Item 1. Business

General

Since the incorporation of Columbia Laboratories, Inc. (hereinafter “we”, “our”, “us”, “Columbia” and the “Company”) in 1986 as a Delaware corporation, we have focused on developing drugs that improve treatment options for women’s reproductive healthcare and endocrine-related disorders. The Company has developed and is developing products for vaginal delivery of hormones and other drugs and for buccal delivery of hormones and peptides. The vaginal products adhere to the vaginal epithelium and the buccal products adhere to the mucosal membrane of the gum and cheek. Both forms provide sustained and controlled delivery of active drug ingredients. This delivery system is particularly useful for active drug ingredients that cannot be ingested.

All of our products and product candidates utilize our Bioadhesive Delivery System (“BDS”), which consists principally of a polymer (polycarbophil) and an active ingredient. The BDS is based upon the principle of bioadhesion, a process by which the polymer adheres to epithelial surfaces or mucosa. The polymer remains attached to epithelial surfaces or mucosa and is discharged upon normal cell turnover, a physiological process that, depending upon the area of the body, occurs every 12 to 72 hours, or longer. This extended period of attachment permits the BDS to be utilized in products when extended duration of effectiveness is desirable or required.

We have focused on women's healthcare because of the significant number of women whose health and hygiene needs have not been met by available products, and because the Company has found vaginal delivery to be a particularly effective way to deliver active ingredients to the female reproductive organs. We have found buccal delivery to be advantageous for products for both men and women. The Company intends to continue to develop products that improve the delivery of previously approved and marketed drugs that cannot be ingested.

Segments

The Company is currently engaged solely in one business segment -- the development, licensing and sale of pharmaceutical products. In certain foreign countries these products may be classified as medical devices or cosmetics by the countries’ regulatory agencies. See footnote 9 to the consolidated financial statements for information on foreign operations.

Operations

The Company was incorporated as a Delaware corporation in 1986. The Company's principal executive offices are located at 354 Eisenhower Parkway, Livingston, New Jersey 07039, and its telephone number is (973) 994-3999. The Company's subsidiaries, all of which are wholly-owned, are Columbia Laboratories (Bermuda) Ltd. ("Columbia Bermuda"), Columbia Laboratories (France) SA ("Columbia France") and Columbia Laboratories (UK) Limited ("Columbia UK”).

We develop products for sale throughout the world. We   contract our manufacturing activities to third parties in the United Kingdom, Switzerland and Italy. Our own sales and marketing organization operates solely in the United States, and is specifically focused on a select group of obstetricians, gynecologists, endocrinologists, urologists and primary care physicians. We have entered into partnerships to commercialize our products outside of the United States and within certain markets in the United States, and seek to enter into additional partnerships to commercialize our products in new countries and with additional audiences in the United States that we do not currently address.

The polymer used in our BDS-based products, medical grade, cross-linked polycarbophil, is currently available from only one supplier, Noveon, Inc. ("Noveon"). We believe that Noveon will supply as much of the material as we may require because our products rank among the highest value-added uses of the polymer. There can be no assurance that Noveon will continue to supply the material. In the event that Noveon cannot or will not supply enough of the material to satisfy the Company's needs, we will be required to seek alternative sources of polycarbophil. There can be no assurance that an alternative source of polycarbophil can be obtained. All of the other raw materials used by the Company for our products are available from multiple sources.

Products

Crinone ^â /Prochieve ^® (progesterone gel). Crinone ^® is the brand name of progesterone gel sold by Ares Trading S.A. (“Serono”) under a worldwide license from the Company. Prochieve ^® is the brand name of the same progesterone gel sold by the Company in the United States under a June 2002 sublicense from Serono pursuant to its worldwide license of Crinone ^® . The Company markets Prochieve ^® under the sublicense to obstetricians, gynecologists and primary care physicians in the U.S. In addition, Serono has agreed not to market Crinone ^® to that audience and the Company has agreed not to market Prochieve ^® to a defined list of fertility specialists in the U.S. See “Licensing and Development Agreements.”   Crinone ^® / Prochieve ^®   is a sustained release, vaginally delivered, natural progesterone product. Progesterone is a hormone manufactured by a woman’s ovaries in the second half of the menstrual cycle. Progesterone is responsible for preparing the uterus for pregnancy and, if pregnancy occurs, maintaining it until birth, or, if pregnancy does not occur, inducing menstruation.

Crinone ^® / Prochieve ^® utilizes the Company’s patented BDS, which enables the progesterone to achieve a “First Uterine Pass Effect™”. The product is available in two strengths, an 8% progesterone gel and a 4% progesterone gel. It is the first product designed to deliver progesterone directly to the uterus, thereby providing a therapeutic benefit and avoiding high blood levels of progestogens seen with orally-delivered synthetic progestins.

Crinone ^® /Prochieve ^® in the 8% progesterone gel is approved in the U.S. for progesterone supplementation or replacement as part of an Assisted Reproductive Technology (“ART”) treatment for infertile women with progesterone deficiency. Crinone ^® /Prochieve ^® in both the 8% and 4% progesterone gels is approved in the U.S. for the treatment of secondary amenorrhea (loss of menstrual period). Crinone ^® was first marketed in the U.S. in 1997. In 2002, Serono discontinued marketing Crinone ^® 4% worldwide. Prochieve ^® 8% and Prochieve ^® 4% were first marketed in the U.S. in September 2002 and March 2003, respectively.

Outside the U.S., Crinone ^® has been approved for marketing for one or more medical indications in 51 countries. The medical indications include progesterone supplementation or replacement as part of an ART treatment for infertile women, the treatment of secondary amenorrhea, the prevention of hyperplasia in post-menopausal women receiving hormone replacement therapy (“HRT”), the reduction of symptoms of premenstrual syndrome (“PMS”), menstrual irregularities, dysmenorrhea and dysfunctional uterine bleeding. Prochieve ^® is not marketed outside the U.S.

The most common side effects of Crinone ^® /Prochieve ^® 8% are breast enlargement, constipation, somnolence, nausea, headache, and perineal pain. The most common side effects of Prochieve ^® 4% when used in combination with estrogen include cramps, fatigue, depression, emotional lability, sleep disorder, and headache. Crinone ^® /Prochieve ^® is contraindicated in the U.S. in patients with active thrombophlebitis or thromboembolic disorders, or a history of hormone-associated thrombophlebitis or thromboembolic disorders, missed abortion, undiagnosed vaginal bleeding, liver dysfunction or disease, and known or suspected malignancy of the breast or genital organs.

  Striant ^® (testosterone buccal system) . Striant ^® is approved in the U.S. and 15 countries in Europe for hypogonadism. Hypogonadism is characterized by a deficiency or absence of endogenous testosterone production. Hypogonadism can be caused by conditions associated with the testes, pituitary gland or hypothalamus gland, or by a genetic disorder. Signs and symptoms of hypogonadism can include decreased libido (sexual desire), erectile dysfunction (ED), fatigue, depression, reduced muscle mass, and osteoporosis. Testosterone replacement therapy helps to provide and maintain normal levels of testosterone. It is estimated that hypogonadism affects between four and five million men in the United States, approximately one million of whom currently receive treatment. Historically, patients have been treated with transdermal patches, topical gels or injectable formulations of testosterone.

In October 2002, the Company and Ardana Biosciences, Ltd. (“Ardana”) entered into a license and supply agreement under which Ardana has licensed and, after obtaining necessary governmental approvals, will sell Striant ^® in 18 European countries (excluding Italy). See “ Licensing and Development Agreements”.

In May 2003, the Company and Mipharm S.p.A. (“Mipharm”) entered into a license and supply agreement under which Mipharm will market, distribute and sell Striant ^® in Italy. S ee “ Licensing and Development Agreements”.

Striant ^® utilizes the BDS to achieve controlled and sustained delivery of testosterone via the buccal cavity. The product, which has the appearance of a small monoconvex tablet, rapidly adheres to the buccal mucosa, the small, natural depression in the mouth where the gum meets the upper lip above the incisor teeth. As it is exposed to saliva, the product softens into a gel-like form which remains comfortably in place over each 12-hour dosing period. Striant ^® delivers testosterone through the buccal mucosa, where it is absorbed into the bloodstream and delivered directly into the superior vena cava (major blood vessel), bypassing the gastrointestinal system and liver. Striant ^® is able to produce circulating testosterone concentrations in hypogonadal males that approximate physiologic levels seen in healthy young men. One dose twice a day, in the morning and in the evening, maintains consistent physiologic levels of testosterone. Because Striant ^® is available in a single strength, no dose titration is required.

The clinical data supporting the approval of Striant ^® by the U.S. Food and Drug Administration (“FDA”) were generated from a 12-week U.S. multi-center, open-label, single arm trial that evaluated the efficacy, safety and tolerability of Striant ^® in 98 hypogonadal men. The most frequent adverse events that occurred with Striant ^® in that trial at an incidence of 1% or greater which were possibly, probably or definitely related to the use of Striant ^® were: gum or mouth irritation (9.2%), bitter taste (4.1%), gum pain (3.1%), gum tenderness (3.1%), headache (3.1%), gum edema (2.0%), and taste perversion (2.0%). A total of 16 patients reported 19 gum-related adverse events. Of these, ten patients (10.2%) reported 12 events of mild intensity, four patients (4.1%) reported five events of moderate intensity, and two patients (2.0%) reported two events of severe intensity. Four patients (4.1%) discontinued treatment with Striant ^® due to gum- or mouth-related adverse events, including two with severe gum irritation, one with mouth irritation and one with "bad taste in mouth." The majority of the gum-related adverse events were transient and resolved within one to 14 days. Patients on Striant ^® should be advised to regularly inspect the gum region where they apply Striant ^® and report any abnormality to their health care professional.

Striant ^® is not indicated for women and must not be used in women. Testosterone supplements may cause fetal harm. Striant ^® should also not be used in patients with known hypersensitivity to any of its ingredients, including testosterone USP that is chemically synthesized from soy. Androgens are contraindicated in men with carcinoma of the breast or known carcinoma of the prostate. Edema with or without congestive heart failure may be a serious complication in patients with preexisting cardiac, renal or hepatic disease. In addition to discontinuation of the drug, diuretic therapy may be required. Gynecomastia frequently develops and occasionally persists in patients being treated with androgens for hypogonadism. The treatment of hypogonadal men with testosterone esters may potentiate sleep apnea in some patients, especially those with risk factors such as obesity or chronic lung diseases. Geriatric patients treated with androgens may be at an increased risk for the development of prostatic hyperplasia and prostatic carcinoma. In diabetic patients, the metabolic effects of androgens may decrease blood glucose and, therefore, insulin requirements.

Advantage-S ^® Bioadhesive Contraceptive Gel . Advantage-S ^® is a female contraceptive gel that utilizes the BDS to deliver the active spermicidal ingredient, nonoxynol-9. The Company began marketing Advantage-S ^® in the U.S. in July 1998 pursuant to FDA’s ongoing review of over-the-counter drug products (including nonoxynol-9 spermicidal products). Among the benefits of Advantage-S ^® is that it utilizes the Company's BDS, which enables the nonoxynol-9 to adhere to the cervix and permits formulation of the product with the lowest dose of nonoxynol-9 of all products on the market. On June 29, 2004, the Company sold the worldwide marketing rights to Advantage-S ^® to Lil’ Drug Store Products, Inc. (“Lil’ Drug Store”) and executed two related agreements with Lil’ Drug Store: a five year supply agreement, with minimum purchase requirements for three years, and a 2½ year professional promotion agreement for the Company’s sales force to promote the product to OB/GYNs in the U.S. See “Licensing and Development Agreements.”

Replens ^® Vaginal Moisturizer . Replens ^® replenishes vaginal moisture on a sustained basis and relieves the discomfort associated with vaginal dryness. Replens ^® was the first product utilizing the BDS. In May 2000, the Company sold the U.S. rights for Replens ^® to Lil’ Drug Store, pursuant to an agreement under which the Company received royalties of 10% of sales of Replens ^® in the U.S until October 2005. On June 29, 2004, the Company sold the remaining worldwide marketing rights for Replens ^® to Lil’ Drug Store and executed two related agreements with Lil’ Drug Store: a five year supply agreement, with minimum purchase requirements for three years, and a 2½ year professional promotion agreement for the Company’s sales force to continue to promote the product to OB/GYNs in the U.S. See “Licensing and Development Agreements.”

RepHresh ^® Vaginal Gel. RepHresh ^® Vaginal Gel is a feminine hygiene product that can eliminate vaginal odor. RepHresh ^® works by maintaining vaginal pH in the normal physiologic range of 4.5 or below. RepHresh ^® uses the Company’s BDS and adheres to the epithelial cells of the vaginal lining for three or more days. It is available in convenient, pre-filled, disposable applicators. On June 29, 2004, the Company sold the worldwide marketing rights to the product to Lil’ Drug Store and executed two related agreements with Lil’ Drug Store: a five year supply agreement, with minimum purchase requirements for three years, and a 2½ year professional promotion agreement for the Company’s sales force to promote the product to OB/GYNs in the U.S. See “Licensing and Development Agreements.”

Other Products . The Company marketed four additional products until April 2000: Advanced Formula Legatrin PM ^®   for the relief of occasional pain and sleeplessness associated with minor muscle aches such as night leg cramps; Legatrin ^â GCM Formula™ , a nutritional supplement to support healthy joint function; Vaporizer in a Bottle ^® , a portable cough suppressant for the temporary relief of a cough due to the common cold; and Diasorb ^® , a pediatric antidiarrheal product. These products do not utilize the BDS. In May 2000, the Company licensed these products to Lil’ Drug Store. Under the terms of these agreements, the Company receives license fees equal to 20% of the licensee’s net sales. These agreements each have five-year terms with provisions for automatic renewal and contain options that allow for the acquisition of the products by the licensee. On December 29, 2000, Lil’ Drug Store purchased Vaporizer in a Bottle for $201,800. The production and sale of Legatrin ^â GCM Formula and Diasorb ^® were discontinued during the first half of 2003. The license for Advanced Formula Legatrin ^â PM renewed automatically to May 2010.

Research and Development

The Company spent $5.8 million in 2005, $5.4 million in 2004 and $3.3 million in 2003 on research and development activities. The expenditures in 2005 and 2004 were primarily costs associated with the Company’s clinical study of Prochieve ^® 8% (progesterone gel) in preventing preterm delivery in pregnant women who are at increased risk for preterm birth , discussed below.   Expenditures in 2003 were primarily costs associated with contracting for, supervising and administering the development and clinical studies of Striant ^® and the delivery of peptides utilizing the BDS. The Company cannot predict whether it will be successful in the development of the products listed below or any other product candidates.

Generally the Company’s drug development activities take the following steps in the U.S. (and comparable steps in foreign countries): After the Company formulates an active drug ingredient into the BDS, it files an Investigational New Drug Application (“IND”) with the FDA to begin to test the product in humans. The IND becomes effective and the studies may begin if the FDA does not disapprove the IND within 30 days of its submission. The IND describes how, where, and by whom the studies will be conducted; information about the safety of the active drug ingredient; how it is thought to work in the body; any toxic effects it may have; and how it is manufactured. All clinical studies must also be reviewed and approved by an Institutional Review Board (“IRB”) that is responsible for the study site. Progress reports on clinical studies must be submitted at least annually to the FDA and the IRB.

 

Clinical studies are divided into three phases.   Phase I studies typically involve small numbers of normal, healthy volunteers. Phase I studies are intended to assess a drug’s safety profile, including the safe dosage range. Phase I studies also determine how the drug is absorbed, distributed, metabolized, and excreted, as well as the duration of its action.   Phase II studies involve volunteer patients (people with the disease intended to be treated) to assess the drug’s effectiveness.   Phase III studies usually involve larger numbers of patients in clinics and hospitals to confirm the product’s efficacy and identify possible adverse events.

 

Following the completion of all three phases of clinical trials, the Company analyzes all of the data and files a New Drug Application (“NDA”) with the FDA if the data successfully demonstrate both safety and effectiveness. The NDA contains all of the scientific information that the Company has gathered. NDAs typically run thousands of pages. If the FDA approves the NDA, the new product becomes available for physicians to prescribe. The Company must continue to submit periodic reports to the FDA, including any cases of adverse reactions and appropriate quality-control records. For some medicines, the FDA requires additional studies after approval (Phase IV studies) to evaluate long-term effects of the drug.

 

Prochieve ^® 8% ^® in Preventing Preterm Birth . In November 2003, the Company announced the Phase III multi-center, randomized, double-blind, placebo-controlled, clinical trial designed to assess the efficacy, safety and tolerability of Prochieve ^® 8% (progesterone gel) in preventing preterm delivery in pregnant women who are at increased risk for preterm birth. The study protocol defines “at risk” patients as pregnant women who have either a history of a spontaneous preterm delivery, or who have a cervical length of 2.5 cm or less, as measured by transvaginal ultrasound, with the current pregnancy. Patients are randomized to receive either Prochieve ^® 8% or placebo. Treatment is initiated between 18 and 22 weeks of gestation and administered daily until delivery, withdrawal from the study, development of preterm rupture of the membranes, or until 37 completed weeks of gestation. This study is designed to enroll 636 patients; 414 patients were enrolled at the end of February, 2006. From October 2005 through February 2006, enrollment averaged 35 patients per month, a rate the Company expects to maintain going forward through the addition of new study centers and execution of its study-related marketing efforts. From October 2005 through February 2006, the Company added 10 study centers. The Company had 53 study centers (42 domestic and 11 foreign) open at the end of February, 2006, and plans to open up to 10 more in March and April 2006. The Company projects that enrollment in the preterm study will be complete by the end of third quarter 2006. The Company expects, if positive results are obtained, to file with the FDA for a label indication in mid-2007. Because there is no approved treatment for preterm birth, and because of the growing incidence, and economic and social impact, of this problem, the Company is hopeful that the FDA will grant an expedited review during 2007.

Prior studies have found prophylactic progestogen administration to be effective in reducing the incidence of preterm birth. Two studies published in 2003 renewed researchers’ interest in the use of progestogens to prevent preterm labor and delivery. Positive results of a trial using weekly intramuscular injections of a synthetic progesterone derivative were published in The New England Journal of Medicine . Similar encouraging findings of a trial using daily administration of pharmacy-compounded progesterone vaginal suppositories were published in the American Journal of Obstetrics and Gynecology . The American College of Obstetricians and Gynecologists’ (“ACOG”) Committee on Obstetric Practice acknowledged the value of this research. The Committee issued an opinion stating that progesterone may be used as treatment to help prevent preterm birth in women with a history of delivering prematurely. The opinion encourages additional research on this topic, particularly related to the ideal method of progesterone delivery. The March of Dimes commended ACOG for these guidelines and reaffirmed their call for research to better understand how women can benefit from progesterone in the prevention of preterm birth.

Preterm delivery is a significant problem in obstetrics. Despite intense efforts for prevention, the delivery rate prior to 37 weeks of gestation increased to 12.3 percent of live births in the United States in 2003 ( National Center for Health Statistics, final natality data, retrieved February 17, 2006, from www.marchofdimes.com/peristats ). Approximately 20 percent of preterm births are the result of a physician’s decision to bring about delivery for maternal and fetal indications. The remainder of preterm deliveries is spontaneous, usually following the onset of premature labor or rupture of the membranes. The current standard of care to help prevent premature delivery includes bed rest, intensive prenatal care for high-risk women and drug therapy, such as tocolytics, to stop uterine contractions.

  Terbutaline Vaginal Gel. In December 2002, the Company announced a development and license agreement with Ardana to develop the Company’s terbutaline vaginal gel product for the treatment of infertility, dysmenorrhea and endometriosis. The Company received a payment of $250,000 upon signing of the agreement and will receive an additional $250,000 upon completion by Ardana of the Phase II clinical trial and if a successful outcome is obtained. Trial completion is expected to occur in 2006. Under the terms of the agreement, if the Phase II trial is successful the Company can elect to continue to work with Ardana to progress the product through further clinical trials and subsequent applications for regulatory approvals. In that case, the Company would have the right to market the product in North America and Ardana would have rights focused in Europe. The parties would share equally in proceeds from licensing and distribution of the product in the rest of the world. If the Company elects not to continue working on the product at the end of the Phase II trial, Ardana can continue to develop the product.

Vaginally administered lidocaine . Vaginally administered lidocaine is designed as a potential treatment for dysmenorrhea and gynecologic pain. Results from a European clinical trial, which we announced on February 5, 2004, showed that vaginally administered lidocaine reduced the frequency of uterine contractions, as well as the intensity and frequency of uterine pain. Subjects were evaluated following vasopressin-induced cramping in the late luteal phase of the menstrual cycle, near menses. On September 8, 2005, we announced the successful completion of a pharmacokinetics study for our vaginally administered lidocaine. The study evaluated both the blood levels obtained by, as well as the relative safety from, three doses of lidocaine formulated with the Company’s patented bioadhesive vaginal gel. Based on those results, a Phase II study is planned for the second half of 2006. The Company believes this product may offer a new and novel approach to treating women who suffer from these common and painful conditions.

Testosterone Vaginal Gel and Testosterone Progressive Hydration Vaginal Tablet. In October 2000, the Company completed a Phase I trial of its testosterone progressive hydration vaginal tablet for women. The study demonstrated that testosterone could be delivered vaginally over a period of days. Vaginal gel and vaginal tablet forms have been developed. A preliminary clinical plan, with a focus on reducing uterine fibroids as well as general testosterone replacement, is under review by our clinical advisors.

Peptide Delivery System. The Company has completed a program that demonstrates that the BDS can deliver therapeutic doses of the peptide, desmopressin, for extended periods of time using the Company’s progressive hydration buccal technology. Based on these positive results, the Company has initiated partnering discussions related to a desmopressin buccal tablet.

Licensing and Development Agreements

 

In May 1995, the Company entered into a license and supply agreement with American Home Products Corporation, now Wyeth, (“Wyeth”) for its Wyeth-Ayerst Laboratories division to market Crinone ^® worldwide. The Company agreed to supply Crinone ^® at a price equal to 30% of Wyeth’s net selling price. In July 1999, Wyeth assigned the license and supply agreement to Serono. In June 2002, the license and supply agreement was amended and restated and a marketing sublicense was granted to the Company. Under the terms of the license and sublicense, Serono markets Crinone ^® in the U.S. to a defined list of fertility specialists. We are free to market Prochieve ^® to all other physicians in the U.S., including obstetricians, gynecologists and primary care physicians. Under the marketing sublicense, the Company is obligated to pay Serono a royalty equal to 30% of net sales on all Prochieve ^® sales. The Company is obligated to pay Serono an additional 40% royalty on all Prochieve ^® sales dispensed to patients of physicians on Serono’s target list of fertility specialists. Conversely, Serono is obligated to pay the Company an additional royalty of 40% of Crinone ^® net sales on all Crinone ^® sales dispensed to patients of physicians outside its target list of fertility specialists in the U.S.

Among other rights it has, Serono may terminate our marketing agreement for Prochieve ^® by sending us written notice if (i) Prochieve ^® is dispensed to patients of physicians on Serono’s target list of fertility specialists in any one calendar quarter at the rate of 10% or more of the amount of Crinone ^® dispensed to those patients, (ii) Serono notifies us in writing of its intent to terminate the marketing agreement and (iii) such rate continues to equal or exceed 10% during the three month period following such notice or a subsequent three month period. If the marketing agreement is terminated and Serono does not market Crinone ^® to the physicians we call on, our profitability with respect to Crinone ^® /Prochieve ^® may be reduced significantly.

Under the agreement, the amount of Prochieve ^® and Crinone ^® dispensed to patients on Serono’s list of fertility specialists is determined by Serono from a combination of objective commercially available third party data and data collected by Serono directly from pharmacies that are not included in the commercially available data. For the four quarters ended June 30, 2005, Prochieve ^® dispensed to patients of Serono’s list of fertility specialists ranged from a high of 7.43% in the fourth quarter of 2004, to a low of 5.85% for the second quarter of 2005. On June 14, 2005, Serono announced a strategic alliance with Priority Healthcare Corporation under which Freedom Drug, its fertility specialty pharmacy, became the preferred specialty pharmacy for fulfillment of Serono fertility products in the U.S. As a result of this alliance, Serono no longer has a close relationship with a number of the pharmacies from which it previously obtained data, and therefore such data was not included in the calculation of Prochieve ^® dispensed to patients of physicians on Serono’s target list for the third quarter and fourth quarters of 2005, which Serono reported to us in December 2005 and February 2006, respectively. The data reported in the most recent quarter approached 8%. We believe this increase resulted from the change in the availability of pharmacy data and not from a change in dispensing patterns for Prochieve ^® and Crinone ^® during these quarters. We are working with Serono to better understand the change in the availability of pharmacy data and whether this change in the availability of data complies with the marketing agreement and are considering possible changes in the terms of the agreement relating to these issues. There can be no assurance, however, that the amount of Prochieve ^® dispensed will not exceed the 10% level described above in the future or that we will be successful in modifying the agreement with Serono.

In March 1999, the Company entered into a license and supply agreement with Mipharm under which Mipharm is the exclusive marketer of the Company’s women’s healthcare products (other than Crinone ^® ) in Italy, Portugal, Greece and Ireland with a right of first refusal for Spain. Mipharm currently sells Replens ^® in Italy and sells RepHresh ^® in Italy under the name MipHil.

 

In October 2002, the Company and Ardana entered into a license and supply agreement under which Ardana will market, distribute and sell Striant ^® in 18 European countries (excluding Italy) as necessary governmental approvals are obtained. In exchange for the license, the Company may receive total potential payments of $8 million. To date the Company has received $5.2 million under this agreement, including $4 million in signature and milestone fees received in 2002, $800,000 received in 2004 upon marketing approval in the U.K and $400,000 received in 2005 upon marketing approval in Germany. Additional milestone payments totaling $800,000 are due upon marketing approvals in other major European countries. The Company expects final licenses will be granted in these countries in the first half of 2006. In addition, a performance payment of $2 million is due upon achievement of a certain level of sales. Ardana will purchase its requirements of product from the Company during the term of the agreement. The agreement will continue in each country in the territory until the date of expiration or lapse of the last patent covering the product in such country.

In December 2002, the Company and Ardana executed a development and license agreement (described above) to develop the Company’s terbutaline vaginal gel product.

In May 2003, the Company and Mipharm entered into an agreement under which Mipharm will market, distribute and sell Striant ^® in Italy. In exchange for these rights, Mipharm is obligated to pay the Company an aggregate of $1.4 million upon achievement of certain milestone events, including $350,000 that was paid in 2003. We received a payment of $100,000, less VAT withholding, in 2004 on account of the UK approval of Striant ^® . Mipharm will provide additional performance payments upon marketing authorization in Italy ($150,000) and achievement of certain levels of sales in Italy, and the Company will receive a percentage markup on the cost of goods for each unit sold. Mipharm is a manufacturer of Striant ^® under a May 2002 agreement.

In June 2004, the Company and Lil’ Drug Store entered into an asset purchase agreement, a five year supply agreement, and a 2½ year professional services agreement. Under the agreements, Lil’ Drug Store acquired the Company’s over-the-counter women’s healthcare products, RepHresh ^® Vaginal Gel and Advantage-S ^® Bioadhesive Contraceptive Gel, and foreign marketing rights for Replens ^® Vaginal Moisturizer. The Company sold the U.S. marketing rights for Replens ^® to Lil’ Drug Store in May 2000. Under the   terms of the asset purchase agreement, Lil’ Drug Store also purchased the U.S. inventory of RepHresh ^® and Advantage-S ^® from the Company. The Company will supply RepHresh ^® , Advantage-S ^® , and ex-U.S. requirements for Replens ^® under the supply agreement. Under the professional services agreement, the Company’s sales force will promote Replens ^® , RepHresh ^® and Advantage-S ^® to its OB/GYN audience through 2006. The Company will be compensated on a per-call basis over the duration of that agreement.

Financing Agreements

On July 31, 2002, PharmaBio Development (“PharmaBio”), an affiliate of Quintiles Transnational Corp. (“Quintiles”), agreed to pay $4.5 million in four equal quarterly installments commencing third quarter 2002 for the right to receive a 5% royalty on net sales of the Company’s women’s healthcare products in the United States for five years, beginning in the first quarter of 2003. The royalty payments are subject to aggregate minimum ($8 million) and maximum ($12 million) amounts. Because the minimum amount exceeds $4.5 million, the Company has recorded the amounts received as liabilities. The excess of the minimum ($8 million) to be paid by the Company over the $4.5 million received by the Company is being recognized as interest expense over the five-year term of the agreement, assuming an interest rate of 12.51%. To date, the Company has paid $3,149,000 in royalties to PharmaBio under this agreement.

On March 5, 2003, the Company and PharmaBio entered into a second agreement under which PharmaBio paid $15 million to the Company over a 15-month period that commenced with the signing of the agreement. In return, PharmaBio will receive a 9% royalty on net sales of Striant ^® in the United States up to agreed annual sales levels, and a 4.5% royalty of net sales above those levels. The royalty term is seven years. Royalty payments commenced in the 2003 third quarter and are subject to aggregate minimum ($30 million) and maximum ($55 million) amounts , and include a true-up payment, payable in the fourth quarter of 2006, of the difference between royalties paid to that date and $13 million . Because the minimum amount exceeds the $15 million, the Company has recorded the amounts received as liabilities. The excess of the minimum ($30 million) to be paid by the Company over the $15 million to be received by the Company is being recognized as interest expense over the seven-year term of the agreement, assuming an interest rate of 10.67%. To date, the Company has paid $712,000 in royalties to PharmaBio under this agreement.

Patents, Trademarks and Proprietary Information

The following table sets forth United States patents granted to the Company since 2001.

 

The Company continues to develop the core BDS and has filed additional patent applications. Because the Company operates on a worldwide basis, the Company seeks worldwide patent protection for its technology and products. We believe our patents are important to our business and we intend to continue to protect them, including through legal action, when appropriate. While patent applications do not ensure the ultimate issuance of a patent, and having patent protection cannot ensure that competitors will not emerge, this is a fundamental step in protecting the Company’s technologies.

The following table sets forth the expiration dates of the principal United States patents for the Company’s marketed products and current development projects.

The Company owns or is seeking registration of “Crinone ^® ”, “ Prochieve ^® ” “ Striant ^® ” and “ Striant SR ^® ” as trademarks in countries throughout the world. Applications for the registration of trademarks do not ensure the ultimate registration of these marks; however, the Company believes marks with pending applications will be registered. In addition, there can be no assurance that such trademarks will afford the Company adequate protection or that the Company will have the financial resources to enforce its rights under such trademarks. In 2004, the Company sold the trademarks " Replens ^® ", “Advantage® 24”, “ Advantage-S ^® ”, “Advantage-LA ^® ”, “ RepHresh ^® ”, and “ RepHresh Vaginal Gel ^® ” to Lil’ Drug Store. See “Licensing and Development Agreements.”

The Company also relies on confidentiality and nondisclosure agreements to protect its intellectual property. There can be no assurance that other companies will not acquire information that the Company considers to be proprietary. Moreover, there can be no assurance that other companies will not independently develop know-how comparable, or superior, to that of the Company.

Sales of Products

From 1997 until 2002, we out-licensed almost all marketing rights to our products. In June 2002, we obtained a sublicense from Serono to market our 8% and 4% progesterone gel products in the United States under the brand name Prochieve ^® . In July 2002, we entered into an agreement with Innovex LP (“Innovex”), an affiliate of Quintiles, thereby establishing our first sales force in the United States. Under the terms of this agreement, Innovex provided a dedicated team of 55 sales representatives on a three-year, fee-for-service basis to commercialize the Company’s women’s healthcare products, Prochieve ^® 8%, Prochieve ^® 4%, Advantage-S ^® , and RepHresh ^® , in the U.S. The sales force was recruited and trained in August and September 2002, and began in October 2002 to call on a targeted list of approximately 8,000 obstetricians and gynecologists to encourage prescriptions and product recommendations for Prochieve ^® 8%, Advantage-S ^® , and RepHresh ^® . The sales force began sales efforts for Prochieve ^® 4% in April 2003.

In March 2003, we entered into a second agreement with Innovex to commercialize Striant ^® in the United States. Under the terms of the agreement, Innovex provided a dedicated team of 67 additional sales representatives for a two-and-a-half year term. The new sales representatives were recruited in June 2003 and were trained on our women’s healthcare products and began calling on obstetricians and gynecologists in July 2003. The entire sales force of 122 sales representatives and 13 managers was trained on Striant ^® in September 2003 and subsequently added endocrinologists, urologists and certain primary healthcare doctors to their call lists.

In January 2004, the Company and Innovex restructured the sales force. The restructured sales force was comprised of ten district managers employed by the Company and 80 sales representatives, divided evenly between the Company and Innovex. Under the terms of the restructuring, Innovex transferred responsibility for management of the sales force to the Company, but continued to provide half of the sales representatives.

On February 2, 2005, in order to align better expenses with projected revenues, we further reduced the size of the sales force to five district managers and 23 sales representatives, 12 of whom were Innovex employees and 11 of whom were Company employees. This 28-person sales force is focused on territories with potential for growth from current products, while preparing the organization for potential near-term opportunities from the Company’s clinical research programs. The sales force calls on OB/GYN’s, endocrinologists, urologists, and certain primary healthcare physicians and educates the doctors and other healthcare professionals in their offices on the benefits of Striant ^® and Prochieve ^® .   Columbia hired the remaining Innovex sales representatives as Columbia employees on November 1, 2005.

We receive revenues both from selling our products to licensees, which we refer to as our “Partnered Products”, and selling our products that we promote through our own sales force to wholesalers and other distributors, which we refer to as our “Promoted Products.”

 

Partnered Products are:

·

Crinone ® sold to Serono on a worldwide basis;

·

Striant ® sold to our ex-U.S. marketing partners;

·

Replens ® Vaginal Moisturizer sold to Lil’ Drug Store ex-U.S.;

·

RepHresh ® Vaginal Gel and Advantage-S ® Bioadhesive Contraceptive Gel sold to Lil’ Drug Store on a worldwide basis; and

·

Royalty and licensing revenues.

Promoted Products are:

·

Prochieve ® 8%, Prochieve ® 4% and Striant ® in the U.S.;

·

Crinone ® prescriptions in the U.S. from our OB/GYN audience, for which Serono pays us a 40% supplemental royalty; and

·

Replens ® Vaginal Moisturizer, RepHresh ® Vaginal Gel and Advantage-S ® Bioadhesive Contraceptive Gel, for which Lil’ Drug Store pays us promotion fees for promoting the products to OB/GYNs.

Success of Marketing Efforts

Our business is dependent on market acceptance of our products by physicians, healthcare payors, patients, and the medical community. Medical doctors’ willingness to prescribe our products depends on many factors, including:

§	Perceived efficacy of our products;

§	Convenience and ease of administration;

§	Prevalence and severity of adverse side effects in both clinical trials and commercial use;

§	Availability of alternative treatments;

§	Cost effectiveness;

§	The pricing of our products; and

§	Our ability to obtain third-party coverage or reimbursement for our products.

Even though we have received regulatory approval for Prochieve ^® and Striant ^® , and even if we receive regulatory approval and satisfy the above criteria for any of our other investigational indications and product candidates, physicians may not prescribe our products. We promote Prochieve ^® and Striant ^® on our own behalf in the U.S. We have entered into agreements with other companies for the distribution and marketing of Crinone ^® , Advantage-S ^® , RepHresh ^® , and Replens ^® in the U.S. and foreign countries, and of Striant ^® in foreign countries. Factors that could affect our success in marketing our products include:

§	The effectiveness of our production, distribution and marketing capabilities;

§	The successful marketing of our products by our distribution and marketing partners;

§	The success of competing products; and,

§	The availability and extent of reimbursement from third-party payors.

If any of our products or product candidates fail to achieve market acceptance, we or our marketing partners may be unable to sell the products successfully, which would limit our ability to generate revenue and could harm our business.

As previously disclosed, in July 2002 and March 2003 we entered into agreements with PharmaBio, under which we received upfront money in exchange for royalty payments on our women’s healthcare products and Striant ^® , respectively. We owe royalty payments to PharmaBio for a fixed period of time. These royalty payments are subject to minimum and maximum amounts, and the minimum amounts are in excess of the amounts we received from PharmaBio. Our failure to successfully market our products could have a material adverse effect on our ability to pay the minimum amounts to PharmaBio.

Competition

We and our marketing partners compete against established pharmaceutical and consumer product companies which market products addressing similar needs. Further, numerous companies are developing, or may develop, enhanced delivery systems and products that compete with our present and proposed products. It is possible that we may not have the resources to withstand these and other competitive forces. Some of these competitors possess greater financial, research and technical resources than our or our partners. Moreover, these companies may possess greater marketing capabilities than our Company or our partners, including the resources to implement extensive advertising campaigns.

The pharmaceutical industry is subject to change as new delivery technologies are developed, new products enter the market, generic versions of available drugs become available and treatment paradigms evolve to reflect these and other medical research discoveries. We face significant competition in all areas of our business. The rapid pace of change in the pharmaceutical industry continually creates new opportunities for existing competitors and start-ups and can quickly render existing products less valuable. Customer requirements and physician and patient preferences continually change as new treatment options emerge, are more or less heavily promoted and become less expensive. As a result, we may not gain, and may lose, market share.

Crinone ^® /Prochieve ^® , a natural progesterone product, competes in markets with other progestins, both synthetic and natural, that may be delivered orally, by injection or by pharmacy compounded vaginal suppository. Some of the more successful orally-dosed products include Provera® (medroxyprogesterone acetate) marketed by Pfizer Inc., Prometrium® (oral micronized progesterone) marketed by Solvay S.A., Prempro® (conjugated estrogens/medroxyprogesterone acetate tablets) and Premphase® (conjugated estrogens/medroxyprogesterone acetate tablets) marketed by Wyeth. Competition is based primarily on delivery method and label indications. Crinone ^® /Prochieve ^® is the only progestin product approved by FDA for use in infertility or for use in pregnant women.

Striant ^® competes against other testosterone products that can be delivered by injection, transdermal patch and transdermal gel. Some of the more successful testosterone products include AndroGel® (testosterone gel) marketed by Unimed Pharmaceuticals, Inc., Testim® (testosterone gel) marketed by Auxilium Pharmaceuticals Inc., and Androderm® (testosterone transdermal system) marketed by Watson Pharma, Inc. Competition is based primarily on delivery method. Transdermal testosterone gels currently have the largest market share and transdermal testosterone patches have the next largest market share, followed by injectable products. Striant ^® is priced comparably to the gels and patches.

Customers

Our customers include trade customers, such as drug wholesalers and chain drug stores, and our marketing partners. We utilize two employees to make calls on the Company’s trade customers for Striant ^® and Prochieve ^® . Our practice, in the case of our trade customers, is to ship our products promptly upon receipt of purchase orders from customers; consequently, backlog orders are not significant.   In the case of our marketing partners, firm purchase orders are received by the Company ninety days in advance of the expected shipping date.

The following table presents information about Columbia’s revenues, including royalty and license revenue, by customer for each of the three years ended December 31:

 

Recent Developments

On March 10, 2006, the Company entered into a Securities Purchase Agreement with certain investors for the private placement of 7,428,220 shares of the Company’s common stock, par value $.01 per share (the “Shares”), at a price of $4.04 per share and warrants to purchase 1,857,041 shares of common stock (the “Warrants”). We expect gross proceeds from the sale of the Shares will be approximately $30 million. The Warrants are exercisable for common stock of the Company at $5.39 per share beginning 180 days from the date they are issued, which is expected to occur on or about March 15, 2006, and expiring 5 years thereafter. The exercise price and number of shares issuable upon exercise are subject to adjustment in the event of stock split, stock dividend, recapitalization, reclassification, combination or exchange of shares, reorganization, liquidation, dissolution, consolidation, or merger. Under the terms of the Securities Purchase Agreement, the Company has agreed to file, within 30 days, a registration statement with the Securities and Exchange Commission to register for resale the Shares and the shares of common stock issuable upon the exercise of the Warrants, which registration statement is required under the Securities Purchase Agreement to become effective within 120 days following the closing. The Company will be required to pay certain cash penalties if it does not meet its registration obligations under the Securities Purchase Agreement.

 

On March 6, 2006, Robert S. Mills was promoted to president and chief executive officer. On January 5, 2006, Mr. Mills was elected president and chief operating officer and was elected to the Company’s Board of Directors. On February 25, 2005, the Company entered into an employment agreement with Mr. Mills defining the terms of his employment with the Company. The initial term of Mr. Mills’ employment under the Agreement is through March 31, 2007.

On January 5, 2006, Fred Wilkinson resigned as president and chief executive officer of the Company and also resigned from the Company’s Board of Directors.

The Company continues to explore a range of strategic options to enhance shareholder value, including a variety of strategic partnership relationships ranging from development projects for third parties, the out-license or sale of one or more of the Company’s products, and a possible sale of the Company. Banc of America Securities LLC, the Company's long-standing financial advisor, is assisting the Company in this exploration process. No formal decisions have been made, and no agreements have been reached. There can be no assurance given that any particular alternative will be pursued or that any transaction will occur or on what terms.

Employees

As of March 3, 2006, the Company had 54 employees: 3 in management, 6 in production, 33 in sales and marketing, and 12 in support functions. Our success is highly dependent on our ability to attract and retain qualified employees. Competition for employees is intense in the pharmaceutical industry. We believe we have been successful in our efforts to recruit qualified employees, but we cannot guarantee that we will continue to be as successful in the future. None of the Company's employees are represented by a labor union or are subject to collective bargaining agreements. We believe that our relationship with our employees is good.

The Company has an employment agreement with one employee, Mr. Mills, President and Chief Executive Officer. See “Executive Compensation--Employment Agreements.” The Board of Directors of the Company has adopted an Indemnification Agreement for Officers and Directors and an Executive Change of Control Severance Agreement for Officers.

Available Information

The Company's Internet address is http://www.columbialabs.com. Through a link on the Investor Relations page of this website, we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with or furnish it to the SEC. In addition, we will provide electronic or paper copies of our filings free of charge upon request. Information contained on our corporate website or any other website is not incorporated into this Annual Report and does not constitute a part of this Annual Report.

In addition, the public may read and copy any materials filed by the Company with the SEC at the SEC’s Reference Room, which is located at 450 Fifth Street, NW, Washington, D.C., 20549. Interested parties may call (800) SEC-0330 for further information on the Reference Room. The SEC also maintains a website containing reports, proxy materials and information statements, among other information, at http://www.sec.gov.

Item 1A. Risk Factors

We have a history of losses and we may continue to incur losses.

 

We have had a history of losses in each fiscal year since our founding. For the fiscal year ended December 31, 2005, we had a net loss of $9.3 million. If we and our partners are unable to successfully market our products, and otherwise increase sales of our products, and contain our operating expenses, we may not have sufficient funds to continue operations unless we are able to raise additional funds from sales of securities or otherwise. Additional financing may not be available to us on acceptable terms, if at all.

 

Our business is heavily dependent on the continued sale of Crinone ^® ,   Replens ^® , RepHresh ^® , Advantage-S ^® and Striant ^® by our marketing partners . If revenues from these partnered products fail to increase as anticipated, or materially decline, our financial condition and results of operations will be materially harmed.

 

Our operating results are heavily dependent on the revenues and royalties derived from the sale of Crinone ^® to Serono, the sale of Replens ^® , RepHresh ^® and Advantage-S ^® to Lil’ Drug Store Products, Inc. and the sale of Striant ^® to Ardana for sale in Europe. Revenues from sales of these partnered products in 2005 comprised approximately 68% of our total revenues. We do not control the amount and timing of marketing resources that our partners devote to our products. If Serono fails to effectively market Crinone ^® ,   Lil’ Drug Store Products fails to effectively market Replens ^® , RepHresh ^® and Advantage-S ^® , or Ardana fails to effectively market Striant ^® in Europe, this could have a material adverse effect on our business, financial condition and results of operations.

 

Our Marketing Agreement for Prochieve ^® may be terminated under certain circumstances.

We market Prochieve ^® under a June 2002 sublicense from Serono under the worldwide license we granted to Serono for our progesterone gel. Under the terms of the license and sublicense, Serono markets Crinone ^® in the U.S. to a defined list of fertility specialists. We are free to market Prochieve ^® to all other physicians in the U.S., including obstetricians, gynecologists and primary care physicians. Serono receives a 30% royalty on all Prochieve ^® sales dispensed to patients of physicians outside its target list of fertility specialists and an additional 40% royalty on all Prochieve ^® sales dispensed to patients of physicians on Serono’s target list of fertility specialists.

Serono may terminate our marketing agreement for Prochieve ^® by sending us written notice if (i) Prochieve ^® is dispensed to patients of physicians on Serono’s target list of fertility specialists in any one calendar quarter at the rate of 10% or more of the amount of Crinone ^® dispensed to those patients, (ii) Serono notifies us in writing of its intent to terminate the marketing agreement and (iii) such rate continues to equal or exceed 10% during the three month period following such notice or a subsequent three month period. If the marketing agreement is terminated and Serono does not market Crinone ^® to the physicians we call on, our profitability with respect to Crinone ^® /Prochieve ^® may be reduced significantly.

 

Healthcare insurers and other payors may not pay for our products or may impose limits on reimbursement.

 

Our ability to commercialize our prescription products will depend, in part, on the extent to which reimbursement for our products is available from third-party payors, such as health maintenance organizations, health insurers and other public and private payors. If we succeed in bringing new prescription products to market, we cannot be assured that third-party payors will pay for such products, or establish and maintain price levels sufficient for realization of an appropriate return on our investment in product development.

 

Many health maintenance organizations and other third-party payors use formularies, or lists of drugs for which coverage is provided under a healthcare benefit plan, to control the costs of prescription drugs. Each payor that maintains a drug formulary makes its own determination as to whether a new drug will be added to the formulary and whether particular drugs in a therapeutic class will have preferred status over other drugs in the same class. This determination often involves an assessment of the clinical appropriateness of the drug and, in some cases, the cost of the drug in comparison to alternative products. Our current or our future products may not be added to payors’ formularies, our products may not have preferred status to alternative therapies, and formulary decisions may not be conducted in a timely manner. Once reimbursement at an agreed level is approved by a third-party payor, we may lose that reimbursement entirely or we may lose the similar or better reimbursement we receive compared to competitive products. As reimbursement is often approved for a period of time, this risk is greater at the end of the time period, if any, for which the reimbursement was approved. We may also decide to enter into discount or formulary fee arrangements with payors, which could result in us receiving lower or discounted prices for Prochieve ^® and Striant ^® or future products.

 

We face significant competition from pharmaceutical and consumer product companies, which may adversely impact our market share.

 

We and our marketing partners compete against established pharmaceutical and consumer product companies that market products addressing similar needs. Further, numerous companies are developing, or may develop, enhanced delivery systems and products that compete with our present and proposed products. It is possible that we may not have the resources to withstand these and other competitive forces. Some of these competitors may possess greater financial, research and technical resources than our company or our partners. Moreover, these companies may possess greater marketing capabilities than our company or our partners, including the resources to implement extensive advertising campaigns.

The pharmaceutical industry is subject to change as new delivery technologies are developed, new products enter the market, generic versions of available drugs become available, and treatment paradigms evolve to reflect these and other medical research discoveries. We face significant competition in all areas of our business. The rapid pace of change in the pharmaceutical industry continually creates new opportunities for existing competitors and start-ups, and can quickly render existing products less valuable. Customer requirements and physician and patient preferences continually change as new treatment options emerge, are more or less heavily promoted, and become less expensive. As a result, we may not gain, and may lose, market share.

Crinone ^® /Prochieve ^® , a natural progesterone product, competes in markets with other progestins, both synthetic and natural, that may be delivered orally, by injection or by pharmacy compounded vaginal suppository. Some of the more successful orally-dosed products include Provera® (medroxyprogesterone acetate) marketed by Pfizer Inc., Prometrium® (oral micronized progesterone) marketed by Solvay S.A., Prempro® (conjugated estrogens/medroxyprogesterone acetate tablets), and Premphase® (conjugated estrogens/medroxyprogesterone acetate tablets) marketed by Wyeth.

Striant ^® competes against other testosterone products that can be delivered by injection, transdermal patch and transdermal gel. Some of the more successful testosterone products include AndroGel® (testosterone gel) marketed by Unimed Pharmaceuticals, Inc., Testim® (testosterone gel) marketed by Auxilium Pharmaceuticals Inc., and Androderm® (testosterone transdermal system) marketed by Watson Pharma, Inc. Competition is based primarily on delivery method. Transdermal testosterone gels currently have the largest market share and transdermal testosterone patches have the next largest market share, followed by injectable products. Striant ^® is priced comparably to the gels and patches.

Our products could demonstrate hormone replacement risks.

 

In the past, certain studies of female hormone replacement therapy products, such as estrogen, have reported an increase in health risks. Progesterone is a natural female hormone, present at normal levels in most women through their lifetimes. However, some women require progesterone supplementation due to a natural or chemical-related progesterone deficiency. It is possible that data suggesting risks or problems may come to light in the future which could demonstrate a health risk associated with progesterone or progestin supplementation or our 8% and 4% progesterone gels. It is also possible that future study results for hormone replacement therapy could be negative and could result in negative publicity about the risks and benefits of hormone replacement therapy. As a result, physicians and patients may not wish to prescribe or use progestins, including our progesterone gels.

 

Similarly, while testosterone is a natural male hormone, present at normal levels in most men through their lifetime, some men require testosterone replacement therapy, or TRT, to normalize their testosterone levels. It is possible that data suggesting risks or problems may come to light in the future which could demonstrate a health risk associated with TRT or Striant ^® . It is also possible that future study results for hormone replacement therapy could be negative and could result in negative publicity about the risks and benefits of hormone replacement therapy. As a result, physicians and patients may not wish to prescribe or use TRT products, including Striant ^® .

 

In addition investors may become concerned about these issues and decide to sell our common stock. These factors could adversely affect our business and the price of our common stock.

 

We may be exposed to product liability claims.

 

We could be exposed to future product liability claims by consumers. Although we presently maintain product liability insurance coverage in the amount of $15 million, such insurance may not be sufficient to cover all possible liabilities. An award against us in an amount greater than our insurance coverage could have a material adverse effect on our operations. Some customers require us to have a minimum level of product liability insurance coverage before they will purchase or accept our products for distribution. If we fail to satisfy insurance requirements, our ability to achieve broad distribution of our products could be limited. This could have a material adverse effect upon our business and financial condition.

 

Steps taken by us to protect our proprietary rights might not be adequate, in which case competitors may infringe on our rights or develop similar products. The United States and foreign patents upon which our original Bioadhesive Delivery System was based have expired.

 

Our success and competitive position are partially dependent on our ability to protect our proprietary position for our technology, products and product candidates. We rely primarily on a combination of patents, trademarks, copyrights, trade secret laws, third-party confidentiality and nondisclosure agreements, and other methods to protect our proprietary rights. The steps we take to protect our proprietary rights, however, may not be adequate. Third parties may infringe or misappropriate our patents, copyrights, trademarks, and similar proprietary rights. Moreover, we may not be able or willing, for financial, legal or other reasons, to enforce our rights. To date, we have never been a party to a proprietary rights action.

 

Bio-Mimetics, Inc. held the patent upon which our original Bioadhesive Delivery System, or BDS, was based and granted us a license under that patent. Bio-Mimetics’ patent contained broad claims covering controlled release products that include a bioadhesive. However, this United States patent and its corresponding foreign patents expired in November 2003. Based upon the expiration of the original Bio-Mimetics patent, other parties will be permitted to make, use or sell products covered by the claims of the Bio-Mimetics patent, subject to other patents, including those which we hold. We have obtained numerous patents with claims covering improved methods of formulating and delivering therapeutic compounds using the BDS. We cannot assure you that any of these patents will enable us to prevent infringement, or that our competitors will not develop alternative methods of delivering compounds, potentially resulting in competitive products outside the protection that may be afforded by our patents. O ther companies may independently develop or obtain patent or similar rights to equivalent or superior technologies or processes. Additionally, although we believe that our patented technology has been independently developed and does not infringe on the proprietary rights of others, we cannot assure you that our products do not and will not infringe on the proprietary rights of others. In the event of infringement, we may be required to modify our technology or products, obtain licenses or pay license fees. We may not be able to do so in a timely manner or upon acceptable terms and conditions. This may have a material adverse effect on our operations.

 

The standards that the U.S. Patent and Trademark Office and its foreign counterparts use to grant patents are not always applied predictably or uniformly and can change. Limitations on patent protection in some countries outside the U.S., and the differences in what constitutes patentable subject matter in these countries, may limit the protection we seek outside of the U.S. For example, methods of treating humans are not patentable subject matter in many countries outside of the U.S. In addition, laws of foreign countries may not protect our intellectual property to the same extent as would laws of the U.S. In determining whether or not to seek a patent or to license any patent in a particular foreign country, we weigh the relevant costs and benefits, and consider, among other things, the market potential of our product candidates in the jurisdiction and the scope and enforceability of patent protection afforded by the law of the jurisdiction.

 

We own or are seeking registration of the following as trademarks in countries throughout the world: Crinone ^® , Prochieve ^® , Striant ^® , and Striant ^® SR. These trademarks, however, may not afford us adequate protection or we may not have the financial resources to enforce our rights under these trademarks.

 

We are subject to government regulation, which could affect our ability to sell products.

 

Nearly every aspect of the development, manufacture and commercialization of our approved pharmaceutical products is subject to time-consuming and costly regulation by various governmental entities, including the Food and Drug Administration, or FDA, the Drug Enforcement Administration and state agencies, as well as regulatory agencies in those foreign countries in which our products are manufactured or distributed. The FDA has the power to seize adulterated or misbranded products and unapproved new drugs, to require their recall from the market, to enjoin further manufacture or sale, and to publicize certain facts concerning a product.

 

We employ various quality control measures in our efforts to ensure that our products conform to their intended specifications and meet the standards proscribed by applicable governmental regulations, including FDA’s current Good Manufacturing Practices regulations. Notwithstanding our efforts, our products or the ingredients we purchase from our suppliers for inclusion in our products may contain undetected defects or non-conformities with specifications. Such defects or non-conformities could compel us to recall the affected product, make changes to or restrict distribution of the product, or take other remedial actions. The occurrence of such events may harm our relations with or result in the loss of customers, injure our reputation, impair market acceptance of our products, harm our financial results, and, in certain circumstances, expose us to product liability or other claims.

 

The development of our pharmaceutical products, including the development of Prochieve ^® 8% for the prevention of preterm birth, is uncertain and subject to a number of significant risks.

 

Some of our pharmaceutical products are in various stages of development. In the United States and most foreign countries, we must complete extensive human clinical trials that demonstrate the safety and efficacy of a product in order to apply for regulatory approval to market the product.

 

The process of developing product candidates involves a degree of risk and may take several years. Product candidates that appear promising in the early phases of development may fail to reach the market for several reasons, including:

 

·	Clinical trials may show our product candidates to be ineffective or to have harmful side effects;

·	Product candidates may fail to receive regulatory approvals required to bring the products to market;

·	Manufacturing costs or other factors may make our product candidates uneconomical; and

·	The proprietary rights of others and their competing products and technologies may prevent our product candidates from being effectively commercialized.

Success in early clinical trials does not ensure that large-scale clinical trials will be successful. Clinical results are frequently susceptible to varying interpretations that may delay, limit or prevent regulatory approvals.

 

The length of time necessary to complete clinical trials and to submit an application for marketing approval for a final decision by a regulatory authority varies significantly and may be difficult to predict. The speed with which we can complete clinical trials and applications for marketing approval will depend on several factors, including the following:

 

·	The rate of patient enrollment, which is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the study, and the nature of the study protocol;

·	Institutional review board, or IRB, approval of the study protocol and the informed consent form;

·	Prior regulatory agency review and approval;

·	Analysis of data obtained from clinical activities, which are susceptible to varying interpretations and which interpretations could delay, limit or prevent regulatory approval;

·	Changes in the policies of regulatory authorities for drug approval during the period of product development; and

·	The availability of skilled and experienced staff to conduct and monitor clinical studies and to prepare the appropriate regulatory applications.

In addition, developing product candidates is very expensive and will continue to have a significant impact on our ability to generate profits. Factors affecting our product development expenses include:

 

·	Our ability to raise any additional funds that we need to complete our trials;

·	The number and outcome of clinical trials conducted by us and/or our collaborators;

·	The number of products we may have in clinical development;

·	In-licensing or other partnership activities, including the timing and amount of related development funding, license fees or milestone payments; and

·	Future levels of our revenue.

Clinical trials are expensive and can take years to complete, and there is no guarantee that the clinical trials will demonstrate sufficient safety and/or efficacy of the products to meet FDA requirements, or those of foreign regulatory authorities.

 

In November 2003, the Company announced a Phase III multi-center, randomized, double-blind, placebo-controlled, clinical trial designed to assess the efficacy, safety and tolerability of Prochieve ^® 8% (progesterone gel) in preventing preterm delivery in pregnant women who are at increased risk for preterm birth. The study protocol defines “at risk” patients as pregnant women who have either a history of a spontaneous preterm delivery, or who have a cervical length of 2.5 cm or less, as measured by transvaginal ultrasound, with the current pregnancy. Patients are randomized to receive either Prochieve ^® 8% or placebo. Treatment is initiated between 18 and 22 weeks of gestation and administered daily until delivery, withdrawal from the study, development of preterm rupture of the membranes, or until 37 completed weeks of gestation. This study is designed to enroll 636 patients; 414 patients were enrolled at the end of February, 2006. From October 2005 through February 2006, enrollment averaged 35 patients per month, a rate the Company expects to maintain going forward through the addition of new study centers and execution of its study-related marketing efforts. From October 2005 through February 2006, the Company added 10 study centers. The Company had 53 study centers (42 domestic and 11 foreign) open at the end of February, 2006, and plans to open up to 10 more in March and April 2006. The Company projects that enrollment in the preterm study will be complete by the end of third quarter 2006. The Company expects, if positive results are obtained, to file with the FDA for a label indication in mid-2007. Because there is no approved treatment for preterm birth, and because of the growing incidence, and economic and social impact, of this problem, the Company is hopeful that the FDA will grant an expedited review during 2007. Enrollment of patients may not be completed in a timely manner and the study may not be successful. If the study does not demonstrate that Prochieve ^® 8% (progesterone gel) prevents preterm delivery in pregnant women who are at increased risk for preterm birth, our future sales opportunities and profitability would be reduced significantly.

 

We may experience adverse events in clinical trials, which could delay or halt our product development.

 

Our product candidates may produce serious adverse events. These adverse events could interrupt, delay or halt clinical trials of our product candidates and could result in FDA or other regulatory authorities denying approval of our product candidates for any or all targeted indications. An IRB or independent data safety monitoring board, the FDA, other regulatory authorities, or we ourselves may suspend or terminate clinical trials at any time. Our product candidates may prove not to be safe for human use.

 

Delays or failures in obtaining regulatory approvals may delay or prevent marketing of the products that we are developing.

 

Other than Prochieve ^® , all of our product candidates are in clinical development and have not received regulatory approval from the FDA or any foreign regulatory authority. The regulatory approval process typically is extremely expensive, takes many years, and the timing or likelihood of any approval cannot be accurately predicted. Delays in obtaining regulatory approval can be extremely costly in terms of lost sales opportunities and increased clinical trial costs. If we fail to obtain regulatory approval for our current or future product candidates or expanded indications for currently marketed products, we will be unable to market and sell such products and indications and therefore may never be profitable.

As part of the regulatory approval process, we must conduct clinical trials for each product candidate to demonstrate safety and efficacy. The number of clinical trials that will be required varies depending on the product candidate, the indication being evaluated, the trial results, and the regulations applicable to any particular product candidate.

 

The results of initial clinical trials of our product candidates do not necessarily predict the results of later-stage clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy despite having progressed through initial clinical trials. The data collected from the clinical trials of our product candidates may not be sufficient to support FDA or other regulatory approval. In addition, the continuation of a particular study after review by an IRB or independent data safety monitoring board does not necessarily indicate that our product candidate will achieve the clinical endpoint.

 

The FDA and other regulatory agencies can delay, limit or deny approval for many reasons, including:

 

·	A product candidate may not be deemed to be safe or effective;

·	The manufacturing processes or facilities we have selected may not meet the applicable requirements; and

·	Changes in their approval policies or adoption of new regulations may require additional clinical trials or other data.

Any delay in, or failure to receive, approval for any of our product candidates could prevent us from growing our revenues or achieving profitability.

 

We are dependent on a principal supplier, the loss of which could impair our ability to manufacture and sell our products.

 

Medical grade, cross-linked polycarbophil, the polymer used in our BDS-based products is currently available from only one supplier, Noveon, Inc., or Noveon. We believe that Noveon will supply as much of the material as we require because our products rank among the highest value-added uses of the polymer. In the event that Noveon cannot or will not supply enough of the product to satisfy our needs, we will be required to seek alternative sources of polycarbophil. An alternative source of polycarbophil may not be available on satisfactory terms or at all, which would impair our ability to manufacture and sell our products.

 

We are dependent upon third-party developers and manufacturers, the loss of which could result in a loss of revenues.

 

We rely on third parties to develop and manufacture our products. These third parties may not be able to satisfy our needs in the future, and we may not be able to find or obtain FDA approval of alternate developers and manufacturers. Delays in the development and manufacture of our products could have a material adverse effect on our business. This reliance on third parties could have an adverse effect on our profit margins. Any interruption in the manufacture of our products would impair our ability to deliver our products to customers on a timely and competitive basis, and could result in the loss of revenues.

 

The loss of our key executives could have a significant impact on our company.

 

Our success depends in large part upon the abilities and continued service of our executive officers and other key employees, particularly Robert S. Mills, our President and Chief Executive Officer. We have entered into an employment agreement with Mr. Mills, which expires in March 2007. The loss of services of our officers and directors could have a material adverse effect on our business and prospects.

We may be limited in our use of our net operating loss carryforwards.

 

As of December 31, 2005, we had certain net operating loss carryforwards of approximately $128 million that may be used to reduce our future U.S. federal income tax liabilities. Our ability to use these loss carryforwards to reduce our future U.S. federal income tax liabilities could be lost if we were to experience more than a 50% change in ownership within the meaning of Section 382(g) of the Internal Revenue Code. If we were to lose the benefits of these loss carryforwards, our future earnings and cash resources would be materially and adversely affected.

 

Sales of large amounts of common stock may adversely affect our market price. The issuance of preferred stock may adversely affect rights of common stockholders .

 

On March 10, 2006, we entered into a Securities Purchase Agreement with certain investors for the private placement of 7,428,220 shares of our common stock, par value $.01 per share (the “Shares”), at a price of $4.04 per share and warrants to purchase 1,857,041 shares of common stock (the “Warrants”). We expect gross proceeds from the sale of the Shares will be approximately $30 million. The Warrants are exercisable for our common stock at $5.39 per share beginning 180 days from the date they are issued, which is expected to occur on or about March 15, 2006, and expiring 5 years thereafter. The exercise price and number of shares issuable upon exercise are subject to adjustment in the event of stock split, stock dividend, recapitalization, reclassification, combination or exchange of shares, reorganization, liquidation, dissolution, consolidation, or merger. Under the terms of the Securities Purchase Agreement, we have agreed to file, within 30 days, a registration statement with the Securities and Exchange Commission to register for resale the Shares and the shares of common stock issuable upon the exercise of the Warrants, which registration statement is required under the Securities Purchase Agreement to become effective within 120 days following the closing. We will be required to pay certain cash penalties if we do not meet our registration obligations under the Securities Purchase Agreement.

As of March 3, 2006, we had 41,754,784 shares of common stock outstanding, of which 41,354,784 shares were freely tradable. Approximately 400,000 shares of our common stock are restricted securities, but may be sold pursuant to Rule 144 under the Securities Act of 1933, as amended, or another exemption under the Securities Act. We also have the following securities outstanding: series B convertible preferred stock, series C convertible preferred stock, series E convertible preferred stock, warrants and options. If all of these securities are exercised or converted, an additional 10,845,895 shares of common stock will be outstanding, all of which will have been registered for resale under the Securities Act. When issued, these registered shares will be freely tradable and restricted shares will be saleable under Rule 144 in the future. The exercise and conversion of these securities is likely to dilute the book value per share of our common stock. In addition, the existence of these securities may adversely affect the terms on which we can obtain additional equity financing.

 

In March 2002, our Board of Directors authorized shares of series D junior participating preferred stock in connection with its adoption of a stockholder rights plan, under which we issued rights to purchase series D convertible preferred stock to holders of our common stock. Upon certain triggering events, such rights become exercisable to purchase shares of common stock (or, in the discretion of our Board of Directors, series D convertible preferred stock) at a price substantially discounted from the then current market price of our common stock.

 

Under our certificate of incorporation, our Board of Directors has the authority to issue up to 1.0 million shares of preferred stock and to determine the price, rights, preferences and privileges of those shares without any further vote or action by our stockholders. The rights of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of any shares of preferred stock that may be issued in the future. While we have no present intention to authorize any additional series of preferred stock, such preferred stock, if authorized, may have other rights, including economic rights senior to the common stock, and, as a result, their issuance could have a material adverse effect on the market value of our common stock.

 

 

Changes in, or interpretations of, accounting principles could result in unfavorable accounting charges.

We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. A change in these principles can have a significant effect on our reported results and may even retroactively affect previously reported transactions. Our accounting principles that recently have been or may be affected by changes in the accounting principles are as follows:

·	Revenue recognition;

·	Accounting for share-based payments;

·	Accounting for income taxes; and

·	Accounting for business combinations and related goodwill.

        

In particular, the FASB recently issued SFAS 123R which requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our consolidated statements of operations. The accounting provisions of SFAS 123R are effective for annual periods beginning after June 15, 2005. We are required to adopt SFAS 123R in the first quarter of fiscal year 2006. We believe that the adoption of SFAS 123R will have a significant adverse effect on our reported financial results and may impact the way in which we conduct our business. Please refer to the section entitled "Recent Accounting Pronouncements" for further information regarding SFAS 123R.

We do not intend to pay cash dividends on our common stock. As a result, you will not receive any periodic in come from an investment in our common stock.

 

We have never paid a cash dividend on our common stock and we do not anticipate paying cash dividends in the foreseeable future. We intend to retain any earnings for use in the development and expansion of our business. In addition, applicable provisions of Delaware law and our debt instruments may affect our ability to declare and pay dividends on our common stock and our preferred stock. Accordingly, you should not expect to receive any periodic income from owning our common stock. Any economic gain on your investment will be solely from an appreciation, if any, in the price of the stock.

 

Anti-takeover provisions could impede or discourage a third-party acquisition of our company. This could prevent stockholders from receiving a premium over market price for their stock.

 

We are a Delaware corporation. Anti-takeover provisions of Delaware law impose various obstacles to the ability of a third party to acquire control of our company, even if a change in control would be beneficial to our existing stockholders. In addition, our Board of Directors has adopted a stockholder rights plan and has designated a series of preferred stock that could be used defensively if a takeover is threatened. Our incorporation under Delaware law, our stockholder rights plan, and our ability to issue additional series of preferred stock, could impede a merger, takeover or other business combination involving our company or discourage a potential acquiror from making a tender offer for our common stock. This could reduce the market value of our common stock if investors view these factors as preventing stockholders from receiving a premium for their shares.

 

We are exposed to market risk from foreign currency exchange rates.

 

With two operating subsidiaries and third party manufacturers in Europe, economic and political developments in the European Union can have a significant impact on our business. All of our products are currently manufactured in Europe. We are exposed to currency fluctuations related to payment for the manufacture of our products in Euros and other currencies and selling them in U.S. dollars and other currencies.

 

Item 1B. Unresolved Staff Comments

None.