Connetics Corporation

3290 West Bayshore Road
Palo Alto, California 94303
U.S.A.
Telephone: (650) 843-2800
Toll Free: (888) 969-2628
Fax: (650) 843-2899
Web site: http://www.connetics.com

Public Company
Incorporated: 1993 as Connective Therapeutics, Inc.
Employees: 218
Sales: $144.35 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: CNCT
NAIC: 325412 Pharmaceutical Preparation Manufacturing

Connetics Corporation develops and markets therapeutics for the dermatology market, selling two products, Luxiq and OLUX, both of which use the company's proprietary foam delivery system. Luxiq, the company's first dermatology product, and OLUX treat psoriasis of the scalp. The products are classified as topical steroids; Luxiq competes in the mid-potency category of the topical steroids market and OLUX competes in the high- and super-high potency category of the topical steroids market. Connetics also owns the rights to Soriatane, an oral psoriasis drug originally developed by Switzerland-based La Roche Holding. Connetics follows what it refers to as its "4:2:1" development model, a strategy that calls for the company to have four products in development, two products in final stage trials mandated by the Food and Drug Administration (FDA), and one new, FDA-approved, product every year.

Origins

During its first decade of existence, Connetics was a company trying to find itself. Both its name and its strategic focus were changed during its inaugural decade, as the company's executives worked to find the right niche for their pharmaceutical company. The company began as an enterprise named Connective Therapeutics, Inc., which was spun off in 1993 from another pharmaceutical company, San Francisco-based Genentech, Inc. Connective Therapeutics drew its name from the physiological focus of its business strategy, concentrating on connective tissues, the components of the body that form structural or binding elements such as skin, joints, ligaments, and lining of organs. Connective tissues form the three-dimensional structure that allow cells to function normally; any alteration in the precise framework causes organs to function abnormally, aberrations that Connective Therapeutics sought to eliminate or to treat with its pharmaceutical products.

Connective Therapeutics began business without any marketable products. The company's drugs were under development, still undergoing clinical trials subject to FDA approval. Connective Therapeutics' initial products were obtained through licensing agreements with two companies, its progenitor, Genentech, and Berkeley, California-based XOMA Corporation, a company with a history of collaborating with Genentech. Connective Therapeutics entered into its licensing agreement with Genentech in September 1993, when the company gained the exclusive worldwide rights to relaxin, a natural hormone that helped lessen the hardening of skin and connective tissue and stimulated new blood vessel growth. In June 1994, Connective Therapeutics signed its agreement with XOMA, giving it technology and patent rights to TCR (T-cell Receptor) Peptide, a vaccine product used to treat multiple sclerosis and rheumatoid arthritis.

The one constant during Connective Therapeutics' decade of change was its leader, Thomas G. Wiggans. Although Wiggans was not among the Genentech executives who founded Connective Therapeutics, he arrived soon after the company's formation and guided it through its transformation into Connetics. Wiggans was named president and chief executive officer in July 1994, joining the company one month after it signed its agreement with XOMA. A graduate of the University of Kansas and Southern Methodist University, Wiggans brought nearly 20 years of experience with him to his posts at Connective Therapeutics, beginning his career at Eli Lily & Co. in 1976, where he held several sales and marketing positions during his four-year stay at the giant pharmaceutical company. After Eli Lily, Wiggans spent a dozen years serving in various executive capacities at Ares-Serono Group, a pharmaceutical company, leaving in 1992 to serve as president and chief operating officer of CytoTherapeutics. After two years at CytoTherapeutics, Wiggans joined the nascent Connective Therapeutics, where he would become the dominant personality leading the company toward finding its identity.

Public Offering and First Revenues in 1996

During Wiggans' first years in charge, Connective Therapeutics devoted itself to bringing its products through the various stages mandated by the FDA before a drug could be "commercialized." Time and resources were directed toward bringing its drugs to treat scalp psoriasis, multiple sclerosis, and rheumatoid arthritis to market, efforts that yielded no revenue for the company. Connective Therapeutics did not generate revenue during its first three years in business, which is more common than not for a small drug company. Wiggans led Connective Therapeutics through its conversion to public ownership, completing the company's initial public offering of stock in February 1996, when 2.5 million shares were sold for $11 per share. The year included another milestone event for the company. In December 1996, Connective Therapeutics generated its first revenue, a celebratory event that was directly related to an acquisition completed during the month. Connective Therapeutics acquired the exclusive U.S. and Canadian rights to Ridaura from pharmaceutical giant SmithKline Beecham Corporation. Ridaura was an established therapy for rheumatoid arthritis, an autoimmune disease afflicting three million people in the United States. In a transaction that involved cash, stock, a promissory note, and royalty payments, Connective Therapeutics paid $29 million for the rights to Ridaura, gaining its first marketable product. By the end of December 1996, the company was able to post its first sales figure, $428,000. The revenue total was meager, a fraction of the total the company would generate several years later, but it was a start.

The addition of Ridaura forced Connective Therapeutics to mature as a company. With a marketable product, the company needed to establish a sales and marketing dimension to its business. A sales team was formally established in March 1997, when the company decided to change its name to Connetics Corporation, a switch made to aid its newly formed marketing staff. Wiggans explained the reasoning behind the name change in a March 24, 1997 interview with Business Wire, stating, "As we begin to establish a commercial presence with our first marketed product, we decided to change the company's name to Connetics, a name which is shorter, easier to remember, and, we believe, denotes an organization that is energetic and dynamic."

More profound changes followed the company's adoption of a new corporate title, as Wiggans and his team honed their strategic focus and developed what would be Connetics' corporate profile in the 21st century. The company took an important step toward that end in early 1998, when it signed a licensing agreement with Soltec Research Pty Ltd. to develop and bring to market the Australian company's Clobetasol mousse in North America. The significance of the deal was the technology used by Soltec Research to administer its drug. The company's mousse, or foam, technology became the central focus of Connetics' strategy as it entered the 21st century, when the 1998 licensing agreement led to a much deeper relationship between the two companies.

After years of waiting, Connetics began selling the first product it developed in-house, receiving approval from the FDA in March 1999. The product, a topical steroid, was called Luxiq, a foam-based treatment for psoriasis of the scalp, a severely dry and flaky skin condition afflicting 6.4 million Americans. "As soon as I got the letter [of approval from the FDA], I got on the phone and hired 16 dermatology salespeople," Wiggans said in a March 9, 1999 interview with the San Francisco Chronicle. Luxiq was first dermatological therapeutic sold by the company, marking its entrance into a market that became the company's sole focus. Annual revenue totals began to swell as Connetics found its commercial footing, leaping from $9.1 million in 1998 to $27 million with the aid of Luxiq in 1999. Profitability, however, continued to elude the company, leading to substantial annual losses. Connetics lost $26.6 million in 1998, a total eclipsed the following year when the company posted a net loss of $27.3 million.

Connetics ended a year in the black for the first time in 2000, a remarkable achievement considering the hefty losses recorded during the preceding years. Part of this financial success was credited to the debut of the company's second dermatological product, OLUX, which entered the market in November. A stronger version of Luxiq, OLUX confirmed Wiggans' commitment to the dermatology market, a commitment that meant Connetics would cut its ties to Ridaura and to developing drugs for treating diseases such as multiple sclerosis and rheumatoid arthritis. In the future, the company would devote itself exclusively to serving the dermatology market, using its foam delivery technology to distinguish it from its competitors.

A New Strategy in 2001

Connetics' conversion to a dermatology-only company was completed in 2001. In April, the company purchased Soltec Research, paying $16.9 million for ownership of the foam delivery technology used in both Luxiq and OLUX. The following month, it sold its rights to Ridaura. The year also marked the establishment of the Connetics Center for Skin Biology, which became a central part of the company's research and development efforts.

Company Perspectives:

There is significant need for improved therapies in the field of dermatology. Connetics focuses on the efficient development of novel therapies using proprietary topical delivery technologies. We believe that our innovative technologies, and competitive advantages, including our development expertise and established sales and marketing infrastructure, drive our success.

The decision to focus solely on dermatology products put Connetics in a market that generated an estimated $1.2 billion worth of business each year. To the company's benefit, many of the massive pharmaceutical companies were exiting the prescription-skin products market during the first half of the 2000s, creating opportunities for Wiggans to occupy ground vacated by larger rivals and capture market share. A prime example of Connetics benefiting from the decision by larger rivals to abandon the prescription skin products market occurred in 2004, when the company completed an acquisition Wiggans referred to as "a transforming event," according to the February 23, 2004 issue of Bioworld Financial Watch.

Roche Holding Ltd., a Switzerland-based pharmaceutical company with $25 billion in annual sales, provided Wiggans with an opportunity to lead Connetics in a new direction. Roche Holding, an affiliate of Genentech, operated in the United States through its New Jersey-based subsidiary, Hoffmann-La Roche Inc., which marketed a drug called Soriatane. In 1997, Hoffmann-La Roche began marketing Soriatane, a once-a-day pill developed to treat psoriasis. The company invested only a modicum of resources into marketing Soriatane, and, consequently, realized only modest financial results in return. "When your sales are in the billions," an analyst remarked in an April 7, 2004 interview with Investor's Business Daily, "why pay attention to a potential $100 million drug?" In 2003, Soriatane produced $41 million in sales, a total Hoffman-La Roche's management no longer wanted to try to increase. The company put Soriatane up for sale in early 2004 and Wiggans seized the opportunity, paying $123 million for the rights to market the oral psoriasis drug.

Wiggans termed the acquisition of Soriatane "transforming" because it moved Connetics into the oral systemic area. "We never had a vision we would stay in topicals or foams," he said in a February 23, 2004 interview with Bioworld Financial Watch. Despite Wiggans' assurance that Connetics was not wed to foam delivery technology, the company's strength as it entered the mid-2000s was in the technology it had acquired from Soltec Research. "It takes a tremendous amount of chemistry to make a foam that can hold a drug substance, melt when it hits skin, and turn into a non-greasy, non-staining liquid," John Higgins, Connetics' chief financial officer, said in an April 7, 2004 interview with Investor's Business Daily. No other company possessed similar technology, giving Connetics an advantage it intended to keep.

As Connetics plotted its course, the company's success in the immediate future appeared to rest on its proprietary foam technology and the sale of Soriatane. The company planned no further acquisitions and did not intend to expand overseas. "Our plan is to own and commercialize our own products," Higgins said in his interview with Investor's Business Daily. "Our focus is on organic growth through our own pipeline." Looking ahead, the company planned to market six products in 2005 and eight products in 2006.

Principal Subsidiaries

Connetics Australia Pty Ltd.

Principal Competitors

Elan Corporation, Plc.; Pfizer Inc.; Schering-Plough Corporation.

Key Dates:

1993:

Genentech, Inc. spins off Connective Therapeutics, Connetics' predecessor.

1996:

Connective Therapeutics acquires the North American rights to market Ridaura.

1997:

Connective Therapeutics changes its name to Connetics Corporation.

1998:

Connetics signs a licensing agreement with Soltec Research Pty Ltd., giving the company access to Soltec's foam delivery technology.

1999:

Connetics is granted FDA approval to market Luxiq, the company's first dermatology product.

2000:

Connetics wins FDA approval to market OLUX.

2001:

Soltec Research is acquired and the rights to Ridaura are sold.

2004:

Connetics acquires the rights to Soriatane.

Further Reading

Abate, Tom, "FDA Oks Palo Alto Firm's Psoriasis Drug," San Francisco Chronicle, March 9, 1999, p. B5.

Benesh, Peter, "Connetics Corp., Palo Alto, California; As Others Exit, It Carves Out a Bigger Share," Investor's Business Daily, April 7, 2004, p. A8.

"Connective Therapeutics Changes Name to Connetics Corp.," Business Wire, March 24, 1997, p. 03241090.

"Connetics Corp.," CDA-Investnet Insiders' Chronicle, February 2, 1998, p. 1.

"Connetics Drops on Setback with Dandruff Drug," America's Intelligence Wire, November 24, 2004, p. 31.

"Connetics Reports Net Loss of $27.3 Million for 1999," Biotech Financial Reports, March 2000, p. 13.

Haines, Mark, "Connetics Corp.," America's Intelligence Wire, June 16, 2004, p. 32.

Osborne, Randall, "Connetics Evolves with Soriatane Purchase," Bioworld Financial Watch, February 23, 2004, p. 1.

"Therapeutic IPO," San Francisco Chronicle, February 2, 1996, p. C2.

Velshi, Ali, "Stock of the Day: Connetics—President and CEO," America's Intelligence Wire, October 18, 2004, p. 54.

—Jeffrey L. Covell