including bone and muscle formation, tissue repair, and endocrine regulation. However, IGF-I does not naturally exist in quantity free of its binding proteins, and limitations associated with administering free IGF-I therapeutically have proven significant. When IGF-I is bound to BP3, as it is in nature, it does not display these acute limitations. Human clinical study results from three Phase I studies have shown that (1) repeated or continuous administration of SomatoKine safely delivers IGF-I at substantially higher dosage levels than have ever been achievable with free IGF-I, (2) SomatoKine safely increases the peak blood concentration of IGF-I up to 35-times normal levels, and (3) elevated levels of 2 3 SomatoKine substantially stimulate bone and connective tissue metabolism, based on measures of metabolic markers in blood and urine of subjects. Based on these findings, Celtrix initiated a Phase II clinical feasibility study in January 1997 using SomatoKine to treat severely osteoporotic patients recovering from hip fracture surgery. Studies have shown that blood levels of IGF-I drop significantly following hip fracture surgery. These patients, whose bone mineral density already is reduced, begin rapidly to lose even further bone and lean body mass, leading to impaired recovery and diminished patient independence. Interim results from the Phase II study have suggested that short-term treatment with SomatoKine may help to minimize, or even prevent this loss, sustantially improving patient recovery. Celtrix plans to establish corporate partnership(s) for the continued global development of SomatoKine for severe osteoporosis, including recovery from hip fracture surgery. The Company began a Phase II feasibility study in patients with severe burns in July 1997. Studies have shown that patients with severe burns typically have very low IGF-I levels along with major tissue damage which disrupt the biological processes that are essential for efficient and successful healing and protection from burn complications. Preliminary data from the study suggest that SomatoKine has a normalizing effect on protein synthesis and immune function which offers the potential to provide critical protection from serious infection, speed recovery and reduce the patient's hospital stay. Celtrix is also evaluating SomatoKine as a potential therapeutic in managing glucose homeostasis in diabetic patients because research by other investigators has demonstrated the importance of IGF-I in hormonal regulation of insulin and growth hormone. Furthermore, Celtrix plans to seek corporate collaborations to develop SomatoKine for treatment of protein wasting in patients suffering from cancer, AIDS, advanced kidney failure, and other life-threatening conditions. SomatoKine's anabolic effects offer the potential to preserve and restore muscle strength and mobility important for these patients' survival and quality of life. Celtrix manufactures SomatoKine for clinical trials at its Santa Clara, California facility. Celtrix has a product development, license and marketing agreement with Genzyme Corporation ("Genzyme") for TGF-beta-2. Genzyme is currently developing TGF-beta-2 for tissue repair and the treatment of systemic indications. Celtrix is not currently pursuing an in-house TGF-beta-2 program. BACKGROUND: MEDICAL NEED Many of the body's physiological functions, such as growth of bone and muscle, tissue healing, immune processes and endocrine functions are controlled by regulatory proteins (growth factors, cytokines, and protein hormones) that bind to specific cells to modulate their function. When the body produces appropriate levels of these proteins and when the target cells respond properly, the body functions normally. When the body encounters adverse situations such as trauma, infection, or chronic disease, the production and regulation of these factors can become unbalanced. Normally, the body has the ability to naturally modulate the production of these regulating proteins to return to a balanced physiological state (homeostasis). However, when the ability to make these changes is lost, it can result in a number of undesirable consequences including, but not limited to, poor nutritional status, an impaired ability to maintain and repair tissues and organs normally, and impaired immune and endocrine functions. Celtrix, alone or in collaboration with others, is developing biopharmaceuticals based on such naturally occurring, regulating proteins. 3 4 SOMATOKINE SomatoKine is a human recombinant equivalent to the naturally occurring complex formed by insulin-like growth factor-I (IGF-I) and its primary binding protein (BP3). The therapeutic potential of SomatoKine stems from a variety of demonstrated IGF-I bioactivities which include: o Bone formation o Muscle formation o Prevention of muscle degradation o Tissue and organ repair o Nutrient utilization o Hormonal regulation of insulin and growth hormone o Immune system stimulation o Neurotrophic activity The metabolic activities of IGF-I suggest that SomatoKine may provide a safe and effective therapeutic approach to treating debilitating conditions associated with adverse metabolic, immune and hormonal functions. Clinical and preclinical studies have demonstrated that circulating IGF-I levels are lower than normal in a variety of conditions including aging, chronic disease, and severe trauma. Low levels of IGF-I are often associated with destructive metabolic processes (catabolism) causing bone and muscle loss, delay healing, and increase the patient's risk of life-threatening complications and infections. Low levels of IGF-I may also exacerbate immunocompromised and diabetic conditions. The overall development of SomatoKine is aimed at elevating the circulating reservoir of IGF-I thereby overcoming these destructive metabolic processes. Once in the bloodstream, the SomatoKine complex attaches to a third naturally occurring protein known as an acid labile subunit, or ALS. The resulting larger complex emulates what is observed in nature, safely storing and transporting IGF-I throughout the patient's body with an extended half life compared to free IGF. The BP3 contains important biological information used by the body in regulating IGF-I bioavailability and biodistribution. In addition, IGF-I can separate from this circulating reservoir and bind to target cells whenever it is needed by the body. Through its specific receptor, IGF-I then stimulates essential metabolic activities important for regeneration of bone and muscle, tissue repair, regulation of blood glucose levels and other critical biological processes. Although other biopharmaceutical companies may have development programs involving IGF-I, Celtrix does not believe that any other company is currently developing the IGF-BP3 (SomatoKine) complex. This complex is of key importance because most naturally occurring IGF-I does not circulate in its free form, but is bound to its primary binding protein, BP3. The natural association of the two molecules appears to be of fundamental biological significance. Preclinical experimentation, including toxicology studies, indicates that SomatoKine substantially improves IGF-I safety and efficacy. In addition, a variety of biological effects have been demonstrated with SomatoKine that could not be demonstrated upon the administration of IGF-I alone. This is believed to be related to the observation that SomatoKine significantly removes the known dose limitations associated with free (unbound) IGF-I. By removing dosage limitations and improving safety while still providing the benefits of IGF-I, SomatoKine has the potential to serve as a superior IGF-I therapeutic composition for a wide range of applications. 4 5 Realization of the therapeutic potential of IGF-I, although pursued by several companies over the past years, has been hampered by a number of limitations mainly associated with the administration of IGF-I in its free form. As demonstrated in preclinical and clinical studies, SomatoKine given over a range of doses is well tolerated, whereas equivalent doses of IGF-I without BP3 can cause serious side effects, such as hypoglycemia, joint pain and swelling, and parotid discomfort. Human clinical studies with IGF-I, administered without BP3, have shown that IGF-I must be administered in low-dose daily injections in order to avoid acute side effects and this, in turn, may limit the observed clinical efficacy. In contrast, Celtrix's Phase I clinical data suggested that injectable, higher doses of SomatoKine are feasible and provide the benefits of IGF-I without dose-limiting side effects. The higher safety margins of SomatoKine, in combination with potentially less frequent dosing, should make it possible to use SomatoKine to treat a variety of conditions that may be difficult to treat successfully with IGF-I alone. Because IGF-BP3 is involved in a wide variety of essential biological processes, Celtrix believes that SomatoKine therapy could have broad range potential. This potential is supported by both preclinical laboratory and animal and clinical studies conducted by Company scientists and other academic collaborations. 5 6 PRODUCTS UNDER RESEARCH AND DEVELOPMENT The following table summarizes potential products currently under research and development, alone and in collaboration with others. CELTRIX PRODUCT PORTFOLIO: SOMATOKINE(R)
- ------------------------------------------------------------------------------------------------------- PATIENT INDICATION BIOLOGICAL ACTION STATUS POPULATION (U.S./WORLD) - ------------------------------------------------------------------------------------------------------- Recovery from Build bone and muscle Phase II 300,000/ Hip Fracture Surgery Prevent muscle loss Feasibility Study 1,700,000 Severe Osteoporosis Build bone and muscle Assessing bone and muscle 1,500,000(1)/ formation in hip fracture 5,000,000 feasibility study Severe Burns Reverse catabolic condition Phase II 10,000/ Stimulate tissue repair Feasibility Study 25,000 Protein Wasting: Prevent muscle loss Preclinical 2,600,000(2)/ Cancer cachexia, and build muscle Also assessing effect 6,000,000 AIDS, advanced on protein wasting in kidney failure, and severe burn feasibility other life-threatening study conditions Diabetes Improve glycemic control Feasibility Study 10,300,000(3)/ Reduce insulin usage 58,000,000 - ------------------------------------------------------------------------------------------------------- CORPORATE PARTNER - ------------------------------------------------------------------------------------------------------- INDICATION PRODUCT(DELIVERY) BIOLOGICAL ACTION STATUS - ------------------------------------------------------------------------------------------------------- Dermal Ulcers TGF-beta-2 in a Stimulate local tissue repair; Phase II (Genzyme Corporation) collagen matrix accelerate healing Clinical (local) Trial - -------------------------------------------------------------------------------------------------------
1 Of the estimated 24 million people in the United States with osteoporosis, there are an estimated 1.5 million fractures per year due to osteoporosis. 2 The population of patients suffering from muscle wasting diseases is comprised of the following groups: Protein wasting associated with gastrointestinal surgery/damage/dysfunction - 500,000; AIDS - 350,000; kidney failure - 1 million; chronic pulmonary disease - 250,000. 3 This population size represents the diagnosed cases of diabetes. 6 7 CLINICAL DEVELOPMENT Recovery from Hip Fracture Surgery Celtrix's initial treatment targets have been elderly patients who have undergone hip fracture surgery, a subset of the severe osteoporosis patient population. Each year approximately 300,000 patients in the United States (1.7 million worldwide) undergo hip surgery to repair fractures of the femur that have occurred during falls. Studies have shown that blood levels of IGF-I drop significantly following hip fracture surgery and that these osteoporotic elderly patients begin to rapidly lose even further bone and lean body mass. This loss can prolong patient immobility, further threaten recovery and survival, interfere with quality of life and add to the high cost of hip repair and rehabilitation. Celtrix's goal is to provide SomatoKine as a short-term therapeutic treatment to prevent bone loss, improve muscle function, restore mobility, and increase the patient's functional independence. In January 1997, Celtrix initiated a multi-center Phase II clinical feasibility study in osteoporotic elderly women (ages 65-90) who have undergone hip fracture surgery. This study, currently ongoing in Belgium, is evaluating approximately 24 patients (eight patients per dose group), who receive either SomatoKine or placebo over a period of eight weeks. Multiple dosage levels are being tested. End points being evaluated include change in the patient's body composition (bone, lean mass and fat mass), muscle function (measured by grip strength), trends in measures of daily activity (ADL, or activities of daily living scores) and bone metabolism markers. Interim results from this Phase II study demonstrate potentially important trend information. Hip fracture patients typically suffer an accelerated loss of hip bone mineral density. In fact, at three months following fracture, the hip bone mineral density of placebo-treated patients had declined approximately 7% from baseline value. Following an initial characteristic loss, SomatoKine-treated patients who were administered drug for eight weeks at 1.0 mg/kg per day, regained a substantial portion of their hip bone mineral density. At the same three-month time point (one month post-treatment), SomatoKine-treated patients showed a hip bone mineral density average decrease of less than 2% from baseline value. Hip bone mineral density is a strong predictor of fracture risk where loss of hip bone mineral density predisposes hip fracture patients to a high risk of refracture; population studies show that a 5% decrease in hip bone mineral density increases the risk of fracture by approximately 25%. Initial results also demonstrated that hand grip strength improved approximately 25% from baseline value for patients treated with 1.0 mg/kg dose of SomatoKine, versus approximately 7% for those receiving the placebo. Whether improved grip strength is related to the anabolic effects of SomatoKine on muscle remains to be determined. Preclinical studies, however, suggest SomatoKine has an effect on building lean body mass. Additionally, fat body mass decreased approximately 13% from baseline for SomatoKine treated patients, versus an approximately 7% decrease in placebo treated patients. Increased grip strength and reduced fat body mass may indicate improved functionality and health. This Phase II feasibility study was designed to demonstrate trends in parameters which might be most affected by SomatoKine, rather than establish statistical significance. The initial data on hip bone mineral density and fat mass reported here are based on findings from seven (of eight) patients per group. Grip strength data are from five patients per group. Celtrix plans to announce the final results of this Phase II feasibility study in fourth quarter 1998, when final patient follow-up and data analysis are completed. 7 8 Severe Osteoporosis Osteoporosis is a chronic, debilitating disorder in which the bones become increasingly porous, brittle and subject to fracture. Severe osteoporosis (defined by the number of patients suffering osteoporotic fractures) affects approximately 1.5 million elderly people in the United States (5 million worldwide). Celtrix believes the findings from the Phase II feasibility study in hip fracture surgery present a strong argument for development of SomatoKine for the short-term treatment of severe osteoporosis. This patient population consists largely of post-menopausal women who already have lost a substantial quantity of bone and are at high risk of fractures of the hip, wrist or spine. In fact, it is estimated that 25% of all women over age 60 will suffer an osteoporosis-related fracture. While estrogens, calcitonins, bisphosphonates and other therapies are prescribed for osteoporosis, these treatments are used primarily to prevent further bone loss rather than to form new bone in this population. A relatively short period of treatment with SomatoKine offers the potential to substantially restore the patient's bone mineral density and form supportive muscle, thus reducing fracture risk and improving the patient's strength and mobility. SomatoKine could provide a much needed therapeutic complement to the existing preventative therapies. Celtrix is actively seeking to establish corporate collaborations for continued global development of SomatoKine for the treatment of severe osteoporosis, including recovery from hip fracture surgery. Severe Burns Another treatment target is severe burns. Annually, approximately 10,000 people in the United States (25,000 worldwide) suffer from traumatic burns over greater than 20% of their body surface. Very low IGF-I levels, along with major tissue damage, are associated with disruption of biological processes that are essential for efficient and successful healing and protection from burn complications. Furthermore, the length of time spent in a burn trauma center is directly related to the time required to conduct the skin grafting required to heal the burn wound. Research has shown that IGF-I plays a significant role in tissue repair and that IGF-I supplementation can potentially promote the healing process and reduce hospital stay. In July 1997, Celtrix initiated a Phase II feasibility trial in severely burned patients, collaborating with leaders in burn care at key burn trauma centers throughout the United States. In addition to their standard burn care, approximately 40 patients, both children and adults, are to receive systemic SomatoKine and/or placebo through two skin graft cycles. The primary endpoint is healing time of the skin donor sites. Celtrix also will evaluate incidence of infection and other complications, length of hospitalization, and a number of parameters important to normalizing key biological processes. Results to date show positive trends. Preliminary data provided evidence supporting the use of SomatoKine to attenuate the degradation of muscle tissue (protein wasting) that is associated with severe trauma such as burn injury. In burn patients, the balance between protein synthesis and degradation is shifted towards degradation, leading to muscle and weight loss which in turn leads to delayed wound healing and increases in infectious complications and mortality. Data obtained from the treatment of six severely burned adults with two doses of SomatoKine showed a 34-58% improvement in the balance between protein synthesis and degradation which is a prerequisite for accelerated wound healing and reduced hospital stay. Additionally, initial data indicate that SomatoKine may have a positive effect on the immune system of severely burned patients. After severe burn, patients typically experience immune system effects that impair their ability to resist infection (i.e. an adverse shift in cytokines produced by T-cell lymphocytes). However, lymphocytes collected from six severely burned SomatoKine-treated patients (ages 2-18) showed an approximately 280% increase in the 8 9 production of interleukin-2 and a 25-90% increase in the production of interferon gamma, both vital immune system proteins. SomatoKine appears to have a normalizing effect on immune functions and protein synthesis which offers the potential to provide critical protection from serious infection and protein wasting response that occur in severe burn patients. Positive findings from this feasibility study will guide the design of a pivotal Phase II/III clinical study in burn patients in 1999. Protein Wasting Many critically ill patients suffer from serious protein wasting conditions which contribute to physical weakness and increase their risk of morbidity and mortality. Annually, the total is estimated at 2.6 million people in the United States (6 million worldwide). They include patients with chronic, debilitating conditions such as cancer cachexia, AIDS, and advanced kidney failure, as well as those with acute traumatic injuries, such as severe burns. SomatoKine's anabolic effects offer the potential to preserve and restore muscle strength important to patient survival and quality of life. Celtrix is actively seeking to establish corporate partnerships to address these major opportunities. Currently, relevant human data are being assessed from the ongoing clinical trial in burn patients, a patient population subject to severe protein wasting. Additionally, preclinical studies are continuing in collaboration with academic researchers. Results from a collaboration demonstrate SomatoKine's potential to effectively prevent loss of both muscle weight and muscle protein in a laboratory model of muscular atrophy (conditions similar to that of a long-term bedridden patient). SomatoKine-treated animals experienced 24% less muscle weight loss and 37% less muscle protein loss compared to untreated animals. More importantly, recent preliminary results from the ongoing severe burns trial provided encouraging human data which demonstrated an improvement in the balance between protein synthesis and degradation in six SomotoKine-treated severely burned adults. This finding demonstrates efficacy for SomotoKine to treat serious medical conditions associated with muscle and weight loss, and provides further evidence supporting the use of SomatoKine to potentially treat wasting diseases associated with cancer cachexia, AIDS and advance kidney failure. Diabetes Diabetes is typically characterized by the inadequate production or utilization of insulin, a vital hormone needed by the body for normal control of blood glucose levels. It afflicts over 5% of the populations of Europe, Japan and North America. In the United States alone, an estimated 10.3 million people have been diagnosed with diabetes. The endocrine activities of IGF-I suggest that SomatoKine may provide an effective therapeutic approach to treating diabetes patients. A number of clinical studies conducted by other researchers have shown that administration of free IGF-I can significantly increase insulin sensitivity and glucose tolerance in patients with diabetes, and IGF-I treatment substantially reduced the requirement for injected insulin and improved glycemic control. In a number of studies, the use of free IGF-I, however, without its primary binding protein, resulted in substantial side effects that limited the therapeutic value of the molecule. Celtrix will evaluate whether the SomatoKine complex will provide similar beneficial therapeutic effects on glycemic control as free IGF-I without its limiting side effects. The Company initiated a Phase II feasibility study in July 1998 to treat patients with Type I diabetes. These patients typically produce little or no insulin of their own, and although they require frequent insulin injections, their tissue may become resistant to insulin over time. 9 10 They also have low blood levels of IGF-I due to lack of normal insulin secretion. This study will evaluate SomatoKine's potential in patients (ages 18-40) who have established Type I diabetes and will measure a number of treatment parameters, including the amount of insulin required for optimal glucose control. Positive study findings will support future corporate collaborations for expanded studies in diabetes. CORPORATE COLLABORATIONS YOSHITOMI PHARMACEUTICALS INDUSTRIES, LTD. In July 1994, Celtrix entered into a license agreement with The Green Cross Corporation covering the development and commercialization of SomatoKine for the treatment of osteoporosis in Japan. Under the terms of the agreement, Green Cross was to be responsible for all related research, development and marketing, as well as product manufacturing to support its needs in Japan. The agreement provided for Celtrix to receive license fees, milestone payments, and upon commercialization, royalties from product sales. Celtrix had an exclusive royalty-bearing license to related know-how and technology development by Green Cross and retained full rights to SomatoKine outside of Japan. In April 1998, Green Cross was merged with Yoshitomi Pharmaceuticals Industries, Ltd. In May 1998, Celtrix received notice from Yoshitomi of its intent to terminate this license agreement. The impact of dissolving the collaboration is the loss of licensing and potential milestone revenues; however, upon termination, Celtrix will regain the rights to the treatment of osteoporosis in Japan. GENZYME CORPORATION In June 1994, the Company entered into a product development, license and marketing agreement with Genzyme on TGF-beta-2 which included equity investments, milestone payments and potential royalties to Celtrix. The objective was to commercialize TGF-beta-2 for tissue repair and treatment of systemic applications. Genzyme has been granted exclusive commercialization rights for all systemic applications and select local applications of TGF-beta-2. In December 1997, under amended terms, the Company granted Genzyme expanded territory rights to TGF-beta-2 to include Japan, China, Korea and Taiwan. In exchange, Genzyme released Celtrix from certain service and royalty obligations under the original agreement. Celtrix has retained all rights to applications of TGF-beta-2 concerning ophthalmic disease and has the option to reacquire rights to other product applications not pursued by Genzyme. Genzyme is conducting a 15-center, double-blinded, randomized Phase II clinical study to evaluate the treatment of 177 diabetic patients suffering from neurotrophic diabetic foot ulcers. Additionally, in December 1997, under a separate license agreement, Genzyme was granted a worldwide royalty-bearing license to TGF-beta antibodies and receptor technology. Under the terms of the agreement, Genzyme will assume the licensing and royalty obligations of Celtrix related to TGF-beta receptor. GENENTECH, INC. In March 1993, the Company entered into a cross-license agreement with Genentech. Under the terms of the agreement, Genentech granted Celtrix rights to certain process patents which may have application in the manufacturing of TFG-beta-2 and TGF-beta receptors, in return for a $4.0 million licensing fee and future product royalties. Celtrix granted Genentech patent rights to TGF-beta for certain fields of use for future product royalties. The license fee was balanced by an equity purchase by Genentech of 572,450 shares of newly issued Celtrix common stock for a total value of $4.0 million, resulting in a non-cash transaction. 10 11 RESEARCH AND DEVELOPMENT The Company's research and development staff has substantial expertise with IGF-I and BP3. Through in-house programs and an extensive collaboration program with leading scientists world-wide, research and development efforts are focused on demonstrating the safety and effectiveness of SomatoKine (IGF-I in combination with BP3) in human clinical studies that are relevant to the indications being evaluated. Studies to evaluate optimal formulations, doses and dosing frequencies are being conducted to aid in the development of SomatoKine. These collaborative efforts have effectively contributed to the Company's understanding of the underlying causes and potential treatment strategies for conditions leading to muscle and bone loss and other catabolic conditions. Celtrix is continuing to expand collaborations into other fields where SomatoKine therapy may be of benefit. Recent advances by the Company's research staff in the development of a novel protein expression technology for SomatoKine provide Celtrix with a proprietary manufacturing method which will position the Company for large-scale commercial manufacturing. Efforts in this area will continue to focus on ways that this technology can advance the SomatoKine program. The Company believes that this technology not only provides benefits to Celtrix programs, but also offers the potential of being useful to other biopharmaceutical companies in need of novel protein expression technology. The Company intends to evaluate its options to license such technology to other biopharmaceutical companies in the future. MANUFACTURING Celtrix currently manufactures human recombinant SomatoKine according to current Good Manufacturing Practices (cGMP) at its Santa Clara location. This facility has the capacity to meet anticipated SomatoKine supply needs through current Phase II studies and Phase III severe burns clinical trials. When larger-scale manufacturing is needed, Celtrix may elect to further expand its manufacturing capabilities or to work through collaborative relationships or contract manufacturers. INTELLECTUAL PROPERTY Proprietary protection for Celtrix's potential products is important to the Company's business. Celtrix's policy is to protect its technology by filing patent applications for technology that it considers important to the development of its business. Celtrix intends to file additional patent applications, when appropriate, relating to improvements in its technology and other specific products that it develops. In the United States, Celtrix currently holds a total of 15 issued or allowed patents related to the composition, production, antibodies and methods of use for SomatoKine, including one issued patent with claims to a BP3 composition-of-matter, four issued therapeutic use patents for SomatoKine, and four issued, three allowed, and two pending patent applications regarding novel expression and production methods which may be used for the manufacture of SomatoKine. Celtrix has 13 families of applications, pending in the U.S. or abroad, regarding the therapeutic use of BP3, antibodies to BP3 and their uses, and therapeutic uses of the complex, SomatoKine. These applications are in various stages of review. In Europe, Celtrix has an issued patent with claims to: a BP3 composition-of-matter; certain therapeutic uses of that BP3; and certain therapeutic uses of a complex of IGF and the claimed BP3. Celtrix has received a European patent with claims to: recombinantly produced BP3; therapeutic uses of BP3; and therapeutic uses of the complex, SomatoKine. This patent has been opposed by another company. 11 12 The Company also owns or co-owns 23 issued patents and one allowed application regarding the composition-of-matter, methods of purification, and therapeutic uses of TGF-beta-2. Celtrix also owns one issued U.S. patent relating to products and methods for topical wound healing using collagen and heparin-containing matrices. Celtrix owns the rights to a collection of patents and patent applications relating to TGF-beta antagonists. Celtrix seeks patent protection for its inventions and discoveries which the Company believes are patentable in the United States and, in most instances, in at least Australia, Canada, Japan and various countries in Europe. As with any pending patent application, there can be no assurance that any of these applications will be issued in the United States or foreign countries, nor can there be any assurance that any United States or foreign patents issuing from any of these applications will not later be held invalid or unenforceable. At least three large biotechnology and pharmaceutical companies with substantial financial and legal resources have patent applications on file in the United States and abroad directed at the production of recombinant IGF-I by various methods. The earliest date of filing of these patent applications is April 25, 1983. Unless and until these applications issue in the United States, it is not possible to determine the breadth of these claims regarding a process for IGF-I production. Furthermore, a large biotechnology and pharmaceutical company with substantial financial and legal resources has a patent issued in the United States directed toward certain DNA molecules encoding BP3 and the corresponding BP3 protein. This same patent was granted in Europe and was successfully opposed by Celtrix. However, this large biotechnology and pharmaceutical company has recently appealed the decision and there can be no assurance that the appeal will not be successful, and it is not possible to determine what, if any, claims will be reinstated or the breadth of such claims. In addition, this large biotechnology company has been issued a patent directed toward the subcutaneous bolus administration of IGF-BP3 for certain limited areas of use. Each of the referenced companies can be expected to defend its patent position vigorously. Celtrix has developed a new process for the production of IGF and BP3 which it does not believe will infringe on other patents relating to recombinant protein production in general or on other patents relating to the production of IGF and BP3 in particular, although there can be no assurance that a contrary position will not be asserted. A large number of other companies have pending patent applications and/or issued patents which claim certain methods of use of IGF. There can be no assurance that third parties will not claim that the Company's technology, current or future products or manufacturing processes infringe the proprietary rights of others. If other companies were to successfully bring legal actions against the Company claiming patent or other intellectual property infringements, in addition to any potential liability for damages, the Company could be required to obtain a license in order to continue to use the affected process or to manufacture or use the affected products or cease using such products or process if enjoined by a court. Any such claim, with or without merit, could result in costly litigation or might require the Company to enter into royalty or licensing agreements, all of which could delay or otherwise adversely impact the Company's potential products for commercial use. If any licenses are required, there can be no assurance that the Company will be able to obtain any such license on commercially favorable terms, if at all, and if these licenses are not obtained, the Company might be prevented from pursuing the development of certain of its potential products. The Company's breach of an existing license or failure to obtain or delay in obtaining a license to any technology that it may require to commercialize its products may have a material adverse impact on the Company. Litigation, which could result in substantial costs to the Company, may also be necessary to enforce any patents issued or licensed to the Company or to determine the scope and validity of another party's proprietary rights. There can be no assurance that the Company's issued or licensed patents would be held valid by a court of competent jurisdiction. An adverse outcome 12 13 in litigation or an interference or other proceeding in a court or patent office could subject the Company to significant liabilities to other parties, require disputed rights to be licensed from other parties or require the Company to cease using such technology, any of which could have a material adverse effect on the Company. Celtrix also relies on trade secrets to protect technology, especially where patent protection is not believed to be appropriate or obtainable. Celtrix attempts to protect its proprietary technology and processes in part by confidentiality agreements with its employees, consultants and certain contractors. There can be no assurance that these agreements will not be breached, that the Company would have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known or be independently discovered by competitors in such a manner that the Company has no practical recourse. To the extent that the Company or its consultants or research collaborators use intellectual property owned by others in their work for the Company, disputes may also arise as to the rights in related or resulting know-how and inventions. COMPETITION In each of the Company's potential product areas, competition from large pharmaceutical companies, biotechnology companies and other companies, universities and research institutions is substantial. Relative to the Company, most of these entities have greater capital resources, research and development staffs, facilities and experience in conducting clinical trials and obtaining regulatory approvals, as well as in manufacturing and marketing pharmaceutical products. Furthermore, the Company believes that competitors have used, and may continue to use, litigation to gain competitive advantage. In addition, these and other entities may have or develop new technologies or use existing technologies that are, or may in the future be, the basis for competitive products. Any potential products that the Company succeeds in developing and for which it gains regulatory approval will have to compete for market acceptance and market share. For certain of the Company's potential products, an important factor in such competition may be the timing of market introduction of competitive products. Accordingly, the relative speed with which the Company can develop products, complete the clinical testing and regulatory approval processes and supply commercial quantities of the product to the market are expected to be important competitive factors. The Company expects that competition will be based, among other things, on product efficacy, safety, reliability, availability, timing and scope of regulatory approval and price. There can be no assurance that the Company's competitors will not succeed in developing technologies and products that are more effective than any that are being developed by the Company or that would render the Company's technology and products obsolete or noncompetitive. In addition, many of the Company's competitors may achieve product commercialization or patent protection earlier than the Company. GOVERNMENT REGULATION The research and development, production and marketing of Celtrix's products are and will be subject to substantial regulation by numerous governmental authorities in the United States and other countries. The regulatory process, which includes preclinical testing and clinical trials of each compound in order to establish its safety and efficacy, can take many years and requires the expenditure of substantial resources. In the United States, pharmaceutical products are subject to rigorous Food and Drug Administration ("FDA") regulation. The Federal Food, Drug and Cosmetic Act and the regulations promulgated thereunder, as well as other federal and state statutes and regulations, govern, among other things, the testing, manufacture, safety, effectiveness, 13 14 labeling, storage, record-keeping, approval, advertising and promotion of Celtrix's potential products. The steps required before a pharmaceutical product may be marketed in the United States include (i) preclinical laboratory and animal tests, (ii) the submission to the FDA of an Investigational New Drug ("IND") application, which must become effective before human clinical trials may commence, (iii) the conduct of adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug product for its intended indications, (iv) the submission to the FDA of a New Drug Application ("NDA") for pharmaceuticals, and (v) FDA approval of the NDA prior to any commercial shipment or sale of the product. Although SomatoKine is a DNA-derived protein complex and is manufactured using biotechnology techniques, the FDA has indicated to Celtrix that products containing SomatoKine will fall into the category of hormones and will be reviewed as a drug. The review has been assigned to the Division of Endocrine and Metabolism Products, Center for Drug Evaluation and Research (CDER). During the investigational phase, the IND requirements will govern the development of the drug. Prior to marketing, FDA approval of products containing SomatoKine will be based on submission of an NDA containing the results of preclinical and clinical studies, and complete manufacturing and controls information. Furthermore, NDA approval requires preapproval inspection by the FDA of the proposed commercial manufacturing facilities to assess compliance with GMP. Prior to the commencement of clinical trials for its potential products, Celtrix must conduct preclinical tests of its products, which include laboratory characterization of the products and the conduct of animal studies to assess preliminarily the safety and pharmacological effect of the products. The preclinical safety tests must be conducted in compliance with FDA regulations regarding good laboratory practices. The results of preclinical tests must be submitted to the FDA as part of the IND application and reviewed by the FDA during the course of the agency's determination as to whether the clinical trials described in the IND application may commence. There is no certainty that submission of an IND application will result in FDA authorization to commence clinical trials. Clinical trials involve the administration of the investigational compound to healthy volunteers or to patients under the supervision of a qualified principal investigator. Clinical trials are conducted in accordance with protocols that detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND application. Further, each clinical study must be conducted under the auspices of an independent Institutional Review Board at the institution at which the study will be conducted, and informed consent must be obtained from each clinical subject. Clinical trials of drug products are typically conducted in three phases, but the phases may overlap. In Phase I, the product is tested for safety (adverse effects) and may include dosage tolerance, metabolism, distribution, excretion and clinical pharmacology. Phase II involves studies in a limited patient population to (i) determine the efficacy of the product for specific, targeted indications, (ii) determine dosage tolerance and optimal dosage, and (iii) identify possible adverse effects and safety risks. When a compound is found to be effective and to have an acceptable safety profile in Phase II evaluations, Phase III trials are undertaken to further confirm clinical efficacy and to further test for safety within an expanded patient population at geographically dispersed clinical study sites. There can be no assurance that Phase I, Phase II or Phase III testing will be completed successfully within any specified time period, if at all, with respect to any of Celtrix's products subject to such testing. Furthermore, Celtrix or the FDA may suspend clinical trials at any time if it is felt that the subjects or patients are being exposed to an unacceptable health risk. 14 15 The results of the product development efforts, preclinical studies and clinical studies are submitted to the FDA in the form of an NDA for approval to permit marketing and commercial shipment and sales of the pharmaceutical product. The testing and approval process is likely to require substantial time and effort and there can be no assurance that any approval will be granted on a timely basis, if at all. The FDA may deny an NDA if applicable regulatory criteria are not satisfied, may require additional testing or information if it does not view the NDA as containing adequate evidence of the safety and efficacy of the product, or may require post-marketing testing and surveillance to monitor the safety of Celtrix's products. Notwithstanding the submission of such data, the FDA may ultimately decide that the application does not satisfy its regulatory criteria for approval. Finally, product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing. Among the conditions for NDA approval is the requirement that the manufacturer's manufacturing procedures and quality control must comply with the FDA regulations as published in the current GMP regulations, as well as any additional standards or guidelines issued for specific drug or biological products. The FDA monitors compliance with these requirements by requiring all drug manufacturers to register with the FDA, which subjects them to biennial FDA inspections of manufacturing facilities. In addition, a precondition for NDA approval is that the FDA conducts an inspection of the manufacturing facility and determines that it complies with all applicable regulatory requirements. In order to assure compliance with those requirements, manufacturers must continue to expend time, resources and effort in the areas of production and quality control to ensure full technical compliance. For marketing outside the United States, Celtrix is also subject to foreign regulatory requirements governing human clinical trials and marketing approval for drugs. The Company is conducting clinical trials in Europe and the considerations set forth above also apply to European clinical trials; for example, clinical trials must be conducted in several phases and there can be no assurance that such phases of testing in Europe will be completed successfully within any specified time period, if at all, with respect to the Company's product. Although the new drug approval process has been centralized for the European Union ("EU"), clinical research is still controlled at the national level. For its current clinical trials in Europe, the Company is required to give a simple notification process and no submission is required. Other European countries may require the submission of a Clinical Trial Exemption ("CTX"), which is the equivalent of the United States IND and which must be effective before human clinical trials may be commenced. Once submitted, the review and approval process typically takes three months, although there can be no assurance that an approval will be obtained within that time period, or at all. For the marketing and commercial shipment and sales of new biotechnology products, the EU has centralized the process for new drug approval. The centralized approval process involves the submission of a Marketing Application ("MA"), the equivalent of a United States NDA, to the European Medicines Evaluation Authority ("EMEA"). The EMEA uses the centralized scientific body of reviewers from the Committee for Proprietary Medicinal Products to assess the new drug product and obtains a recommendation whether or not to approve the new product. A single approval from the centralized EMEA is typically applicable to the entire European Community. Because Celtrix intends to have its products marketed in certain foreign countries in the future, approval by these countries' regulatory authorities may need to be obtained. The approval procedures vary from country to country, and the time required for approval may be longer or shorter than that required for FDA approval. Even after foreign approvals are obtained, further delays may be encountered before products may be marketed. For example, many countries require additional government approval for price reimbursement under national 15 16 health systems. Such approvals can be critical to any extensive marketing of drug products in such countries. The Company is also subject to licensure in California as a drug manufacturer by the Food and Drug Branch of the California Department of Health Services. Licensure requires annual inspections of the Company's manufacturing facilities by inspectors from the Food and Drug Branch, to ensure continued compliance with applicable GMP requirements. In addition to regulations enforced by the FDA, Celtrix also is subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other present and potential future federal, state or local regulations. INSURANCE; PRODUCT LIABILITY The Company currently has in force general liability insurance, with coverage limits of $2.0 million per incident and $4.0 million in the aggregate annually, and product liability insurance with coverage limits of $1.0 million per incident and $3.0 million in the aggregate annually. The Company's insurance policies provide coverage for product liability and general liability on a claims made basis. These policies are subject to annual renewal. EMPLOYEES As of March 31, 1998, Celtrix employed 87 full-time and part-time employees. No employee is represented by a union and the Company believes its employee relations are good. The Company is highly dependent on the principal members of its management and scientific staff and its future success depends in large part upon its ability to attract and retain highly qualified scientific and management personnel. Celtrix faces significant competition for such personnel from other companies, academic institutions, government entities and other organizations. There can be no assurance that Celtrix will be successful in hiring or retaining requisite personnel. EXECUTIVE OFFICERS OF THE COMPANY The following sets forth certain information with respect to the current executive officers of Celtrix and their ages as of March 31, 1998:
NAME AGE POSITION - -------------------------- --- -------------------------------------------------------------------- Andreas Sommer, Ph.D. 56 Chief Executive Officer, President and Director Donald D. Huffman 51 Vice President, Finance and Administration, Chief Financial Officer David M. Rosen, Ph.D. 42 Senior Vice President, Research and Development Malcolm J. McKay, Ph.D. 42 Vice President, Regulatory Affairs & Quality Assurance
Dr. Sommer has served as President and CEO of Celtrix since April 1995 and as a member of the Board of Directors since May 1994. He served as Celtrix's Senior Vice President from July 1993 to April 1995. Previously, Dr. Sommer served as Vice 16 17 President, Research of Celtrix since 1992, following Celtrix's merger with BioGrowth, Inc., where he served as Vice President, Research and Development since 1989. He previously was a member of the scientific management team at Synergen. Also during his professional career, Dr. Sommer served as an advanced research fellow in the Department of Microbiology at the University of Basel Biocenter and was a postdoctoral fellow in the Department of Biological Chemistry at the University of California, Davis. He received his Ph.D. in Microbiology from the University of California, Davis, and has published extensively in noted scientific journals. Mr. Huffman was appointed Vice President of Finance and Administration and Chief Financial Officer in October 1997. Previously, he was Vice President and Chief Financial Officer of Endosonics Corporation and served in the same capacity at Qualimatrix, Inc. prior to 1995. Mr. Huffman has an extensive background in finance and strategic planning for Fortune 200, mid-size and emerging growth companies. He received an MBA from State University of New York at Buffalo and a B.S. from Pennsylvania State University. Dr. Rosen was appointed Senior Vice President of Research and Development in April 1998. He served as Vice President of Research and Development from April 1995 to March 1998. Previously, he served as Celtrix's director of research since January 1994. He has served at Celtrix since its founding by Collagen Corporation and has extensive research and project management experience, as well as an in-depth working knowledge of SomatoKine. Dr. Rosen worked at Collagen since 1982, initially serving as a scientist in the connective tissue research laboratories. Dr. Rosen received his Ph.D. in biochemistry from the University of California, Riverside and has over forty research publications to his credit. Dr. McKay was appointed Vice President of Regulatory Affairs and Quality Assurance in August 1996. He was formerly a director of quality assurance and quality control at COR Therapeutics since 1995. Previously, he served for four years at Celtrix as director of quality assurance, and prior to 1991, oversaw this function at Triton Biosciences. In addition, he served as group leader of technical support at Abbott Laboratories. Dr. McKay received his Ph.D. in biochemistry at the University of London and was a postdoctoral fellow at the Medical College of Virginia. The Board of Directors elects Celtrix's officers and such officers serve at the discretion of the Board of Directors of Celtrix. There are no family relationships among the directors or officers of Celtrix. ITEM 2. PROPERTIES Celtrix leases a 69,000 square foot facility at 3055 Patrick Henry Drive, Santa Clara, California 95054-1815. At present, the Company's manufacturing operations have been designed to address the Company's anticipated needs through current Phase II studies and Phase III severe burns clinical trials. In the future, the Company will either need to expand these operations or subcontract its manufacturing operations in anticipation of expanded studies and commercialization. There can be no assurance that the Company will be able to manufacture any of its current or future products on a commercial scale, nor that such products can be manufactured by the Company or any other party at a cost or in quantities to make commercially viable products. ITEM 3. LEGAL PROCEEDINGS As of the date hereof, there are no legal proceedings pending against or involving Celtrix or its assets that, in the opinion of management, could result in a materially adverse change in the business or financial condition of Celtrix. 17 18 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth fiscal quarter ended March 31, 1998. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is listed on the Nasdaq National Market under the symbol CTRX. The following table represents quarterly information on the high and low closing prices of Celtrix's common stock for the last two fiscal years:
Fiscal Year 1998 High Low ---- --- First Quarter .............................. $ 3.00 $ 2.00 Second Quarter ............................. $ 2.94 $ 2.00 Third Quarter .............................. $ 2.63 $ 1.66 Fourth Quarter ............................. $ 3.88 $ 1.72 Fiscal Year 1997 First Quarter .............................. $ 3.94 $ 2.31 Second Quarter ............................. $ 3.37 $ 2.00 Third Quarter .............................. $ 2.66 $ 1.81 Fourth Quarter ............................. $ 3.88 $ 2.06
As of March 31, 1998, there were approximately 1,230 stockholders of record. No cash dividends have been paid to date by the Company on its common stock. Celtrix does not anticipate the payment of dividends in the foreseeable future. 18 19 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended March 31, ---------------------------------------------------------------------------- Statement of Operations Data: 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (in thousands, except per share data) Total revenues $ 661 $ 658 $ 1,750 $ 2,200 $ 858 Costs and expenses: Cost of sales 1 5 31 134 206 Research and development 13,006 11,999 10,990 18,091 16,286 General and administrative 1,985 1,814 2,063 3,459 2,823 Restructuring costs(1) -- -- -- 2,108 -- -------- -------- -------- -------- -------- 14,992 13,818 13,084 23,792 19,315 -------- -------- -------- -------- -------- Operating loss $(14,331) $(13,160) $(11,334) $(21,592) $(18,457) Interest income, net 681 464 625 843 697 Gain on sale of investment 737 -- 3,463 -- -- -------- -------- -------- -------- -------- Net loss $(12,913) $(12,696) $ (7,246) $(20,749) $(17,760) ======== ======== ======== ======== ======== Basic and diluted net loss per share $ (0.61) $ (0.83) $ (0.51) $ (1.57) $ (1.64) ======== ======== ======== ======== ======== Shares used in basic and diluted per share computation 21,004 15,238 14,161 13,255 10,805 ======== ======== ======== ======== ========
March 31, ---------------------------------------------------------------------------- Balance Sheet Data: 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (in thousands) Cash, cash equivalents and short-term investments(2) $ 7,913 $ 5,788 $ 17,643 $ 19,929 $ 27,948 Total assets $ 17,876 $ 16,956 $ 30,145 $ 35,024 $ 44,089 Long-term obligations -- -- $ 238 $ 828 $ 1,456 Total stockholders' equity $ 14,744 $ 14,210 $ 26,786 $ 29,436 $ 39,121
(1) Restructuring costs for the year ended March 31, 1995 resulted from the termination of the Company's ophthalmic program in 1995 and included charges for severance, equipment leases and purchase commitments. (2) Cash, cash equivalents and short-term investments balances for the years 1994-1997 include restricted cash related to equipment leases. 19 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Celtrix Pharmaceuticals, Inc. is a biopharmaceutical company developing novel therapeutics for seriously debilitating, degenerative conditions primarily associated with aging, chronic diseases, and severe trauma. The Company's development focus is on SomatoKine(R), a novel IGF-BP3 complex, for use in restoring lost tissues and metabolic processes essential for the patient's health and quality of life. Ongoing product development programs target severe osteoporosis, including hip fracture surgery in the elderly, diabetes and acute traumatic injury, such as severe burns. Other potential indications include protein wasting diseases associated with cancer, AIDS, advanced kidney failure, and other life-threatening conditions. SomatoKine, the recombinant equivalent of the naturally occurring complex formed by the anabolic hormone insulin-like growth factor-I (IGF-I) and its major binding protein, BP3, shows potential as a therapy for patients suffering from severe physical trauma and serious illness. IGF-I is known to play a major role in diverse biological processes, including muscle and bone formation, and tissue repair. However, IGF-I does not naturally exist in quantity free of its binding proteins, and limitations associated with administering free IGF-I have proven significant. When IGF-I is bound to BP3, as it is in nature, it does not display these acute limitations. Phase I human clinical trials demonstrated that SomatoKine safely delivers IGF-I at substantially higher dosage levels than have ever been feasible before with free IGF-I and thus substantially stimulated bone and connective tissue metabolism. In calendar 1997, the Company initiated two Phase II clinical feasibility studies, using SomatoKine to treat patients recovering from hip fracture surgery and severe burns. Hip fracture patients typically suffer an accelerated loss of hip bone mineral density, which predisposes them to a high risk of refracture. Recent interim results from the hip fracture surgery feasibility trial show a positive effect of SomatoKine on hip bone mineral density which is a strong predictor of reduced refracture risk. Additionally, increased grip strength and reduced body fat were also observed which may indicate improved health and functionality. The Company plans to use these findings to establish corporate partnership(s) for the continued global development of SomatoKine for treatment of hip fracture surgery and osteoporosis. For severe burns, preliminary data provided evidence supporting the use of SomatoKine to attenuate the degradation of muscle tissue that is associated with severe trauma such as burn injury. The balance between protein synthesis and degradation in burn patients is shifted towards degradation, leading to muscle and weight loss which in turn leads to delayed wound healing and increases in infectious complications and mortality. Data obtained from the treatment of six severely burned adults with SomatoKine showed an improvement in the balance between protein synthesis and degradation which is a prerequisite for accelerated wound healing and reduced hospital stay. Furthermore, data from the severe burns feasibility trial also demonstrated a positive effect of SomatoKine on the immune system of severely burned children. Severe burns can cause significant imbalances in the immune functions. However, SomatoKine appears to have a normalizing effect on the immune functions that protect severe burns patients from infections. Various findings from ongoing studies are expected to be reported in 1998 and will serve as the basis for initiating full-scale Phase III clinical studies in 1999. 20 21 Additionally, Celtrix plans to evaluate SomatoKine as a potential therapeutic in managing glucose homeostasis in diabetic patients because extensive research by a number of investigators has demonstrated the importance of IGF-I in hormonal regulation of insulin and growth hormone. The Company initiated a Phase II feasibility study in Type I diabetes patients in mid-1998 to evaluate the potential of SomotaKine on glycemic control. Other potential indications include protein wasting conditions associated with cancer cachexia, AIDS, advanced kidney failure, and other life-threatening conditions. Celtrix plans to pursue the use of SomatoKine in these areas through corporate collaborations. SomatoKine's anabolic effects offer the potential to preserve and restore muscle strength and mobility which are important for these patients' survival and quality of life. Celtrix manufactures SomatoKine for clinical trials at its Santa Clara, California facility. The Company has a product development, license and marketing agreement with Genzyme Corporation ("Genzyme") for TGF-beta-2, a potential pharmaceutical based on a naturally occurring compound which appears to play an important role in regulating healthy cell functions. In December 1997, under amended terms, the Company granted Genzyme expanded territory rights to TGF-beta-2 to include Japan, China, Korea and Taiwan. Additionally, under a separate license agreement, Genzyme was granted a worldwide royalty-bearing license to TGF-beta antibodies and receptor technology. The Company is not currently pursuing an in-house TGF-beta-2 program. The Company entered into a license agreement in 1994 with The Green Cross Corporation ("Green Cross"), a Japanese pharmaceutical company, covering the development and commercialization of SomatoKine for the treatment of osteoporosis in Japan. Green Cross was merged with Yoshitomi Pharmaceuticals Industries, Ltd. ("Yoshitomi") in April 1998, and in May 1998, the Company received notification of intent from Yoshitomi to terminate the Green Cross license agreement with Celtrix. The result of the termination would be loss of potential revenues from milestone and license payments and royalties on future product sales; however, upon termination, Celtrix will regain the rights to the treatment of osteoporosis in Japan. Celtrix has not earned substantial revenues from product sales since inception and at March 31, 1998 has an accumulated deficit of $117.0 million. The Company's revenues to date consist principally of licensing and milestone payments from pharmaceuticals, research and development funding, related party revenue, and to a lesser extent, sales of products for use in research and assay applications. The Company expects to incur additional operating losses, which may fluctuate quarter to quarter, for at least the next several years as the Company expands its development activities, including clinical trials and manufacturing. There can be no assurance that Celtrix will ever achieve either significant revenues from product sales or profitable operations. To achieve profitable operations, the Company, alone or with others, must successfully develop, obtain regulatory approval for and market its potential products. No assurance can be given that the Company's product development efforts will be successfully completed, that required regulatory approvals will be obtained, or that any products, if developed and introduced, will be successfully marketed or achieve market acceptance. RESULTS OF OPERATIONS The Company incurred net losses of $12.9 million, $12.7 million, and $7.2 million in fiscal 1998, 1997, and 1996, respectively. Basic and diluted net loss per share for these years were $0.61, $0.83, and $0.51, respectively. 21 22 Revenues, consisting of licensing revenue from Yoshitomi and miscellaneous product sales, were $661,000 and $658,000, respectively, for 1998 and 1997. Revenues decreased 62% in 1997 from $1.8 million in 1996. In addition to $704,000 in licensing and miscellaneous product sales, 1996 revenues included proceeds received from Collagen Corporation ("Collagen") for the sale of the Vitrogen business, receipts from an Orphan Drug Grant, and reimbursement from Genzyme for development work on TGF-beta-2. Operating expenses increased 9% to $15.0 million in 1998 from $13.8 million in 1997 due primarily to increased costs associated with the Phase II feasibility clinical trials, and additional staffing to support increased SomatoKine manufacturing and clinical activities. Operating expenses increased 5% in 1997 from $13.1 million in 1996 due primarily to costs associated with Phase I human clinical trials and increased manufacturing of SomatoKine for clinical studies. Interest income, net of interest expense, increased 47% to $681,000 in 1998 from $464,000 in 1997 due primarily to an increase in average cash, cash equivalents and short-term investments resulting from net proceeds received from the Company's April 1997 private equity financing of approximately $13.3 million. Net interest income decreased 26% in 1997 from $625,000 in 1996 due primarily to the lower average cash, cash equivalents and short-term investments balances, partly offset by lower interest expense. Interest expense was $24,000, $89,000, and $176,000 in 1998, 1997, and 1996, respectively. In 1998, the Company reported a gain on investment of $737,000 as a result of the sale of preferred stock in Prograft Medical, Inc. ("Prograft"), held by the Company since 1993. In 1996, the Company sold an equity investment in Metra Biosystems, Inc. which resulted in a reported gain of $3.5 million. At March 31, 1998, the Company had net operating loss and tax credit carryforwards for federal income tax purposes of approximately $113.4 million and $4.1 million, respectively, expiring in the years 2006 through 2013. Due to ownership changes as defined by the Internal Revenue Code, the Company's utilization of its net operating loss carryforwards and tax credits is subject to substantial annual limitations. The Company has determined that a valuation allowance for deferred tax assets of $45.8 million and $41.0 million at March 31, 1998 and 1997, respectively, is required to reduce the deferred tax assets to the amount realizable, zero, based upon the Company's earnings history of losses. LIQUIDITY AND CAPITAL RESOURCES Celtrix has funded its activities with proceeds from public and private offerings, advances from Collagen Corporation, research and development revenues and licensing fees from collaborative arrangements, lease and debt financing arrangements, proceeds from liquidating its equity investments, and, to a lesser extent, other revenues and product sales. At March 31, 1998, Celtrix's cash, cash equivalents and short-term investments were $7.9 million compared to $5.8 million (including restricted cash of $520,000) at March 31, 1997. This net increase of $2.1 million was due primarily to net proceeds of $13.4 million received from the issuance of common stock, $737,000 in realized gain from the sale of an investment in Prograft, partially offset by cash outlays consisting of $11.1 million in net cash used in operating activities and $901,000 used for investing and financing activities. The Company's financial statements are prepared and presented on a basis assuming it continues as a going concern. At March 31, 1998, the Company had net working capital of $5.9 million and an accumulated deficit of $117.0 million, and incurred a net loss of $12.9 million for the 22 23 year ended March 31, 1998. Management's planned expenditure for the next twelve months exceed current cash, cash equivalents and short-term investments. The Company is currently in the process of raising additional capital through an equity offering. Current cash, cash equivalents and short-term investments, excluding the equity offering proceeds, will not be sufficient to fund operations for the next twelve months. The Company also continues to pursue the possibility of securing additional capital through corporate partner arrangements that are consistent with the Company's product development and commercialization strategies and evaluating other options including mergers and acquisitions. There can be no assurance that the Company will be able to raise any additional funds or enter into any collaborative arrangement on terms favorable to the Company, or at all. If the Company is unable to obtain the necessary capital, significant reduction in spending and the delay or cancellation of planned activities or more substantial restructuring options will be necessary. These actions will have material adverse effects on the Company's business, results of operations and prospects. The Company anticipates that it will expend significant capital resources in product research and development, which is typical in the biopharmaceutical industry. Capital resources may also be used for the acquisition of complementary businesses, products or technologies. The Company's future capital requirements will depend on many factors, including scientific progress in its research and development programs, the magnitude of these programs, progress with preclinical and clinical trials, the cost of scaling up manufacturing and establishing facilities for commercialization, the time and costs involved in obtaining regulatory approvals, the time and costs involved in filing, prosecuting, enforcing and defending patent claims, competition in technological and market developments, the ability to enter into a collaborative relationship for the continuation of the hip fracture surgery clinical trials and the initiation of trials for osteoporosis, the continuation of the same observations in future severe burns clinical trials, the initiation of Type I diabetes trials and the cost of commercialization activities and arrangements. The Company anticipates that it will be required to raise substantial additional capital over a period of several years in order to continue its research and development programs, including clinical trials, and to prepare for commercialization by expanding manufacturing and marketing capabilities. No assurance can be given that such additional capital will be available, or if so, on reasonable terms, or at all. The unavailability of such financing could delay or prevent the development and marketing of the Company's potential products. IMPACT OF YEAR 2000 Many computer systems experience problems handling dates beyond the year 1999. Therefore, some computer hardware and software will need to be upgraded or modified prior to the Year 2000 in order to remain functional. The Company is currently assessing the impact of Year 2000 on its existing softwares and systems. The Company expects to implement successfully the systems and software changes necessary to address the Year 2000 issues, and does not believe that the costs of such actions will have a material effect on the Company's results of operations or financial condition. However, it is unknown the extent, if any, of the impact of the Year 2000 on other systems and equipment of third parties with which the Company does business. There can be no assurance that third parties will address the Year 2000 issue in a timely fashion, or at all. Any Year 2000 compliance problem or delay of either the Company, its suppliers, its clinical research organizations, or its collaborative partners could have a material adverse effect on the Company's business, operating results and financial conditions. 23 24 RISK FACTORS Early Stage of Development; No Developed or Approved Products The Company's potential products are in research and development and no material revenues have been generated to date from product sales. To achieve profitable operations, the Company, alone or with others, must successfully develop, obtain regulatory approval for, manufacture and market its potential products. Much of the clinical development work for the Company's potential products remains to be completed. No assurance can be given that the Company's product development effort will be successfully completed, that required regulatory approval will be obtained or that any products, if developed and introduced will be successfully marketed or achieve market acceptance. History of Operating Losses; Accumulated Deficit The Company has incurred net operating losses in every year of operation since its inception. As of March 31, 1998, the Company had an accumulated deficit of approximately $117.0 million. Losses have resulted principally from costs incurred in connection with the Company's research and development activities and from general and administrative costs associated with the Company's operations. The Company expects to incur substantial and increasing operating losses for at least the next several years. The Company's ability to achieve profitability will depend in part on completing the research and development of, and obtaining regulatory approvals for, its products and successfully commencing product commercialization. Possible Volatility of Stock Price; Dividend Policy The market prices for securities of biopharmaceutical and biotechnology companies have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Since the Company's Common Stock became listed for public trading, its market price has fluctuated over a wide range and the Company expects that it will continue to fluctuate. Announcements concerning the Company or its competitors, the results of clinical trials, technological innovations or new commercial products, government regulations, developments concerning proprietary rights, litigation or public concern as to safety of the Company's potential products as well as changes in general market conditions may have a significant effect on the market price of Celtrix's common stock. The Company has never paid dividends on its capital stock and the Company does not anticipate paying any cash dividends in the foreseeable future. Future Capital Requirements and Uncertainty of Additional Funding The Company is currently in the process of raising additional capital by means of an equity offering. Current cash, cash equivalents and short term investments, excluding any proceeds from the equity offering, will be sufficient to fund the Company's operations through September 1998. The development of the Company's products requires the commitment of substantial resources to conduct the time-consuming research and development, clinical studies and regulatory activities necessary to bring any potential therapeutic products to market and to establish production, marketing and sales capabilities. Such additional funding will need to be raised through collaborative arrangements or through public or private financings, including equity financing. Any additional equity financing may be dilutive to stockholders, and any debt 24 25 financing, if available, may involve restrictions on the Company's ability to pay future dividends on its capital stock or the manner in which the Company conducts its business. There can be no assurance that any such financing will be available to the Company or on terms attractive to the Company, or that the Company can enter into a collaborative relationship with a corporate partner for the continuation of the clinical trials for recovery from hip fracture surgery and the initiation of trials for osteoporosis. The inability to obtain funds, or to enter into additional corporate collaborations, will require the Company to delay, scale back or eliminate some or all of its research and product development programs or to license third parties to commercialize products or technologies that the Company would otherwise seek to develop itself. These actions will have material adverse effects on the Company's business, results of operations and prospects. Stringent Government Regulation; Need for Product Approvals The preclinical testing and clinical trials of any compounds developed by the Company or its collaborative partners and the manufacturing and marketing of any drugs resulting therefrom are subject to regulation by numerous federal, state and local governmental authorities in the United States, the principal one of which is the United States Food and Drug Administration (the "FDA"), and by similar agencies in other countries in which drugs developed by the Company or its collaborative partners may be tested and marketed (each of such federal, state, local and other authorities and agencies, a "Regulatory Agency"). Any compound developed by the Company or its collaborative partners must receive Regulatory Agency approval before it may be marketed as a drug in a particular country. The regulatory process, which includes preclinical testing and clinical trials of each compound in order to establish its safety and efficacy, can take many years and requires the expenditure of substantial resources. Data obtained from preclinical and clinical activities are susceptible to varying interpretations which could delay, limit or prevent Regulatory Agency approval. In addition, delays or rejections may be encountered based upon changes in Regulatory Agency policy during the period of drug development and/or the period of review of any application for Regulatory Agency approval for a compound. Delays in obtaining Regulatory Agency approvals could adversely affect the marketing of any drugs developed by the Company or its collaborative partners, impose costly procedures upon the Company's and its collaborative partners' activities, diminish any competitive advantages that the Company or its collaborative partners may attain and adversely affect the Company's ability to receive royalties, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that, even after such time and expenditures, Regulatory Agency approvals will be obtained for any compounds developed by or in collaboration with the Company. Moreover, if Regulatory Agency approval for a drug is granted, such approval may entail limitations on the indicated uses for which it may be marketed that could limit the potential market for any such drug. Furthermore, if and when such approval is obtained, the marketing and manufacture of the Company's products would remain subject to extensive regulatory requirements, and discovery of previously unknown problems with a drug or its manufacturer may result in restrictions on such drug or manufacturer, including withdrawal of the drug from the market. Failure to comply with regulatory requirements could, among other things, result in fines, suspension of regulatory approvals, operating restrictions and criminal prosecution. In addition, Regulatory Agency approval of prices is required in many countries and may be required for the marketing of any drug developed by the Company or its collaborative partners in such countries. 25 26 Uncertainties Related to Clinical Trials Before obtaining regulatory approvals for the commercial sale of any of its products under development, the Company must demonstrate through preclinical studies and clinical trials that the product is safe and efficacious for use in each target indication. The results from preclinical studies and early clinical trials may not be predictive of results that will be obtained in large-scale testing, and there can be no assurance that the Company's clinical trials will demonstrate the safety and efficacy of any products or will result in marketable products. A number of companies in the biotechnology industry have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. For example, in fiscal year 1995, Celtrix discontinued its in-house TGF-beta-2 program for the treatment of ophthalmic conditions as a result of disappointing clinical study results. The rate of completion of the Company's clinical trials is dependent upon, among other factors, the rate of patient enrollment. Patient enrollment is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the study. Delays in planned patient enrollment may result in increased costs and delays, which could have a material adverse effect on the Company's business, financial condition and results of operations. No Assurance of Market Acceptance There can be no assurance that any products successfully developed by the Company, if approved for marketing, will achieve market acceptance. The products and therapies which the Company is attempting to develop will compete with a number of well-established traditional drugs and therapies manufactured and marketed by major pharmaceutical companies. The degree of market acceptance of any products developed by the Company will depend on a number of factors, including the establishment and demonstration in the medical community of the clinical efficacy and safety of the Company's product candidates, their potential advantage over existing treatment methods, and reimbursement policies of government and third-party payors. Competitors may also develop new technologies or products which are more effective or less costly than SomatoKine or perceived to be more cost-effective. There is no assurance that physicians, patients or the medical community in general will accept and utilize any products that may be developed by the Company. The Company's business, financial condition and results of operations may be materially adversely affected if SomatoKine does not receive market acceptance for any reason. Substantial Competition In each of the Company's potential product areas, competition from large pharmaceutical companies, biotechnology companies and other companies, universities and research institutions is substantial. At least three large biotechnology and pharmaceutical companies with substantial financial and legal resources have patent applications on file in the United States and abroad directed at the production of recombinant IGF-I by various methods. Relative to the Company, most of these entities have substantially greater capital resources, research and development staffs, facilities and experience in conducting clinical trials and obtaining regulatory approvals, as well as in manufacturing and marketing pharmaceutical products. Furthermore, the Company believes that competitors have used, and may continue to use, litigation to gain competitive advantage. In addition, these and other entities may have or develop new technologies or use existing technologies that are, or may in the future be, the basis for competitive products. Any potential products that the Company succeeds in developing and for which it gains regulatory approval will have to compete for market acceptance and market share. For certain 26 27 of the Company's potential products, an important factor in such competition may be the timing of market introduction of competitive products. Accordingly, the relative speed with which the Company can develop products, complete the clinical testing and regulatory approval processes and supply commercial quantities of the product to the market are expected to be important competitive factors. The Company expects that competition will be based, among other things, on product efficacy, safety, reliability, availability, timing and scope of regulatory approval and price. There can be no assurance that the Company's competitors will not succeed in developing technologies and products that are more effective than any that are being developed by the Company or that would render the Company's technology and products obsolete or noncompetitive. In addition, many of the Company's competitors may achieve product commercialization or patent protection earlier than the Company. The failure of the Company to compete effectively would have a material adverse effect on the Company's business, financial condition and results of operations. Dependence on Proprietary Technology; Uncertainty of Patent Protection The Company's success will depend in part on its ability to obtain patents, maintain trade secrets and operate without infringing on the proprietary rights of others, both in the United States and in other countries. The patent positions of pharmaceutical, biopharmaceutical and biotechnology companies, including the Company, are highly uncertain and involve complex legal and factual questions. Patent law relating to the scope of claims in the technology fields in which the Company operates is still evolving. The degree of future protection for the Company's proprietary rights is therefore uncertain. No consistent policy has emerged regarding the permissible breadth of coverage of claims in biotechnology patents. Therefore, no assurance can be given that any of the Company's or its licensors' patent applications will issue as patents or that any such issued patents will provide competitive advantages for the Company's products or will not be successfully challenged or circumvented by its competitors. In addition, there can be no assurance that others will not independently develop substantially equivalent proprietary technology that is not covered by the Company's patents or that others will not be issued patents that may prevent the sale of the Company's proposed products or require licensing and the payment of significant fees or royalties by the Company. At least three large biotechnology and pharmaceutical companies with substantial financial and legal resources have issued patents and/or patent applications on file in the United States and abroad directed at the production and/or use of recombinant IGF-I by various methods. The earliest date of filing of these patent applications is April 25, 1983. Unless and until all of these applications issue, it is not possible to determine the breadth of these claims regarding a process for IGF-I production or for the use of IGF-I for any particular indication. Furthermore, a large biotechnology and pharmaceutical company with substantial financial and legal resources has a patent issued in the United States directed towards certain DNA molecules encoding BP3 and the corresponding BP3 protein. This same patent was previously granted in Europe and was successfully opposed by Celtrix. However, this large biotechnology and pharmaceutical company has recently appealed the decision and there can be no assurance that the appeal will not be successful, and it is not possible to determine what, if any, claims will be reinstated or the breadth of such claims. In addition, this large biotechnology company has been issued a patent directed toward the subcutaneous bolus administration of IGF-BP3 for certain limited areas of use. Each of the referenced companies can be expected to defend its patent position vigorously. Celtrix has developed a new process for the production of IGF and BP3 which it does not believe will infringe on other patents relating to recombinant protein production in general or on other patents relating to the production of IGF and BP3 in particular, although there can be no assurance that a contrary position will not be asserted. A large number of other companies have pending patent applications and/or issued patents which claim certain methods of use of 27 28 IGF. There can be no assurance that third parties will not claim the Company's technology, current or future products or manufacturing processes infringe the proprietary rights of others. If other companies were to successfully bring legal actions against the Company claiming patent or other intellectual property infringements, in addition to any potential liability for damages, then the Company could be required to obtain a license in order to continue to use the affected process or to manufacture or use the affected products or cease using such products or process if enjoined by a court. Any such claim, with or without merit, could result in costly litigation or might require the Company to enter into royalty or licensing agreements, all of which could delay or otherwise adversely impact the Company's potential products for commercial use. If any licenses are required, there can be no assurance that the Company will be able to obtain any such license on commercially favorable terms, if at all, and if these licenses are not obtained, the Company might be prevented from pursuing the development of certain of its potential products. The Company's breach of an existing license or failure to obtain or delay in obtaining a license to any technology that it may require to commercialize its products may have a material adverse impact on the Company. Litigation, which could result in substantial costs to the Company, may also be necessary to enforce any patents issued or licensed to the Company or to determine the scope and validity of another party's proprietary rights. There can be no assurance that the Company's issued or licensed patents would be held valid by a court of competent jurisdiction. An adverse outcome in litigation or an interference or other proceeding in a court or patent office could subject the Company to significant liabilities to other parties, require disputed rights to be licensed from other parties or require the Company to cease using such technology, any of which could have a material adverse effect on the Company. Celtrix also relies on trade secrets to protect technology, especially where patent protection is not believed to be appropriate or obtainable. Celtrix attempts to protect its proprietary technology and processes in part by confidentiality agreements with its employees, consultants and certain contractors. There can be no assurance that these agreements will not be breached, that the Company would have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known or be independently discovered by competitors in such a manner that the Company has no practical recourse. To the extent that the Company or its consultants or research collaborators use intellectual property owned by others in their work for the Company, disputes may also arise as to the rights in related or resulting know-how and inventions. Limited Manufacturing Experience and Capacity The Company's products must be manufactured in compliance with regulatory requirements and at acceptable costs. At present, the Company's manufacturing operations have been designed to address the Company's anticipated needs through the completion of Phase II clinical trials. In the future, the Company will either need to expand these operations or subcontract its manufacturing operations in anticipation of Phase III studies and commercialization. There can be no assurance that the Company will be able to manufacture any of its current or future products on a commercial scale, nor that such products can be manufactured by the Company or any other party at a cost or in quantities to make commercially viable products. Failure to obtain sufficient commercial quantities of SomatoKine at acceptable terms will have an adverse impact on the Company's attempts to seek approval for this product, or to commercialize this product. 28 29 Limited Sales and Marketing Experience If the Company is permitted to commence commercial sales of products, it will face commercial competition with respect to sales, marketing and distribution, areas in which it has no experience. To market any of its products directly, the Company must develop a marketing and sales force with technical expertise and with supporting distribution capability. Alternatively, the Company may obtain the assistance of a pharmaceutical company with a large distribution system and a large direct sales force. There can be no assurance that the Company will be able to establish sales and distribution capabilities or be successful in gaining market acceptance for its proprietary products. To the extent the Company enters into co-promotion or other licensing arrangements, any revenues received by the Company will be dependent on the efforts of third parties and there can be no assurance that such efforts will be successful. Reliance on Qualified and Key Personnel The Company is highly dependent on the principal members of its scientific and management staff, the loss of whose services might significantly delay or prevent the achievement of research, development, or business objectives. In addition, the Company relies on consultants and advisors to assist the Company in formulating its research and development strategy. Retaining and attracting qualified scientific and management personnel, consultants and advisors is therefore critical to the Company's success. There can be no assurance that the Company will be able to hire sufficient qualified personnel on a timely basis or retain such personnel. The loss of key management or scientific personnel could adversely affect the Company's business. The Company's potential expansion into areas and activities requiring additional expertise, such as clinical trials, governmental approvals, manufacturing and marketing, are expected to place a significant strain on the Company's management, operational and financial resources. These demands are expected to require a substantial increase in management and scientific personnel and the development of additional expertise by existing management personnel. The failure to attract and retain such personnel or to develop such expertise could materially adversely affect prospects for the Company's success. Product Liability; Availability of Insurance The Company currently has in force general liability insurance, with coverage limits of $2.0 million per incident and $4.0 million in the aggregate annually, and product liability insurance with coverage limits of $1.0 million per incident and $3.0 million in the aggregate annually. The Company's insurance policies provide coverage for product liability on a claims made basis and general liability on occurrence basis. These policies are subject to annual renewal. Such insurance may not be available in the future on acceptable terms or at all. There can be no assurance that the Company's insurance coverage will be adequate or that a product liability claim or recall would not materially adversely affect the business or financial condition of the Company. The use of the Company's potential products or technology in clinical trials and the sale of such products may expose the Company to liability claims. Such risks exist even with respect to those potential products, if any, that receive regulatory approval for commercial sale. Although Celtrix has taken and will continue to take what it believes are appropriate precautions, there can be no assurance that it will avoid significant product liability exposure. There also can be no assurance that the Company's insurance coverage will be adequate or that a product liability claim or recall would not materially adversely affect the business or financial condition of the Company. 29 30 Environmental Liability The Company is subject to federal, state and local laws and regulations governing the use, generation, manufacture, storage, discharge, handling and disposal of certain materials and wastes used in its operations. There can be no assurance that the Company will not be required to incur significant costs to comply with environmental laws and regulations as its research activities are increased, or that the operations, business and future profitability of the Company will not be adversely affected by current or future environmental laws and regulations. Concentration of Stock Ownership The Company's directors and officers and their affiliates beneficially own approximately 30% of the outstanding Common Stock. As a result, these stockholders will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. Such concentration of ownership may have the effect of delaying or preventing a change in control of the Company. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements and Financial Statement Schedules of the Company required by this item are incorporated herein and listed under Item 14(a)(1) and (2). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III Certain information required by Part III is omitted from this report because the Registrant will file a definitive proxy statement within 120 days after the end of its fiscal year pursuant to Regulation 14(A) (the "Proxy Statement") for its Annual Meeting of Stockholders scheduled to be held on September 10, 1998 and the information included therein is incorporated herein by reference to the extent detailed below. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning the Registrant's directors required by this Item is incorporated by reference to the information under the caption "Election of Directors--Nominees" in the Registrant's Proxy Statement. The information concerning the Registrant's executive officers is set forth in "Item 1--Business--Executive Officers of the Company" in this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the information under the captions "Election of Directors--Compensation of Directors," "Compensation of Executive Officers--Summary Compensation Table," "Compensation of Executive Officers--Stock Option Grants in Last Fiscal Year," and "Compensation of Executive Officers--Aggregated 30 31 Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values" in the Registrant's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the information under the caption "Common Stock Ownership of Certain Beneficial Owners and Management" in the Registrant's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to the information under the caption "Transactions with Management and Others" in the Registrant's Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) INDEX TO FINANCIAL STATEMENTS The financial statements required by this item are submitted in a separate section of this report:
Page ---- Report of Ernst & Young LLP, Independent Auditors .............. 39 Consolidated Balance Sheets - March 31, 1998 and 1997 .......... 40 Consolidated Statements of Operations Years Ended March 31, 1998, 1997 and 1996 .................. 41 Consolidated Statements of Stockholders' Equity Years Ended March 31, 1998, 1997 and 1996 .................. 42 Consolidated Statements of Cash Flows Years Ended March 31, 1998, 1997 and 1996 .................. 43 Notes to the Consolidated Financial Statements ................. 44
(a) (2) FINANCIAL STATEMENT SCHEDULES Schedules have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Financial Statements or notes thereto. (a) (3) EXHIBITS
EXHIBIT NO. DESCRIPTION 2.1 - Stock Exchange Agreement dated September 14, 1992, among Registrant, Baltimore Biotech, Inc. ("BBI") and holders of outstanding stock of BBI. (6) (10)
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EXHIBIT NO. DESCRIPTION 3.1 - Certificate of Incorporation of the Registrant, as amended and restated. 3.2 - Bylaws of the Registrant. (1) 4.1 - Certificate of Incorporation of the Registrant. (See Exhibit 3.1) 4.2 - Bylaws of the Registrant. (See Exhibit 3.2) 4.3 - Warrant of the Registrant dated November 17, 1993 to Warburg, Pincus Investors, L.P. (13) 10.1 - Distribution Agreement dated January 23, 1991, between Collagen Corporation and the Registrant. (2) 10.2a - Registrant's 1991 Directors' Stock Option Plan. (3) 10.3a - Registrant's 1991 Employee Stock Purchase Plan. (3) 10.4a - Registrant's 1991 Stock Option Plan. (3) 10.5 - Agreement by the Registrant to provide services to Collagen Corporation dated as of February 1, 1991, between Collagen Corporation and the Registrant. (2) 10.6 - Supply and License Agreement from the Registrant to Collagen Corporation effective as of February 1, 1991, between Collagen Corporation and the Registrant. (2) (8) 10.7 - Agreement by Collagen Corporation to provide services to the Registrant dated as of February 1, 1991, between Collagen Corporation and the Registrant. (2) 10.8 - Supply and License Agreement from Collagen Corporation to the Registrant effective as of February 1, 1991, between Collagen Corporation and the Registrant. (2) (8) 10.9 - Distribution Agency Agreement dated as of February 1, 1991, among the Registrant, Collagen Corporation and the Bank of New York. (2) 10.11 - Tax Allocation Agreement dated as of February 1, 1991, between Collagen Corporation and the Registrant. (2) 10.12 - Vitrogen(R)Agreement Between Collagen Corporation and the Registrant effective as of February 1, 1991. (2) (8) 10.14 - Joint Venture Agreement dated as of March 26, 1987, between Collagen Corporation and Hercules Incorporated. (1) 10.15 - Letter Agreement dated as of July 21, 1989, by and among Collagen Corporation, Hercules Incorporated and Epicor Laboratories, Inc. (1) 10.16 - License Agreement for Wound Healing Composition dated as of April 15, 1987, between the University of Washington and Collagen Corporation. (1)
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EXHIBIT NO. DESCRIPTION 10.18 - Form of Indemnification Agreement between the Registrant and each of its executive officers and directors. (1) 10.19 - Form of Loan and Security Agreement between the Registrant and certain of its employees. (1) 10.20 - Agreement Between Bristol-Myers Squibb and Collagen Corporation dated September 7, 1990. (1) 10.21 - License Agreement dated as of December 4, 1991, among Massachusetts Institute of Technology, Whitehead Institute and the Registrant. (4) (9) 10.22 - License Agreement dated as of June 15, 1990, between the Board of Trustees of the Leland Stanford Junior University and BioGrowth, Inc. (4) 10.23 - Lease Agreement dated as of August 1, 1991, between Spieker French Foster #249, a California General Partnership, and the Registrant, as amended. (4) 10.24 - Escrow Agreement dated as of December 12, 1991, among the Registrant, BioGrowth, Inc., The Bank of New York, and Larry Brown and James Bennington, M.D., as representatives of and on behalf of the BioGrowth, Inc. Shareholders. (4) 10.25 - Form of Non-Competition Agreement between the Registrant and each of Edward O. Lanphier II, Andreas Sommer, Christopher Maack and E. Martin Spencer. (4) 10.26 - Form of Affiliate's Agreement between the Registrant and each of Edward O. Lanphier II, Andreas Sommer and certain other shareholders of BioGrowth, Inc. (4) 10.28 - Loan and Security Agreement dated as of January 28, 1992, between the Registrant and Andreas Sommer. (4) 10.30 - Master Lease Agreement Number 9131 between the Registrant and LeasTec Corporation. (6) 10.33 - License Agreement dated April 1, 1993, between the Registrant and Genentech, Inc. (11) (12) 10.34 - Registration Rights Agreement dated April 1, 1993, between the Registrant and Genentech, Inc. (12) 10.37 - Common Stock Purchase Agreement dated June 2, 1993, between the Registrant and Certain Purchasers of its Common Stock. (12) 10.38 - Common Stock and Warrant Purchase Agreement dated October 27, 1993, between the Registrant and Warburg, Pincus Investors, L.P. (14) 10.39 - Registration Rights Agreement dated November 17, 1993, between the Registrant and Warburg, Pincus Investors, L.P. (13) 10.40 - Common Stock Purchase Agreement dated June 22, 1994, between the Registrant and Genzyme Corporation (15)
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EXHIBIT NO. DESCRIPTION 10.41 - Registration Rights Agreement dated June 22, 1994, between the Registrant and Genzyme Corporation (15) 10.42 - License and Development Agreement dated June 22, 1994, between the Registrant and Genzyme Corporation (15) (16) 10.43 - License Agreement dated July 5, 1994, between the Registrant and The Green Cross Corporation. (17) (18) 10.44 - Common Stock Purchase Agreement dated September 2, 1994, between the Registrant and Kingsbury Capital Partners, L.P. (19) 10.45 - Registration Rights Agreement dated September 2, 1994, between the Registrant and Kingsbury Capital Partners, L.P. (19) 10.46 - Vitrogen Distribution Agreement and Option to Purchase dated January 1, 1995, between the Registrant and Collagen Corporation. (20) (21) 10.48 - Separation Agreement and Mutual Release between the Registrant and the employees who participated in the Registrant's reductions-in-force. (22) (23) 10.49 - Amendment dated September 29, 1995 to Common Stock Purchase Agreement dated June 24, 1994, between the Registrant and Genzyme Corporation. (24) 10.50 - Common Stock and Warrant Purchase Agreement dated April 1, 1997, between the Registrant and each of the Selling Stockholders. (25) 10.51 - Employment Agreement dated January 7, 1997 between the Registrant and Dr. Andreas Sommer. (26) 10.53 - License Agreement dated December 18, 1997, between the Registrant and Genzyme Corporation. (27) (28) 10.54 - Amendment dated December 31, 1997 to License and Development Agreement dated June 24, 1994, between the Registrant and Genzyme Corporation. (27) (28) 21 - Subsidiaries of the Registrant. (4) 23.1 - Consent of Ernst & Young LLP, Independent Auditors. 24 - Power of Attorney. (See page 38 of this report.) 27 - Financial Data Schedule
- -------------------- (1) Incorporated by reference to identically numbered exhibits filed with Registrant's Form 10 Registration Statement, filed with the Securities and Exchange Commission on January 14, 1991. (2) Incorporated by reference to identically numbered exhibits filed with Registrant's Form 8 Amendment to Form 10 Registration Statement, filed with the Securities and Exchange Commission on January 30, 1991. 34 35 (3) Incorporated by reference to identically numbered exhibits filed with Registrant's Registration Statement on Form S-1 (File No. 33-40915), filed with the Securities and Exchange Commission declared effective on July 23, 1991. (4) Incorporated by reference to identically numbered exhibits filed with Registrant's Registration Statement on Form S-1 (File No. 33-45370), filed with the Securities and Exchange Commission declared effective on March 6, 1992. (6) Incorporated by reference to identically numbered exhibits filed with Registrant's Form 10-Q for the quarterly period ended September 30, 1992, filed with the Securities and Exchange Commission on November 9, 1992. (8) Confidential treatment has been granted with respect to portions of this exhibit by order dated February 1, 1991. (9) Confidential treatment has been granted with respect to portions of this exhibit by order dated March 6, 1992. (10) Confidential treatment has been granted with respect to portions of this exhibit by order dated December 1, 1992. (11) Confidential treatment has been granted with respect to portions of this exhibit by order dated August 6, 1993. (12) Incorporated by reference to identically numbered exhibits filed with Registrant's Form 10-K for the year ended March 31, 1993, filed with the Securities and Exchange Commission on June 18, 1993. (13) Exhibit to the Registrant's Current Report on Form 8-K dated November 18, 1993. (14) Exhibit to the Registrant's Current Report on Form 8-K dated October 29, 1993. (15) Incorporated by reference to identically numbered exhibits filed with Registrant's Form 10-K for the year ended March 31, 1994, filed with the Securities and Exchange Commission on June 28, 1994. (16) Confidential treatment has been granted with respect to portions of this exhibit by order dated August 16, 1994. (17) Incorporated by reference to identically numbered exhibits filed with Registrant's Form 10-Q for the quarterly period ended June 30, 1994, filed with the Securities and Exchange Commission on August 15, 1994. (18) Confidential treatment has been granted with respect to portions of this exhibit by order dated February 17, 1995. (19) Incorporated by reference to identically numbered exhibits filed with Registrant's Form 10-Q for the quarterly period ended September 30, 1994, filed with the Securities and Exchange Commission on November 15, 1994. (20) Incorporated by reference to identically numbered exhibits filed with Registrant's Form 10-Q for the quarterly period ended December 31, 1994, filed with the Securities and Exchange Commission on February 13, 1995. 35 36 (21) Confidential treatment has been granted with respect to portions of this exhibit by order dated March 31, 1995. (22) Incorporated by reference to identically numbered exhibits filed with Registrant's Form 10-K for the year ended March 31, 1995, filed with the Securities and Exchange Commission on June 28, 1995. (23) Confidential treatment has been granted with respect to portions of this exhibit by order dated June 26, 1995. (24) Incorporated by reference to identically numbered exhibits filed with Registrant's Form 10-Q for the quarterly period ended December 31, 1995, filed with the Securities and Exchange Commission on February 12, 1996. (25) Incorporated by reference to identically numbered exhibits filed with Registrant's Registration Statement on Form S-3 (File No. 333-27263), filed with the Securities and Exchange Commission on May 16, 1997. (26) Incorporated by reference to identically numbered exhibits filed with Registrant's Form 10-K for the year ended March 31, 1997, filed with the Securities and Exchange Commission on June 24, 1997. (27) Incorporated by reference to identically numbered exhibits filed with Registrant's Form 10-Q for the quarterly period ended December 31, 1997, filed with the Securities and Exchange Commission on February 12, 1998. (28) Confidential treatment has been granted with respect to portions of this exhibit by order dated March 18, 1998. (B) REPORTS ON FORM 8-K The Company filed the following report on Form 8-K during the quarter ended March 31, 1998: 1. Report Date: January 22, 1998 Item 5. Other Events Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. The Registrant announced financial results for the quarter ended December 31, 1997. 2. Report Date: February 5, 1998 Item 5. Other Events Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. The Registrant announced expanded relationship with Genzyme's Tissue Repair Division. 3. Report Date: March 26, 1998 Item 5. Other Events Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. The Registrant reported interim results of Phase II clinical feasibility study using SomatoKine(R) for recovery from hip fracture surgery. 36 37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CELTRIX PHARMACEUTICALS, INC. By: /s/ Andreas Sommer ---------------------------------- Andreas Sommer, Ph.D. Chief Executive Officer and President Date: July 10, 1998 37 38 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints jointly and severally, Andreas Sommer and Donald D. Huffman, and each one of them, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - --------------------------------------------------------------------------------------------------- /s/ANDREAS SOMMER - -------------------- (Andreas Sommer) Chief Executive Officer, July 10, 1998 President and Director ------------- /s/DONALD D. HUFFMAN - -------------------- (Donald D. Huffman) Vice President, Finance July 10, 1998 and Administration, ------------- Chief Financial Officer and Assistant Secretary (Principal Financial and Accounting Officer) /s/HENRY E. BLAIR - -------------------- (Henry E. Blair) Director July 10, 1998 ------------- /s/BARRY M. SHERMAN - -------------------- (Barry M. Sherman) Director July 10, 1998 ------------- /s/JAMES E. THOMAS - -------------------- (James E. Thomas) Chairman of the Board July 10, 1998 -------------
38 39 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Celtrix Pharmaceuticals, Inc. We have audited the accompanying consolidated balance sheets of Celtrix Pharmaceuticals, Inc. as of March 31, 1998 and 1997 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended March 31, 1998. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Celtrix Pharmaceuticals, Inc. at March 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 1998, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that Celtrix Pharmaceuticals, Inc. will continue as a going concern. As more fully described in Note 1, the Company has net working capital of $5.9 million and an accumulated deficit of $117.0 million as of March 31, 1998, and has incurred recurring losses from operations. In addition, the Company's available cash, cash equivalents and short-term investments are insufficient to fund operations for the next twelve months. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans as to these matters are also described in Note 1. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability or classification of assets or the amounts and classification of liabilities that might result from the outcome of this uncertainty. /s/ ERNST & YOUNG LLP Palo Alto, California April 24, 1998 39 40 CELTRIX PHARMACEUTICALS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
March 31, March 31, 1998 1997 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 1,608 $ 2,684 Short-term investments 6,305 2,584 Restricted cash -- 520 Receivables and other current assets 219 197 --------- --------- Total current assets 8,132 5,985 Property and equipment, at cost: Leasehold improvements 11,133 11,118 Machinery and equipment 8,974 8,802 --------- --------- 20,107 19,920 Less accumulated depreciation and amortization (13,045) (11,497) --------- --------- 7,062 8,423 Intangible and other assets, net of accumulated amortization of $938 and $678 at March 31, 1998 and 1997, respectively 2,682 2,548 --------- --------- $ 17,876 $ 16,956 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 751 $ 486 Accrued clinical expenses 482 145 Accrued compensation 421 221 Other accrued liabilities 580 528 Short-term debt and lease obligations 8 328 --------- --------- Total current liabilities 2,242 1,708 Deferred rent 890 1,038 Commitments Stockholders' equity: Preferred stock, $.01 par value, authorized 2,000,000 shares; none issued and outstanding -- -- Common stock, $.01 par value, authorized 30,000,000 shares; 21,061,053 shares and 15,263,429 shares issued and outstanding at March 31, 1998 and 1997, respectively 211 153 Additional paid-in capital 131,542 118,152 Accumulated deficit (117,009) (104,095) --------- --------- Total stockholders' equity 14,744 14,210 --------- --------- $ 17,876 $ 16,956 ========= =========
See accompanying notes to consolidated financial statements. 40 41 CELTRIX PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended March 31, ------------------------------------------ 1998 1997 1996 -------- -------- -------- Revenues: Product sales $ 51 $ 31 $ 99 Related party -- -- 420 Licensing revenues and other 610 627 1,231 -------- -------- -------- 661 658 1,750 Costs and expenses: Cost of sales 1 5 31 Research and development 13,006 11,999 10,990 General and administrative 1,985 1,814 2,063 -------- -------- -------- 14,992 13,818 13,084 -------- -------- -------- Operating loss (14,331) (13,160) (11,334) Interest income, net 681 464 625 Gain on sale of investments 737 -- 3,463 -------- -------- -------- Net loss $(12,913) $(12,696) $ (7,246) ======== ======== ======== Basic and diluted net loss per share $ (0.61) $ (0.83) $ (0.51) ======== ======== ======== Shares used in basic and diluted per share computation 21,004 15,238 14,161 ======== ======== ========
See accompanying notes to consolidated financial statements. 41 42 CELTRIX PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
Additional Total Common Paid-in Accumulated Stockholders' Stock Capital Deficit Equity --------- --------- --------- --------- Balance at March 31, 1995 $ 137 $ 113,622 $ (84,323) $ 29,436 Issuance of 1,472,829 shares of common stock to Genzyme Corporation 15 4,382 -- 4,397 Issuance of 21,944 shares of common stock under the Employee Stock Purchase Plan -- 48 -- 48 Unrealized gain on available-for-sale securities -- -- 151 151 Net loss -- -- (7,246) (7,246) --------- --------- --------- --------- Balance at March 31, 1996 152 118,052 (91,418) 26,786 Issuance of 20,249 shares of common stock upon exercise of stock options -- 51 -- 51 Issuance of 29,188 shares of common stock under the Employee Stock Purchase Plan 1 49 -- 50 Unrealized gain on available-for-sale securities -- -- 19 19 Net loss -- -- (12,696) (12,696) --------- --------- --------- --------- Balance at March 31, 1997 153 118,152 (104,095) 14,210 Issuance of 5,721,876 shares of common stock and warrants to purchase 2,860,934 shares of common stock in a private placement, net 57 13,274 -- 13,331 Issuance of 75,748 shares of common stock under the Employee Stock Purchase Plan 1 116 -- 117 Unrealized loss on available-for-sale securities -- -- (1) (1) Net loss -- -- (12,913) (12,913) --------- --------- --------- --------- Balance at March 31, 1998 $ 211 $ 131,542 $(117,009) $ 14,744 ========= ========= ========= =========
See accompanying notes to consolidated financial statements. 42 43 CELTRIX PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (IN THOUSANDS)
Year Ended March 31, ------------------------------------------ 1998 1997 1996 -------- -------- -------- Cash flows from operating activities: Net loss $(12,913) $(12,696) $ (7,246) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,660 1,840 2,234 Gain on sale of investments (737) -- (3,463) Changes in operating accounts: Receivables and other current assets (22) (2) 112 Accounts payable, accrued compensation and other accrued liabilities 854 79 (1,485) -------- -------- -------- Net cash used in operating activities (11,158) (10,779) (9,848) Cash flows from investing activities: Sales and maturities of available-for-sale securities 40,497 35,210 34,544 Purchase of available-for-sale securities (43,482) (30,315) (24,940) Decrease (increase) in restricted cash 520 (470) 948 Capital expenditures (187) (198) (8) Increase in intangible and other assets (394) (455) (192) -------- -------- -------- Net cash (used in) provided by investing activities (3,046) 3,772 10,352 Cash flows from financing activities: Proceeds from issuance of common stock, net 13,448 101 4,445 Principal payments under long-term obligations (320) (543) (596) -------- -------- -------- Net cash provided by (used in) financing activities 13,128 (442) 3,849 -------- -------- -------- Net (decrease) increase in cash and cash equivalents (1,076) (7,449) 4,353 Cash and cash equivalents at beginning of year 2,684 10,133 5,780 -------- -------- -------- Cash and cash equivalents at end of year $ 1,608 $ 2,684 $ 10,133 ======== ======== ======== Supplemental disclosure: Interest paid $ 24 $ 89 $ 176 ======== ======== ========
See accompanying notes to consolidated financial statements. 43 44 CELTRIX PHARMACEUTICALS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Celtrix Pharmaceuticals, Inc. (the "Company") is a biopharmaceutical company focused on developing novel therapeutics for the treatment of seriously debilitating, degenerative conditions primarily associated with severe trauma, chronic diseases or aging. Celtrix was a wholly owned subsidiary of Collagen Corporation ("Collagen") prior to February 1991. Collagen distributed Celtrix's common stock as a special dividend to the Collagen stockholders in February 1991. The consolidated financial statements include the accounts of Celtrix and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The accompanying financial statements have been prepared assuming that the Company continues as a going concern. At March 31, 1998, the Company had net working capital of $5.9 million and an accumulated deficit of $117.0 million, and incurred a net loss of $12.9 million for the year ended March 31, 1998. Management's planned expenditure for the next twelve months exceed current cash, cash equivalents and short-term investments. The Company is currently in the process of raising additional capital through an equity offering. Current cash, cash equivalents and short-term investments, excluding the equity offering proceeds, will not be sufficient to fund operations for the next twelve months. The Company also continues to pursue the possibility of securing additional capital through corporate partner arrangements that are consistent with the Company's product development and commercialization strategies and evaluating other options including mergers and acquisitions. There can be no assurance that the Company will be able to raise any additional funds or enter into any collaborative arrangement on terms favorable to the Company, or at all. If the Company is unable to obtain the necessary capital, significant reduction in spending and the delay or cancellation of planned activities or more substantial restructuring options will be necessary. These actions will have material adverse effects on the Company's business, results of operations and prospects. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates. Cash Equivalents and Short-term Investments Celtrix considers all highly liquid investment securities with maturity from date of purchase of three months or less to be cash equivalents and investment securities with maturity from date of purchase of more than three months to be short-term investments. To date, all marketable securities have been classified as available-for-sale and are carried at fair value, with unrealized gains and losses reported in accumulated deficit. Fair values of investment securities are based on quoted market prices, and the costs of securities sold are based on the specific identification method. Premiums and discounts are amortized over the period from acquisition to maturity and are included in investment income, along with interest and dividends. 44 45 Property and Equipment Depreciation and amortization of property and equipment is provided on the straight-line method over the estimated useful lives (three to seven years) of the assets. Leasehold improvements are amortized over the shorter of the life of the lease or their estimated useful lives using the straight-line method. Intangible Assets Patents, carried at cost, are amortized using the straight-line method over the estimated useful lives of the related intellectual property, generally 12 years. Revenue Recognition Licensing revenues are recorded when contractually earned. Revenue from product sales is recognized at time of shipment. Stock-Based Compensation The Financial Accounting Standards Board issued SFAS 123, "Accounting for Stock-Based Compensation" in October 1995, which encourages, but does not require, companies to record compensation expense for stock-based employee compensation plans at fair value. The Company has elected to follow the disclosure requirements of SFAS 123 for the fiscal years ended 1998, 1997 and 1996 (see Note 5) and will continue to measure stock-based compensation to employees in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees". The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, and, accordingly, recognizes no compensation expense for the stock option grants. Net Loss Per Share Net loss per share is calculated using the weighted-average number of common shares outstanding. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share" ("SFAS 128"), which the Company adopted in the period ended December 31, 1997. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options and warrants is excluded. The impact of SFAS 128 results in no change to the Company's net loss per share, as stock options and other common stock equivalents have been excluded from the current computation as they are antidilutive. Recently Issued Accounting Standard In June 1997, the Financial Accounting Standards Board issued SFAS 130, "Reporting Comprehensive Income" ("SFAS 130"), which is effective for fiscal years beginning after December 15, 1997. SFAS 130 requires that all components of comprehensive income, including net income, be reported in the financial statements in the period in which they are recognized. Comprehensive income is defined as the change in equity during a period from transactions and other events from non-owner sources, which include foreign currency translation adjustments, and unrealized gains and losses on investments. The Company does not believe the adoption of SFAS 130 will have a significant impact on the Company's consolidated financial statement disclosures. 45 46 2. INVESTMENT SECURITIES The following is a summary of available-for-sale securities at March 31 (in thousands). Gross unrealized losses were immaterial for the two years.
1998 1997 ---------------------------------- ---------------------------------- Net Estimated Net Estimated Unrealized Fair Unrealized Fair Cost Losses Value Cost Losses Value ---------------------------------- ---------------------------------- U.S. treasury securities and obligations of U.S. government agencies $5,808 $ 1 $5,807 $3,381 $ 1 $3,380 U.S. corporate debt securities 499 1 498 -- - -- -------------------------------- -------------------------------- $6,307 $ 2 $6,305 $3,381 $ 1 $3,380 ================================ ================================ Classified as: Cash equivalents $ -- $-- $ -- $ 796 $-- $ 796 Short-term investments 6,307 2 6,305 2,585 1 2,584 -------------------------------- -------------------------------- $6,307 $ 2 $6,305 $3,381 $ 1 $3,380 ================================ ================================
During fiscal year 1998, none of the securities were sold prior to maturity. During fiscal year 1997, available-for-sale debt securities sold amounted to $1,985,000, resulting in $8,000 of gross realized gains. At March 31, 1998, by contractual maturity, all of the available-for sale securities are due in one year or less. 3. INTANGIBLE AND OTHER ASSETS Intangible and other assets consist primarily of patents and employee receivables. Amounts due from employees as of March 31, 1998 and 1997 of $159,000 and $167,000, respectively, consist primarily of secured promissory notes that bear interest of approximately five percent and have terms of up to nine years. Principal and interest are due and payable upon maturity. 4. DEBT AND COMMITMENTS As of March 31, 1998, the Company has fully amortized its obligation under capital leases and debt arrangements; accordingly, the carrying value was $0, net of $2,855,000 accumulated amortization at March 31, 1998, and $124,000, net of $2,731,000 accumulated amortization at March 31, 1997. Amortization expense for leased assets is included in depreciation and amortization expense. The Company has an extension on one remaining capital lease and future minimum payments under that arrangement total $8,000 in fiscal 1999. The Company leases its office, laboratory and manufacturing facility under a noncancelable operating lease which expires in the year 2004 and contains several option periods to extend the lease up to an additional 18 years. Payments are adjusted based on changes in the Consumer Price Index ("CPI"), under the terms of the facility lease agreement. Deferred rent reflects the landlord's funding of certain leasehold improvements prior to lease commencement and is amortized over the lease term to offset rent expense. The Company also leases certain equipment under noncancelable operating leases. Rent expense was $1.1 million, $1.2 million, and $1.2 million for the years ended March 31, 1998, 1997, and 1996 respectively. 46 47 Future minimum lease payments under operating leases at March 31, 1998 (exclusive of potential CPI adjustments) are as follows (in thousands):
Operating Leases -------- 1999 $ 1,281 2000 1,281 2001 1,089 2002 1,089 2003 1,089 Thereafter 1,089 -------- Total minimum lease payments $ 6,918 ========
5. INCENTIVE AND BENEFIT PLANS In September 1997, the stockholders approved an increase in the number of shares reserved for issuance under the Company's 1991 Stock Option Plan from 1,500,000 to 3,000,000 shares of common stock. Under the 1991 Directors' Stock Option Plan, 200,000 shares of Celtrix's common stock have been reserved for issuance. The exercise prices under these plans are determined by the Board of Directors or its committee and may not be less than 100% of the fair market value of Celtrix's common stock at the time of grant. The options expire ten years from the date of grant, unless otherwise provided in the option agreement. The options generally become vested and exercisable over four years. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for its stock options because, as discussed below, the alternative fair value accounting provided for under Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. Pro forma information regarding net loss and net loss per share is required by SFAS 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to March 31, 1995 under the fair value method of that Statement. The fair value of these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for 1998, 1997 and 1996, respectively: risk-free interest rates of 6.03%, 6.55% and 5.87%; dividend yields of zero; volatility factors of the expected market price of the Company's common stock of .792 for 1998 and .733 for 1997 and 1996; and an expected option life of 5 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility and expected option life. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Under Celtrix's 1991 Employee Stock Purchase Plan, of which 250,000 shares of common stock have been reserved for issuance, employees have an opportunity to purchase common stock of Celtrix at 85% of the fair market value at the beginning or end of each 12- 47 48 month offering period, whichever is lower. The first offering period commenced January 1, 1994. As of March 31, 1998, 176,880 shares of common stock have been issued to company employees. The fair value of the employees' purchase rights was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions for 1998, 1997 and 1996, respectively: risk-free interest rates of 5.59%, 5.66% and 5.09%; dividend yields of zero; volatility factors of the expected market price of the Company's common stock of .792 for 1998 and .733 for 1997 and 1996; and an expected life of 1 year. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands except for net loss per share information):
1998 1997 1996 -------- -------- --------- Pro forma net loss $(13,275) $(12,929) $(7,342) Pro forma net loss per share $ (0.63) $ (0.85) $(0.52)
The weighted-average fair value of options granted during 1998, 1997 and 1996 was $1.59, $1.47 and $1.55, respectively. Because SFAS 123 is applicable only to options granted subsequent to March 31, 1995, its pro forma effect will not be fully reflected until fiscal 1999. A summary of the Company's stock option activity, which includes the 1991 Stock Option Plan and the 1991 Directors' Stock Option Plan, for the years ended March 31 follows:
Outstanding Options ---------------------------------------------------- Shares Weighted- Available Number of Price Average For Grant Shares Per Share Exercise Price ---------- ---------- ------------- ---------------- Balance at March 31, 1995 787,587 900,488 $2.50-$11.50 $3.87 Options granted (640,699) 640,699 $1.25-$2.63 $2.39 Options canceled 506,447 (506,447) $2.50-$9.50 $3.90 ---------- ---------- ------------- ----- Balance at March 31, 1996 653,335 1,034,740 $1.25-$11.50 $2.94 Options granted (137,116) 137,116 $1.94-$3.94 $2.45 Options exercised -- (20,249) $1.31-$2.63 $2.52 Options canceled 191,249 (191,249) $1.31-$9.50 $4.30 ---------- ---------- ------------- ----- Balance at March 31, 1997 707,468 960,358 $1.25-$11.50 $2.61 Shares authorized 1,500,000 -- -- -- Options granted (1,073,783) 1,073,783 $2.00-$2.94 $2.34 Options canceled 272,450 (272,450) $2.44-$3.94 $2.60 ---------- ---------- ------------- ----- Balance at March 31, 1998 1,406,135 1,761,691 $1.25-$11.50 $2.39 ========== ========== ============= =====
The following table summarizes information concerning outstanding options at March 31, 1998:
Options Outstanding Options Exercisable ---------------------------------------------- ------------------------------ Weighted- Weighted- Weighted- Average Average Average Options Remaining Exercise Options Exercise Range of Exercise Price Outstanding Contractual Life Price Exercisable Price - ----------------------- ---------------------------------------------- ------------------------------ $1.25 - $2.50 1,004,008 8.2 $2.17 378,970 $2.25 $2.63 - $3.94 752,433 8.3 $2.64 315,968 $2.70 $5.50 - $11.50 5,250 4.4 $7.71 5,180 $7.73 -------------- ------------ 1,761,691 700,118 ============== ============
48 49 Under Celtrix's 1991 retirement savings plan ("401(k) Plan"), employees may elect to defer up to 20% of their total compensation, not to exceed the amount allowed by applicable Internal Revenue Service guidelines. There were no employer contributions to the plan as of March 31, 1998. 6. STOCKHOLDERS' EQUITY In April 1997, the Company completed a private placement of 5,721,876 shares of newly issued shares of common stock at $2.438 per share. For every two shares of stock issued, the Company also issued a warrant to purchase an additional share of Celtrix common stock at $2.682 per share. The warrants are exercisable only after the shares of stock are held for at least one year and as of March 31, 1998, there were 2,758,391 warrants outstanding related to this financing (102,543 were cancelled due to the sale of stock). The warrant expires in April 2000. The net proceeds to the Company, after fees and expenses of approximately $619,000, were $13.3 million. 7. RELATED PARTY TRANSACTIONS Pursuant to the distribution of Celtrix common stock by Collagen in February 1991, Celtrix entered into various agreements with Collagen, including a Vitrogen(R) 100 Collagen manufacturing agreement. In January 1995, Celtrix entered into a separate agreement with Collagen under which Collagen was granted distribution rights and an option to purchase the Vitrogen business; Collagen exercised the purchase option for $400,000 in May 1995. This revenue is reported as related party revenue in 1996. 8. LICENSE AND COLLABORATIVE ARRANGEMENTS In July 1994, Celtrix entered into a license agreement with The Green Cross Corporation ("Green Cross"), covering the development and commercialization of SomatoKine for the treatment of osteoporosis in Japan. Under the terms of the agreement, Green Cross was to be responsible for all related research, development and marketing, as well as manufacturing the product to support its preclinical, clinical and commercial needs in Japan. The agreement provided for Celtrix to receive licensing fees, milestone payments upon Green Cross accomplishing specific product development activities and royalties on future product sales. Celtrix retained full rights outside of Japan to SomatoKine and also to related know-how and technology developed by Green Cross. In April 1998, Green Cross was merged with Yoshitomi Pharmaceuticals Industries, Ltd. ("Yoshitomi"). In May 1998, Celtrix received notice from Yoshitomi of its intent to terminate this license agreement. The impact on the Company of dissolving the collaboration would be loss of potential revenues from milestone and license payments and royalties on future product sales. However, upon termination, Celtrix will regain the rights to the treatment of osteoporosis in Japan. In June 1994, the Company entered into a product development, license and marketing agreement with Genzyme Corporation ("Genzyme") on TGF-beta-2 which includes equity investments, milestone payments and potential royalties to Celtrix. As part of the agreement, Celtrix sold to Genzyme 1,550,388 shares of Celtrix common stock in June 1994, and subsequently, in December 1995 Celtrix exercised the option to receive an additional investment by Genzyme for 1,472,829 shares of Celtrix common stock resulting in $4.4 million of net proceeds to the Company. Under recently amended terms, Genzyme has been granted expanded worldwide commercialization rights for all systemic applications and select local applications of TGF-beta-2 to include Japan, China, Korea and Taiwan; in exchange, Genzyme released Celtrix from certain service and royalty obligations under the original agreement. Celtrix has retained rights to select applications of TGF-beta-2 and the 49 50 Company has the option to reacquire rights to other product applications not pursued by Genzyme. In December 1997, the Company also entered into a new license agreement with Genzyme granting Genzyme a worldwide exclusive royalty-bearing license to TGF-beta antibodies, and license and sublicense rights to TGF-beta receptor. Under the terms of the agreement, Genzyme will assume the licensing and royalty obligations of Celtrix related to TGF-beta receptor. Since inception, Celtrix has entered into various other research and development and licensing arrangements. Some of these agreements contain royalty and other obligations. 9. GAIN ON SALE OF INVESTMENTS In June 1997, the Company sold 43,750 shares of Prograft Medical, Inc. preferred stock, resulting in the recording of $737,000 in gain on investment. These shares were held by Celtrix since 1993. In 1996, Celtrix liquidated an equity investment of 231,480 shares of Metra Biosystems, Inc. common stock, resulting in the recording of $3.5 million in gain on investment. 10. INCOME TAXES At March 31, 1998, the Company had net operating loss and tax credit carryforwards for federal income tax purposes of approximately $113.4 million and $4.1 million, respectively, expiring in the years 2006 through 2013. The federal net operating loss carryforward differs from the accumulated deficit principally due to (i) the nondeductibility for tax purposes of the charges for in-process research and development resulting from the BioGrowth, Inc. merger and the Baltimore Biotech, Inc. acquisition, and (ii) timing difference in the recognition of certain revenue and expense items for financial and federal tax reporting purposes (primarily certain expenses not currently deductible). Approximately $8.8 million of the total federal net operating losses are available only to offset future consolidated taxable income to the extent contributed by the Company's wholly owned subsidiary, BioGrowth, Inc. Utilization of the net operating losses and credits is subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986. Significant components of the Company's deferred tax assets and liabilities for federal and state income taxes as of March 31 are as follows (in thousands):
Deferred tax assets: 1998 1997 -------- -------- Net operating loss carryforwards $ 39,100 $ 35,100 Research credits 5,500 4,800 Acquired intangibles -- -- Research expenses capitalized for tax purposes 2,200 3,700 Other-net (1,000) (2,600) -------- -------- Net deferred tax assets 45,800 41,000 Valuation allowance for deferred tax assets (45,800) (41,000) -------- -------- Total deferred tax assets $ -- $ -- ======== ========
The valuation allowance increased by $4.8 million, $5.2 million, and $2.9 million during the years ended March 31, 1998, 1997, and 1996, respectively. 50 51 11. SUBSEQUENT EVENT (UNAUDITED) In May 1998, the Board of Directors approved the Company to increase its authorized shares of common and preferred stocks to 60,000,000 and 10,000,000 shares, respectively. This action received majority stockholder approval and the Company amended and restated its Certificate of Incorporation to effect the increase in July 1998. 51 52 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION 3.1 - Certificate of Incorporation of the Registrant, as amended and restated. 23.1 - Consent of Ernst & Young LLP, Independent Auditors. 24 - Power of Attorney. (see page 38 of this report.) 27 - Financial Data Schedule
52 EX-3.1 2 CERTIFICATE OF INCORPORATION OF THE REGISTRANT 1 EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF CELTRIX PHARMACEUTICALS, INC. Celtrix Pharmaceuticals, Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: FIRST: The name of the corporation is Celtrix Pharmaceuticals, Inc. The corporation was originally incorporated under the name "Celtrix Laboratories, Inc.," and the original Certificate of Incorporation of the corporation was filed with the Secretary of State of the State of Delaware on December 3, 1990. SECOND: Pursuant to Section 245 of the General Corporation Law of the State of Delaware, this Restated Certificate of Incorporation restates and integrates, without further amendment, the provisions of the Certificate of Incorporation of this corporation, and there is no discrepancy between the provisions of the Certificate of Amendment, as heretofore amended or supplemented, and the provisions of this Restated Certificate of Incorporation. THIRD: The text of the Certificate of Incorporation as heretofore amended or supplemented is hereby restated to read in its entirety as follows: "1. The name of the corporation is Celtrix Pharmaceuticals, Inc. (the "Corporation"). 2. The address of the Corporation's registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company. 3. The nature of the business or purpose to be conducted or promoted by the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. 4. (a) The Corporation is authorized to issue two classes of shares to be designated, respectively, "Preferred Shares" and "Common Shares." The number of shares of Preferred Shares authorized to be issued is Ten Million (10,000,000) and the number of shares of Common Shares authorized to be issued is Sixty Million (60,000,000). The Preferred Shares and Common Shares shall each have a par value of $.01 per share. (b) The shares of Preferred Shares may be issued from time to time in one or more series. The Board of Directors of the Corporation is authorized, by filing a certificate pursuant to the applicable law of the State of Delaware, to: (i) establish from time to time the number of shares to be included in each such series; (ii) fix the voting powers, designations, powers, preferences and relative, participating, optional or other rights of the shares of each such series and the qualifications, limitations or restrictions thereof, including but not limited to the fixing or alteration of the dividend rights, dividend rate, conversion rights, conversion rate, voting rights, rights and terms of redemption (including sinking fund provisions), the redemption price or prices, and the liquidation preferences of any wholly unissued series of shares of Preferred Shares; and (iii) increase or decrease the number of shares of any series subsequent to the issue of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the number of shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. 2 5. The Corporation is to have perpetual existence. 6. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter, amend or repeal the Bylaws of the Corporation, but the stockholders may make additional Bylaws and may alter or repeal any Bylaw whether adopted by them or otherwise. 7. The number of directors which will constitute the whole Board of Directors of the Corporation shall be as specified in the Bylaws of the Corporation. 8. At all elections of directors of the Corporation, and subject to the provisions of the Bylaws of the Corporation, each holder of stock or of any class or classes or of a series or series thereof shall be entitled to as many votes as shall equal the number of votes which (except for such provision as to cumulative voting) he would be entitled to cast for the election of directors with respect to his shares of stock multiplied by the number of directors to be elected by him, and he may cast all of such votes for a single director or may distribute them among the number to be voted for, or for any two or more of them as he may see fit. 9. Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. 10. (a) To the fullest extent permitted by the Delaware General Corporation Law as the same exists or as may hereafter be amended, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. (b) The corporation shall indemnify to the full extent permitted by law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate is or was a director, officer or employee of the corporation or any predecessor of the corporation or serves or served any other enterprise as a director, officer or employee at the request of the corporation or any predecessor of the corporation. (c) Neither any amendment nor repeal of this Article 10, nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article 10, shall eliminate or reduce the effect of this Article 10 in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article 10, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. 11. Advance notice of new business and stockholder nominations for the election of directors shall be given in the manner and to the extent provided in the Bylaws of the Corporation. 12. The Corporation reserves the right to amend, alter, change or repeal any provisions contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation." IN WITNESS WHEREOF, said Celtrix Pharmaceuticals, Inc. has caused this Restated Certificate of Incorporation to be signed by Andreas Sommer, its President and Chief Executive Officer, and attested by Craig W. Johnson, its Secretary, this 24th day of June 1998. CELTRIX PHARMACEUTICALS, INC. By: /s/ Andreas Sommer ---------------------------- Andreas Sommer President and Chief Executive Officer ATTEST: By: /s/ Craig W. Johnson --------------------------- Craig W. Johnson, Secretary EX-23.1 3 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-55482) pertaining to the Celtrix Pharmaceuticals, Inc. 1991 Stock Option Plan and 1991 Directors' Stock Option Plan, in the Registration Statement (Form S-8 No. 33-42703) pertaining to the Celtrix Pharmaceuticals, Inc. 1991 Stock Option Plan, 1991 Employee Stock Purchase Plan, and 1991 Directors' Stock Option Plan and in the Registration Statements (Form S-3 No. 33-66008 and No. 333-27263) of Celtrix Pharmaceuticals, Inc. of our report dated April 24, 1998, with respect to the consolidated financial statements of Celtrix Pharmaceuticals, Inc. included in this Annual Report (Form 10-K) for the year ended March 31, 1998. /s/ ERNST & YOUNG LLP Palo Alto, California July 9, 1998 EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS INCLUDED IN ITS FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS MAR-31-1998 APR-01-1997 MAR-31-1998 1,608 1,608 6 0 0 8,132 20,107 13,045 17,876 2,242 0 0 0 211 14,533 17,876 51 661 1 1 13,006 0 24 0 0 (12,913) 0 0 0 (12,913) (0.61) (0.61)
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