-----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, VgdIDJhvjcoZdAE5ZXJxJt7Z9nBgyrodOq0NoidzKTLAOiE+US+TUiBIAil8ct42 qaTA6EzzL9tlCvKzxFmjag== 0000950149-98-000616.txt : 19980401 0000950149-98-000616.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950149-98-000616 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: THERATECH INC /DE/ CENTRAL INDEX KEY: 0000885015 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 870420511 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20063 FILM NUMBER: 98583663 BUSINESS ADDRESS: STREET 1: 417 WAKARA WAY STE 100 CITY: SALT LAKE CITY STATE: UT ZIP: 84108 BUSINESS PHONE: 8015886200 10-K 1 ANNUAL REPORT FOR PERIOD ENDED 12/31/1997 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 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to ________ Commission File Number: 0-20063 THERATECH, INC. (Exact name of registrant as specified in its charter) DELAWARE 87-0420511 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 417 WAKARA WAY, SALT LAKE CITY, UTAH 84108 (Address of principal executive offices) (Zip Code) (801) 588-6200 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock 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 the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of February 27, 1998, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $97,754,000 based on the closing sale price as reported on the Nasdaq National Market on such date. Shares of Common Stock held by officers, directors and holders of more than 5% of the outstanding Common Stock have been excluded from this calculation because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares of Common Stock outstanding on February 27, 1998 was 21,149,953. DOCUMENTS INCORPORATED BY REFERENCE Part II and Part IV of this Report on Form 10-K incorporate information by reference from the Registrant's 1997 Annual Report to Stockholders. Part III of this Report on Form 10-K incorporates information by reference from the Registrant's Proxy Statement for its 1998 Annual Meeting of Stockholders. 2 PART I ITEM 1. BUSINESS TheraTech, Inc. ("TheraTech" or the "Company") develops advanced, controlled release and other drug delivery products which administer drugs through the skin, by oral delivery to the gastrointestinal tract, through tissues in the oral cavity, through absorption in the lungs and by other means. The Company believes its products provide advantages over existing controlled release drug delivery products and conventional oral, injectable, inhalation and continuous infusion methods by increasing efficacy, safety, bioavailability and/or patient compliance and comfort. The Company focuses its research and development efforts on the design and development of improved delivery systems for off-patent and proprietary drugs. Historically, TheraTech's product development activities have been conducted independently or pursuant to collaborative research and development agreements with pharmaceutical companies. For products developed independently by TheraTech, marketing rights may later be transferred to pharmaceutical and other companies under licensing and marketing agreements. These agreements normally provide for TheraTech to receive payments in various forms, which can include licensing fees and other payments upon the execution of an agreement, milestone payments upon achievement of technical and regulatory goals, and periodic payments in the form of cost reimbursements for product development and clinical evaluation of a specified product, including a portion of general and administrative expenses. The client generally receives marketing rights to the product and TheraTech generally retains manufacturing rights, for which it recognizes product sales revenue at the time TheraTech ships product to the client and/or at the time the client sells product to its customers. To date, four research and development programs have resulted in commercialized products. The United States Food & Drug Administration ("FDA") has cleared for marketing three of TheraTech's developed products. Two of these products, the Androderm(R) two and one half milligram ("2.5 mg") testosterone transdermal system for men and the Alora(R) estradiol transdermal system for women, received marketing clearances within one year of their respective initial submissions. Prior to 1997, the testosterone transdermal system had received marketing clearances in Brazil, Denmark, Finland, Ireland, South Korea, Sweden, Switzerland and the United Kingdom, and during 1997 marketing clearances were received in Australia, Germany, Norway and certain Central and South American countries. During 1997, the FDA cleared for marketing TheraTech's third product, its Androderm five milligram ("5 mg") testosterone transdermal system. This clearance was received within six months of filing its supplemental New Drug Application ("sNDA") with the FDA. One of TheraTech's marketing partners, together with that partner's sublicensees, have obtained regulatory approval to market in certain European countries TheraTech's fourth product, its nitroglycerin transdermal system. An Abbreviated New Drug Application ("ANDA") for TheraTech's nitroglycerin product is under review by the FDA. Additionally, TheraTech has more than 20 other drug delivery products under development and testing in the United States, Europe, Japan and South Korea, of which nine are in various stages of clinical development. DRUG DELIVERY Conventional dosage forms currently dominate the pharmaceutical market. These dosage forms can be grouped by routes of administration into oral, injectable, topical, nasal, inhalation, ocular and rectal delivery categories. Oral dosage forms comprise a substantial majority of all present dosage forms. Conventional dosage forms can offer ease of administration and low cost-per-use, but often require inconvenient dosage intervals and may result in higher side-effects, reduced efficacy and poor bioavailability. Controlled drug delivery systems, also referred to as alternate drug delivery systems, have been introduced to eliminate or reduce the limitations of conventional therapies and currently comprise a small percentage of the pharmaceutical market. Controlled drug delivery systems currently marketed by pharmaceutical companies include transdermal patches, oral controlled release products, biodegradable and non-biodegradable implants and long-acting injectables. Controlled drug delivery seeks to either maintain a more consistent and appropriate drug level in the bloodstream than conventional dosage forms or eliminate the need for injections. Conventional dosage forms often produce higher initial drug levels than required for optimal therapy, increasing risks of side effects, and subsequently, lower than therapeutically optimal levels as the drug is metabolized and cleared from the body. Controlled drug delivery technologies allow for the development of "patient-friendly" dosage forms which may eliminate the need for frequent administration, such as frequent injections or taking tablets several times a day, and thus can improve safety, efficacy and patient compliance. This can be especially beneficial for certain patient populations, such as elderly patients, who often require several medications with differing dosage regimens. 2 3 Controlled drug delivery can provide patent protection for a product that includes a drug that has not been patented or for which the patent is expiring or has expired. Patented methods of controlled drug delivery may extend product life and provide a pharmaceutical company with a competitive advantage over generic products delivered by conventional means. The controlled delivery of certain drugs can also result in the approval of new therapeutic indications, thereby expanding the utility of and the market for those drugs. COMPANY STRATEGY TheraTech's strategy is to develop, manufacture and market advanced, controlled release and other drug delivery products for a wide variety of therapeutic applications utilizing a broad array of proprietary delivery technologies. The Company's strategy consists of five basic elements: Collaborative Product Development with Established Pharmaceutical Companies TheraTech is developing several drug delivery products in collaboration with major pharmaceutical companies. In general, TheraTech's collaborative partners provide research funds, and clinical and other support during the product development process. Either TheraTech or a pharmaceutical company may bring an idea for a drug delivery product to the other, seeking to collaborate on the development and testing of a new product. Once a product is approved, TheraTech's partners generally provide an established and trained marketing and sales force to sell TheraTech's product. Independent Product Development In addition to its collaborative efforts, the Company is engaged in independent product development. If successful, independently developed products will provide the Company with the flexibility either to market the product itself or enter into agreements with pharmaceutical partners on terms generally more favorable to the Company than if the agreement was entered into at an earlier stage of development. Although independent product development entails more financial risk than initially working with a collaborative partner, the Company is better able to control the development process and retain a greater portion of the product revenue stream. TheraTech currently has several products which are being or were initially developed independently, including testosterone transdermal patches for men; estradiol, estradiol/progestin, testosterone, and estradiol/testosterone transdermal patches for women; and oral, oral transmucosal, pulmonary and topical dosage form products. Use of Multiple Drug Delivery Technologies TheraTech typically begins product development by defining the target blood level profile for a given drug and choosing from its broad technology base the most appropriate dosage form and route of administration to achieve that profile. TheraTech's extensive technology base enables the Company to deliver a much wider variety of drugs more effectively than could be delivered from the use of a single delivery technology. TheraTech devotes significant resources to continued development of new drug delivery technologies as well as additional products based on its existing technologies. TheraTech's strategy is to maintain ownership of its drug delivery technologies and to license only specific product applications. Control of the Product Manufacturing Process TheraTech products are manufactured using several proprietary materials and production technologies. By manufacturing its own products and generally those it develops for its pharmaceutical partners, TheraTech can protect the proprietary aspects of the manufacturing process, retain control over the quality of its products and increase its share of the product revenue stream. TheraTech generally produces product for development requirements and clinical supplies in its pilot plant facilities, and commercial transdermal products in its 63,000 square foot manufacturing facility. This facility is equipped to produce commercial quantities of both liquid reservoir and matrix transdermal patches, and may be adapted to manufacture other dosage forms. Marketing and Sales TheraTech's objective is to establish an internal sales force to market some of its independently developed products and co-promote certain of its licensed products. The Company will initially focus on selected market segments expected to provide optimum return on the sale of its products. The Company will also seek in-licensing product opportunities appropriate with the marketing focus. By developing this capacity, TheraTech plans to expand the markets for its existing products through direct sales activities, while continuing to work effectively with its marketing partners. TheraTech plans to develop a sustained portfolio of products for a target group of physicians and patients through research, development and in-licensing. 3 4 THERATECH TECHNOLOGIES TheraTech approaches drug delivery from a multi-disciplinary perspective, applying innovations in medical and pharmaceutical sciences, fundamental knowledge of drug permeation mechanisms and advanced technologies in polymer science. This process begins by first defining the desired blood level profile, then the most appropriate methods of administration, such as transdermal, oral, oral transmucosal, pulmonary, or others are identified for product development. For new chemical entities under development, the optimal profile is frequently not known. Further, the ideal dosing for many drugs may not be fully understood due to absorption or delivery difficulties. In such cases, TheraTech's initial objective is to develop a delivery technology to administer these drugs which may not otherwise be deliverable without invasive methods such as injections, and to subsequently develop an optimized dosage form. Transdermal Drug Delivery Transdermal drug delivery entails the administration of drugs through the skin from an adhesive patch. This method of drug delivery is ideally suited for certain drugs that must be injected and for many orally delivered drugs that are degraded either in the gastrointestinal tract or by the liver, such that only a small fraction of the total administered dose is actually absorbed and therapeutically effective. Attempts to overcome such inefficient oral delivery through increased dosage may lead to direct adverse effects in the liver and result in high levels of the metabolized drug ("metabolites") which can potentiate certain side-effects. Transdermal delivery systems overcome such "first-pass" metabolism problems by delivering the drug directly into the bloodstream at prescribed rates. Further, transdermal delivery systems provide a convenient means to administer many drugs over prolonged periods, which would otherwise require frequent dosing. Thus, transdermal delivery can significantly enhance the therapeutic benefits of certain drugs through improved efficacy, safety and bioavailability while improving patient compliance and comfort. Due to the significant barrier properties of skin, transdermal drug delivery has historically been limited to those drugs which are highly potent and can naturally permeate skin. TheraTech has developed and obtained patents on several enhancer compositions for use in transdermal drug delivery. The Company has demonstrated that these proprietary enhancers can be used to create transdermal products that will deliver a variety of drugs at higher rates than would otherwise be possible. These patented enhancer compositions consist of agents that have already been approved for human use in pharmaceutical, cosmetic and/or food applications. As a result, the Company believes products employing these enhancers can achieve regulatory approval more quickly than products using new chemical entity enhancers. The Company also believes that its enhancer technologies represent a significant competitive advantage over other transdermal drug delivery products. TheraTech has developed two principal types of transdermal patch systems, the TheraDerm-LRS(R) ("Liquid Reservoir System" or "LRS") and the TheraDerm-MTX(R) ("Matrix System" or "MTX"). The Company can incorporate the use of its enhancer technologies into either system type. TheraDerm-LRS was designed and developed to overcome the limitations of other liquid reservoir systems. Numerous drug formulations can be incorporated into a TheraDerm-LRS patch since the system is not rate limiting to the administration of the drug and the drug reservoir is physically isolated from the adhesive within the system. This system design also eliminates adverse drug formulation interactions with the patch adhesive. The TheraDerm-LRS patch is particularly useful for drugs that require higher doses or have intrinsically low transdermal permeability. Two United States patents, as well as international patents, have been issued for the TheraDerm-LRS transdermal patch. The TheraDerm-MTX is an adhesive matrix patch design. The drug is incorporated in the adhesive, resulting in a light and flexible patch which conforms to the skin for maximum adhesion and comfort. The TheraDerm-MTX employs a convenient application tab, allowing the user to easily apply the patch. Several United States patents have been issued to provide a proprietary position for products developed by TheraTech utilizing the TheraDerm-MTX patch design. Oral Transmucosal Drug Delivery The Company has placed considerable emphasis on the development of new technologies for the administration of large molecule drugs including peptides and polysaccharides, as well as other drugs requiring rapid onset of action or that cannot be readily delivered orally or transdermally. These technologies enable the delivery of many such drugs across the mucosal tissue of the oral cavity ("oral transmucosal delivery"). The advantages of this approach over other delivery routes include: high drug permeability relative to transdermal administration; reduced metabolism and increased bioavailability relative to oral dosing where enzymatic degradation in the intestine and by the liver is significant; rapid absorption; easy access to the oral cavity for convenient application or removal of the dose by the patient; localization of the dosage form at 4 5 the delivery site over prolonged periods to extend the duration of drug delivery and maximize the extent of absorption; and greater resistance to chemical and mechanical irritation relative to other mucosal delivery routes. TheraTech's oral transmucosal ("OTM") delivery systems are solid dosage forms, which will adhere to various surfaces in the oral cavity and deliver drugs over a period of time. TheraTech views its OTM technology as a patient friendly alternative to systemic injection that has wide applicability to many peptide and other macromolecular drugs, as well as smaller conventional drugs which must currently be injected. The Company has been issued patents for certain OTM designs and compositions, and has filed additional patent applications for other system designs and therapeutic applications. The Company has conducted human feasibility studies demonstrating the ability of these systems to deliver therapeutic levels of glucagon-like insulinotropic peptide ("GLP-1"). The results of this study were published in the August 1996 issue of Diabetes Care. The Company has also conducted similar studies on GLP-1 in Type II diabetic patients. GLP-1 is an investigational drug for the treatment of non-insulin dependent diabetes mellitus, commonly referred to as Type II or adult-onset diabetes. The results from these studies conclusively demonstrate the ability to deliver peptide drugs using TheraTech's proprietary OTM technology. TheraTech entered into a multi-product collaboration with Eli Lilly and Company ("Lilly") early in 1997 to evaluate certain Lilly peptide drugs and develop OTM dosage forms using TheraTech's proprietary technologies. Two Lilly peptide drugs are currently under evaluation. The Company is also developing long lasting lozenges which provide controlled release drug delivery in the oral cavity. This lozenge technology complements the Company's transmucosal delivery technology and is applicable to a wide variety of drugs for either local delivery or systemic delivery through the mucosal tissues of the mouth. During 1997, TheraTech entered into a collaboration with SmithKline Beecham Consumer Health to complete the development of TheraTech's nicotine lozenge, as well as to market the product. Oral Drug Delivery The Company continues to invest resources in the area of orally administered controlled release dosage forms by developing and/or acquiring patented technologies for controlled release dosage forms formulated using FDA approved or acceptable materials and using established solid dosage form manufacturing processes. The Company is currently developing several oral controlled release products. Other Delivery Technologies To complement its transdermal efforts, TheraTech is developing topical formulations for dermatological applications based upon its proprietary skin enhancer technologies. These topical formulations are designed to maximize the delivery of the drug to the skin itself, and more particularly to the regions of skin underlying the outer barrier layer. TheraTech's proprietary enhancer technologies allow topical dosing to the skin at significantly greater levels than those provided by conventional topical formulations and technologies. This allows the Company to increase dosing to the target site, which may result in increased therapeutic efficacy for many topically administered drugs. TheraTech has acquired exclusive rights to two inhalation drug delivery technologies. A dry powder inhalation ("DPI") respiratory drug delivery device and an assist device for use with existing metered dose inhalers ("MDI"). Design features of both devices include breath activation by the patient and an expected lower production cost compared to other devices currently under development. Both devices, acquired from Innovative Devices, LLC, have patents issued and/or pending with the first United States patent on the DPI device issued in December 1997. The MDI device is targeted to be compatible with approximately 80 percent of the asthma medications currently on the market and to be reusable for up to a year. The DPI device is being developed primarily for certain peptides and larger protein drugs and has a mechanism that should provide maximum deaggregation of drug particles. Both MDI and DPI devices are in early stages of development. These additional technologies expand TheraTech's protein drug delivery capabilities and provide an entry into the important pulmonary drug delivery area, a market that is both large and growing. In fact, the worldwide respiratory drug market totaled approximately $7 billion in 1996 and is expected to surpass $11 billion by the year 2001. 5 6 THERATECH PRINCIPAL PRODUCTS AND KEY PARTNERSHIPS The following table lists the potential indications, current status as of March 1998, and collaborative marketing partners for each of the Company's principal products that have been approved or are in various stages of development. The table does not include all the products the Company has in its development pipeline.
PRODUCT TARGETED STATUS PARTNERS DESCRIPTION INDICATION TERRITORY/AVAILABILITY - ---------------------------- ----------------- ------------------------ ----------------------------------- TESTOSTERONE Male Hypogonadism Launched in: U.S., So. SMITHKLINE BEECHAM (U.S., Canada, (Transdermal TheraDerm-LRS) Korea, (Androderm(R)); Ireland and U.K.); CEPA (Spain); U.K., Ireland LABORTERAPIA (Portugal); ASTRA (Andropatch(TM)); (Scandinavia, Austria, Germany Sweden, Denmark, and Switzerland); SCHWARZ PHARMA Finland (Atmos(R)). (Italy, France, Benelux countries Approved in: Norway and certain Eastern European (Atmos), Switzerland, countries); WYETH-AYERST (Mexico, Germany, Australia and Central and South America); certain countries in SAMYANG (So. Korea) Central and South America. - ---------------------------- ----------------- ------------------------ ----------------------------------- ESTRADIOL Female HRT Launched in U.S. PROCTER & GAMBLE (Worldwide, (Transdermal TheraDerm-MTX) Osteoporosis (Alora(TM)). Approved except in certain Asian in Canada and the U.K. countries); SAMYANG (So. Korea) - ---------------------------- ----------------- ------------------------ ----------------------------------- FACE LIFT(TM) (Dernal Cosmetic Supplied through UNIVERSITY MEDICAL (Worldwide) Vitamin C Anti-Wrinkle Wrinkle Natrapac, a Patch(TM)) Reduction wholly-owned subsidiary of TheraTech. Launched in U.S. - ---------------------------- ----------------- ------------------------ ----------------------------------- NITROGLYCERIN Angina Pectoris Launched in: France, LAVIPHARM (Worldwide, except (Transdermal TheraDerm-MTX) Greece, Holland and So. Korea); SUB DISTRIBUTORS: Italy. LAVIPHARM/SYNTHELABO (Greece); ANDA filed in U.S. WYETH-LEDERLE (Belgium); sNDS filed in Canada NOVARTIS and KNOLL (Italy); RHONE-POULENC RORER CANADA (Canada); SYNTHELABO (France, Spain, and Portugal); BRISTOL MYERS SQUIBB (Switzerland); LOREX SYNTHELABO (The Netherlands); SAMYANG (So. Korea) - ---------------------------- ----------------- ------------------------ ----------------------------------- ESTRADIOL/PROGESTIN Female HRT Phase III PROCTER & GAMBLE (Worldwide, except (Transdermal TheraDerm-MTX) Osteoporosis in certain Asian countries); SAMYANG (So. Korea) - ---------------------------- ----------------- ------------------------ ----------------------------------- PROGESTIN Female HRT Phase II Available Worldwide (Transdermal TheraDerm-MTX) - ---------------------------- ----------------- ------------------------ ----------------------------------- TESTOSTERONE Female HRT Phase II PROCTER & GAMBLE (Worldwide, (Transdermal TheraDerm-MTX) Sexual except in certain Asian Dysfunction, countries); SAMYANG (So. Korea) Osteoporosis - ---------------------------- ----------------- ------------------------ ----------------------------------- TESTOSTERONE Cancer and HIV Phase II THERATECH, INC. (Transdermal TheraDerm-MTX) Wasting - ---------------------------- ----------------- ------------------------ ----------------------------------- OXYBUTYNIN Urinary Urge Phase II MEIJI MILK (Asia); (Transdermal TheraDerm-MTX) Incontinence Meiji/Sankyo (Japan); Available in the remainder of the world - ---------------------------- ----------------- ------------------------ ----------------------------------- NICOTINE (OTM Lozenge) Smoking Phase I/II SMITHKLINE BEECHAM CONSUMER Cessation HEALTHCARE (Worldwide except in certain Asian countries) - ---------------------------- ----------------- ------------------------ ----------------------------------- GLP-1 (OTM) Diabetes Phase I Available Worldwide - ---------------------------- ----------------- ------------------------ ----------------------------------- DESMOPRESSIN (OTM) Nocturnal Phase I Available Worldwide Enuresis - ---------------------------- ----------------- ------------------------ ----------------------------------- ESTRADIOL/TESTOSTERONE Female HRT Phase I PROCTER & GAMBLE (Worldwide, (Transdermal TheraDerm-MTX) Sexual except in certain Asian Dysfunction countries) Osteoporosis - ---------------------------- ----------------- ------------------------ ----------------------------------- LILLY PEPTIDE 1 (OTM) Undisclosed Development LILLY (Worldwide) - ---------------------------- ----------------- ------------------------ ----------------------------------- BUSPIRONE Anxiety Development Available Worldwide (Transdermal TheraDerm-MTX) - ---------------------------- ----------------- ------------------------ ----------------------------------- ANALGESIC (OTM) Pain Development Available Worldwide - ---------------------------- ----------------- ------------------------ ----------------------------------- CALCITONIN (OTM) Osteoporosis Research Available Worldwide - ---------------------------- ----------------- ------------------------ ----------------------------------- ADRIAMYCIN-LIGAND Cancer Research Available Worldwide - ---------------------------- ----------------- ------------------------ ----------------------------------- LILLY PEPTIDE 2 (OTM) Undisclosed Research LILLY (Worldwide) - ---------------------------- ----------------- ------------------------ -----------------------------------
(1) For an explanation of the various stages of development, see "Risk Factors - Government Regulation and Product Approvals." For international markets, a pharmaceutical company is subject to regulatory requirements, interactions and product approvals substantially the same as those in the United States. Although the clinical trials can be different than those conducted in the United States, the trials themselves are substantially the same as those in the United States and are commonly referred to in the industry as Phases I, II, and III. 6 7 Testosterone Transdermal System for Male Hormone Replacement Therapy The Company independently developed a 2.5 mg LRS testosterone transdermal system for the treatment of male hypogonadism. For the vast majority of patients, two patches are applied to non-scrotal skin, providing testosterone and its active metabolites at levels closely matching those which result from natural testosterone production and metabolism in normal men. TheraTech completed the development and launch of a second dosage form testosterone transdermal system that delivers a nominal daily dose of five milligrams of testosterone from a single patch in a manner equivalent to the application of two 2.5 mg Androderm patches. A single 5 mg patch provides additional convenience over the two patch per day dosage. The sNDA for this product was cleared by the FDA in May 1997. Current competitive products include injectable synthetic hormones, oral androgens and a transdermal patch which is applied to the shaved scrotum. In addition, a non-scrotal testosterone product of a competitor has recently been cleared for marketing by the FDA and a sublingual testosterone product of a competitor was recently found unapprovable by the FDA. TheraTech believes that its systems offer significant advantages over competitive products in that the natural hormone is administered in a more physiological fashion from more patient friendly products, and are smaller in size than the competitor's non-scrotal patch. TheraTech has assigned United States, Canadian, Ireland and United Kingdom marketing rights to its 2.5 mg testosterone transdermal system to SmithKline Beecham. Under the agreement with SmithKline Beecham, TheraTech retains an option to co-promote the product in the United States under certain conditions. During 1997, TheraTech reacquired rights from SmithKline Beecham to Austria, Germany, Switzerland, Benelux countries, Greece, Italy, Australia and New Zealand, and also reacquired rights to France and French-speaking African countries from Laboratoires Fournier. Also during 1997, TheraTech assigned marketing rights to Schwarz Pharma for Italy, France, the Benelux countries, and certain countries in Eastern Europe. TheraTech assigned the Scandinavian marketing rights for the product to Astra AB ("Astra") in 1995, and in 1997 expanded Astra's rights to include Austria, Germany, and Switzerland. The Company also has distribution agreements to market this product with Compania Espanola De La Penicilina Y Antibioticos, S.L. ("CEPA") in Spain; Laborterapia - Produtos Farmaceuticos, S.A. ("Laborterapia") in Portugal; and Samyang Corporation ("Samyang") in South Korea. The Company has granted Wyeth-Ayerst International, Inc. ("Wyeth-Ayerst"), a division of American Home Products Corporation, exclusive testosterone patch marketing and distribution rights in Mexico, Central America and South America. TheraTech has granted marketing rights for the 5 mg patch to Astra, CEPA, Laborterapia, Schwarz Pharma, SmithKline Beeacham and Wyeth-Ayerst in their respective territories. The testosterone transdermal system for men was cleared for marketing under the trade name Androderm by the FDA and is currently marketed by SmithKline Beecham in the United States. The product is or will be marketed under the trade name Atmos(R) in Denmark, Finland, Norway, and Sweden; and Andropatch(TM) in Ireland and the United Kingdom. In addition, Samyang had received government approval to market the product under the trade name Androderm in South Korea and launched the product during 1997. Male hypogonadism results when the body cannot produce normal levels of testosterone. The consequences of testosterone deficiency include decreased libido, impotence, fatigue, depression, and muscle and bone loss. It is estimated that approximately one percent to five percent of men in the United States between the ages of 20 and 65 suffer from hypogonadism, including approximately 200,000 men afflicted by Klinefelter's syndrome (a genetic condition in which men have an extra female chromosome). In such cases, testosterone replacement therapy may have a beneficial impact. Furthermore, it is now recognized that natural testosterone production can be dramatically reduced with age in men, of which it is estimated that 20 percent or more of men over age 65 are hypogonadal. The effects of testosterone replacement in hypogonadal, elderly men have not been systematically evaluated. Additionally, men with certain disease states, such as HIV, type II diabetes and cancer, may also be hypogonadal. Female Hormone Replacement Therapy The Company is developing a number of transdermal products for female Hormone Replacement Therapy ("HRT"). These include an estradiol patch, an estradiol/progestin combination patch, a progestin patch, a female testosterone patch and an estradiol/testosterone combination patch. TheraTech has a development and marketing agreement with Procter & Gamble Pharmaceutical, Inc. ("Procter & Gamble") which previously provided worldwide rights (excluding Asia) for its estradiol patch and estradiol/progestin combination patch. In late 1997, the agreement with Procter & Gamble was expanded to include estradiol and estradial/progestin products for certain Asian countries and further expanded to include the female 7 8 testosterone and estradial/testosterone patches worldwide excluding certain Asian countries. The Company also has an agreement with Samyang to market the estradiol patch and estradiol/progestin combination patch in South Korea. TheraTech submitted an New Drug Application ("NDA") on its MTX estradiol patch in December 1995, and received FDA clearance in December 1996 under the trade name Alora. This was TheraTech's second product approval in two years, both occurring within one year of their initial submission. Alora has also received regulatory approval in Canada and the United Kingdom. The commercial launch of Alora occurred in the United States during May 1997 by Procter & Gamble. The Alora patch is available in three dosage strengths: 0.05; 0.075; and 0.1 milligrams per day. In collaboration with Procter & Gamble, the Company also initiated United States Phase III clinical trials for its MTX estradiol/progestin combination patch in 1996. These studies are evaluating multiple dosing levels and regimes with the combination patch. The estradiol and estradiol/progestin combination products are being developed for the treatment of menopausal symptoms and other conditions associated with estrogen deficiency, including osteoporosis. Menopause is a condition associated with aging in which women no longer produce steroid hormones at the physiological levels which were present in their younger years. Menopause can also result from surgical intervention, such as oophorectomy. It is now accepted that bone loss is associated with menopause, which can lead to osteoporosis, a debilitating condition contributing to more than one million bone fractures each year in the United States. Estrogen replacement therapy can effectively treat menopausal symptoms, as well as reduce bone loss with beneficial effects on the prevention of osteoporosis. It is estimated that there are more than 90 million menopausal or postmenopausal women in the United States and Europe, and this number is anticipated to increase during the next decade. In 1996, worldwide sales for female hormone replacement therapy products exceeded $2.3 billion. The current market for estrogen in the United States is dominated by oral products which require significantly larger doses of estrogen to produce the desired effects relative to transdermal estradiol administration. Further, unopposed estrogen administration can lead to pre-cancerous uterine conditions in many women unless counterbalanced by the co-administration of a progestin. As with estrogen replacement, progestin therapy is currently dominated by oral products which require higher levels of progestin hormones. Transdermal female hormone replacement patch development is an active field with several companies developing estradiol patches and estradiol/progestin combination patches. In the United States, three other estradiol matrix patches offered by competitors of the Company have also received FDA approval. The Company believes that its products may provide improved performance and better skin toleration than competitive transdermal estradiol products. An exciting new product in the female HRT area is a MTX transdermal patch that delivers testosterone to women. Although women produce only about one twentieth the amount of testosterone produced by men, it is believed to have an important role in the normal hormonal balance of healthy women. The potential consequences of testosterone deficiency in women, including loss of libido and muscle and bone deterioration, are becoming more recognized by the medical community, offering TheraTech new opportunities in the female HRT market. The issuance in October 1995 of a United States patent on this transdermal technology solidified TheraTech's leadership position in this rapidly evolving area. TheraTech has conducted Phase II clinical trials for two separate indications on its female testosterone patch. The first study was conducted at the Massachusetts General Hospital, to evaluate the effects of the patch on wasting in HIV infected women who are testosterone deficient. This trial was completed in 1997, with results showing an increase in body mass at physiological dosing with testosterone. The second study evaluates the effects of low testosterone levels on sexual function, mood and quality of life in women who have had their ovaries removed. The effects of testosterone replacement on bone turnover markers will also be evaluated. The latter study is being conducted at several medical centers in the United States, and is anticipated to be completed by the end of 1998. Nitroglycerin Transdermal System for the Treatment of Angina TheraTech has developed an enhanced transdermal nitroglycerin patch for the treatment of angina, a painful attack due to insufficient oxygen in the muscles of the heart. TheraTech's system utilizes proprietary enhancer technology allowing equivalent dose administration from smaller patches than the currently marketed originator products. Utilizing a TheraDerm-MTX patch design, this product was developed as a generic bioequivalent product against Ciba Geigy's (now Novartis AG) ("Novartis") Transderm-Nitro(R) product and in 1993 an ANDA was submitted to the FDA. The FDA has listed both Schering Plough's Nitro-Dur(R) and Novartis' Transderm-Nitro(R) as suitable reference standard products for bioequivalence comparisons; allowing generic substitution of TheraTech's product against Transderm-Nitro pending final ANDA approval. In Europe, marketing applications based on TheraTech's bioequivalency study against the Transderm-Nitro product were submitted and approved in several countries and TheraTech's product is being marketed by Lavipharm S.A. ("Lavipharm") and its distributors in France, Greece, Holland and Italy. 8 9 TheraTech entered into development and license agreements with Lavipharm, a privately-held European company with sales of approximately $200 million in 1997, pursuant to which TheraTech has received development payments and is receiving royalties in exchange for granting Lavipharm exclusive worldwide (excluding South Korea) marketing rights for this product. Lavipharm has licensed the product to various distributors for sales in Europe and Canada. TheraTech retains exclusive manufacturing rights for the United States, but has granted exclusive manufacturing rights to Lavipharm with respect to the rest of the world, except South Korea. TheraTech has entered into a technical license agreement with Samyang pursuant to which TheraTech will receive certain license fees and royalties in exchange for granting Samyang the exclusive right to manufacture and market the product in South Korea. Approximately four million people in the United States suffer from angina. Nitrate therapy is a leading method of treatment of angina. Total United States annual sales of nitroglycerin patches at the manufacturer's level are approximately $250 million, and worldwide annual sales of nitroglycerin patches are approximately $500 million. Oral and OTM Drug Delivery The Company continues to make significant progress in the oral controlled release and OTM drug delivery areas. TheraTech has a small scale, solid dosage form pilot plant for the development and manufacturing of oral controlled release tablets, self adherent OTM systems and long acting lozenges, in accordance with current Good Manufacturing Practice ("cGMP"). This facility is being used to support clinical supplies manufacturing and is capable of biobatch production runs. The Company made particular progress in the transmucosal delivery of macromolecules. Such drugs include peptide and carbohydrate based compounds which are the focus of many biotechnology based drug discovery programs within the industry. Such compounds are inherently difficult to administer using conventional drug delivery technologies and typically must be administered by injection. A major technological milestone was reached with a successful clinical feasibility study using TheraTech's proprietary OTM system for peptide delivery. In this study, TheraTech's proprietary OTM system administered pharmacologically active amounts of GLP-1, which works primarily by stimulating the release of insulin while inhibiting gastric emptying, thus lowering blood glucose. The ability of GLP-1 to stimulate insulin secretion is accomplished in a blood glucose-dependent fashion with minimal effects when blood glucose levels are normal or low. GLP-1 may, thereby, offer an inherent safety advantage over conventional drugs for the treatment of Type-II diabetes. TheraTech's successful GLP-1 clinical trials demonstrate the viability of the Company's proprietary OTM technology for the non-invasive administration of peptide drugs. Most peptide drugs cannot be administered orally because of their susceptibility to enzymatic digestion in the gastrointestinal tract and their large molecular size. GLP-1, for example, is a 30 amino acid peptide with a molecular weight of approximately 3,300. TheraTech is in discussions with several pharmaceutical companies regarding the development of peptides using OTM technology. The first development agreement in this area was signed in January 1997 with Lilly. This agreement encompasses a multiple-product development and marketing collaboration program. The products under this agreement will utilize the OTM technology for the delivery of several Lilly peptide drugs, primarily in the endocrine area. Within Lilly's development program, these peptide drugs are at various stages of preclinical and clinical development. The first Lilly peptide drug incorporating OTM tablet technology is currently in development at TheraTech. Pfizer New Chemical Entity Transdermal Products TheraTech has had a broad, long-standing agreement with Pfizer, that was recently renewed, to evaluate and develop transdermal patches for selected new chemical entities under development at Pfizer. Under this agreement, TheraTech is screening a selected number of compounds and developing prototype patches for clinical studies on those compounds satisfying transdermal drug delivery requirements. Based on Phase I results, further development activities would be subsequently negotiated. Nicotine Products for Smoking Cessation Although TheraTech is developing a nicotine transdermal patch for smoking cessation therapy for Lavipharm, the Company and Lavipharm are not currently allocating substantial resources to this product. TheraTech has licensed the nicotine transdermal patch to Samyang, who is actively developing the product for South Korea. Additionally, the Company developed a nicotine lozenge for smoking cessation and initiated Phase I clinical trials on this product, and subsequently licensed this OTM nicotine product to SmithKline Beecham Consumer Healthcare in early 1998. 9 10 Anti-Wrinkle Patch Natrapac, Inc., TheraTech's wholly-owned consumer products subsidiary, in late 1997 granted a worldwide marketing license for an anti-wrinkle dermal patch to University Medical Products, USA, Inc. ("University Medical"). University Medical launched this product in the United States in January 1998. This product, marketed under the trade name Face Lift(TM) - Vitamin C Anti-Wrinkle Patch(TM), is a cosmetic product containing anti-oxidants for treatment of fine wrinkles around the eyes and mouth and uses TheraTech's MTX technology. RISK FACTORS The statements contained in this Report on Form 10-K that are not purely historical are "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All forward looking statements involve various risks and uncertainties. Forward looking statements contained in this Report include statements regarding the Company's future product development and commercialization, market opportunities and acceptance, United States and foreign regulatory approval, expectations, goals, product sales and other revenues, financial performance, strategies, mission and intentions for the future. Such forward looking statements are included under Item 1. "Business" and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." All forward looking statements included in this Report are made as of the date hereof, based on information available to TheraTech as of such date, and the Company assumes no obligation to update any forward looking statement. It is important to note that such statements may not prove to be accurate and that the Company's actual results and future events could differ materially from those anticipated in such statements. Among the factors that could cause actual results to differ materially from the Company's expectations are those described below and elsewhere in this Report. These factors also affect the Company's earnings and stock price. All subsequent written and oral forward looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by this section and other factors included elsewhere in this Report. Early Stage of the Company and its Products; Technological Uncertainty TheraTech was founded in January 1985 and its revenues to date have consisted principally of research fees, licensing fees, milestone payments and other payments from other entities under collaborative research and other agreements, as well as and more recently revenues from sales of TheraTech's products. These include the testosterone product in the United States and Europe, the estradial patch in the United States and royalties from Lavipharm for sales of the nitroglycerin product in Europe. During the year ended December 31, 1997, revenue from product sales accounted for approximately 39 percent of the Company's total revenues, with a majority of the product sales coming from SmithKline Beecham and Procter & Gamble. The loss of either of these customers would have a material adverse result on the Company's business, financial condition and results of operations. To achieve significant revenues and profitable operations on a continuing basis, the Company and its partners must successfully develop, manufacture, and license or market additional products. The Company's four marketed products are at an early stage of commercialization and many of the Company's drug delivery products and technologies are at various stages of research and development. The time necessary to achieve market success for any individual product is long and uncertain. No assurance can be given that the Company's product development efforts will be successfully completed, that required regulatory approvals can be obtained, that products under development can be manufactured at acceptable cost and with appropriate quality or that any approved products can be successfully licensed or marketed. In addition, there can be no assurance that the drug development and marketing efforts of TheraTech or its partners will be successful. Competition Competition for the development of drug delivery products is intense and expected to increase. TheraTech's competitors include Alza Corporation, Cygnus Therapeutic Systems, Elan Corporation ("Elan"), Ethical Pharmaceuticals, Ltd., Inhale Therapeutic Systems, Novartis, Noven Pharmaceuticals Inc, Schering Plough, 3-M Pharmaceuticals and others. Some of these companies have substantially greater financial resources and larger research and development staffs than TheraTech, as well as substantially greater experience in developing products, in obtaining regulatory approvals and in manufacturing and marketing pharmaceutical products. Competition with these companies involves not only product development, but also acquisition of products and technologies from universities and other research institutions. TheraTech also competes with pharmaceutical companies, universities and other institutions in the development of products, technologies and processes that are, or in the future may be, the basis for competitive products. There can be no assurance that the Company will successfully develop technologies and products that are more effective or affordable than those being developed by its competitors. In addition, one or more of the Company's competitors may achieve product commercialization or obtain patent protection earlier than TheraTech. Competitive products have either been approved or 10 11 are being developed for most of TheraTech's products. The first pharmaceutical product to reach the market in a therapeutic area often has a significant competitive advantage relative to later entrants to the market. TheraTech expects that its products will compete primarily on the basis of product efficacy, safety, patient convenience, reliability, price and scope of patent rights. The Company's competitive position will also depend on its ability to attract and retain qualified scientific and other personnel, develop effective proprietary products, implement production and marketing plans, obtain patent protection and secure adequate capital resources. There can be no assurance that future competitive forces will not have a material adverse effect on the Company's business, financial condition or results of operations. Manufacturing and Supply TheraTech transdermal patches are manufactured using several proprietary materials and production technologies developed by TheraTech in conjunction with equipment and material suppliers. TheraTech has a 63,000 square foot multi-product cGMP commercial manufacturing facility. When fully equipped, this facility will be capable of producing up to approximately 140 million LRS patches and 100 million MTX patches annually. The LRS and MTX portions of the facility have been validated and have undergone Pre-Approval Inspections ("PAI") by the FDA. TheraTech believes it has sufficient capacity to support the initial United States and worldwide marketing of its approved transdermal products. Further product growth may require TheraTech to expand this facility or obtain a second manufacturing facility. The Company has installed the equipment necessary for current LRS and MTX production capability and plans to install additional production equipment to attain full capacity. Currently, the facility is producing the required commercial quantities of testosterone transdermal systems, estradiol transdermal systems and anti-wrinkle dermal patches for distribution. In addition, TheraTech has two pilot production facilities which continue to supply TheraTech's transdermal patch developmental requirements and are capable of producing biobatch lots. TheraTech also manufactures its OTM, lozenge and controlled release oral dosage forms for development purposes in its separate solid dosage form pilot manufacturing facility under cGMP practices. TheraTech performs quality control testing in-house for each aspect of the manufacturing process, from raw material studies to final product characterization. There can be no assurance, however, that the Company will not encounter manufacturing difficulties with respect to its existing and future products that could have a material adverse effect on the Company's business, financial condition or results of operations. Several materials used in the manufacture of the Company's products are available only from sole source suppliers. These items have generally been available to TheraTech and the pharmaceutical industry on commercially reasonable terms. TheraTech has not experienced undue difficulty acquiring materials necessary to manufacture clinical quantities of its products. TheraTech intends to negotiate supply contracts, as appropriate, for its products and has already entered into contracts on certain materials for its Androderm production. Any interruption of supply could have a material adverse effect on the Company's business, financial condition and results of operations. Marketing and Sales TheraTech is developing several drug delivery products under research and development, and marketing and distribution agreements pursuant to which the other contracting parties are responsible for marketing activities. Although TheraTech believes that its collaborative partners intend to commercialize the products which they license from the Company, the level of resources and attention devoted by the collaborative partner to a product is not within the Company's control. Collaborative partners are generally responsible for marketing and distribution activities. Product sales forecasts provided by collaborative partners are used by TheraTech for production scheduling. Significant changes in sales forecasts may cause substantial changes in the Company's production and future product sales. TheraTech's product sales are subject to many variables, including: the collaborative partners' ability to identify the market; market acceptance of the product; inventory levels held in the distribution network and marketing efforts by collaborative partners. As a result, TheraTech's production, and the resulting product sales, are dependent upon the collaborative partners marketing and sales efforts. There can be no assurance with respect to the market acceptance of the Company's products or the anticipated sales growth of such products. Certain of TheraTech's products may be directed toward markets and indications whose potential has not been fully developed. New products and technologies could expand the size of a market due to the limitations of existing therapies. This may require extensive education of physicians and potential new patients. Physicians may require assistance in understanding the benefits of these new products and overcoming objections to long-standing ideas on treatments. Patients may not be aware of their symptoms, or that the symptoms they are experiencing are signs of a medical condition that now 11 12 has treatments available. As a result, the growth of product sales may be significantly dependent upon this educational process. TheraTech generally has retained manufacturing rights and intends to manufacture most of its products under development, but may also choose to license certain manufacturing rights, as appropriate. TheraTech is also developing several products independently. Initially, the Company intended to license most of these independently developed products for sale through pharmaceutical companies. However, TheraTech's long-term objective is to market some of its independently developed products through an internal marketing and sales force. The Company will initially focus on selected market segments expected to provide optimum return on the sale of its products. In the event significant sales of products are not achieved or sustained, whether through marketing partners or the Company's own sales efforts, the Company's business, financial condition and results of operations would be materially adversely affected. Patents and Proprietary Technology TheraTech's policy is to file patent applications in appropriate situations to protect and preserve, for its own use, technology, inventions and improvements that it considers important to the development of its business. The Company seeks patent protection for its proprietary technologies and products as it believes is appropriate in the United States, Canada, Australia, key European and Asian countries and other countries. The Company also relies on trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain its competitive position. TheraTech's success will depend, in part, on its ability to obtain or license patents, protect trade secrets and operate without infringing the proprietary rights of others. The Company has a number of patents and patent applications. There can be no assurance, however, that existing patent applications will mature into issued patents, that the Company will be able to obtain additional licenses to patents of others or that the Company will be able to develop its own additional patentable technologies. In addition, there can be no assurance that any patents issued to the Company will provide it with competitive advantages or will not be challenged by others or, if challenged, will be held valid, or that the patents of others will not have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, there can be no assurance that others will not independently develop similar products, or if patents are issued to the Company, will not design around such patents. TheraTech currently holds 31 issued and allowed United States patents and an additional 19 pending United States patent applications. Corresponding patents or applications have been issued or filed in Canada, Australia and key European and Asian countries, including Japan. These international filings are in various stages of prosecution, some having been issued as patents, with others being allowed or pending. TheraTech currently is not aware of any claims of infringement against its products or technologies, except its nicotine TheraDerm-MTX system may infringe patents issued to Elan and other companies. In late 1997, the Company obtained a sublicense to certain patents issued to the University of Southern California to avoid any potential infringement of its estradial/testosterone patch. There can be no assurance that claims will not be made against TheraTech or that TheraTech will not be precluded from marketing certain of its products in the United States or elsewhere. In addition to the sublicense described above, TheraTech may in the future be required to obtain licenses to patents or other proprietary rights of others. No assurance can be given that any licenses required under any such patents or proprietary rights would be made available on terms acceptable to the Company, if at all. If TheraTech does not obtain such licenses, it could encounter delays in product market introductions while it attempts to design around such patents, or could find that the development, manufacture or sale of products requiring such licenses could be foreclosed. In addition, the Company could experience a loss of revenue, as well as incur substantial costs, in defending itself and potentially indemnifying its partners in suits involving such patents or proprietary rights. Further, there can be no assurance that any patent obtained or licensed by TheraTech will be held valid and enforceable if asserted by TheraTech against another party. TheraTech generally requires each of its employees, consultants and advisors to execute a confidentiality and assignment of proprietary rights agreement upon the commencement of employment or consulting relationship with the Company. The agreements generally provide that all inventions, ideas, discoveries, improvements, and copyrightable material made or conceived by the individual arising out of the employment or consulting relationship and all confidential information developed or made known to the individual during the term of the relationship shall be the exclusive property of the Company. This information shall be kept confidential and not disclosed to third parties except in specified circumstances. The confidentiality agreements generally also contain a covenant not to compete for twelve months and a prohibition against disclosure of confidential information for a period of five years after termination of the relationship. There can be no assurance, however, that these agreements will provide meaningful protection for the Company's proprietary information in the event of unauthorized use or disclosure of such information. 12 13 Government Regulation and Product Approvals The production and marketing of the Company's products and its research and development activities are subject to regulation by numerous governmental authorities in the United States and other countries. In the United States, pharmaceutical products are subject to the Federal Food, Drug & Cosmetic Act, the Public Health Services Act, and other federal statutes and regulations. These regulations and statutes influence the testing, manufacture, labeling, storage, record keeping, advertising, promotion and approval of such pharmaceutical products. Failure to comply with applicable requirements can result in fines, recall or seizure of products, total or partial suspension of production, refusal by the government to approve marketing of the product and criminal prosecution. In order to obtain FDA approval of a new product, the Company must submit proof of safety, efficacy and stability, and validate its manufacturing processes. These efforts can entail extensive preclinical, clinical and laboratory testing in order to prepare the necessary application for FDA approval. The testing and application process is expensive and time consuming, often taking several years to complete. There is no assurance that the FDA will act favorably or quickly in reviewing such applications. With respect to patented products or technologies, delays imposed by the governmental approval process may materially reduce the period during which the Company will have the exclusive right to exploit them. The FDA approval process for a new pharmaceutical product includes: (i) preclinical laboratory and animal studies to enable FDA approval of an Investigational New Drug ("IND") application; (ii) initial IND clinical studies to define safety and dose parameters; (iii) well-controlled IND clinical trials to demonstrate product efficacy and safety in the target population ("pivotal trials"); and, (iv) submission and FDA approval of an NDA. Preclinical studies involve laboratory evaluation of product characteristics and animal studies to assess the efficacy and safety of the product. Human clinical trials are typically conducted in three sequential phases with some amount of overlap allowed. Phase I trials normally consist of testing the product in a small number of volunteers for safety and pharmacokinetic parameters using single and multiple dosing regimens. In Phase II, continued safety and initial efficacy of the product is evaluated in a somewhat larger patient population for dose ranging. Phase III trials typically involve additional testing for safety and clinical efficacy using multiple dosage regimens in an expanded patient population at multiple clinical testing centers. A clinical plan (or "protocol"), accompanied by the approval of the institution participating in the trials, must be submitted to the FDA prior to commencement of each clinical trial. The FDA may order the temporary or permanent discontinuation of clinical trials at any time. All the results of the preclinical and clinical studies on a pharmaceutical product are submitted to the FDA in the form of an NDA for approval to commence commercial distribution. In responding to an NDA, the FDA may grant marketing approval, require additional testing and/or information, or deny the application. Continued compliance with all FDA requirements and the conditions in an approved application, including product specification, manufacturing process, labeling, promotional material, record keeping and reporting requirements, is necessary throughout the life of the product. Failure to comply, or the occurrence of unanticipated adverse effects during commercial marketing, could lead to the need for product recall or other FDA-initiated actions that could delay further marketing until the products or processes are brought into compliance. The facilities of each pharmaceutical manufacturer must be registered with and approved by the FDA. Continued registration requires compliance with cGMP regulations. Manufacturers must also be registered with the Drug Enforcement Administration ("DEA") and similar state and local regulatory authorities if they handle controlled substances, and with the Environmental Protection Agency ("EPA") and similar state and local regulatory authorities to insure efficient emissions and control is maintained. Certain drugs used in products being developed by the Company are controlled substances and are subject to regulation by the DEA and state and local authorities. Each of these organizations conduct periodic establishment inspections to confirm continued compliance with its regulations. Failure to comply with any of these regulations could result in fines, interruption of production and criminal prosecution. For international markets, a pharmaceutical company is subject to regulatory requirements, interactions and product approvals substantially the same as those in the United States. Although the technical details are different, the trials are substantially the same as the Phase I, II and III trial definitions in the United States regulations. For most of the Company's development agreements, the collaborative partner is responsible for regulatory interactions. However, the Company is responsible for part, or all, of the regulatory interactions on its independently developed products and some of its collaborative products. The time and cost required to obtain these international market approvals may be more or less than that required for FDA approval. There can be no assurance that required approvals from the FDA or foreign regulatory authorities will be obtained on a timely basis, if at all, with respect to TheraTech's products currently under development. Furthermore, future regulatory action, and government compliance measures could significantly impact the Company's launched products and 13 14 those under development and subject the Company to unexpected delays, costs and expenses. Any failure or material delay in obtaining required regulatory approvals or in satisfying applicable government regulations could affect significantly the Company's future revenues and have a material adverse effect on the Company's business, financial condition and results of operations. Product Liability Exposure; Limited Insurance The Company's business exposes it to potential product liability risks which are inherent in the testing, manufacturing, marketing and sale of therapeutic products. Product liability insurance for the pharmaceutical industry generally is expensive, to the extent it is available at all. TheraTech has product liability insurance, however, there can be no assurance that it will be able to maintain such insurance on acceptable terms, that the Company will be able to secure increased coverage as the commercialization of its products increase or that the insurance will provide adequate protection against potential liabilities. A successful claim brought against the Company in excess of the Company's insurance coverage could have a material adverse effect on the Company's business, financial condition and results of operations. Possible Limitations on Health Care Reimbursement TheraTech's ability to successfully commercialize its products may depend in part on the extent to which reimbursement for the costs of such products and related treatments will be available from government health administration authorities, private health coverage insurers and other organizations. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and there can be no assurance that adequate third-party coverage will be available for the Company to maintain price levels or volume sufficient to realize an appropriate return on its investment in developing new drug delivery systems. Government and other third-party payors are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement for new therapeutic products approved for marketing and refusing, in some cases, to provide any coverage for indications for which the FDA and other national health regulatory authorities have not granted marketing approval. If adequate coverage and reimbursement levels are not provided by government and third-party payors for uses of the Company's products, market acceptance of these products could be materially adversely affected. EMPLOYEES As of February 28, 1998, TheraTech had 237 full time and 3 part-time employees, of whom 29 hold Ph.D., Pharm.D. and/or M.D. degrees and 43 hold master's degrees. Of the total number, 147 employees were engaged in research and development activities, 60 employees were in manufacturing, and 33 employees were in finance and administration. TheraTech's management team is composed of pharmaceutical industry specialists, including individuals with experience ranging from project conception and design to regulatory approval process and commercial production. ITEM 2. PROPERTIES TheraTech's executive and principal facilities are located in Salt Lake City, Utah. These facilities include approximately 76,000 square feet of research and development, pilot manufacturing and packaging, and administrative space under one lease. The lease expires in May 1999 and has two, one year renewal options. TheraTech has also entered into a 40-year lease, with an option to renew for an additional ten years, on approximately seven acres of land located in the University of Utah Research Park for its commercial manufacturing facility. TheraTech also maintains approximately 3,000 square feet of leased space for business development and related purposes in Tokyo, Japan. Included in the Utah facilities, TheraTech currently has two pilot cGMP transdermal manufacturing facilities and one pilot cGMP manufacturing facility for oral products. These facilities utilize small scale production machines for product development and clinical production activities. In addition, the Company has installed similar machines, with modifications for higher throughput and increased manufacturing, in its substantially larger, multi-product transdermal manufacturing facility also located in Salt Lake City, Utah. This 63,000 square foot building is owned by TheraTech and has been approved by the FDA for the commercial production of Androderm and Alora. The manufacturing facility has also been approved by the United Kingdom Medicines Control Agency for the production of Andropatch and Alora. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any litigation, other than legal and arbitration proceedings which are believed to be ordinary or routine litigation incidental to its business. There can be no assurance that the Company's pending or future legal proceedings will not have a material adverse effect on the Company's business, financial condition or results of operations. 14 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS TheraTech's common stock is traded on the Nasdaq National Market under the Symbol: THRT. The quarterly high and low sales prices for the calendar years 1996 and 1997 as reported are shown below:
1996: HIGH LOW ---- --- First Quarter $16.83 $10.42 Second Quarter 16.33 12.00 Third Quarter 14.00 8.38 Fourth Quarter 13.63 9.38 1997: HIGH LOW ---- --- First Quarter $14.75 $9.50 Second Quarter 12.25 7.50 Third Quarter 12.13 9.69 Fourth Quarter 12.13 7.00
As of December 31, 1997, there were approximately 243 stockholders of record and approximately 5,100 beneficial owners of TheraTech stock. TheraTech has never declared or paid cash dividends on its common stock and does not anticipate paying cash dividends in the foreseeable future. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is included under "Selected Consolidated Financial Data" in the Company's 1997 Annual Report to Stockholders and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is included under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1997 Annual Report to Stockholders and is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is included in the "Financial Section" in the Company's 1997 Annual Report to Stockholders and is incorporated herein by reference. Such information is listed under Item 14(a)1 of Part IV of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 15 16 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is included under "Election of Directors," "The Board of Directors and Committees," "Executive Officers" and "Other Matters" in the Company's Proxy Statement to be filed in connection with its 1998 Annual Meeting of Stockholders and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is included under "Executive Compensation" in the Company's Proxy Statement to be filed in connection with its 1998 Annual Meeting of Stockholders and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is included under "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement to be filed in connection with its 1998 Annual Meeting of Stockholders and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is included under "Certain Relationships and Related Transactions" in the Company's Proxy Statement to be filed in connection with its 1998 Annual Meeting of Stockholders and is incorporated herein by reference. 16 17 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements and Report of Independent Auditors. The following financial statements of the Company and Report of Independent Auditors are contained in the Company's 1997 Annual Report to Stockholders and are incorporated by reference in Item 8 of Part II of this Report on Form 10-K: Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements Report of Independent Auditors 2. Financial Statement Schedules. The following financial statement schedules are filed as part of this Report on Form 10-K and are incorporated herein by reference: All schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. 3. Exhibits. The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Report on Form 10-K. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended December 31, 1997. (c) See Item 14(a)3 above. (d) See Item 14(a)2 above. 17 18 INDEX TO EXHIBITS (ITEM 14(C))
NUMBER EXHIBITS 3.1 Restated Certificate of Incorporation of the Company. (1) 3.2 Amended Bylaws of the Company. (1) 3.3 Certificate of Amendment to Restated Certificate of Incorporation of the Company. (2) 4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3. 4.2 Specimen Common Stock Certificate of the Company. (3) 10.18* TheraTech, Inc. Amended and Restated 1992 Employees' Stock Option Plan. (4) 10.19* TheraTech, Inc. Amended and Restated 1992 Directors' Stock Option Plan. 10.27* TheraTech, Inc. Deferred Compensation Plan. 13.1 Certain portions of the TheraTech, Inc. 1997 Annual Report to Stockholders, which portions are incorporated by reference into Part II of this Report on Form 10-K. 21.1 Subsidiaries of the Company. (2) 23.1 Consent of Independent Auditors, Ernst & Young LLP. 27.1 Financial Data Schedule for the year ended December 31, 1997. 27.2 Restated Financial Data Schedule for the year ended December 31, 1996.
- ----------------- (1) Incorporated by reference to identically numbered Exhibit to the Company's Registration Statement on Form S-1 (Commission File No. 33-55122), which became effective on December 17, 1992. (2) Incorporated by reference to identically numbered Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. (3) Incorporated by reference to identically numbered Exhibit to the Company's Registration Statement of Form S-1 (Commission File No. 33-46155), which became effective on March 13, 1992. (4) Incorporated by reference to the exhibit filed with the Company's Proxy Statement filed in connection with its 1996 Annual Meeting of Stockholders. * Management contracts or compensatory plans or arrangements. 18 19 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 in Salt Lake City, State of Utah, on the 30th day of March 1998. TheraTech, Inc. By: DINESH C. PATEL ------------------------------------ Dinesh C. Patel, Ph.D. Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and as of the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- DINESH C. PATEL Chairman of the Board, President and March 30, 1998 - --------------------------------- Chief Executive Officer (Principal Executive Officer) Dinesh C. Patel, Ph.D. ALEXANDER L. SEARL Senior Vice President and Chief Financial Officer March 30, 1998 - --------------------------------- (Principal Financial and Accounting Officer) Alexander L. Searl WILLIAM I. HIGUCHI Director March 30, 1998 - --------------------------------- William I. Higuchi, Ph.D. GARY L. CROCKER Director March 30, 1998 - --------------------------------- Gary L. Crocker JAY J. PISIK Director March 30, 1998 - --------------------------------- Jay J. Pisik JAMES T. O'BRIEN Director March 30, 1998 - --------------------------------- James T. O'Brien BOYD J. POULSEN Director March 30, 1998 - --------------------------------- Boyd J. Poulsen, Ph.D. ROBERT K. DEVEER Director March 30, 1998 - --------------------------------- Robert K. deVeer, Jr.
19 20 INDEX TO EXHIBITS
NUMBER EXHIBITS 3.1 Restated Certificate of Incorporation of the Company. (1) 3.2 Amended Bylaws of the Company. (1) 3.3 Certificate of Amendment to Restated Certificate of Incorporation of the Company. (2) 4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3. 4.2 Specimen Common Stock Certificate of the Company. (3) 10.18* TheraTech, Inc. Amended and Restated 1992 Employees' Stock Option Plan. (4) 10.19* TheraTech, Inc. Amended and Restated 1992 Directors' Stock Option Plan. 10.27* TheraTech, Inc. Deferred Compensation Plan. 13.1 Certain portions of the TheraTech, Inc. 1997 Annual Report to Stockholders, which portions are incorporated by reference into Part II of this Report on Form 10-K. 21.1 Subsidiaries of the Company. (2) 23.1 Consent of Independent Auditors, Ernst & Young LLP. 27.1 Financial Data Schedule for the year ended December 31, 1997. 27.2 Restated Financial Data Schedule for the year ended December 31, 1996.
- ----------------- (1) Incorporated by reference to identically numbered Exhibit to the Company's Registration Statement on Form S-1 (Commission File No. 33-55122), which became effective on December 17, 1992. (2) Incorporated by reference to identically numbered Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. (3) Incorporated by reference to identically numbered Exhibit to the Company's Registration Statement of Form S-1 (Commission File No. 33-46155), which became effective on March 13, 1992. (4) Incorporated by reference to the exhibit filed with the Company's Proxy Statement filed in connection with its 1996 Annual Meeting of Stockholders. * Management contracts or compensatory plans or arrangements. EX-10.19 2 MATERIAL CONTRACTS 1 EXHIBIT 10.19 THERATECH, INC. AMENDED AND RESTATED 1992 DIRECTORS' STOCK OPTION PLAN 1. Establishment, Purpose and Definitions. (a) There is hereby adopted the Amended and Restated 1992 Directors' Stock Option Plan (the "Plan") of TheraTech, Inc., a Delaware corporation (the "Company"). The Plan is intended to provide a means whereby directors of the Company who are not officers or employees of the Company ("Non-Employee Director"), as described in subparagraph 3(b) hereof ("Participants"), may be given an opportunity to purchase shares of Stock (as defined in subparagraph 3(a) hereof) of the Company pursuant to options which are not intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code as amended from time to time (the "Code"). (b) The purpose of the Plan is to provide incentives to Participants for increased efforts and successful achievements on behalf of or in the interests of the Company while serving on the Company's Board of Directors (the "Board") and to maximize the rewards due them for such increased efforts and successful achievements. All share amounts of the Stock set forth in paragraph 3 reflect the Company's 3 - for - 2 stock split effected June 28,1996. 2. Administration of the Plan. The Plan shall be administered by the Board. 3. Stock Subject to the Plan. (a) Stock shall mean the Common Stock of the Company or such stock as the Common Stock may be changed as contemplated by paragraph 11 hereof. The maximum number of shares of Stock which may be granted under the Plan shall be 277,500 shares, as adjusted pursuant to paragraph 11 hereof. If any option ceases to be exercisable in whole or in part, the shares which were subject to such option but as to which the option had not been exercised shall continue to be available under the Plan. (b) An option to purchase 11,250 shares of Stock or such other number of shares as the Board may determine shall be granted to each Non-Employee Director elected or appointed to the Board upon the date each first becomes a Non-Employee Director of the Company (the "Initial Grant"). Thereafter, during each year that a Non-Employee Director continues to serve as a Director, such Non-Employee Director shall be granted an option to purchase 8,000 shares of Stock or such other number of shares as the Board may determine (the "Annual Grant"). 4. Eligibility. All Non-Employee Directors shall be eligible to receive grants of Stock options as provided in subparagraph 3(b) hereof. 5. Exercise Price for Options Granted under the Plan. The exercise price per share of Stock covered by each option shall be the per share fair market value of the Stock on the date the option is granted ("Fair Market Value"). The exercise price of an option granted under the Plan shall be subject to adjustment to the extent provided in paragraph 11 hereof. A-1 2 6. Terms and Conditions of Options. (a) Each option granted pursuant to the Plan shall be evidenced by a written stock option agreement executed by the Company and the person to whom such option is granted, containing such terms, provisions and conditions as may be determined by the Board and not inconsistent with the Plan. (b) Each Initial Grant option shall become exercisable as to one-third thereof on the first, second and third anniversary of its grant date. Each Annual Grant option shall be immediately exercisable. If a Participant ceases to be a director of the Company, all options not then exercisable shall terminate. 7. Use of Proceeds. Cash proceeds realized from the sale of Stock pursuant to Stock issued under the Plan shall constitute general funds of Company. 8. Transferability. No option to purchase Stock granted pursuant to the Plan shall be transferable by the Participant other than (i) by will or by the laws of descent and distribution; (ii) pursuant to a qualified domestic relations order (as defined in the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder); or (iii) pursuant to approval by the Board on the terms set forth below. The Board may, in its discretion, authorize all or a portion of the options granted or to be granted to a Participant to be transferred by such Participant to (i) the spouse, children or grandchildren of the Participant ("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit of such Immediate Family Members, or (iii) a partnership or limited liability company in which such Immediate Family Members are the only partners or members, provided that (x) there may be no consideration for any such transfer, (y) the stock option agreement pursuant to which such options are granted or an amendment thereto must be approved by the Board and must expressly provide for transferability in a manner consistent with this paragraph 8, and (z) subsequent transfers of transferred options shall be prohibited except those in accordance with this paragraph 8. Following an authorized transfer, any such options shall continue to be subject to the same terms and conditions as were applicable immediately prior to such transfer, provided that for purposes of the Plan the term "Participant" shall be deemed to include a permitted transferee, as applicable. If a Participant ceases to be a director of the Company, any options transferred in accordance with this paragraph 8 shall be exerciseable by the permitted transferee only to the extent such options were exerciseable by the original Participant at the time immediately prior to the Participant ceasing to be a director, and all other terms and conditions of such options shall be effective with respect to any permitted transferee to the same extent such terms and conditions were applicable to the original Participant. All options shall, subject to the terms of the Plan, during the Participant's lifetime, be exerciseable only by the Participant or by a permitted transferee. In the event an option or options are transferred by a Participant in the manner provided herein, the Participant shall remain subject to any withholding taxes for the amount of the income realized upon exercise of the options, and the Company shall have no obligation to provide notice to the permitted transferee of the termination of the option due to termination of the original Participant's service as a director or the death, disability or retirement of such original Participant. Further, the Company shall be under no obligation to file a registration statement under the Securities Act of 1933, as amended, with respect to the shares issuable upon exercise of any options that have been transferred in the manner provided herein. 9. Payment Upon Exercise. Payment of the exercise price upon exercise of any option to purchase Stock granted under the Plan shall be made in whole or in part with (i) cash, (ii) Stock held by the Participant, (iii) notes, (iv) or such other valuable consideration as the Board, in its discretion, determines and is consistent with the Plan's purpose and applicable law. Any Stock used to exercise options to purchase Stock shall be valued at its fair market value on the date of the exercise of the option. Any notes used to exercise options shall be full recourse, interest-bearing obligations containing such terms as the Board shall determine. A-2 3 10. Withholding Taxes. (a) Shares of Stock issued hereunder shall be delivered to a Participant only upon payment by such person to the Company of the amount of any withholding tax which may be imposed thereon under the provisions of the Code as then in effect or any law of any other taxing jurisdiction requiring such withholding tax. (b) The Board may, under such terms and conditions as it deems appropriate, require a Participant to satisfy withholding tax obligations under this paragraph 10 by having the Company withhold from the Stock to be issued to the Participant shares of Stock having a fair market value equal to the amount of the withholding tax required to be withheld. 11. Merger or Consolidation; Corporate Transactions. If there should be any change in a class of Stock subject to the Plan, through merger, consolidation, reorganization, recapitalization, reincorporation, stock split, stock dividend (in excess of two percent (2%) of the Company's outstanding capital stock) or other change in the corporate structure of the Company, the Company shall make appropriate adjustments in order to preserve, but not to increase, the benefits to Participants, including adjustments in the number of shares and in the price per share of outstanding option grants. Upon the dissolution or liquidation of the Company, the Plan and the options issued hereunder shall terminate. In the event of any of the following transactions (a "Corporate Transaction"): (a) a merger or acquisition in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state of the Company's incorporation, or (b) any reverse merger in which the Company is the surviving entity but in which fifty percent (50%) or more of the Company's outstanding voting stock is transferred to holders different from those who held the stock immediately prior to such merger, outstanding options shall be assumed or equivalent options shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless such successor corporation does not agree to assume the options or to substitute equivalent options, in which case in lieu of such assumption or substitution, Participants shall have the right to exercise their options as to all of the optioned Stock, including shares as to which their options would not otherwise be exercisable. If any option becomes fully exercisable in lieu of assumption or substitution in the event of a Corporate Transaction, the Board shall notify Participants that such options shall be fully exercisable for a period of fifteen (15) days from the date of such notice and will terminate upon the expiration of such period. 12. Amendment and Termination of the Plan. (a) Amendment. The Board, without further approval of the stockholders, may amend the Plan at any time and from time to time in such respects as the Board may deem advisable, subject to any stockholder or regulatory approval required by law, and to any conditions established by the terms of such amendment. (b) Termination and Suspension. The Board, without further approval of the stockholders, may at any time terminate or suspend the Plan. Any such termination or suspension of the Plan shall not affect options already granted hereunder and such options shall remain in full force and effect as if the Plan had not been terminated or suspended. No option may be granted hereunder while the Plan is suspended or after it is terminated. Rights and obligations under any option granted hereunder while the Plan is in effect shall not be altered or impaired by suspension or termination of the Plan, except with the consent of the Participant to whom the option was granted. An option hereunder may be terminated by agreement between the Participant and the Company and, in lieu of the terminated option, a new option may be granted with an exercise price which may be higher or lower than the exercise price of the terminated option. A-3 4 13. Conditions Upon Issuance of Stock. Stock shall not be issued with respect to any option granted under the Plan unless the exercise of such option and the issuance and delivery of such Stock pursuant thereto shall comply with all relevant provisions of law, and the requirements of any stock exchange upon which the Stock may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. Inability of the Company to obtain authority from any regulatory body having jurisdictional authority deemed by its counsel to be necessary to the lawful issuance and sale of any Stock hereunder shall relieve the Company of any liability in respect of the non-issuance or sale of such Stock as to which such requisite authority shall not have been obtained. 14. Reservation of Shares. The Company, during the term of the Plan, will at all times reserve and keep available a number of shares of Stock as shall be sufficient to satisfy the requirements of the Plan. A-4 EX-10.27 3 MATERIAL CONTRACTS 1 EXHIBIT 10.27 THERATECH, INC. DEFERRED COMPENSATION PLAN 1. Purpose The TheraTech, Inc. Deferred Compensation Plan, (the "Plan") is designed to help you save for retirement. The Plan is "Non-Qualified," meaning it is not qualified under Section 401 of the Internal Revenue Code. However the amounts contributed to the Plan by you and your employer are not subject to federal and state income tax until distributed from the Plan. Until distribution, the contributions and any earnings are held in an irrevocable trust known as a "rabbi trust" by an independent trustee, Fidelity Management Trust Company ("Fidelity"). The trust assets must remain subject to the employer's creditors in the event of insolvency in order to avoid current income taxation. As used herein, the term "you" refers to an eligible employee of TheraTech, Inc. as set forth in paragraph 2 below. 2. Eligibility You are eligible to participate in the Plan if you are an employee of TheraTech, Inc. specifically designated to participate in the Plan, and you make at least an 8.5% deferral into the TheraTech, Inc. 401(k) Savings Plan and Trust ("401(k) Plan"). 3. Contributions (a) Employee Deferral Contributions. Subject to your Salary Deferral Agreement, you may defer up to 50% of your eligible compensation and up to 100% of your bonus. Your deferral election will remain in effect until a new one is made. Any new election will not be effective until the first day of the following plan year. (b) Employer Matching Contributions. The employer will make a matching contribution to this Plan in an amount up to 75% of your deferral contributions to this Plan and the 401(k) Plan. Deferral contributions in excess of 8.5% of eligible compensation shall not be matched by the employer. The matching contribution to this Plan will be reduced by the amount of matching contributions made to the 401(k) Plan. (c) Eligible Compensation. Your eligible compensation is equal to your total compensation excluding the value of an incentive or a non-qualified stock option. 2 4. Investments (a) You may invest among the following funds managed by Fidelity Investments: Fidelity Retirement Money Market Portfolio Fidelity Puritan Fund Fidelity Equity Income Fund Fidelity Growth & Income Portfolio Fidelity Contrafund Fidelity Low-Priced Stock Fund Fidelity Freedom Funds Fidelity U.S. Bond Index Fund Spartan U.S. Equity Index Fund Fidelity Diversified International Fund (b) You may redirect your future contributions simply by calling the toll-free number provided by Fidelity. You may also call the same number to make exchanges among the Plan's investment options. You may contact a Fidelity telephone representative between 8:30 AM (ET) and 8:00 PM (ET) on any business day. Exchanges requested before 4:00 PM (ET) will be posted that business day based upon the closing price of the affected mutual fund(s). Exchanges requested after 4:00 PM (ET) will be processed on the next business day. The minimum exchange is the lesser of $250 or 100% of your account balance in the mutual fund. If your exchange is less than $250 then it may only be exchanged into one mutual fund. (c) You may contact a Fidelity representative at 1-800-544-8888 to obtain a prospectus or information about a mutual fund. To protect its shareholders, each fund reserves the right to modify its exchange privileges as outlined in the fund prospectus with sixty days written notice. 5. Vesting (a) The term "vesting" refers to your right to the contributions in your account. You are always 100% vested in your employee contributions. (b) Employer matching contributions will be vested in accordance with the following schedule:
Years of Service for Vesting Percentages less than 2 0 2 25 3 50 4 75 5 100
3 6. Access To Your Money (a) The Plan allows you to take a lump sum payout upon the distribution date you elect on your Salary Deferral Agreement. The distribution dates are (1) attainment of the Plan's Normal Retirement Age (age 59 1/2), (2) termination of employment or (3) a designated date no sooner than one year from the following January 1st. This election applies to your entire account balance. You will have the right to change your election as long as the new election is executed no later than 12 months before the earlier of (1) the date such new election is to be effective or (2) the date payments would otherwise commence. (b) You may request a hardship withdrawal prior to termination of your employment, if you qualify, subject to a $1,000 minimum. 7. Statement Schedule You will receive a statement four times a year within 20 days after February 28, May 31, August 31, and October 31 disclosing the value of your account balances. 8. Incorporation By Reference The Plan is governed by the terms and conditions set forth in the Plan Adoption Agreement dated November 17, 1997 and the Service Agreement between TheraTech, Inc. and Fidelity Management Trust Company, which terms and conditions are incorporated herein by this reference. Contributions to the Plan are also governed by your Salary Deferral Agreement, a form of which is attached hereto. 4 THERATECH, INC. THERATECH, INC DEFERRED COMPENSATION PLAN SALARY DEFERRAL AGREEMENT FOR 1998 As an executive of TheraTech, Inc, you have the opportunity to participate in the TheraTech, Inc Deferred Compensation Plan (the Supplemental Plan). The Plan is provided to you as a supplement to the TheraTech, Inc. 401(k) Savings Plan and Trust (the 401(k) Plan). Due to regulatory limitations, you may not be able to make deferrals into 401(K) Plan to the extent you desire. Also, for some income levels, you could lose a portion of the Company Contribution. The Supplemental Plan supplements those benefits limited under the 401(K) plan. To participate in the Supplemental Plan you must make at least an 8.5% contribution to the 401(K) plan. The IRS deferral limit for 1998 is $10,000. Below you have the opportunity to make three deferral elections: Supplemental Plan I, Supplemental Plan II and a special Supplemental Plan II for any bonus check. The Supplemental Plan I deferrals begin when and if you reach the IRS deferral limit in the 401(K) plan and continue for the remainder of the year. Supplemental Plan II deferrals begin immediately and run the entire year. The special Supplemental Plan II deferral for any bonus check allows you to defer a larger portion of your bonus check and applies only to your bonus check. Your total deferral percentage for both Supplemental Plan I and Supplemental Plan II cannot exceed 50% of pay. Your total deferral percentage for the special Supplemental Plan II for bonus checks can equal up to 100% of your bonus. YOUR SUPPLEMENTAL PLAN I ELECTION MUST BE AT THE SAME PERCENTAGE LEVEL YOU CHOOSE FOR YOUR TAX-DEFERRED 401(K) PLAN CONTRIBUTION. This will maintain a constant cash flow level in your paycheck should you reach the IRS deferral limit for 401(K) plan. This is your Supplemental Plan deferral agreement. IT IS IMPORTANT THAT YOU COMPLETE IT, EVEN IF YOU CHOOSE NOT TO PARTICIPATE. This agreement may be executed in one or more counterparts, each of which is legally binding and enforceable. This agreement is qualified by the terms and conditions of the actual Supplemental Plan document whose provisions are incorporated herein by reference. SUPPLEMENTAL PLAN I DEFERRAL ELECTION (NOTE: Must be at least 8.5% and equal to your 401(K) PLAN percentage. This deferral begins when the IRS maximum deferral limit is reached in 401(K) PLAN.) Check one below: ( ) I elect to participate in the plan from January 1, 1998 to December 31, 1998. I wish to make a Supplemental Plan I deferral in an amount equal to ____% of my pay for 1998. Remember, these deferrals will begin after the tax-deferred -------- limit in 401(K) PLAN has been reached. ( ) I do not want to participate in the plan at this time. I understand that by making this election, I will not be able to participate in this plan for 1998, but that I can elect to participate in future years, if eligible, by filing a new Supplemental Plan agreement. (Please be sure to turn to the last page and sign.) 5 SUPPLEMENTAL PLAN II DEFERRAL ELECTION - (OPTIONAL) (NOTE: This deferral begins with your first paycheck in January and continues the entire year.) IF YOU MADE A SUPPLEMENTAL PLAN I ELECTION ABOVE, you have the option of making a Supplemental Plan II election up to 41.5% of your pay. However, your combined Supplemental Plan I and Supplemental Plan II election cannot exceed 50%. ( ) I wish to make a Supplemental Plan II deferral in an amount equal to _____% of my TOTAL pay for 1998. SPECIAL SUPPLEMENTAL PLAN II DEFERRAL ELECTION FOR 1998 BONUS (OPTIONAL) If you made a Supplemental Plan I election above, you also have the option of specifying a separate Supplemental Plan II deferral percentage for your bonus check, if applicable. For example, this allows you to defer a higher or lower percent of your bonus check than you elected for your regular pay. IF YOU DO NOT MAKE THIS ELECTION, NONE OF YOUR 1998 BONUS CHECK WILL BE DEFERRED INTO THE PLAN. ( ) I wish to make a Special Supplemental Plan II deferral election for my 1998 bonus check in an amount equal to _____% of pay. DISTRIBUTION ELECTION If you elect to participate, you must elect when you wish your entire account balance to be paid to you with respect to deferrals and Company contributions. This election must be made at this time. You will have the right to change your election at a later time as long as that change is executed no later that 12 months before the earlier of (i) the date such modification or variation is to be effective or (ii) the date payments would otherwise commence under the previous election. (a) ______ Attainment of Normal Retirement Age. Normal Retirement Age under the plan is 59-1/2. (b) ______ Termination of employment with the Employer. (c) ______ A lump sum payment on _____________ (no sooner that 1 year from next January 1). 6 INVESTMENT ELECTION I hereby elect the following as the investments in which my account shall be treated as invested: (Indicate a whole percentage for each fund. The total must equal 100%.)
Fund Name Percentage Fidelity Retirement Money Market Portfolio % (0630) --------- Fidelity U.S. Bond Index Portfolio(0651) % --------- Fidelity Puritan Fund (0004) % --------- Fidelity Equity Income Fund (0023) % --------- Spartan U.S. Equity Index Fund (0650) % --------- Fidelity Growth & Income Fund % --------- Fidelity Contrafund (0022) % --------- Fidelity Low-Priced Stock Fund (0316) % --------- Fidelity Diversified International Fund % --------- Fidelity Freedom 2000 Fund (0370) % --------- Fidelity Freedom 2010 Fund (0371) % --------- Fidelity Freedom 2020 Fund (0372) % --------- Fidelity Freedom 2030 Fund (0373) % --------- Fidelity Freedom Income Fund (0369) % --------- Total 100%
BENEFICIARY ELECTION In the event of my death before fulfillment of my account has been made to me, I designate the following beneficiaries for this Supplemental Plan. Primary Beneficiary Name ------------------------------------ Address ------------------------------------ Secondary Beneficiary Name ------------------------------------ Address ------------------------------------ I understand that benefits will be paid to my Primary Beneficiary if my Primary Beneficiary survives me by at least 30 days. Benefits will be paid to my estate if neither the Primary Beneficiary nor the Secondary Beneficiary survives me by at least 30 days. I have the right to change my designation of beneficiaries from time to time by submitting a new form (in writing) to the Secretary of TheraTech, Inc. or his representative. I agree that no change in Beneficiary shall be effective until I receive an acknowledgement from the Secretary of TheraTech, Inc. or his representative. This written acknowledgement should be sent to me at the address below: Name ------------------------------------ Address ------------------------------------ ------------------------------------ ------------------------------------ 7 SIGNATURES By signing this agreement I acknowledge that neither the Company nor any of its employees or agents has any responsibility whatsoever for any elections I make in other personal plans or programs as a result of my decision regarding the Supplemental Plan and they are fully released to such extent. All other terms of this deferral agreement shall be governed by the TheraTech, Inc. Deferred Compensation Plan (and any amendments) which is in effect at the time of this election. All other terms and conditions of that plan are incorporated by reference herein. In witness whereof, the Company and I have executed this Deferral Agreement for the period beginning January 1, 1998. EXECUTIVE: THERATECH, INC.: - ------------------------------- ---------------------------------------- Signature Signature - ------------------------------- ---------------------------------------- Type or Print Name Type or Print Name - ------------------------------- ---------------------------------------- Date Date EX-13.1 4 ANNUAL REPORT TO SECURITY HOLDERS 1 THERATECH, INC. EXHIBIT 13.1 ---------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Since its inception in January 1985, TheraTech has devoted substantially all of its resources to drug delivery research and development programs. TheraTech develops advanced, controlled release and other drug delivery products which administer drugs through the skin, by oral delivery to the gastrointestinal tract, through tissues in the oral cavity, through absorption in the lungs and by other means. TheraTech product development activities have been conducted independently or pursuant to collaborative research and development agreements generally with pharmaceutical companies ("Collaborative Partners"). For independently developed products, TheraTech has entered into licensing, marketing and distribution agreements generally with pharmaceutical companies to market TheraTech manufactured products, or has transferred the technology to other companies. TheraTech continues to devote substantial resources to the development of drug delivery technologies and product development programs. The Company has entered into various product development, licensing, marketing, manufacturing and supply agreements with Collaborative Partners. Product development and licensing agreements generally provide for TheraTech to receive payments in various forms, which can include licensing fees and other payments upon the execution of an agreement, milestone payments upon achievement of certain technical and regulatory goals and periodic payments in the form of cost reimbursements for product development and clinical evaluation of a specified product, including a portion of general and administrative expenses. Manufacturing and supply agreements provide for TheraTech to manufacture and transfer products to Collaborative Partners, which allows TheraTech to earn product sales revenues in a variety of ways. In general, product sales represent sales to TheraTech's marketing partners for resale purposes or contract payments. Product sales may be recognized based on one or a combination of the following: (i) TheraTech's fully burdened manufacturing cost; (ii) a fixed or variable manufacturing profit; (iii) a transfer of product where the price is based on a percentage of the marketing partners' sales to their clients; and/or (iv) a royalty on the partners' product sales. Certain agreements also require the marketing partner to meet certain production volumes or pay TheraTech's fixed production costs. Accordingly, TheraTech's product sales do not necessarily reflect the existing or future market demand for such products. The Company's results of operations may vary significantly from quarter to quarter and depend, among other factors, on the signing of new product development agreements, the timing of fees and milestone payments made by Collaborative Partners, the progress of clinical trials, product sales levels and costs associated with the manufacturing processes. The timing of the Company's research and development revenues may not match the timing of the associated expenses. The amount of revenues in any given period is not necessarily indicative of future revenues. To date, four research and development programs have resulted in commercialized products. TheraTech has received marketing clearance from the United States Food and Drug Administration ("FDA") for its Alora(R) estradiol transdermal systems for women and its Androderm(R) two and one half milligram ("2.5 mg") testosterone transdermal system for men. Both received marketing clearances within one year of their respective initial submissions. During 1997, TheraTech also received marketing clearance for its Androderm(R) five milligram ("5 mg") product within six months of filing its supplemental New Drug Application ("sNDA") with the FDA. These are the Company's first three commercial products in the United States. The testosterone transdermal systems for men have also been approved in certain European countries under different trade names. TheraTech also has a nitroglycerin transdermal product which has been approved in certain European countries and has been launched by TheraTech's marketing partners in France, Greece, Holland and Italy. Worldwide marketing rights (excluding certain Asian countries) have been granted to Procter & Gamble Pharmaceuticals, Inc. ("Procter & Gamble") for TheraTech's estradiol transdermal products and its estradiol/progestin combination product which is currently in Phase III clinical trials. TheraTech's estradiol transdermal products are marketed under the trade name Alora and are available in 0.05, 0.075, and 0.1 mg per day dosage strengths. TheraTech made its initial shipments of these products to Procter & Gamble in March 1997 and the commercial launch of Alora commenced in the United States in May 1997. In December 1997, TheraTech and Procter & Gamble announced an agreement to develop and market a transdermal female testosterone product which is in Phase II clinical trials and a transdermal female estradiol/testosterone combination product which is in Phase I clinical trials. 2 THERATECH, INC. ---------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In September 1997, TheraTech announced that Astra AB ("Astra") had been granted exclusive distribution and marketing rights to the Androderm testosterone transdermal systems for men in Germany, Austria and Switzerland, it already had rights to the products in Scandinavia. In December 1997, TheraTech announced a similar agreement with Schwarz Pharma covering Belgium, France, Italy, the Netherlands and certain East European countries. Marketing rights to these countries were reacquired from SmithKline Beecham and Fournier earlier in the year. TheraTech also has marketing agreements for its testosterone transdermal systems with: SmithKline Beecham in the United States, Canada, Ireland and the United Kingdom; Compania Espanola de la Penicilina y Antibioticos, S.L. ("CEPA") in Spain; Laborterapia - Produtos Farmaceuticos, S.A. ("Laborterapia") in Portugal; Wyeth-Ayerst International, Inc. ("Wyeth-Ayerst") in Mexico, Central and South America, non-French-speaking Africa and the Middle East; and Samyang Corporation ("Samyang") in South Korea. The 2.5 mg testosterone transdermal product has received approval and is currently being marketed under the following trade names: Androderm, by SmithKline Beecham in the United States and by Samyang in South Korea; Andropatch(TM), by SmithKline Beecham in Ireland and the United Kingdom; and Atmos(R), by Astra in Denmark, Finland, and Sweden. TheraTech intends to assign marketing rights in the remaining unassigned territories. In May 1997, TheraTech and SmithKline Beecham announced that the FDA had cleared the Androderm 5 mg product for marketing in the United States. The commercial launch of this product by SmithKline Beecham occurred in the United States in June 1997. The 5 mg product has also been approved in certain European countries and is being marketed in Ireland and the United Kingdom by SmithKline Beecham under the trade name Andropatch and in Sweden by Astra under the trade name Atmos. The original testosterone transdermal product was a two-patch per day, 2.5 mg system. The new 5 mg patch restores testosterone levels to a normal range by continuous delivery of testosterone for 24 hours in a convenient one-patch per day formulation. Both Androderm 2.5 mg and 5 mg products are currently available to meet patient needs. TheraTech was responsible for filing with the FDA the Androderm 2.5 mg New Drug Application ("NDA") and the Androderm 5 mg sNDA in the United States. In all other countries, TheraTech's partners are responsible for filing and obtaining regulatory approvals to market the male testosterone product. The ability to market and the timing of the testosterone product launch in the various countries is dependent upon obtaining the necessary regulatory approvals. To date, the Company's product sales, operating results and assets associated with operations outside the United States have not been a significant portion of the Company's consolidated business. For each of the years ended December 31, 1997, 1996 and 1995, less than 10 percent of the Company's total revenues, including product sales, licensing fees, and research and development revenue, were attributable to export sales and other revenues derived from foreign sources. RESULTS OF OPERATIONS For the year ended December 31, 1997, the Company had net income of $5,851,000, equal to $0.27 per share. This compares to net income of $4,225,000 or $0.20 per share, and a net loss of $7,841,000 or $0.40 per share for the years ended December 31, 1996 and 1995, respectively. The Company had total revenues of $39,750,000, $36,361,000 and $24,521,000 for the years ended December 31, 1997, 1996 and 1995, respectively. RESEARCH AND DEVELOPMENT REVENUES were $20,240,000, $20,413,000 and $15,998,000 for the years ended December 31, 1997, 1996 and 1995, respectively. During 1997, TheraTech earned a majority of its revenues from its collaborative development programs with Procter & Gamble involving (i) Phase III development activities on the estradiol/progestin combination product; (ii) technical support for the Alora market launch, continuing estradiol development activities necessary for foreign regulatory approval, along with stability studies and clinical trials associated with the estradiol program; and (iii) Phase II clinical and development activities for the female testosterone transdermal product. Other programs included preclinical research and development activities on the OTM delivery technology under the multi-product collaboration with Eli Lilly and Company ("Lilly") signed in January 1997 and on-going development activities on the 5 mg testosterone product for SmithKline Beecham and other partners. With the commercial launches of Alora in May 1997 and the Androderm 5 mg product in June 1997, major development activities for these products were being completed. As a result, research and development revenues for these products decreased in the 1997 period compared to the 1996 period. This decrease was largely offset by revenues generated from other product development programs. 2 3 THERATECH, INC. ---------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS During 1996, TheraTech earned revenues for: (i) estradiol commercialization activities performed for Procter & Gamble, which included a milestone payment for the FDA clearance in December 1996 to market the estradiol transdermal system for women in the United States; (ii) estradiol/progestin combination product development activities also with Procter & Gamble, which completed Phase II studies and initiated Phase III clinical trials; (iii) development activities on the 5 mg testosterone product for SmithKline Beecham and Wyeth-Ayerst, which included filing an sNDA with the FDA in October 1996; (iv) product development activities on oxybutynin for Meiji Milk Products Co. ("Meiji"), in the form of milestone payments; and (v) providing supplies for additional Androderm clinical trials, supporting Collaborative Partners with foreign regulatory filings and other research and development activities. The milestone payment received for the FDA approval of Alora is primarily the reason for the increase in revenues from 1995 to 1996. A substantial portion of research and development revenues in 1995 resulted primarily from an agreement signed in 1995 with Procter & Gamble to develop and market new hormone replacement products for women. Under this agreement, TheraTech received significant milestone payments for the estradiol NDA submission and for the completion of Phase I studies on the estradiol/progestin combination product. TheraTech also earned from Procter & Gamble cost reimbursements of research and development expenses for these products. During 1995, milestone and cost reimbursement payments were also received from SmithKline Beecham, Grelan Pharmaceutical Co., Ltd and Nichiiko Pharmaceutical Co., Ltd. PRODUCT SALES for the years ended December 31, 1997, 1996 and 1995 were $15,470,000, $11,296,000 and $4,318,000, respectively. TheraTech began shipping initial supplies of Alora to Procter & Gamble in March 1997, and retail distribution and promotion to physicians by Procter & Gamble began in May 1997. Also in May, TheraTech began shipping initial supplies of the new Androderm 5 mg product to SmithKline Beecham. Retail distribution and promotion to physicians of this product by SmithKline Beecham began in June 1997. TheraTech also recorded sales of the nitroglycerin product in certain European countries reported by Lavipharm S.A. ("Lavipharm"). As a result, product sales increased in the 1997 period. Product sales during 1996 relate primarily to TheraTech's 2.5 mg testosterone transdermal products including Androderm, Andropatch and Atmos. Product sales during 1996 also include (i) client contract payments received by Natrapac, Inc., a wholly-owned consumer products subsidiary of TheraTech for providing non-pharmaceutical packaging services, (ii) repackaging of patient and physician inserts into cartons of Androderm, (iii) payments for fixed production costs, and (iv) royalties on sales by Lavipharm of the nitroglycerin product in Italy, France and Greece. Product sales during 1995 were primarily from the launch of the Androderm 2.5 mg product in the United States. The Company also recognized revenue on Lavipharm's sales of the nitroglycerin product which was launched in Italy and France during 1995. LICENSING REVENUES were $2,495,000, $2,999,000 and $2,715,000 for the years ended December 31, 1997, 1996 and 1995, respectively. During the 1997, TheraTech granted distribution and marketing rights for the testosterone transdermal system for men to Schwartz Pharma in 13 European and East European countries, and to Astra in Germany, Austria and Switzerland. Procter & Gamble also extended its marketing rights for the estradiol and estradiol/progestin combination products into certain Asian countries. Additionally, TheraTech earned licensing revenues from Wyeth-Ayerst for the achievement of milestones under a testosterone product licensing agreement and from Samyang under an estradiol product licensing agreement. During the 1996 period, TheraTech earned licensing revenues from SmithKline Beecham, Wyeth-Ayerst and Astra for achieving milestones under their testosterone product licensing agreements and from Samyang for milestones under an estradiol/progestin combination product licensing agreement and testosterone product licensing agreement. During 1995, TheraTech earned licensing fees by achieving milestones for the approval of Androderm in the United States and upon regulatory submission of the 2.5 mg testosterone transdermal product in France. Also during the period, the Company earned fees upon signing agreements with Wyeth-Ayerst and Astra for distribution of the testosterone transdermal 3 4 THERATECH, INC. ---------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS product. Licensing fees also included the payment by Procter & Gamble for worldwide (excluding Asian countries) marketing rights covering new female hormone replacement products. INTEREST AND OTHER REVENUES were $1,544,000, $1,653,000 and $1,490,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Interest and other revenues consist primarily of interest income. The Company earned interest income of $1,461,000, $1,296,000 and $1,438,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Interest income increased during the 1997 period from the 1996 period due to higher average balances in cash, cash equivalents and investments. Interest income during the 1996 period decreased from the 1995 period due to lower yields on lower average balances in cash, cash equivalents and investments. Other revenues in the 1997 period consisted primarily of intermediate materials sold to Collaborative Partners. Other revenues in the 1996 period consisted primarily of a settlement with a supplier of manufacturing materials, intermediate materials sold to a Collaborative Partner and a foreign currency transaction gain on a Collaborative Partner payment. RESEARCH AND DEVELOPMENT EXPENSES for the years ended December 31, 1997, 1996 and 1995 were $16,952,000, $18,086,000 and $19,959,000, respectively. Research and development programs during the 1997 period include the following: (i) estradiol/progestin combination product development activities, including certain Phase III clinical costs; (ii) preclinical research and development on the pulmonary drug delivery technology; (iii) continuing estradiol development activities necessary for foreign regulatory approval, along with stability studies and clinical costs associated with the program; (iv) preclinical research and development activities on the OTM drug delivery technology; (v) Androderm 5 mg development and commercialization activities including interactions with the FDA; (vi) Phase II clinical and development activities for the female testosterone transdermal product; (vii) Phase II oxybutynin development activities in the United States and Phase I development activities for Meiji's oxybutynin product in Japan; (viii) Phase I development activities for the nicotine oral lozenge product; and (ix) various other collaboratively and independently developed products and technologies in several areas including transdermal, oral controlled release, pulmonary and drug targeting. With the commercial launches of Alora in May 1997 and the Androderm 5 mg product in June 1997, major development activities for these products were being completed. As a result, research and development expenses for these products decreased in the 1997 period compared to the 1996 period. The reduction in 1996 compared to 1995 was the result of Phase III clinical trials and NDA preparation activities for the estradiol transdermal product and Androderm commercialization activities conducted during 1995 and not repeated in 1996. This decrease was partially offset by additional spending on: (i) commercialization, pre-approval inspection preparation and follow-up activities for the estradiol transdermal product; (ii) estradiol/progestin combination product development activities including completion of Phase II studies and initiation of Phase III clinical trials; (iii) testosterone single patch per day product development activities; (iv) female testosterone product Phase I and Phase II clinical activities; and (v) other projects funded by Collaborative Partners and by TheraTech. During 1995, research and development expenses included the completion of Phase III clinical studies and the NDA submission for TheraTech's estradiol transdermal product, validation of the manufacturing process for Androderm, preproduction start-up expenses and costs associated with new and existing programs. Preproduction start-up expenses which included costs associated with staffing, training and operating the Company's commercial manufacturing facility were required to obtain regulatory approvals and prepare for product commercialization. COST OF PRODUCTS SOLD for the years ended December 31, 1997, 1996 and 1995 were $10,640,000, $8,009,000 and $4,711,000, respectively, which included direct and indirect manufacturing costs attributable, in the 1997 period to production of the testosterone transdermal products and Alora, and in the 1996 period to the production of Androderm, Atmos and Andropatch, and the packaging cost associated with the Natrapac client contract. Gross margin on products sold improved to 31.2 percent for 1997, compared to 29.1 percent for 1996 and a negative 9.1 percent for 1995. The improved gross margins resulted from increased revenues recognized on Collaborative Partners shipments of products to their customers and improved production efficiencies. 4 5 THERATECH, INC. ---------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL AND ADMINISTRATIVE EXPENSES for the years ended December 31, 1997, 1996 and 1995 were $5,370,000, $4,935,000 and $6,694,000, respectively. The increase in expenses during 1997 is primarily due to outside services associated with business development and the negotiation of several contracts. The reduction of expenses in the 1996 period was primarily the result of 1995 outside services associated with the negotiation of several contracts being greater than such services in 1996. Expenses in 1995 included outside legal and consulting fees incurred in connection with marketing and supply agreements, costs to re-acquire the testosterone transdermal product marketing rights in Scandinavia, as well as the costs associated with growth in Japanese operations. INTEREST AND OTHER EXPENSES for the years ended December 31, 1997, 1996 and 1995 were $937,000, $1,106,000 and $998,000, respectively. Interest and other expenses consist primarily of interest expense. The Company incurred interest expense of $888,000, $1,060,000 and $972,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The reduction in interest expense between 1997 and 1996 reflects lower total debt resulting from monthly payments of principal and interest toward notes payable and capital lease obligations. The increase in interest expense from 1995 to 1996 reflects an increase in capital lease obligations which were entered into in late 1995, partially offset by the payment of notes payable and capital lease obligations during 1996. LIQUIDITY AND CAPITAL RESOURCES Since its inception, TheraTech has funded its operations primarily through equity and debt financing, collaborative research and development agreements, product sales, licensing fees, and other revenues. As of December 31, 1997 and 1996, TheraTech had cash, cash equivalents and investments totaling $27,379,000 and $25,215,000, respectively. This increase was primarily the result of cash provided by operating activities, partially offset by cash used in investing activities (when adjusted for the net purchases and sales of securities) and financing activities as reflected in the Company's Consolidated Statements of Cash Flows. Net cash provided by operating activities for the years ended December 31, 1997 and 1996 was $7,141,000 and $4,039,000, respectively, compared to net cash used in operating activities of $4,300,000 for 1995. Cash provided in 1997 and 1996 was primarily a result of net income and adjustments of non-cash expenses for depreciation and amortization, as compared to a net loss in 1995. The increase in cash during 1997 was partially offset by small increases in inventories and receivables along with decreases in unearned revenue, accounts payable and accrued liabilities. The increase in cash during 1996 was partially offset by increases in contracts and accounts receivable and a decrease in accounts payable and accrued liabilities. The net cash provided by operating activities in 1997 is not necessarily indicative of future levels. As a result of changing levels of product sales and production costs, the amount and timing of milestone payments and licensing fees, and the timing of expenditures for new and existing product development programs, net income and accordingly the levels of net cash from operations will vary from year to year. The Company's investing activities during the year ended December 31, 1997 used $10,704,000 compared to cash provided of $1,390,000 during 1996. Cash used in the 1997 period was primarily for the purchase of investment securities with the Company's excess cash. TheraTech evaluates its total cash position by including all its investments. If the net effect of cash used for the purchase and sales of securities were removed, investing activities would have used $4,402,000 during 1997 and used $2,976,000 during 1996. Cash used in the 1997 period reflects the purchases of equipment, leasehold improvements and intangible assets, which was primarily a non-exclusive, world-wide sublicense of certain patents relating to female hormone treatment. Cash used during 1996 was primarily for plant expansion costs and the purchase of equipment for manufacturing and research and development, partially offset by the release of cash previously restricted as part of a covenant in a financing agreement. In a non-cash transaction, the Company acquired the marketing rights of certain hormone replacement therapy products which were subsequently licensed to a Collaborative Partner. The transaction has been reflected as an increase in intangible assets and other liabilities, and requires only principal payments over five years beginning in 1998. 5 6 THERATECH, INC. ---------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cash used in investing activities is generally a function of capital expenditures. The Company's future capital expenditure requirements will depend upon numerous factors, including the progress of research and development activities, the resources that the Company devotes to the independent development of products and technologies, and the need for additional manufacturing plant and equipment due to the demand for its other products, if and when approved. Net cash used in financing activities for the years ended December 31, 1997 and 1996 was $530,000 and $739,000, respectively. Cash used in the 1997 and 1996 periods consist primarily of payments on notes payable and capital lease obligations, largely offset by proceeds from the issuance of stock in both the employee stock purchase plan and the employee stock option plan, and in 1996, from a short-term note with a client company. Based upon current expectation of operations and capital expenditures for 1998, the Company anticipates that its available cash, cash equivalents and investments plus anticipated revenues from collaborative agreements, product licensing and sales, interest income and bank financing should be sufficient to fund its current capital requirements and operating activities. Year 2000 Issue The Company has determined that it will need to modify or replace significant portions of its software to enable its computer systems to function properly with respect to dates in the year 2000 and beyond. The Company also has initiated discussions with its large customers, significant suppliers and financial institutions to ensure that those parties have appropriate plans to remediate Year 2000 issues where their systems interface with the Company's systems or otherwise impact its operations. The Company is assessing the extent to which its operations are vulnerable should those organizations fail to properly remediate their computer systems. The Company's Year 2000 initiative is being managed by a team of internal staff and outside consultants. The team's activities are designed to ensure that there are no adverse effects on the Company's core business operations and that transactions with customers, suppliers and financial institutions are fully supported. The Company is well underway with these efforts, which are scheduled to be completed in mid-1999. While the Company believes that its planning efforts are adequate to address its Year 2000 concerns and that expenditures associated with Year 2000 compliance will not have a material impact on anticipated earnings in 1998 or 1999, there can be no assurance that unexpected difficulties will not arise or prevent TheraTech's and other companies systems from being converted on a timely basis or that such expenditures will not have a material adverse effect on the Company's business, financial condition or results of operations. New Accounting Pronouncements The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", which is effective for fiscal years beginning after December 15, 1997. SFAS No. 130 requires all items that are recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Examples of other comprehensive income include foreign currency items, unrealized gains and losses on certain investments in debt and equity securities and minimum pension liability adjustments. It is not anticipated that the adoption of this statement will have a material effect on the financial statements of the Company. 6 7 THERATECH, INC. ----------------- SELECTED CONSOLIDATED FINANCIAL DATA (In thousands, except per share data)
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- STATEMENTS OF OPERATIONS DATA: Revenues: Research and development $ 20,241 $ 20,413 $ 15,998 $ 3,228 $ 2,063 Product sales 15,470 11,296 4,318 -- -- Licensing 2,495 2,999 2,715 4,277 3,300 Interest and other 1,544 1,653 1,490 1,282 902 -------- -------- -------- -------- -------- Total revenues 39,750 36,361 24,521 8,787 6,265 Costs and expenses: Research and development 16,952 18,086 19,959 15,581 8,957 Cost of products sold 10,640 8,009 4,711 -- -- General and administrative 5,370 4,935 6,694 4,545 3,617 Interest and other 937 1,106 998 298 120 Purchase of in-process technology -- -- -- -- 1,446 -------- -------- -------- -------- -------- Total costs and expenses 33,899 32,136 32,362 20,424 14,140 -------- -------- -------- -------- -------- Net income (loss) $ 5,851 $ 4,225 $ (7,841) $(11,637) $ (7,875) ======== ======== ======== ======== ======== Net income (loss) per share - basic (1) $ 0.28 $ 0.21 $ (0.40) $ (0.61) $ (0.50) ======== ======== ======== ======== ======== Net income (loss) per share - diluted (1) $ 0.27 $ 0.20 $ (0.40) $ (0.61) $ (0.50) ======== ======== ======== ======== ======== BALANCE SHEET DATA: Cash, cash equivalents and investments $ 27,379 $ 25,215 $ 25,098 $ 29,050 $ 18,749 Working capital 24,710 22,302 14,530 20,012 14,831 Total assets 61,861 53,847 50,836 49,818 28,060 Notes payable and capital lease obligations, less current portion 7,261 8,661 10,320 8,662 652 Accumulated deficit (27,210) (33,061) (37,286) (29,445) (17,808) Stockholders' equity 43,557 36,022 30,391 37,307 22,595
- --------- 1) The net income (loss) per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, "Earnings per Share". For further discussion on earnings per share and the impact of Statement No. 128, see the notes to the consolidated financial statements. 8 THERATECH, INC. ----------------- CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------------------ 1997 1996 1995 ------------ ------------ ------------ Revenues: Research and development revenue under collaborative agreements $ 20,240,486 $ 20,413,161 $ 15,997,563 Product sales 15,469,831 11,296,298 4,318,193 Licensing 2,495,000 2,999,000 2,715,000 Interest and other 1,544,302 1,653,083 1,490,777 ------------ ------------ ------------ Total revenues 39,749,619 36,361,542 24,521,533 Costs and expenses: Research and development 16,952,259 18,086,153 19,959,358 Cost of products sold 10,639,550 8,008,967 4,711,102 General and administrative 5,370,070 4,935,429 6,694,112 Interest and other 936,991 1,106,084 997,550 ------------ ------------ ------------ Total costs and expenses 33,898,870 32,136,633 32,362,122 ------------ ------------ ------------ Net income (loss) $ 5,850,749 $ 4,224,909 $ (7,840,589) ============ ============ ============ Net income (loss) per share - basic $ 0.28 $ 0.21 $ (0.40) ============ ============ ============ Net income (loss) per share - diluted $ 0.27 $ 0.20 $ (0.40) ============ ============ ============
See accompanying notes. 9 THERATECH, INC. ----------------- CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, ---------------------------- 1997 1996 ------------ ------------ Current assets: Cash and cash equivalents $ 14,979,465 $ 19,116,991 Short-term investments 9,397,948 4,097,419 Contracts and accounts receivable 4,847,106 4,726,112 Inventories 2,830,270 2,277,021 Prepaid expenses 66,095 36,127 ------------ ------------ Total current assets 32,120,884 30,253,670 Investments in long-term securities 3,001,938 2,000,468 Plant and equipment: Plant 9,301,171 9,301,171 Equipment 15,039,772 11,950,618 Leasehold improvements 806,740 986,703 Construction in progress 2,395,759 2,929,228 ------------ ------------ 27,543,442 25,167,720 Less accumulated depreciation and amortization (8,225,341) (5,737,034) ------------ ------------ Net plant and equipment 19,318,101 19,430,686 Other assets: Intangible assets 7,115,879 1,165,998 Other assets 304,008 995,980 ------------ ------------ Total other assets 7,419,887 2,161,978 ------------ ------------ Total assets $ 61,860,810 $ 53,846,802 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,517,512 $ 1,360,512 Accrued liabilities 1,941,915 2,383,698 Current portion of notes payable and capital lease obligations 1,397,763 1,609,587 Unearned revenue 2,553,237 2,597,942 ------------ ------------ Total current liabilities 7,410,427 7,951,739 Notes payable, less current portion 5,135,569 5,684,880 Capital lease obligations, less current portion 2,125,366 2,975,864 Other liabilities 3,420,000 -- Unearned revenue 212,000 1,212,000 Commitments and contingencies Stockholders' equity: Common stock, $0.01 par value: Authorized - 50,000,000 shares; issued and outstanding 21,019,255 as of December 31, 1997 and 20,563,395 as of December 31, 1996 210,193 205,634 Additional paid-in capital 70,840,782 69,116,551 Accumulated deficit (27,210,414) (33,061,163) Cumulative translation adjustment (283,113) (238,703) ------------ ------------ Total stockholders' equity 43,557,448 36,022,319 ============ ============ Total liabilities and stockholders' equity $ 61,860,810 $ 53,846,802 ============ ============
See accompanying notes. 10 THERATECH, INC. ----------------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL UNREALIZED ------------------------------- PAID-IN GAIN (LOSS) SHARES PAR VALUE CAPITAL ON INVESTMENTS --------------- --------------- --------------- --------------- Balance at December 31, 1994 19,599,297 $ 195,993 $ 66,584,075 $ (52,958) Common stock issued upon exercise of stock options 377,025 3,770 742,909 -- Common stock issued in the employee stock purchase plan 31,386 315 160,772 -- Compensation expense related to the grant of stock options -- -- 21,392 -- Unrealized gain on investments held as available-for-sale -- -- -- 132,899 Cumulative translation adjustment -- -- -- -- Net loss -- -- -- -- --------------- --------------- --------------- --------------- Balance at December 31, 1995 20,007,708 200,078 67,509,148 79,941 Common stock issued upon exercise of stock options 519,321 5,193 1,313,287 -- Common stock issued in the employee stock purchase plan 36,385 363 293,448 -- Repurchase of fractional shares resulting from the 3-for-2 stock split (19) -- (288) -- Compensation expense related to the grant of stock options -- -- 956 -- Change in unrealized gain on investments held as available-for-sale -- -- -- (79,941) Cumulative translation adjustment -- -- -- -- Net income -- -- -- -- --------------- --------------- --------------- --------------- Balance at December 31, 1996 20,563,395 205,634 69,116,551 -- Common stock issued upon exercise of stock options, net 379,650 3,797 1,016,636 Common stock issued in the employee stock purchase plan, net 43,525 435 374,922 -- Common stock issued for in-process technology 32,685 327 332,673 -- Cumulative translation adjustment -- -- -- -- Net income -- -- -- -- --------------- --------------- --------------- --------------- Balance at December 31, 1997 21,019,255 $ 210,193 $ 70,840,782 $ - =============== =============== =============== ===============
CUMULATIVE TOTAL ACCUMULATED TRANSLATION STOCKHOLDERS' DEFICIT ADJUSTMENT EQUITY ---------------- -------------- --------------- Balance at December 31, 1994 $ (29,445,483) $ 25,361 $ 37,306,988 Common stock issued upon exercise of stock options -- -- 746,679 Common stock issued in the employee stock purchase plan -- -- 161,087 Compensation expense related to the grant of stock options -- -- 21,392 Unrealized gain on investments held as available-for-sale -- -- 132,899 Cumulative translation adjustment (137,006) (137,006) Net loss (7,840,589) -- (7,840,589) ---------------- -------------- --------------- Balance at December 31, 1995 (37,286,072) (111,645) 30,391,450 Common stock issued upon exercise of stock options -- -- 1,318,480 Common stock issued in the employee stock purchase plan -- -- 293,811 Repurchase of fractional shares resulting from the 3-for-2 stock split -- -- (288) Compensation expense related to the grant of stock options -- -- 956 Change in unrealized gain on investments held as available-for-sale -- -- (79,941) Cumulative translation adjustment -- (127,058) (127,058) Net income 4,224,909 -- 4,224,909 ---------------- -------------- --------------- Balance at December 31, 1996 (33,061,163) (238,703) 36,022,319 Common stock issued upon exercise of stock options, net -- -- 1,020,433 Common stock issued in the employee stock purchase plan, net -- -- 375,357 Common stock issued for in-process technology -- -- 333,000 Cumulative translation adjustment -- (44,410) (44,410) Net income 5,850,749 -- 5,850,749 ---------------- -------------- --------------- Balance at December 31, 1997 $ (27,210,414) $ (283,113) $ 43,557,448 ================ ============== ===============
See accompanying notes. 11 THERATECH, INC. ----------------- CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, -------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ OPERATING ACTIVITIES: Net income (loss) $ 5,850,749 $ 4,224,909 $ (7,840,589) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 3,056,619 2,354,279 1,552,362 Common stock issued for in-process technology 333,000 -- -- Compensation expense related to the grant of stock options -- 956 21,392 Changes in operating assets and liabilities: Contracts and accounts receivable (120,994) (2,568,553) (1,139,339) Inventories (553,249) 141,495 (2,418,516) Prepaid expenses 284,117 409,214 (46,386) Accounts payable and accrued liabilities (664,783) (688,455) 2,146,684 Unearned revenue (1,044,705) 165,120 3,424,322 ------------ ------------ ------------ Net cash provided by (used in) operating activities 7,140,754 4,038,965 (4,300,070) INVESTING ACTIVITIES: Purchases of securities (12,411,000) (5,519,041) (10,252,075) Sales and maturities of securities 6,109,001 9,884,968 11,200,326 Purchases of plant and equipment (2,677,467) (3,628,421) (3,962,822) Purchase of intangible assets (2,416,448) (107,739) (170,922) Changes in other assets 691,972 760,440 1,215,783 ------------ ------------ ------------ Net cash provided by (used in) investing activities (10,703,942) 1,390,207 (1,969,710) FINANCING ACTIVITIES: Proceeds from issuance of notes payable and capital lease obligations -- 300,000 4,069,477 Proceeds from issuance of common stock, net 1,395,790 1,612,003 907,766 Payments of notes payable and capital lease obligations (1,925,718) (2,651,478) (1,706,564) ------------ ------------ ------------ Net cash provided by (used in) financing activities (529,928) (739,475) 3,270,679 Effect of exchange-rate changes on cash and cash equivalents (44,410) (127,058) (137,006) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (4,137,526) 4,562,639 (3,136,107) Cash and cash equivalents at beginning of period 19,116,991 14,554,352 17,690,459 ============ ============ ============ Cash and cash equivalents at end of period $ 14,979,465 $ 19,116,991 $ 14,554,352 ============ ============ ============
See accompanying notes. 12 THERATECH, INC. ----------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ACCOUNTING POLICIES Organization and Business Activities TheraTech, Inc. ("TheraTech" or the "Company") was incorporated in January 1985 and develops advanced, controlled release and other drug delivery products which administer drugs through the skin, by oral delivery to the gastrointestinal tract, through tissues in the oral cavity, through absorption in the lungs and by other means. The Company designs, develops and manufactures products which it believes utilize the most effective delivery method for administering a given drug. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries Nippon TTI K.K. ("TheraTech Japan") and Natrapac, Inc. ("Natrapac"). All significant intercompany accounts and transactions have been eliminated. Estimates Preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Reclassifications Certain prior year amounts have been reclassified to conform with the 1997 presentation. Revenues The Company has entered into various collaborative research and development, product licensing and marketing agreements with certain pharmaceutical companies ("Collaborative Partners"). These agreements provide for TheraTech to receive payments in various forms, which can include licensing fees and other payments upon execution of an agreement, milestone payments upon achievement of certain technical and regulatory goals and periodic payments in the form of cost reimbursements for product development and clinical evaluation of a specified product, including a portion of general and administrative expenses. Research and development revenues and licensing fees are recognized as earned based on terms in the specific contracts. Milestone payments are included in revenues in the period in which the applicable milestone is achieved. TheraTech has also entered into various product supply agreements to manufacture products for certain Collaborative Partners. These agreements include provisions for TheraTech to recognize product sales and unearned revenue at the time TheraTech ships product to the Collaborative Partner and/or at the time the Collaborative Partner ships product to its customers. Unearned revenue relates to advances on future product sales. Three Collaborative Partners accounted for 82 percent of research and development and licensing revenues for the year ended December 31, 1997, three Collaborative Partners accounted for 86 percent in 1996 and four Collaborative Partners accounted for 84 percent in 1995. Additionally, two Collaborative Partners accounted for 95 percent of product sales for the year ended December 31, 1997, and one Collaborative Partner accounted for 79 and 94 percent of product sales in 1996 and 1995, respectively. Interest and other revenues consist primarily of interest income. The Company earned interest income of $1,461,236, $1,296,163, and $1,438,123 for the years ended December 31, 1997, 1996 and 1995, respectively. -1- 13 THERATECH, INC. ----------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Research and Development Research and development expenses consist of self-funded research and development costs and the costs associated with work performed under collaborative research and development agreements. Research and development expenses include direct and allocated expenses and exclude reimbursable general and administrative costs. Research and development expenses incurred under collaborative agreements were approximately $12,581,000, $14,813,000 and $13,939,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The Company performs research and development under agreements with certain of its pharmaceutical company partners, some of whom have made equity investments in TheraTech. None of these partners have an interest greater than a 10 percent in the Company. Income Taxes The Company records its income taxes under the asset and liability method, in which deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period of the enactment date. Net Income (Loss ) per Share In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share". Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement 128 requirements. Cash and Cash Equivalents Cash includes currency on hand and demand deposits with financial institutions. Cash equivalents consist of highly liquid investments with original maturities of three months or less. The carrying amount reported on the balance sheets for cash and cash equivalents approximates their fair value. Credit and Investment Risk The Company considers its credit risk to be minimal as its transactions are primarily with major pharmaceutical company partners. Allowances for doubtful accounts were $50,000 and $91,000 at December 31, 1997 and 1996, respectively. Additionally, short-term investments and investments in long-term securities at December 31, 1997 and 1996 consist of investment grade U.S. Government obligations and corporate debt securities of companies with strong credit ratings from a variety of industries. Plant and Equipment Plant and equipment is recorded at cost. Depreciation of plant and equipment is computed on a straight-line basis over estimated useful lives of three to seven years for equipment and 20 years for the plant. Equipment under capital leases is stated at the present value of minimum lease payments and is amortized using the straight-line method over the estimated useful life of the asset. Leasehold improvements are amortized straight line over the lesser of the useful life of the improvement or lease term. Amortization of equipment under capital leases and leasehold improvements is included with depreciation expense. -2- 14 THERATECH, INC. ----------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Intangible and Other Assets Intangible and other assets consist of the following:
December 31, ----------------------- 1997 1996 ---------- ---------- Intangible assets: Patent application costs, net $3,535,111 $1,163,253 Marketing rights, net 3,578,333 -- Other 2,435 2,745 ---------- ---------- Net intangible assets $7,115,879 $1,165,998 ========== ========== Other assets: Deposits $ 175,099 $ 195,637 Cash surrender value of life insurance 128,909 50,343 Restricted cash -- 750,000 ---------- ---------- Total other assets $ 304,008 $ 995,980 ========== ==========
Patent application costs represent capitalized legal and other costs incurred in connection with obtaining patents which, once granted, are amortized over the shorter of 17 years, the remaining patent life or the estimated useful life of the patent using the straight-line method. During 1997, TheraTech acquired a non-exclusive, world-wide sublicense to certain patents relating to hormone treatment. Accumulated amortization was $163,505 and $118,605 as of December 31, 1997 and 1996, respectively. Amortization expense was $44,900, $35,873 and $31,285 for the years ended December 31, 1997, 1996 and 1995, respectively. Marketing rights represent costs incurred to acquire the marketing rights of certain hormone replacement therapy products which were subsequently licensed to a Collaborative Partner. The Company acquired the marketing rights in a non-cash transaction which has been reflected as an increase in intangible assets and other liabilities, and requires only principal payments over five years. Amortization is calculated using the shorter of the estimated useful life of the products under the licensing agreement or the life of the patents covering the technology used in the products, using the straight-line method. Amortization expense and accumulated amortization was $221,667 at December 31, 1997. The estimated useful lives and recorded values of all intangible assets are periodically reviewed by management and adjusted to reflect any change in anticipated lives or diminution in value. Accrued Liabilities Accrued liabilities consist of the following:
December 31, ----------------------- 1997 1996 ---------- ---------- Accrued payroll and payroll taxes $1,126,400 $ 912,292 Accrued marketing rights costs 380,000 -- Accrued clinical costs 100,000 837,533 Other 335,515 633,873 ---------- ---------- $1,941,915 $2,383,698 ========== ==========
-3- 15 THERATECH, INC. ----------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS New Accounting Pronouncements The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards ("SFAS") No 130, "Reporting Comprehensive Income", which is effective for fiscal years beginning after December 15, 1997. SFAS No. 130 requires that all items that are recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Examples of other comprehensive income include foreign currency items, unrealized gains and losses on certain investments in debt and equity securities and minimum pension liability adjustments. It is not anticipated that the adoption of this statement will have a material effect on the financial statements of the Company. 2. SHORT-TERM INVESTMENTS AND INVESTMENTS IN LONG-TERM SECURITIES The Company classifies its investments in one of two categories: held-to-maturity or available-for-sale. Held-to-maturity securities are those securities in which the Company has the ability and intent to hold the security until maturity. All other securities are classified as available-for-sale. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization of premiums or discounts. Premiums and discounts are amortized over the life of the related security. Available-for-sale securities are recorded at fair value based on general market valuations. Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders' equity until realized. Short-term investments have a maturity of twelve months or less. Investments in long-term securities generally mature in one to five years. Short-term investments and investments in long-term securities consist of the following:
1997 1996 ---------- ---------- Short-term investments: Held-to-maturity, at amortized cost $9,397,948 $4,097,419 ========== ========== Investments in long-term securities: Held-to-maturity, at amortized cost $3,001,938 $2,000,468 ========== ==========
The amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value for held-to-maturity securities by major security type at December 31, 1997 and 1996, were as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair DECEMBER 31, 1997 Cost Gains Losses Value ----------- ----------- ----------- ----------- Held-to-maturity: U.S. government obligations $ 1,000,000 $ -- $ 900 $ 999,100 Corporate obligations 11,399,886 44,667 4,640 11,439,913 ----------- ----------- ----------- ----------- $12,399,886 $ 44,667 $ 5,540 $12,439,013 =========== =========== =========== ===========
Gross Gross Estimated Amortized Unrealized Unrealized Fair DECEMBER 31, 1996 Cost Gains Losses Value ---------- ---------- ---------- ---------- Held-to-maturity: U.S. government obligations $2,001,663 $ -- $ 1,063 $2,000,600 Corporate obligations 4,096,224 2,239 780 4,097,683 ---------- ---------- ---------- ---------- $6,097,887 $ 2,239 $ 1,843 $6,098,283 ========== ========== ========== ==========
-4- 16 THERATECH, INC. ----------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During 1997, TheraTech purchased $12,411,000 in held-to-maturity securities. Also during 1997, proceeds from the maturity of held-to-maturity securities were $6,109,001. During 1996, the Company purchased $5,310,532 in held-to-maturity securities and $208,509 in available-for-sale securities. Also during 1996, proceeds from the maturity of held-to-maturity securities were $6,410,840 and sales of available-for-sale securities were $3,474,128. 3. INVENTORIES Inventories are stated at the lower of cost or market applying the first-in, first-out cost method. Inventories at December 31, 1997 and 1996, consist of the following:
1997 1996 ---------- ---------- Raw materials $2,568,690 $2,181,079 Work in process 148,801 9,552 Finished goods 112,779 86,390 ========== ========== $2,830,270 $2,277,021 ========== ==========
4. NOTES PAYABLE AND LEASES TheraTech has a 15 year term note which will mature in September 2009 with a bank to finance its commercial manufacturing facility. TheraTech is required to make monthly payments of principal and interest. Interest for the first 60 months is fixed at 8.99 percent and will be adjusted every 60 months based on the five-year U.S. Treasury constant maturity rate. Based on the adjustable interest rate, the carrying value of this note approximates fair value. TheraTech has generally financed equipment by using promissory notes and leases. Certain of these leases have been classified as capital lease obligations. At December 31, 1997 and 1996, the gross amount of equipment recorded under capital leases for both years was approximately $5,000,000. Accumulated amortization on these assets at December 31, 1997 and 1996 was approximately $1,745,000 and $985,000, respectively. At the expiration of the 60 month lease term, TheraTech will have the option to purchase all the equipment or renew the lease for twelve months and then: a) return the equipment, b) purchase the equipment at fair market value or c) re-negotiate the lease. Additionally, TheraTech has notes payable with a financial institution for certain equipment which have outstanding balances totaling approximately $276,000, and which require monthly payments of principal and interest sufficient to fully amortize the notes in periods ranging from one to two years. The notes bear interest at rates between 8.68 and 9.12 percent. Notes payable and capital lease obligations are secured by a building, equipment (and during 1996, an interest bearing deposit classified as restricted cash) with a total cost of approximately $14,300,000 at December 31, 1997. The various financing agreements contain covenants among which require TheraTech to maintain certain financial ratios and minimum cash balances and restrict dividend payments. As of December 31, 1997, the Company was in compliance with these covenants. The weighted average interest rate on notes payable was 8.94 percent as of December 31, 1997. TheraTech also has noncancellable operating leases for land, office and laboratory space and equipment. The Company has a 40-year lease, with an option to renew for an additional ten years, on approximately seven acres of land in Salt Lake City, Utah on which the Company has constructed its manufacturing facility. The Company also leases office and laboratory facilities in Salt Lake City, Utah and in Tokyo, Japan. These leases expire in February and May 1999. The lease on the Utah facility has two, one year renewal options and is subject to adjustment based on a consumer price index. The lease on the Tokyo facility has a renewal option of an additional two years. Future minimum payments of these renewals are not reflected in the table below. Equipment leases are generally for periods of three to five years and contain purchase options at fair market value. Lease expense amounted to $1,140,552, $977,508 and $937,396 for the years ended December 31, 1997, 1996 and 1995, respectively. Interest expense which approximates interest paid was $887,734, $1,060,076 and $971,708 for the years ended December 31, 1997, 1996 and 1995, respectively. -5- 17 THERATECH, INC. ----------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Future minimum capital lease payments, maturities of notes payable, other liabilities and minimum lease payments under noncancellable operating leases at December 31, 1997 are as follows:
Capital Lease Notes Other Operating Year ended December 31: Obligations Payable Liabilities Leases ---------- ---------- ---------- ---------- 1998 $1,099,111 $ 547,265 $ 380,000 $1,140,514 1999 1,373,906 297,009 380,000 465,791 2000 943,410 323,743 950,000 110,378 2001 -- 355,546 950,000 99,256 2002 -- 389,084 1,140,000 98,766 Thereafter -- 3,770,187 -- 2,995,902 ---------- ---------- ---------- ---------- 3,416,427 $5,682,834 $3,800,000 $4,910,607 ========== ========== ========== Less amount representing imputed interest 440,563 ---------- Present value of net minimum capital lease payments 2,975,864 Less current portion of capital lease obligations 850,498 ---------- Capital lease obligations, less current portion $2,125,366 ==========
5. COMMITMENTS AND CONTINGENCIES TheraTech entered into a purchase commitment with a commercial supplier for material used in its manufacturing process. Under this agreement, TheraTech was to purchase, at predetermined prices, fixed quantities over four years. During 1997, TheraTech renegotiated a significant reduction in the purchase commitment and added an option to pay a fixed fee instead of purchasing material. Amounts paid to the supplier under the commitment were approximately $875,000 in 1995, $1,392,000 in 1996 and $2,516,000 in 1997. In 1998, TheraTech has the option of purchasing quantities of material totaling $1,750,032 or paying $800,000. In the ordinary course of business, various suits and claims are filed by and against TheraTech. In the past, TheraTech's liability claims have not been significant. The Company is not a party to any litigation, other than legal and arbitration proceedings which are believed to be ordinary or routine litigation incidental to its business. 6. STOCKHOLDERS' EQUITY TheraTech is authorized to issue 5,000,000 shares of preferred stock, $0.01 par value, none of which was outstanding at December 31, 1997 and 1996. The Board of Directors may determine rights, preferences and privileges of any preferred stock issued in the future. Stock Option Plans The Company has granted non-qualified stock options to officers, employees, consultants and outside members of the Board of Directors. TheraTech also has an incentive stock option plan for its employees (the "Employee Plan") and a stock option plan for its directors (the "Director Plan") (together, the "Option Plans"). In general, options granted under the Option Plans vest over zero to five years and have maximum terms of 10 years. At December 31, 1997, a total of 2,812,500 shares of Common Stock were reserved for issuance under the Option Plans of which 277,500 shares were reserved for issuance under the Director Plan. The Company has elected to continue to apply Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its plans. The alternative fair value method of accounting prescribed by Financial Accounting Standards Board No. 123, "Accounting for Stock-Based Compensation" ("FAS 123") requires the use of option valuation models that were not developed for use in valuing employee stock options, as discussed below. Accordingly, under APB 25, no compensation expense has been recognized for the stock option plans except compensation expense for the difference between the grant price and the market value at the date of grant. Compensation expense related to stock options was not material. -6- 18 THERATECH, INC. ----------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Because the Company's 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, in management's opinion the existing models do not necessarily provide a reliable single measure of the fair value of the stock options. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: expected dividend yield, 0%; expected stock price volatility, 27.2% - - 34.5%; risk-free interest rate, 5.5% - 6.7%; and average expected life of options, 3.8 - 4.2 years. If compensation expense for the Company's stock-based compensation plans had been determined consistent with FAS 123, the Company's net income (loss) and net income (loss) per share would have been reduced to the pro forma amounts indicated below:
Year Ended December 31, -------------------------------------------- 1997 1996 1995 ---------- ---------- ------------ Net income (loss) As reported $5,850,749 $4,224,909 $(7,840,589) Pro forma 4,597,492 2,970,535 (8,884,776) Net income (loss) per share - basic As reported $0.28 $0.21 $(0.40) Pro forma 0.22 0.15 (0.45) Net income (loss) per share - diluted As reported $0.27 $0.20 $(0.40) Pro forma 0.21 0.14 (0.45)
The effect of FAS 123 on pro forma net income (loss) and net income (loss) per share disclosed for 1997, 1996 and 1995 may not be representative of the effects on pro forma results in future years. The pro forma results for 1997, 1996 and 1995 include the impact of only three, two and one years, respectively, of options vesting, while subsequent years will include additional years of vesting. A summary of the Company's stock option activity is as follows:
Weighted Weighted Weighted Year Ended Average Year Ended Average Year Ended Average December 31, Exercise December 31, Exercise December 31, Exercise 1997 Price 1996 Price 1995 Price --------- --------- --------- --------- --------- -------- Balance at beginning of period 2,830,514 $ 6.84 3,090,420 $ 5.70 3,053,595 $ 4.65 Granted 493,950 9.38 303,515 11.47 488,925 9.64 Exercised (379,650) 2.71 (519,321) 2.54 (377,025) 1.97 Canceled (47,425) 10.99 (44,100) 8.69 (75,075) 7.51 --------- --------- --------- --------- --------- -------- Balance at end of period 2,897,389 $ 7.75 2,830,514 $ 6.84 3,090,420 $ 5.70 ========== ========= ========= ========= ========= ======== Exercisable 2,368,461 2,300,635 2,315,595 Weighted-average fair value of options granted during the year $3.43 $4.24 $3.44
-7- 19 THERATECH, INC. ----------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following summarizes information about stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable ---------------------------------------- ------------------------- Weighted- Number Average Number Outstanding Remaining Weighted- Exercisable Weighted- Range of at Contractual Average at Average Exercise December 31, Life in Exercise December 31, Exercise Prices 1997 Years Price 1997 Price - ---------------------- -------------- ----------- ---------- ----------- ---------- $0.83 to 6.00 927,677 3.22 $ 3.44 882,677 $ 3.48 6.60 to 10.00 1,092,729 7.06 8.78 783,326 8.85 10.06 to 15.50 876,983 7.30 11.04 702,458 11.04 - --------------------- --------- ---- ------ --------- ------ $0.83 to 15.50 2,897,389 5.90 $ 7.75 2,368,461 $ 7.50 ===================== ========= ==== ====== ========= ======
Employee Stock Purchase Plan As part of an employee retention program, the Company established the 1992 Employee Stock Purchase Plan (the "Stock Purchase Plan") to provide employees with an opportunity to purchase common stock of the Company through payroll deductions. Accordingly, 300,000 shares of common stock were reserved for issuance to eligible employees. This Stock Purchase Plan will terminate in the year 2012 unless sooner terminated by the Board of Directors. Under this Stock Purchase Plan, the Company's employees, subject to certain restrictions, may purchase shares of common stock at the lesser of 85 percent of fair market value at either the enrollment date or the exercise date. As of December 31, 1997, under this plan 123,911 shares had been issued. 7. NET INCOME (LOSS) PER SHARE The following table sets forth the computation of basic and diluted net income (loss) per share:
1997 1996 1995 ------------ ------------ ------------ Numerator: Net income (loss) -- Numerator for basic and diluted net income (loss) per share $ 5,850,749 $ 4,224,909 $ (7,840,589) ============ ============ ============ Denominator: Denominator for basic net income (loss) per share - weighted average shares 20,778,060 20,291,513 19,789,460 Effect of dilutive securities: Stock options 956,280 1,295,415 -- ------------ ------------ ------------ Denominator for diluted net income (loss) per share - adjusted weighted average shares and assumed conversions 21,734,340 21,586,928 19,789,460 ============ ============ ============ Net income (loss) per share - basic $ 0.28 $ 0.21 $ (0.40) ============ ============ ============ Net income (loss) per share - diluted $ 0.27 $ 0.20 $ (0.40) ============ ============ ============
Options to purchase an additional 1,101,208 shares of common stock were outstanding during 1997 but were not included in the computation of diluted net income (loss) per share because the options' exercise price was greater than the average market price of the common shares, therefore, the effect would be antidilutive. -8- 20 THERATECH, INC. ----------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. RELATED PARTY TRANSACTIONS One of the Company's principal stockholders and directors is affiliated with the University of Utah ("the University"). In the normal course of business, the Company has entered into various agreements with the University for research and other services. Additionally, certain agreements provide for, but are not limited to, the following terms: granting of exclusive licensing and marketing rights to TheraTech, ownership of patents by the University and royalties payable to the University ranging from 2 to 15 percent on royalties received by the Company. The Company paid to a University department affiliated with the principal stockholder and director $55,000, $57,500 and $18,393 for the years ended December 31, 1997, 1996 and 1995, respectively. As of December 31, 1997, TheraTech had two unsecured loans to officers of the Company, an 8.0 percent note for $72,676 due November 25, 1998, and an 8.0 percent note for $73,227 which was fully paid in February 1998. 9. 401(k) AND NON-QUALIFIED DEFERRED COMPENSATION PLANS The Company sponsors a 401(k) plan under which employees may defer a certain percentage of their salary. The Company will match 75 percent of the employee's contribution up to 8.5 percent of their salary. Employees who have completed six months of service and who are at least 18 years of age are eligible to participate. For the years ended December 31, 1997, 1996 and 1995, the 401(k) plan expenses were $461,712, $288,161 and $206,371, respectively. Additionally, effective December 1, 1997, the Company established a non-qualified deferred compensation plan ("Non-Qualified Plan") for certain executives of the Company. The Non-Qualified Plan enables participants to defer income on a pre-tax basis and is not funded. The Company will match 75 percent of the participant's contribution up to 8.5 percent of their salary, however, the Company's combined contribution to both the 401(k) plan and the Non-Qualified Plan will be based on an amount not to exceed 8.5% of the participant's salary. For the year ended December 31, 1997, the Non-Qualified Plan expenses were $29,382. As of December 31, 1997, the liability for deferred compensation was $108,550. 10. INCOME TAXES As of December 31, 1997, TheraTech had federal and state net operating loss carryforwards of approximately $39,000,000. The Company also has federal research and development tax credit carryforwards of approximately $2,500,000. The net operating loss and credit carryforwards will expire at various dates beginning in years 2001 through 2012, if not utilized. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows:
December 31, ---------------------------- 1997 1996 ------------ ------------ Deferred tax assets: Net operating loss carryforwards $ 14,418,000 $ 15,473,000 Research credits 2,594,000 1,846,000 Other, net 982,000 1,060,000 ------------ ------------ Total deferred tax assets 17,994,000 18,379,000 Valuation allowance for deferred tax assets (17,994,000) (18,379,000) ------------ ------------ Net deferred tax assets $ -- $ -- ============ ============
The net valuation allowance decreased by $385,000, during the year ended December 31, 1997. As of December 31, 1997, and 1996, approximately $5,832,000 and $4,708,000, respectively, of the valuation allowance for deferred tax assets relate to benefits of stock option deductions which, when recognized, will be credited directly to additional paid-in capital. -9- 21 THERATECH, INC. ----------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table reconciles income tax at the U.S. federal statutory tax rate to the tax provision at the effective tax rate:
1997 1996 --------- ---- Current: Federal $ 123,000 -- State -- -- --------- ---- Total current 123,000 -- Deferred Federal (123,000) -- State -- -- --------- ---- Total deferred (123,000) -- --------- ---- Provision (benefit) for income taxes $ -- $ -- ========= ====
The reconciliation of income tax at the U.S. federal statutory tax rate to income expense is as follows:
1997 1996 ----------- ----------- Tax at U.S. statutory rates $ 1,989,000 $ 1,436,000 State tax, net of federal tax benefit 193,000 139,000 Credits (620,000) (182,000) Adjustments of valuation allowance for Deferred tax assets (1,560,000) (1,401,000) Other, net (2,000) 8,000 ----------- ----------- Income tax expense $ -- $ -- =========== ===========
-10- 22 Report of Independent Auditors The Board of Directors and Stockholders TheraTech, Inc. We have audited the accompanying consolidated balance sheets of TheraTech, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of TheraTech, Inc. and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Salt Lake City, Utah February 6, 1998 EX-23.1 5 CONSENT OF AUDITORS 1 EXHIBIT 23.1 Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of TheraTech, Inc. of our report dated February 6, 1998, included in the 1997 Annual Report to Stockholders of TheraTech, Inc. We also consent to the incorporation by reference in the Registration Statements (Form S-8) pertaining to the 1992 Employees' Stock Option Plan, 1992 Directors' Stock Option Plan and Informal Stock Option Program, and the 1993 Employee Stock Purchase Plan of TheraTech, Inc. of our report dated February 6, 1998, with respect to the consolidated financial statements of TheraTech, Inc. incorporated by reference in the Annual Report (Form 10-K) for the year ended December 31, 1997. ERNST & YOUNG LLP Salt Lake City, Utah March 30, 1998 EX-27.1 6 FINANCIAL DATA SCHEDULE #1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE THERATECH, INC. CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS. YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 14,979,465 9,397,948 4,847,106 50,000 2,380,270 32,120,884 27,543,422 8,225,341 61,860,810 7,410,427 7,260,935 0 0 210,193 43,347,255 61,860,810 15,469,831 39,749,619 10,639,550 32,961,879 49,257 0 887,734 5,850,749 0 5,850,749 0 0 0 5,850,749 0.28 0.27
EX-27.2 7 FINANCIAL DATA SCHEDULE #2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE THERATECH, INC. CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS. YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 19,116,991 4,097,419 4,726,112 91,034 2,277,021 30,253,670 25,167,720 5,737,034 53,846,802 7,951,739 8,660,744 0 0 205,634 35,816,685 53,846,802 11,296,298 36,361,542 8,008,967 31,030,549 46,009 0 1,060,075 4,224,090 0 4,224,909 0 0 0 4,224,909 0.21 0.20
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