NUCRYST and Smith & Nephew Revise Agreements
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WAKEFIELD, MA, October 1, 2007 - NUCRYST Pharmaceuticals Corp. today announced that on September 30, 2007 it signed amended agreements with Smith & Nephew wound management for the manufacture and sale of Acticoat(TM) dressings with SILCRYST(TM) nanocrystalline coatings. The two companies first entered into the agreements in 2001, when Smith & Nephew bought the Acticoat(TM) brand from NUCRYST and agreed to grant NUCRYST exclusive manufacturing rights, plus pay manufacturing cost reimbursement, a royalty on sales and milestone payments linked to agreed-upon sales and performance targets.
"The advanced wound care market, including the silver dressing segment, has become significantly more competitive since we signed the original agreements in 2001," said David C. McDowell, Vice President Operations for NUCRYST Pharmaceuticals. "As a result, both parties recognized the need to restructure the agreements to enable Smith & Nephew and NUCRYST to jointly support the continued growth of the Acticoat(TM) brand in the context of increasing competitive pressures."
Joe Woody, President of Smith & Nephew Advanced Wound Management commented "We are very pleased to maintain our long relationship with NUCRYST, in particular through Acticoat(TM) and nanocrystalline silver antimicrobial dressings which offers patients worldwide proven clinical benefits and an improved quality of life".
Highlights of the material changes made to the agreements include:
Smith & Nephew will advance $5 million of a milestone payment to NUCRYST in 2007.
Under the previous agreements, the price paid by Smith & Nephew for Acticoat(TM) products was NUCRYST's fully allocated cost of goods sold including equipment depreciation. To provide Smith & Nephew with greater costing certainty of the Acticoat(TM) product line, the costing mechanism has been amended starting in 2007 to a fixed overhead charge plus direct costs, which will be established annually.
The overhead charge payable by Smith & Nephew in 2007 through 2009 has been fixed at a minimum floor amount equal to the 2007 overhead charge. This floor amount will be payable by Smith & Nephew regardless of the actual volume of Acticoat(TM) products ordered by Smith & Nephew. NUCRYST may use any actual overhead cost savings achieved by NUCRYST over the next two years to offset an annual early cost of goods relief payment in the amount of $4.5 million that NUCRYST has agreed to make to Smith & Nephew beginning in 2007 through 2009. In 2010, the parties will establish new fixed prices after taking into account the cost savings achieved by NUCRYST in the previous two years.
NUCRYST will be entitled to immediately include in the cost of goods sold to Smith & Nephew partial depreciation on a new production facility and equipment scheduled to be certified by NUCRYST in the fourth quarter of 2007. Once NUCRYST begins using the new equipment to produce Acticoat(TM) products, inclusion of the full depreciation will commence (subject to any proportionate use NUCRYST itself makes of the equipment). Prior to the revisions to the agreements, NUCRYST would not have been able to recover any portion of the capital costs for this capacity expansion until NUCRYST began using the equipment to produce Acticoat(TM) products.
A non-compete clause has been deleted from the agreements to allow Smith & Nephew to broaden their wound care dressings product line to include other forms of silver. In exchange, Smith & Nephew's exclusive license has been limited to existing Acticoat(TM) products and such new wound care or burn products as the parties agree to develop together using NUCRYST's SILCRYST(TM) technology.
New products developed alone by NUCRYST that contain SILCRYST(TM) technology or any new form of nanocrystalline silver developed by NUCRYST will be initially offered to Smith & Nephew. If Smith & Nephew declines to commercialize any of these products on terms acceptable to NUCRYST, NUCRYST will be free to pursue other commercialization options.
NUCRYST will contribute services towards the joint development of new products with Smith & Nephew up to a maximum amount per year equivalent to 1.5% of Smith & Nephew's sales of Acticoat(TM) products in the year. This replaces a system whereby Smith & Nephew reimbursed NUCRYST for all of its product development costs.
Royalty rates will be maintained, except for the elimination of a supplemental royalty that was payable to NUCRYST only if certain gross profit margins were achieved on sales of Acticoat(TM) products over a specified threshold.
The overall combined impact of all of the above changes on NUCRYST's financial results is not expected to be significant in 2007. However, the changes could have a material adverse affect on NUCRYST's quarterly financial results in subsequent periods depending on the timing of payments made to and received from Smith & Nephew, Smith & Nephew's sales of Acticoat(TM) products, the achievement of cost savings by NUCRYST, and the receipt by NUCRYST of further milestones payments.In the longer term, NUCRYST expects the amendments to the agreements to further facilitate its ongoing efforts to expand NUCRYST's business opportunities while enabling it to continue to support Smith & Nephew to realize the future growth potential of the Acticoat(TM) products.
NUCRYST Pharmaceuticals develops, manufactures and commercializes medical products that fight infection and inflammation using its patented atomically disordered nanocrystalline silver technology. Smith & Nephew plc sell a range of advanced wound care products under their Acticoat(TM) trade mark: Acticoat(TM) products incorporate NUCRYST's SILCRYST(TM) coatings and are sold in over 30 countries. NUCRYST is also developing new medical products to address conditions that are characterized by infection and inflammation.
