e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
or
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 000-28402
Aradigm Corporation
(Exact name of registrant as specified in its charter)
|
|
|
California
|
|
94-3133088 |
(State or other jurisdiction of
|
|
(I.R.S. Employer |
incorporation or organization)
|
|
Identification No.) |
3929 Point Eden Way
Hayward, CA 94545
(Address of principal executive offices including zip code)
(510) 265-9000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
|
|
|
|
|
|
|
Large accelerated filer o
|
|
Accelerated filer o
|
|
Non-accelerated filer o
(Do not check if a smaller reporting company)
|
|
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
|
|
|
(Class)
|
|
(Outstanding at July 30, 2010) |
Common
|
|
137,778,964 |
ARADIGM CORPORATION
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ARADIGM CORPORATION
CONDENSED BALANCE SHEETS
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Unaudited) |
|
|
(Note 1) |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
9,608 |
|
|
$ |
3,903 |
|
Short-term investments |
|
|
|
|
|
|
5,228 |
|
Receivables |
|
|
394 |
|
|
|
155 |
|
Prepaid and other current assets |
|
|
499 |
|
|
|
328 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
10,501 |
|
|
|
9,614 |
|
Property and equipment, net |
|
|
1,849 |
|
|
|
2,166 |
|
Notes receivable |
|
|
53 |
|
|
|
52 |
|
Other assets |
|
|
129 |
|
|
|
133 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
12,532 |
|
|
$ |
11,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS DEFICIT |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
948 |
|
|
$ |
572 |
|
Accrued clinical and cost of other studies |
|
|
664 |
|
|
|
670 |
|
Accrued compensation |
|
|
652 |
|
|
|
341 |
|
Facility lease exit obligation |
|
|
182 |
|
|
|
263 |
|
Other accrued liabilities |
|
|
284 |
|
|
|
357 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
2,730 |
|
|
|
2,203 |
|
Deferred rent |
|
|
123 |
|
|
|
136 |
|
Facility lease exit obligation, non-current |
|
|
785 |
|
|
|
828 |
|
Other non-current liabilities |
|
|
75 |
|
|
|
75 |
|
Note payable and accrued interest |
|
|
9,113 |
|
|
|
8,896 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
12,826 |
|
|
|
12,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders deficit: |
|
|
|
|
|
|
|
|
Preferred stock, 5,000,000 shares authorized, none outstanding |
|
|
|
|
|
|
|
|
Common stock, no par value; authorized shares: 150,000,000 at
June 30, 2010 and December 31, 2009; issued and outstanding
shares: 137,561,464 at June 30, 2010; 102,381,116 at December
31, 2009 |
|
|
352,484 |
|
|
|
348,271 |
|
Accumulated other comprehensive income |
|
|
|
|
|
|
2 |
|
Accumulated deficit |
|
|
(352,778 |
) |
|
|
(348,446 |
) |
|
|
|
|
|
|
|
Total shareholders deficit |
|
|
(294 |
) |
|
|
(173 |
) |
|
|
|
|
|
|
|
Total liabilities and shareholders deficit |
|
$ |
12,532 |
|
|
$ |
11,965 |
|
|
|
|
|
|
|
|
See accompanying Notes to the Unaudited Condensed Financial Statements
3
ARADIGM CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Royalty revenue |
|
|
|
|
|
|
|
|
|
|
4,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
|
|
|
|
|
|
|
|
4,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
2,736 |
|
|
|
2,927 |
|
|
|
5,573 |
|
|
|
6,653 |
|
General and administrative |
|
|
1,382 |
|
|
|
1,368 |
|
|
|
2,635 |
|
|
|
2,766 |
|
Restructuring and asset impairment |
|
|
13 |
|
|
|
205 |
|
|
|
26 |
|
|
|
223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
4,131 |
|
|
|
4,500 |
|
|
|
8,234 |
|
|
|
9,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(4,131 |
) |
|
|
(4,500 |
) |
|
|
(4,234 |
) |
|
|
(9,642 |
) |
Interest income |
|
|
4 |
|
|
|
14 |
|
|
|
14 |
|
|
|
42 |
|
Interest expense |
|
|
(109 |
) |
|
|
(105 |
) |
|
|
(218 |
) |
|
|
(209 |
) |
Other income (expense), net |
|
|
108 |
|
|
|
(3 |
) |
|
|
106 |
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(4,128 |
) |
|
$ |
(4,594 |
) |
|
$ |
(4,332 |
) |
|
$ |
(9,813 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share |
|
$ |
(0.04 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common share |
|
|
104,891 |
|
|
|
99,298 |
|
|
|
102,396 |
|
|
|
85,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to the Unaudited Condensed Financial Statements
4
ARADIGM CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(4,332 |
) |
|
$ |
(9,813 |
) |
Adjustments to reconcile net loss to cash used in operating activities: |
|
|
|
|
|
|
|
|
Impairment loss on property and equipment |
|
|
|
|
|
|
31 |
|
Amortization and accretion of investments |
|
|
26 |
|
|
|
(5 |
) |
Depreciation and amortization |
|
|
322 |
|
|
|
600 |
|
Stock-based compensation expense |
|
|
451 |
|
|
|
384 |
|
Loss on retirement and sale of property and equipment |
|
|
|
|
|
|
3 |
|
Facility lease exit cost . |
|
|
|
|
|
|
158 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Receivables |
|
|
(239 |
) |
|
|
163 |
|
Prepaid and other current assets |
|
|
(171 |
) |
|
|
(243 |
) |
Other assets |
|
|
3 |
|
|
|
27 |
|
Accounts payable |
|
|
376 |
|
|
|
724 |
|
Accrued compensation |
|
|
311 |
|
|
|
139 |
|
Other liabilities |
|
|
138 |
|
|
|
51 |
|
Deferred rent |
|
|
(13 |
) |
|
|
(47 |
) |
Deferred revenue |
|
|
|
|
|
|
710 |
|
Facility lease exit obligation |
|
|
(124 |
) |
|
|
(195 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(3,252 |
) |
|
|
(7,313 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(5 |
) |
|
|
(6 |
) |
Purchases of short-term investments |
|
|
|
|
|
|
(8,669 |
) |
Proceeds from sales and maturities of short-term investments |
|
|
5,200 |
|
|
|
2,400 |
|
Note receivable payments |
|
|
|
|
|
|
(16 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
5,195 |
|
|
|
(6,291 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from public offering of common stock, net |
|
|
|
|
|
|
3,927 |
|
Proceeds from private placement of common stock, net |
|
|
3,719 |
|
|
|
|
|
Proceeds from issuance of common stock |
|
|
43 |
|
|
|
37 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
3,762 |
|
|
|
3,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
5,705 |
|
|
|
(9,640 |
) |
Cash and cash equivalents at beginning of period |
|
|
3,903 |
|
|
|
16,741 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
9,608 |
|
|
$ |
7,101 |
|
|
|
|
|
|
|
|
See accompanying Notes to the Unaudited Condensed Financial Statements
5
ARADIGM CORPORATION
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
June 30, 2010
1. Organization, Basis of Presentation and Liquidity
Organization
Aradigm Corporation (the Company, we, our, or us) is a California corporation focused
on the development and commercialization of drugs delivered by inhalation for the treatment of
severe respiratory diseases. The Companys principal activities to date have included conducting
research and development and developing collaborations. Management does not anticipate receiving
any revenues from the sale of products in the upcoming year, except for royalty revenue from
Zogenix. The Company operates as a single operating segment.
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance
with United States generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and
footnote disclosures normally included in financial statements prepared in accordance with United
States generally accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission (the SEC). In the opinion of
management, the financial statements reflect all adjustments, which are of a normal recurring
nature, necessary for fair presentation. The accompanying unaudited condensed financial statements
should be read in conjunction with the financial statements and notes thereto included in the
Companys Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the SEC on
March 24, 2010 (the 2009 Annual Report on Form 10-K). The results of the Companys operations for
the interim periods presented are not necessarily indicative of operating results for the full
fiscal year or any future interim period.
The balance sheet at December 31, 2009 has been derived from the audited financial statements
at that date, but does not include all of the information and footnotes required by United States
generally accepted accounting principles for complete financial statements. For further
information, please refer to the financial statements and notes thereto included in the 2009 Annual
Report on Form 10-K.
Liquidity
The Company had cash and cash equivalents of approximately $9.6 million as of June 30, 2010.
The Company believes that this amount, as well as anticipated recurring royalty payments from
Zogenix, will be sufficient to enable it to fund operations through at least the fourth quarter of
2010.
On June 21, 2010, the Company closed a private placement in which it sold 34,702,512 shares of
common stock and warrants to purchase an aggregate of 7,527,214 shares of common stock to
accredited investors (which included a few existing significant investors) under the terms of a
securities purchase agreement that was entered into with the investors on June 18, 2010 (the June
2010 Private Placement). At the closing of the June 2010 Private Placement, the Company received
approximately $4.1 million in aggregate gross proceeds from the sale of the common stock and the
warrants. After deducting for fees and expenses, the aggregate net proceeds from the sale of the
common stock and the warrants were approximately $3.7 million. The warrants have an exercise price
of $0.1184 per share and are exercisable after the Company has called and held a special meeting of
its shareholders to vote on a proposal to approve an amendment to the Companys Amended and
Restated Articles of Incorporation to increase the number of authorized shares of common stock and
has received the requisite shareholder approval for the shareholder proposal. The warrants also
include a mandatory exercise provision whereby the Company has the right to require the holders to
exercise the warrants after it has received the requisite shareholder approval for the shareholder
proposal. The warrants expire the earlier of 10 business days after the date on which the
requisite shareholder approval for the shareholder proposal is received and 90 days after the
issuance date of the warrants. Assuming the warrants are fully exercised at an exercise price of
$0.1184 per share, the Company would receive approximately $0.9 million in additional aggregate net
proceeds from the exercise of the warrants.
The Company is currently exploring means to fund the further development of the cystic
fibrosis indication for ARD-3100, as well as the anticipated costs of the Phase 3 liposomal
ciprofloxacin bronchiectasis trials, focusing primarily on establishing funded partnering
agreements and through sale or out-licensing of non-strategic assets.
6
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements, in conformity with United States generally accepted
accounting principles, requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. These estimates include useful
lives for property and equipment and related depreciation calculations, estimated amortization
period for payments received from product development and license agreements as they relate to
revenue recognition, assumptions for valuing options and warrants, and income taxes. Actual results
could differ materially from these estimates.
Cash and Cash Equivalents
The Company considers all liquid investments purchased with an initial maturity of three
months or less to be cash equivalents. The Company invests cash and cash equivalents not needed for
operations in money market funds, commercial paper, corporate bonds and government notes in
accordance with the Companys investment policy.
Investments
Management determines the appropriate classification of the Companys investments, which
consist solely of debt securities, at the time of purchase. All investments are classified as
available-for-sale, carried at estimated fair value and reported in cash and cash equivalents or
short-term investments. Unrealized gains and losses on available-for-sale securities are excluded
from earnings and losses and are reported as a separate component in accumulated other
comprehensive income in shareholders equity until realized. Fair values of investments are based
on quoted market prices where available. Interest income is recognized when earned and includes
interest, dividends, amortization of purchase premiums and discounts, and realized gains and losses
on sales of securities. The cost of securities sold is based on the specific identification method.
The Company regularly reviews all of its investments for other-than-temporary declines in fair
value. When the Company determines that the decline in fair value of an investment below the
Companys accounting basis is other-than-temporary, the Company reduces the carrying value of the
securities held and records a loss equal to the amount of any such decline. No such reductions were
required during any of the periods presented.
Property and Equipment
The Company records property and equipment at cost and calculates depreciation using the
straight-line method over the estimated useful lives of the respective assets. Machinery and
equipment includes external costs incurred for validation of the equipment. The Company does not
capitalize internal validation expense. Computer equipment and software includes capitalized
computer software. All of the Companys capitalized software is purchased; the Company has not
internally developed computer software. Leasehold improvements are depreciated over the shorter of
the term of the lease or useful life of the improvement.
Impairment of Long-Lived Assets
In accordance with Accounting Standards Codification (ASC) 360-10, Property, Plant, and
Equipment Overall, the Company reviews for impairment whenever events or changes in circumstances
indicate that the carrying amount of property and equipment may not be recoverable. Determination
of recoverability is based on an estimate of undiscounted future cash flows resulting from the use
of the asset and its eventual disposition. In the event that such cash flows are not expected to be
sufficient to recover the carrying amount of the assets, the assets are written down to their
estimated fair values and the loss is recognized in the statements of operations.
Accounting for Costs Associated with Exit or Disposal Activities
In accordance with ASC 420, Exit or Disposal Cost Obligations (ASC 420), the Company
recognizes a liability for the cost associated with an exit or disposal activity that is measured
initially at its fair value in the period in which the liability is incurred. According to ASC 420,
costs to terminate an operating lease or other contracts are (a) costs to terminate the contract
before the end of its term or (b) costs that will continue to be incurred under the contract for
its remaining term without economic benefit to the entity. In periods subsequent to initial
measurement, changes to the liability are measured using the credit-adjusted risk-free rate that
was used to measure the liability initially.
Revenue Recognition
The Company recognizes revenue under the provisions of the SECs Staff Accounting Bulletin
104, Topic 13, Revenue Recognition Revised and Updated (SAB 104) and ASC 605, Revenue
Recognition. In addition, contract revenue from the Companys
7
collaboration arrangements typically contain multiple elements and are accounted for under the
guidance of ASC 605-25, Revenue Recognition-Multiple Element Arrangements.
Contract Revenue. Contract revenues consist of revenues from grants, collaboration agreements
and feasibility studies. The Company records license fees, milestone fees and reimbursement of
research and development expenses as contract revenue. The Company reviews all of these
arrangements for the existence of multiple elements such as license fees, milestone fees, research
and development reimbursements, product steering committee services and other performance
obligations.
The Company reviews elements that have been delivered and determines whether such items have
value to the Companys collaborators on a stand-alone basis and whether objective reliable evidence
of fair value of the undelivered items exists. Deliverables that meet these criteria are considered
a separate unit of accounting and are recognized as revenue when delivered and collection is
reasonably assured. Deliverables that do not meet these criteria are combined and accounted for as
a single unit of accounting. Revenue recognition criteria are identified and applied to each
separate unit of accounting. The Company typically has not had reliable evidence of separate units
and has treated the entire arrangement as a single unit of accounting.
Royalty Revenue. The Company earns royalty revenue under the terms of the asset sale
agreement with Zogenix. Revenue is recognized when the amounts under this agreement can be
determined and when collectability is probable. The Company has no performance obligations under
this agreement. Revenue will be recognized from the quarterly royalty payments one quarter in
arrears due to the contractual terms in the asset sale agreement that allow Zogenix sixty days to
complete their royalty report following the end of the quarter. In the first quarter of 2010, the
Company received the $4.0 million milestone payment that was due upon the first commercial sale by
Zogenix of a product using the DosePro* technology. This one-time payment was recorded as royalty
revenue for the three months ended March 31, 2010. The Company anticipates recording the recurring
royalty revenue beginning with the three months ending September 30, 2010 since the terms of the
asset sale agreement provides for royalty payments to be based on cash received by Zogenix on their
product sales and there is a sixty day period following the end of the quarter for Zogenix to
complete their royalty reporting. The Company has been informed by Zogenix that wholesalers
distributing the SUMAVEL DosePro product were given net 90 day payments terms for the first quarter
sales, resulting in the effective delay of first quarter 2010 royalties until the second quarter
2010 royalty payment due in late August 2010. After first quarter 2010, the payment terms for
wholesalers reverted to net 30 days.
Research and Development
Research and development expenses consist of costs incurred for company-sponsored,
collaborative and contracted research and development activities. These costs include direct and
research-related overhead expenses. Research and development expenses under collaborative and
government grants approximate the revenue recognized under such agreements. The Company expenses
research and development costs as such costs are incurred.
Stock-Based Compensation
The Company accounts for share-based payment arrangements in accordance with ASC 718,
Compensation-Stock Compensation and ASC 505-50, Equity-Equity Based Payments to Non-Employees which
requires the recognition of compensation expense, using a fair-value based method, for all costs
related to share-based payments including stock options and restricted stock awards and stock
issued under the Companys employee stock purchase plan. This guidance requires companies to
estimate the fair value of share-based payment awards on the date of the grant using an
option-pricing model. The Company has adopted the simplified method to calculate the beginning
balance of the additional paid-in capital, or APIC pool of excess tax benefits, and to determine
the subsequent effect on the APIC pool and statement of cash flows of the tax effects of
stock-based compensation awards.
Income Taxes
The Company makes certain estimates and judgments in determining income tax expense for
financial statement purposes. These estimates and judgments occur in the calculation of certain tax
assets and liabilities, which arise from differences in the timing of recognition of revenue and
expense for tax and financial statement purposes. As part of the process of preparing the financial
statements, the Company is required to estimate income taxes in each of the jurisdictions in which
it operates. This process involves the Company estimating its current tax exposure under the most
recent tax laws and assessing temporary differences resulting from differing treatment of items for
tax and accounting purposes. These differences result in deferred tax assets and liabilities, which
are included in the balance sheets.
The Company assesses the likelihood that it will be able to recover its deferred tax assets.
It considers all available evidence, both positive and negative, including the historical levels of
income and losses, expectations and risks associated with estimates of future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for a valuation
allowance. If the
8
Company does not consider it more likely than not that it will recover its deferred tax
assets, the Company records a valuation allowance against the deferred tax assets that it estimates
will not ultimately be recoverable. At June 30, 2010 and December 31, 2009, the Company believed
that the amount of its deferred income taxes would not be ultimately recovered. Accordingly, the
Company recorded a full valuation allowance for deferred tax assets. However, should there be a
change in the Companys ability to recover its deferred tax assets, the Company would recognize a
benefit to its tax provision in the period in which it determines that it is more likely than not
that it will recover its deferred tax assets.
Net Loss Per Common Share
Basic net loss per common share is computed using the weighted-average number of shares of
common stock outstanding during the period less the weighted-average number of restricted shares of
common stock subject to repurchase. Potentially dilutive securities were not included in the net
loss per common share calculation for the three and six months ended June 30, 2010 and 2009,
because the inclusion of such shares would have had an anti-dilutive effect.
Recently Issued Accounting Pronouncements
In April 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2010-17, Milestone Method of Revenue Recognition a consensus of the FASB Emerging
Issues Task Force. This standard provides guidance on defining a milestone and determining when it
may be appropriate to apply the milestone method for revenue recognition for research and
development arrangements. This standard provides guidance on the criteria that should be met to
recognize revenue upon achievement of the related milestone event. This guidance will be effective
for us for the three months ending September 30, 2010. We will evaluate the impact of this guidance
upon entering into any future collaboration arrangements.
On January 21, 2010, the FASB issued ASU 2010-06, Improving Disclosures About Fair Value
Measurements which amends ASC 820 to add new requirements for disclosures about transfers into and
out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements
relating to Level 3 measurements. ASU 2010-06 also clarifies existing fair value disclosures about
the level of disaggregation and about inputs and valuation techniques used to measure fair value.
We adopted this guidance for the three months ended March 31, 2010. The adoption of this guidance
did not have an impact on the Companys financial position or results of operations.
In September 2009, the FASB issued ASU 2009-13 Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements (formerly EITF Issue No. 08-1 Revenue Arrangements with
Multiple Deliverables). This standard modifies the revenue recognition guidance for arrangements
that involve the delivery of multiple elements, such as product, license fees and research and
development reimbursements, to a customer at different times as part of a single revenue generating
transaction. This standard provides principles and application guidance to determine whether
multiple deliverables exist, how the individual deliverables should be separated and how to
allocate the revenue in the arrangement among those separate deliverables. The standard also
significantly expands the disclosure requirements for multiple deliverable revenue arrangements. We
will evaluate the impact of this standard for any multiple-deliverable arrangements that are
entered into in the future.
3. Cash, Cash Equivalents and Short-Term Investments
A summary of cash and cash equivalents and short-term investments, classified as
available-for-sale and carried at fair value is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gain |
|
|
(Loss) |
|
|
Fair Value |
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
9,608 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
9,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Certificates of deposit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
3,903 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
$ |
500 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
500 |
|
Certificates of deposit |
|
|
3,183 |
|
|
|
2 |
|
|
|
|
|
|
|
3,185 |
|
U.S. treasury and agencies |
|
|
1,543 |
|
|
|
|
|
|
|
|
|
|
|
1,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,226 |
|
|
$ |
2 |
|
|
$ |
|
|
|
$ |
5,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
The Company considers all liquid investments purchased with a maturity of three months or less
to be cash equivalents. The Company had no short-term investments at June 30, 2010.
The Company invests its cash and cash equivalents and short-term investments in money market
funds, commercial paper and corporate and government notes. All of these securities are classified
as available for sale with the unrealized gain and loss being recorded in accumulated other
comprehensive income.
4. Fair Value Measurements
The Company records its cash and cash equivalents and its short term investments at fair
value. The Company classifies these assets by using the fair value hierarchy which is based on the
inputs used to measure fair value. The fair value hierarchy has three levels based on the
reliability of the inputs used to determine fair value. Level 1 values are based on quoted prices
in active markets. Level 2 values are based on significant other observable inputs. Level 3 values
are based on significant unobservable inputs. The following table presents the fair value level for
the assets that are measured at fair value on a recurring basis and are categorized using the fair
value hierarchy. The Company does not have any liabilities that are measured at fair value. The
following table summarized the basis used to measure certain assets at fair value on a recurring
basis at June 30, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Significant |
|
|
|
Balance |
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Unobservable Inputs |
|
Description |
|
June 30, 2010 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Cash and cash equivalents |
|
$ |
9,608 |
|
|
$ |
5,609 |
|
|
$ |
3,999 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Certificates of deposit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys cash and cash equivalents at June 30, 2010 consisted of cash, commercial paper,
U.S. agency notes and money market funds. Money market funds are valued using quoted market prices.
The Company had no short-term investments at June 30, 2010. The Company uses an independent third
party pricing service to value its commercial paper, and other Level 2 investments. The pricing
service uses observable inputs such as new issue money market rates, adjustment spreads, corporate
actions and other factors and applies a series of matrices pricing model.
5. Sublease Agreement and Lease Exit Liability
On July 18, 2007, the Company entered into a sublease agreement with Mendel Biotechnology,
Inc. (Mendel), under which the Company subleases to Mendel approximately 48,000 square feet of
the 72,000 square foot facility located at 3929 Point Eden Way, Hayward, CA. The Company recorded a
$2.1 million impairment expense related to the sublease for the year ended December, 31, 2007.
The Company recorded this expense and the related lease exit liability because the monthly
payments the Company expects to receive under the sublease are less than the amounts that the
Company will owe the lessor for the sublease space. The fair value of the lease exit liability was
determined using a credit-adjusted risk-free rate to discount the estimated future net cash flows,
consisting of the minimum lease payments to the lessor for the sublease space and payments the
Company will receive under the sublease. The sublease loss and ongoing accretion expense required
to record the lease exit liability at its fair value using the interest method have been recorded
as part of restructuring and asset impairment expense in the statement of operations.
10
The lease exit liability activity for the six months ended June 30, 2010 is as follows (in
thousands):
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, 2010 |
|
Balance at January 1, 2010 |
|
$ |
1,091 |
|
Accretion expense |
|
|
26 |
|
Lease payments |
|
|
(150 |
) |
|
|
|
|
Balance at June 30, 2010 |
|
$ |
967 |
|
|
|
|
|
As of June 30, 2010, $182,000 of the $967,000 balance was recorded as a current liability and
$785,000 was recorded as a non-current liability.
6. Collaborations and Royalty Agreements
Zogenix
In August 2006, the Company sold all of its assets related to the Intraject needle-free
injector technology platform and products, including 12 United States patents along with foreign
counterparts, to Zogenix, Inc., a privately-held pharmaceutical company. Zogenix is responsible
for further development and commercialization efforts of Intraject (now rebranded under the name
DosePro*). Under the terms of the asset sale agreement, the Company received a $4.0 million initial
payment from Zogenix and was entitled to a $4.0 million milestone payment upon initial U.S.
commercialization, as well as quarterly royalty payments upon the sale of DosePro products. In
December 2007, Zogenix submitted a New Drug Application (NDA) with the U.S. Food and Drug
Administration (FDA) for the migraine drug sumatriptan using the needle-free injector DosePro
(SUMAVEL* DosePro). The NDA was accepted for filing by the FDA in March 2008. The same month,
Zogenix entered into a license agreement to grant exclusive rights in the European Union to Desitin
Pharmaceuticals, GmbH to develop and commercialize SUMAVEL DosePro in the European Union.
On July 16, 2009, Zogenix announced that it had received approval from the FDA for its NDA for
SUMAVEL DosePro needle-free delivery system. On August 3, 2009, Zogenix and Astellas Pharma US,
Inc. announced that they had entered into an exclusive co-promotion agreement in the U.S. for the
SUMAVEL DosePro needle-free delivery system. Under the announced terms of the agreement, the
companies will collaborate on the promotion and marketing of SUMAVEL DosePro with Zogenix focusing
their sales activities primarily on the neurology market while Astellas will focus mostly on
primary care physicians. Zogenix will have responsibility for manufacturing and distribution of the
product.
On January 13, 2010, Zogenix announced the U.S. commercial launch of its SUMAVEL DosePro
product. The U.S. launch entitled the Company to the $4.0 million milestone payment which it
received and recorded as royalty revenue during the three months ended March 31, 2010. The Company
did not record any recurring royalty revenue for the three and six months ended June 30, 2010. The
Company anticipates recording the recurring royalty revenue beginning with the three months ending
September 30, 2010 since the terms of the asset sale agreement provides for royalty payments to be
based on cash received by Zogenix on their product sales and there is a sixty day period following
the end of the quarter for Zogenix to complete their royalty reporting. The Company has been
informed by Zogenix that wholesalers distributing the SUMAVEL DosePro product were given net 90 day
payments terms for the first quarter sales, resulting in the effective delay of first quarter 2010
royalties until the second quarter 2010 royalty payment due in late August 2010. After first
quarter 2010, the payment terms for wholesalers reverted to net 30 days.
7. Stock-Based Compensation and Stock Options, Awards and Units
The following table shows the stock-based compensation expense included in the accompanying
condensed statements of operations for the six months ended June 30, 2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
$ |
41 |
|
|
$ |
44 |
|
|
$ |
92 |
|
|
$ |
160 |
|
General and administrative |
|
|
149 |
|
|
|
127 |
|
|
|
359 |
|
|
|
224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock based compensation expense |
|
$ |
190 |
|
|
$ |
171 |
|
|
$ |
451 |
|
|
$ |
384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
There was no capitalized stock-based employee compensation cost for the three and six months
ended June 30, 2010 and 2009. Since the Company incurred net losses during the quarters ended June
30, 2010 and 2009, there was no recognized tax benefit associated with stock-based compensation
expense.
The total amount of unrecognized compensation cost related to non-vested stock options and
stock purchases, net of forfeitures, was $0.4 million as of June 30, 2010. This amount will be
recognized over a weighted average period of 1.71 years.
For restricted stock awards, the Company recognizes compensation expense over the vesting
period for the fair value of the stock award on the measurement date. The total fair value of
restricted stock awards that vested during the six months ended June 30, 2010 was $39,000. The
Company retained purchase rights with respect to 2,497,250 shares of unvested restricted stock
awards issued pursuant to stock purchase agreements at no cost per share as of June 30, 2010. As of
June 30, 2010, there was $0.2 million of total unrecognized compensation costs, net of forfeitures,
related to non-vested stock awards which are expected to be recognized over a weighted average
period of 1.34 years.
Stock Option Plans: 1996 Equity Incentive Plan, 2005 Equity Incentive Plan and 1996 Non-Employee
Directors Plan
The 1996 Equity Incentive Plan (the 1996 Plan) and the 2005 Equity Incentive Plan (the 2005
Plan), which amended, restated and retitled the 1996 Plan, were adopted to provide a means by
which selected officers, directors, scientific advisory board members and employees of and
consultants to the Company and its affiliates could be given an opportunity to acquire an equity
interest in the Company. All employees, directors, officers, scientific advisory board members and
consultants of the Company are eligible to participate in the 2005 Plan. During 2000, the board of
directors approved the termination of the 1996 Non-Employee Directors Stock Option Plan (the
Directors Plan). This termination had no effect on options already outstanding under the
Directors Plan.
Stock Option Activity
The following is a summary of activity under the 1996 Plan, the 2005 Plan and the Directors
Plan for the six months ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
|
Shares Available |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
for Grant of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
Option, Award or |
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise |
|
|
|
Unit |
|
|
Shares |
|
|
Exercise Price Range |
|
|
Price |
|
Balance at January 1, 2010 |
|
|
763,185 |
|
|
|
5,088,443 |
|
|
$ |
0.15 |
|
|
|
|
|
|
$ |
120.63 |
|
|
$ |
2.49 |
|
Options authorized |
|
|
4,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
(400,000 |
) |
|
|
400,000 |
|
|
|
0.12 |
|
|
|
|
|
|
|
0.13 |
|
|
|
0.12 |
|
Options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options cancelled |
|
|
526,515 |
|
|
|
(526,515 |
) |
|
$ |
0.25 |
|
|
|
|
|
|
$ |
120.63 |
|
|
$ |
6.42 |
|
Restricted share awards granted |
|
|
(350,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted share awards cancelled |
|
|
229,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted share units awarded |
|
|
(333,333 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan shares cancelled and not reauthorized |
|
|
(4,136 |
) |
|
|
|
|
|
$ |
120.63 |
|
|
|
|
|
|
$ |
120.63 |
|
|
$ |
120.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010 |
|
|
4,431,231 |
|
|
|
4,961,928 |
|
|
$ |
0.12 |
|
|
|
|
|
|
$ |
115.00 |
|
|
$ |
2.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value is the sum of the amounts by which the quoted market price of the
Companys stock exceeded the exercise price of the stock options at June 30, 2010 for those stock
options for which the quoted market price was in excess of the exercise price (in-the-money
options). As of June 30, 2010, options to purchase 3,506,393 shares of common stock were
exercisable and had an aggregate intrinsic value of zero. In addition, options that were not yet
exercisable also had an intrinsic value of zero. Thus, all of the Companys options were under
water since all the exercise prices of the Companys outstanding options exceeded the market value
of the Companys common stock as of June 30, 2010.
No options were exercised during the six months ended June 30, 2010.
A summary of the Companys unvested restricted stock and performance bonus stock award as of
June 30, 2010 is presented below representing the maximum number of shares that could be earned or
vested under the 2005 Plan:
12
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
Weighted Average |
|
|
|
of |
|
|
Grant Date Fair |
|
|
|
Shares |
|
|
Value |
|
Balance at December 31, 2009 |
|
|
2,668,006 |
|
|
$ |
0.41 |
|
Restricted share awards issued |
|
|
350,000 |
|
|
|
0.12 |
|
Restricted share awards vested |
|
|
(291,756 |
) |
|
|
0.23 |
|
Restricted share awards cancelled |
|
|
(229,000 |
|
|
|
0.20 |
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010 |
|
|
2,497,250 |
|
|
$ |
0.41 |
|
|
|
|
|
|
|
|
|
During the three months ended June 30, 2010, the Company issued 333,333 shares of restricted
stock units with no exercise price to non-employee members of its Board of Directors. The units
will vest on the earlier of either a change in control of the Company or upon the grantees
termination of service as a Board member. In 2010, the non-employee members of the Board of
Directors elected to forego all or a portion of their cash compensation in lieu of the
aforementioned restricted stock unit grants and restricted stock awards.
8. Private Placement
On June 21, 2010, the Company closed the June 2010 Private Placement in which it sold
34,702,512 shares of common stock and warrants to purchase an aggregate of 7,527,214 shares of
common stock to accredited investors (which included three existing significant investors) under
the terms of a securities purchase agreement that was entered into with the investors on June 18,
2010. At the closing of the June 2010 Private Placement, the Company received approximately $4.1
million in aggregate gross proceeds from the sale of the common stock and the warrants. After
deducting for fees and expenses, the aggregate net proceeds from the sale of the common stock and
the warrants were approximately $3.7 million. The warrants have an exercise price of $0.1184 per
share and are exercisable after the Company has called and held a special meeting of its
shareholders to vote on a proposal to approve an amendment to the Companys Amended and Restated
Articles of Incorporation to increase the number of authorized shares of common stock and has
received the requisite shareholder approval for the shareholder proposal. The warrants also include
a mandatory exercise provision whereby the Company has the right to require the holders to exercise
the warrants after it has received the requisite shareholder approval for the shareholder proposal.
The warrants expire the earlier of 10 business days after the date on which the requisite
shareholder approval for the shareholder proposal is received and 90 days after the issuance date
of the warrants. Assuming the warrants are fully exercised at an exercise price of $0.1184 per
share, the Company would receive approximately $0.9 million in additional aggregate net proceeds
from the exercise of the warrants.
9. Net Loss Per Common Share
The Company computes basic net loss per common share using the weighted-average number of
shares of common stock outstanding during the period less the weighted-average number of shares of
common stock subject to repurchase. The effects of including the incremental shares associated with
options, warrants and unvested restricted stock are anti-dilutive, and are not included in the
diluted weighted average number of shares of common stock outstanding for the six month periods
ended June 30, 2010 and 2009.
The Company excluded the following securities from the calculation of diluted net loss per
common share for the six months ended June 30, 2010 and 2009, as their effect would be
anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
Outstanding stock options |
|
|
4,962 |
|
|
|
5,377 |
|
Unvested restricted stock |
|
|
2,497 |
|
|
|
1,423 |
|
Unvested restricted stock units |
|
|
333 |
|
|
|
|
|
Outstanding common stock warrants |
|
|
7,527 |
|
|
|
|
|
10. Comprehensive Loss
Comprehensive loss includes net loss and other comprehensive income, which for the Company is
primarily comprised of unrealized holding gains and losses on the Companys available-for-sale
securities that are excluded from the accompanying condensed statements of operations in computing
net loss and reported separately in shareholders equity. Comprehensive loss and its components
are as follows (in thousands):
13
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
Net loss |
|
$ |
(4,332 |
) |
|
$ |
(9,813 |
) |
Other comprehensive income: |
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) on available-for-sale securities |
|
|
(2 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(4,334 |
) |
|
$ |
(9,821 |
) |
|
|
|
|
|
|
|
11. Subsequent Events
On July 30, 2010, the Company entered into a Stock Purchase Agreement with Novo Nordisk A/S
providing for the issuance by the Company to Novo Nordisk A/S in a private placement of 26,000,000
shares of the Companys common stock in consideration for the termination of all of the Companys
obligations under the Promissory Note and Security Agreement dated July 3, 2006, as well as the
termination of the existing Amended and Restated Stock Purchase Agreement, dated as of January 26,
2005, previously entered into by the Company, Novo Nordisk A/S and Novo Nordisk Pharmaceuticals,
Inc. in connection with the January 2005 restructuring transaction with Novo Nordisk. The
Promissory Note and Security Agreement dated July 3, 2006 evidences, among other things, a loan
that was previously made by Novo Nordisk A/S to the Company in the principal amount of $7.5
million, which bears interest accruing at 5% per annum and the principal, along with the accrued
interest, is payable in three equal payments of approximately $3.5 million at July 2, 2012, July 1,
2013 and June 30, 2014. As of June 30, 2010, the amount outstanding under the Promissory Note and
Security Agreement, including accrued interest, was approximately $9.1 million.
The closing of the transactions contemplated by the Stock Purchase Agreement is subject to the
Companys receipt of the requisite shareholder approval to increase the number of authorized shares
of the Companys common stock to cover the 26,000,000 million shares to be issued and other
customary conditions. The Stock Purchase Agreement requires the Company to call and hold a special
meeting of the Companys shareholders to vote on a proposal to approve an amendment to the
Companys Amended and Restated Articles of Incorporation to increase the number of authorized
shares of the Companys common stock to cover the 26,000,000 shares to be issued. The Company
intends to present this proposal and the proposal to approve an amendment to the Companys amended
and restated Articles of Incorporation to increase the number of authorized shares of the Companys
common stock contemplated by the June 2010 Private Placement to the Companys shareholders at the
same special meeting. The Company anticipates recording this transaction in the three months ending
September 30, 2010 when the transaction is finalized.
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that are based on the
current beliefs of management, as well as current assumptions made by, and information currently
available to, management. All statements contained in this Quarterly Report on Form 10-Q, other
than statements that are purely historical, are forward-looking statements. Words such as
anticipate, expect, intend, plan, believe, may, will, could, continue, seek,
estimate, or the negative thereof and similar expressions also identify forward-looking
statements. Forward looking statements include our anticipation of recording recurring royalty
revenue beginning with the three months ending September 30, 2010, our belief that our cash and
cash equivalents as of June 30, 2010 and the Zogenix quarterly royalty payments will be sufficient
to enable us to fund our operations at least through the fourth quarter of 2010, our statements
regarding the closing of the June 2010 Private Placement and the transactions contemplated by our
Stock Purchase Agreement with Novo Nordisk A/S and our statements regarding our intent with respect
to the related special meeting and proxy statement. These forward-looking statements are subject to
risks and uncertainties that could cause our future actual results, performance or achievements to
differ materially from those expressed in, or implied by, any such forward-looking statements as a
result of certain factors, including, but not limited to, the risk that the conditions to the
closing of the June 2010 Private Placement and the transactions contemplated by our Stock Purchase
Agreement with Novo Nordisk A/S might not be satisfied and the risk of any difficulties or delays
in obtaining the required shareholder approval to increase the number of authorized shares of our
common stock and those risks and uncertainties discussed in this section, as well as in the
section entitled Risk Factors in this Quarterly Report on Form 10-Q and other reports filed with
the United States Securities and Exchange Commission (the SEC).
These forward-looking statements and our business is subject to significant risks including,
but not limited to, our ability to obtain additional financing, our ability to implement our
product development strategy, the success of product development efforts, obtaining and enforcing
patents important to our business, clearing the lengthy and expensive regulatory approval process
and possible competition from other products. Even if product candidates appear promising at
various stages of development, they may not reach
14
the market or may not be commercially successful for a number of reasons. Such reasons
include, but are not limited to, the possibilities that the potential products may be found to be
ineffective during clinical trials, may fail to receive necessary regulatory approvals, may be
difficult to manufacture on a large scale, are uneconomical to market, may be precluded from
commercialization by proprietary rights of third parties or may not gain acceptance from health
care professionals and patients.
You are cautioned not to place undue reliance on the forward-looking statements contained
herein, which speak only as of the date of the filing of this Quarterly Report on Form 10-Q. We
undertake no obligation to update these forward-looking statements in light of events or
circumstances occurring after the date of the filing of this Quarterly Report on Form 10-Q or to
reflect the occurrence of unanticipated events.
Overview
We are an emerging specialty pharmaceutical company focused on the development and
commercialization of drugs delivered by inhalation for the treatment of severe respiratory diseases
by pulmonologists. Over the last decade, we invested a large amount of capital to develop drug
delivery technologies, particularly the development of a significant amount of expertise in
pulmonary drug delivery. We also invested considerable effort into the generation of a large volume
of laboratory and clinical data demonstrating the performance of our AERx® pulmonary
drug delivery platform and other proprietary technology, including our liposomal ciprofloxacin
formulation for inhalation. We have not been profitable since inception and expect to incur
additional operating losses over at least the next several years as we continue product development
efforts, clinical trial activities, and possible sales, marketing and contract manufacturing
efforts. To date, we have not had any significant product sales and do not anticipate receiving
revenues from the sale of any of our products in the near term. However, we do expect to generate
royalty revenue from the Intraject technology platform that we sold to Zogenix in 2006. As of June
30, 2010, we had an accumulated deficit of $352.8 million. Historically, we have funded our
operations primarily through public offerings and private placements of our capital stock, license
fees and milestone payments from collaborators, proceeds from the January 2005 restructuring
transaction with Novo Nordisk, borrowings from Novo Nordisk, the sale of Intraject-related assets
to Zogenix, the milestone payment received from Zogenix during the first quarter of 2010 and
interest earned on cash equivalents and short-term investments.
Over the last four years, our business has focused on opportunities in the development of
drugs for the treatment of severe respiratory disease that could be developed by the Company and
commercialized in the United States, or another significant territory such as the European Union
(EU). It is our longer term strategy to commercialize our respiratory product candidates with our
own focused sales and marketing force addressing pulmonary specialty doctors in the United States
or in the EU, where we believe that a proprietary sales force will enhance the return to our
shareholders. Where our products can benefit a broader population of patients in the United States
or in other countries, we may enter into co-development, co-promotion or other marketing
arrangements with collaborators, thereby reducing costs and increasing revenues through license
fees, milestone payments and royalties. In selecting our proprietary development programs, we
primarily seek drugs approved by the United States Food and Drug Administration (FDA) that can be
reformulated for both existing and new indications in respiratory disease. Our intent is to use our
pulmonary delivery methods and formulations to improve their safety, efficacy and convenience of
administration to patients. We believe that this strategy will allow us to reduce cost, development
time and risk of failure, when compared to the discovery and development of new chemical entities.
Our lead development candidate is a proprietary liposomal formulation of the antibiotic
ciprofloxacin that is delivered by inhalation for the treatment of infections associated with the
severe respiratory diseases cystic fibrosis and non-cystic fibrosis bronchiectasis. We received
orphan drug designations for both of these indications in the U.S. and for cystic fibrosis in the
European Union. We have reported the results of two successful Phase 2a trials with this product
candidate in cystic fibrosis (CF) and non-cystic fibrosis bronchiectasis (BE), respectively, as
described below.
In June 2008, we completed a multi-center 14-day treatment Phase 2a trial in Australia and New
Zealand in 21 CF patients with once daily dosing of 6 mL of inhaled liposomal ciprofloxacin
(ARD-3100). The primary efficacy endpoint in this Phase 2a study was the change from baseline in
the sputum Pseudomonas aeruginosa colony forming units (CFU), an objective measure of the reduction
in pulmonary bacterial load. Data analysis in 21 patients who completed the study demonstrated that
the CFUs decreased by a mean 1.43 log over the 14-day treatment period (p<0.0001). Evaluation
one week after study treatment was discontinued showed that the Pseudomonas bacterial density in
the lung was still reduced from the baseline without additional antibiotic use. Pulmonary function
testing as measured by the forced expiratory volume in one second (FEV1) showed a significant mean
increase of 6.86% from baseline after 14 days of treatment (p=0.04). The study drug was well
tolerated and there were no serious adverse events reported during the trial.
In December 2008, we completed an open-label, four week treatment study with once daily
inhaled liposomal ciprofloxacin (ARD-3100) in patients with non-CF bronchiectasis. The study was
conducted at eight leading centers in the United Kingdom and enrolled a total of 36 patients. The
patients were randomized into two equal size groups, one receiving 3 mL of inhaled liposomal
ciprofloxacin and the other receiving 6 mL of inhaled liposomal ciprofloxacin, once-a-day for the
four-week treatment period. The primary efficacy
15
endpoint was the change from baseline in the sputum Pseudomonas aeruginosa CFU, the standard
objective measure of the reduction in pulmonary bacterial load. The 3 mL and 6 mL doses of inhaled
liposomal ciprofloxacin in the evaluable patient population demonstrated significant mean decreases
against baseline in the CFUs over the 28-day treatment period of 3.5 log (p<0.001) and 4.0 log
(p<0.001) units, respectively.
In July 2009, we announced that clearance was received from the U.S. Food and Drug
Administration for the inhaled liposomal ciprofloxacin (ARD-3100) Investigational New Drug (IND)
application for the management of non-cystic fibrosis bronchiectasis.
In November 2009, the first patient was dosed in the ORBIT-2 (Once-daily Respiratory
Bronchiectasis Inhalation Treatment) trial, a 6-month, multicenter, international Phase 2b clinical
trial of inhaled ciprofloxacin with the ARD-3150 formulation in 40 adult patients with non-cystic
fibrosis bronchiectasis. The randomized, double-blind, placebo-controlled trial is being conducted
in Australia and New Zealand. Following a 14 day screening period, the patients are treated
once-a-day for 28 days with either the active drug, or placebo, followed by a 28 day off-treatment
period. This on-off sequence will be repeated three times. The primary endpoint is defined as the
mean change in Pseudomonas aeruginosa density in sputum (colony forming units CFU per gram)
from baseline to day 28 of the active treatment group versus placebo. Safety and tolerability
assessments of the treatment versus placebo group will be performed and secondary efficacy
endpoints will include long term microbiological responses, time to an exacerbation, severity of
exacerbations, length of time to resolve exacerbations and changes in lung function and in quality
of life measurements.
ORBIT-2 is exploring whether the novel formulation ARD-3150, which has a different drug
release profile than ARD-3100, may have additional therapeutic benefits. We expect that the 6-month
study will also generate valuable data on the long term impact of once daily inhaled ciprofloxacin
in patients with severe bronchiectasis. In March 2010, we announced that we had completed
enrollment and administered the first dose to the last patient enrolled in this trial.
In February 2010, the first patient was dosed in the U.S. as part of the ORBIT-1 trial, an
international, randomized, double-blind, placebo-controlled Phase 2b study designed to evaluate
inhaled liposomal ciprofloxacin with the ARD-3100 formulation in patients with BE under the
aforementioned U.S. IND. The ORBIT-1 trial will randomize 96 patients, who will receive for four
weeks, either one of two different once-daily inhaled doses (100 or 150 mg ciprofloxacin delivered
by inhalation as 2 or 3 mL of liposomal dispersion, respectively) or once-daily inhaled placebo.
The primary efficacy endpoint will be the change from baseline in sputum Pseudomonas aeruginosa
colony forming units (CFUs). Secondary endpoints will include quality of life measurements and
improvement of outcomes with respect to exacerbations. Lung function changes will be monitored for
safety.
The results from each of these trials, expected in the second half of 2010, will produce an
extensive data base of information from which we hope to select the optimum product and the most
appropriate endpoints to test in Phase 3. In order to expedite anticipated time to market and
increase market acceptance, we have elected to deliver our formulations via an approved,
widely-accepted nebulizer system for each of these Phase 2b trials.
In May 2010, we announced that clearance was received from the U.S. Food and Drug
Administration for the inhaled liposomal ciprofloxacin (ARD-3100) Investigational New Drug (IND)
application for the management of cystic fibrosis (CF). The first trial planned under this IND is a
Phase 1/2a study in pediatric CF patients.
The CF and BE programs incorporate formulation and manufacturing processes and the early
preclinical safety data developed for our inhalation anthrax program discussed below. We believe
our inhaled liposomal ciprofloxacin could also be explored for the treatment of other serious
respiratory infections, such as those occurring in severe asthma and COPD patients.
In 2004, we executed a development agreement with Defence Research and Development Canada
(DRDC), a division of the Canadian Department of National Defence, for the development of
liposomal ciprofloxacin for the treatment of biological terrorism-related inhalation anthrax, using
the same formulation that we are exploring for the studies of the treatment of respiratory
infections associated with cystic fibrosis and with non-cystic fibrosis bronchiectasis. If we apply
in the future for approval of this product candidate for the prevention and treatment of inhalation
anthrax and possibly other inhaled life-threatening bioterrorism infections, we anticipate using
safety data from these studies to support our application. We are currently seeking U.S. government
funding to complete the development of this product.
In August 2006, we sold all of the assets related to the Intraject needle-free injector
technology platform and products, including 12 United States patents along with foreign
counterparts, to Zogenix, Inc., a privately-held pharmaceutical company. Zogenix is responsible for
further development and commercialization efforts of Intraject (now rebranded under the name
DosePro). Under the terms of the asset sale agreement, we received a $4.0 million initial payment
from Zogenix and would be entitled to a $4.0 million milestone payment upon initial U.S.
commercialization, as well as quarterly royalty payments upon commercialization of DosePro
products. In December 2007, Zogenix submitted a New Drug Application (NDA) with the U.S. Food and
Drug Administration
16
(FDA) for the migraine drug sumatriptan using the needle-free injector DosePro (SUMAVEL
DosePro). The NDA was accepted for filing by the FDA in March 2008. The same month, Zogenix
entered into a license agreement to grant exclusive rights in the European Union to Desitin
Pharmaceuticals, GmbH to develop and commercialize SUMAVEL DosePro in the European Union.
On July 16, 2009, Zogenix announced that it had received approval from the FDA for its NDA for
SUMAVEL DosePro needle-free delivery system. On August 3, 2009, Zogenix and Astellas Pharma US,
Inc. announced that they had entered into an exclusive co-promotion agreement in the U.S. for the
SUMAVEL DosePro needle-free delivery system. Under the announced terms of the agreement, the
companies will collaborate on the promotion and marketing of SUMAVEL DosePro with Zogenix focusing
their sales activities primarily on the neurology market while Astellas will focus mostly on
primary care physicians. Zogenix will have responsibility for manufacturing and distribution of the
product.
On January 13, 2010, Zogenix announced the U.S. commercial launch of its SUMAVEL DosePro
product. The U.S. launch entitled the Company to the $4.0 million milestone payment which we
received and recorded as royalty revenue during the three months ended March 31, 2010. We are also
entitled to quarterly royalty payments based on sales of the DosePro product. We anticipate
recording this recurring royalty revenue beginning with the three months ending September 30, 2010
since the terms of the asset sale agreement provides for royalty payments to be based on cash
received by Zogenix on their product sales and there is a sixty day lag following the end of the
quarter in royalty reporting. We have been informed by Zogenix that wholesalers distributing the
SUMAVEL DosePro product were given net 90 day payments terms for the first quarter sales, resulting
in the effective delay of first quarter 2010 royalties until the second quarter 2010 royalty
payment due in late August 2010. After the first quarter 2010, the payment terms for wholesalers
reverted to net 30 days.
On June 21, 2010, we closed the June 2010 Private Placement, in which we sold 34,702,512
shares of common stock and warrants to purchase an aggregate of 7,527,214 shares of common stock to
accredited investors (which included a few existing significant investors) under the terms of a
securities purchase agreement that was entered into with the investors on June 18, 2010. At the
closing of the June 2010 Private Placement, we received approximately $4.1 million in aggregate
gross proceeds from the sale of the common stock and the warrants. After deducting for fees and
expenses, the aggregate net proceeds from the sale of the common stock and the warrants were
approximately $3.7 million. The warrants have an exercise price of $0.1184 per share and are
exercisable after we have called and held a special meeting of its shareholders to vote on a
proposal to approve an amendment to our amended and restated articles of incorporation to increase
the number of authorized shares of common stock and has received the requisite shareholder approval
for the shareholder proposal. The warrants also include a mandatory exercise provision whereby we
have the right to require the holders to exercise the warrants after we have received the requisite
shareholder approval for the shareholder proposal. The warrants expire the earlier of 10 business
days after the date on which the requisite shareholder approval for the shareholder proposal is
received and 90 days after the issuance date of the warrants. Assuming the warrants are fully
exercised at an exercise price of $0.1184 per share, we would receive approximately $0.9 million in
additional aggregate net proceeds from the exercise of the warrants.
On July 30, 2010, we entered into a Stock Purchase Agreement with Novo Nordisk A/S providing for
the issuance by us to Novo Nordisk A/S in a private placement of 26,000,000 shares of our common
stock in consideration for the termination of all of our obligations under the Promissory Note and
Security Agreement dated July 3, 2006 , as well as the termination of the existing Amended and
Restated Stock Purchase Agreement, dated as of January 26, 2005, previously entered into by us,
Novo Nordisk A/S and Novo Nordisk Pharmaceuticals, Inc. in connection with our January 2005
restructuring transaction with Novo Nordisk. The Promissory Note and Security Agreement evidences,
among other things, a loan that was previously made by Novo Nordisk A/S to us in the principal
amount of $7.5 million, which bears interest accruing at 5% per annum and the principal, along with
the accrued interest, is payable in three equal payments of approximately $3.5 million at July 2,
2012, July 1, 2013 and June 30, 2014. As of July 30, 2010, the amount outstanding under the
Promissory Note and Security Agreement, including accrued interest, was approximately $9.1 million.
The closing of the transactions contemplated by the Stock Purchase Agreement is subject to our
receipt of the requisite shareholder approval to increase the number of authorized shares of our
common stock to cover the 26,000,000 shares to be issued and other customary conditions. The Stock
Purchase Agreement requires us to call and hold a special meeting of our shareholders to vote on a
proposal to approve an amendment to our amended and restated articles of incorporation to increase
the number of authorized shares of our common stock to cover the 26,000,000 shares to be issued.
We intend to present this proposal and the proposal to approve an amendment to our amended and
restated articles of incorporation to increase the number of authorized shares of our common stock
contemplated by the June 2010 Private Placement, to our shareholders at the same special meeting.
In connection with obtaining shareholder approval to increase the number of authorized shares
of our common stock described above, we will prepare a proxy statement for our shareholders to be
filed with the SEC. The proxy statement will contain information about our company, the
transaction and related matters. Shareholders are urged to read the proxy statement carefully when
it is available because it will contain important information. We and our directors and executive
officers and other members of management and employees may be deemed to be participants in the
solicitation of proxies. Information concerning our company and
17
our directors and executive officers is set forth in our proxy statement and Annual Report on
Form 10-K previously filed with the SEC.
Critical Accounting Policies and Estimates
We consider certain accounting policies related to revenue recognition, impairment of long-lived
assets, exit/disposal activities, research and development, income taxes and stock-based
compensation to be critical accounting policies that require the use of significant judgments and
estimates relating to matters that are inherently uncertain and may result in materially different
results under different assumptions and conditions. The preparation of financial statements in
conformity with United States generally accepted accounting principles requires us to make
estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes to the financial statements. These estimates include useful lives for property
and equipment and related depreciation calculations, estimated amortization periods for payments
received from product development and license agreements as they relate to revenue recognition, and
assumptions for valuing options, warrants and other stock-based compensation. Our actual results
could differ from these estimates.
Revenue Recognition
The Company recognizes revenue under the provisions of the SECs Staff Accounting Bulletin
(SAB) 104, Topic 13, Revenue Recognition Revised and Updated and ASC 605, Revenue Recognition. In
addition, contract revenue from our collaboration arrangements typically contain multiple elements
and are accounted for under the guidance of ASC 605-25, Revenue Recognition-Multiple Element
Arrangements.
Contract Revenue. Contract revenues consist of revenues from grants, collaboration agreements
and feasibility studies. We record license fees, milestone fees, reimbursement of research and
development expenses as contract revenue. We review all of these arrangements for the existence of
multiple elements. The Company reviews elements that have been delivered and determines whether
such items have value to the Companys collaborators on a stand-alone basis and whether objective
reliable evidence of fair value of the undelivered items exists. Deliverables that meet these
criteria are considered a separate unit of accounting and are recognized as revenue when delivered
and collection is reasonably assured. Deliverables that do not meet these criteria are combined
and accounted for as a single unit of accounting. Revenue recognition criteria are identified and
applied to each separate unit of accounting. The Company typically has not had reliable evidence of
separate units and has treated the entire arrangement as a single unit of accounting.
Royalty Revenue. The Company earns royalty revenue under the terms of the asset sale
agreement with Zogenix. Revenue is recognized when the amounts under this agreement can be
determined and when collectability is probable. The Company has no performance obligations under
this agreement. Revenue will be recognized from the quarterly royalty payments one quarter in
arrears due to the contractual terms in the asset sale agreement that allow Zogenix sixty days to
complete their royalty report following the end of the quarter. In the first quarter of 2010, the
Company received the $4.0 million milestone payment that was due upon the first commercial sale by
Zogenix of a product using the DosePro technology. This one-time payment was recorded as royalty
revenue for the three months ended March 31, 2010. The Company anticipates recording the recurring
royalty revenue beginning with the three months ending September 30, 2010 since the terms of the
asset sale agreement provides for royalty payments to be based on cash received by Zogenix on their
product sales and there is a sixty day period following the end of the quarter for Zogenix to
complete their royalty reporting. The Company has been informed by Zogenix that wholesalers
distributing the SUMAVEL DosePro product were given net 90 day payments terms for the first quarter
sales, resulting in the effective delay of first quarter 2010 royalties until the second quarter
2010 royalty payment due in late August 2010. After first quarter 2010, the payment terms for
wholesalers reverted to net 30 days.
Impairment of Long-Lived Assets
In accordance with ASC 360-10, Property Plant and Equipment Overall, we review for
impairment whenever events or changes in circumstances indicate that the carrying amount of
property and equipment may not be recoverable. Determination of recoverability is based on an
estimate of undiscounted future cash flows resulting from the use of the asset and its eventual
disposition. In the event that such cash flows are not expected to be sufficient to recover the
carrying amount of the assets, we write down the assets to their estimated fair values and
recognize the loss in the statements of operations.
Accounting for Costs Associated with Exit or Disposal Activities
In accordance with ASC 420, Exit or Disposal Cost Obligations (ASC 420), we recognize a
liability for the cost associated with an exit or disposal activity that is measured initially at
its fair value in the period in which the liability is incurred, except for a liability for
one-time termination benefits that is incurred over time. According to this guidance, costs to
terminate an operating lease or other
18
contracts are (a) costs to terminate the contract before the end of its term or (b) costs that
will continue to be incurred under the contract for its remaining term without economic benefit to
the entity. In periods subsequent to initial measurement, changes to the liability are measured
using the credit-adjusted risk-free rate that was used to measure the liability initially.
Research and Development
Research and development expenses consist of costs incurred for company-sponsored,
collaborative and contracted research and development activities. These costs include direct and
research-related overhead expenses. Research and development expenses under collaborative and
government grants approximate the revenue recognized under such agreements. We expense research and
development costs as such costs are incurred.
Income Taxes
We make certain estimates and judgments in determining income tax expense for financial
statement purposes. These estimates and judgments occur in the calculation of certain tax assets
and liabilities, which arise from differences in the timing of recognition of revenue and expense
for tax and financial statement purposes. As part of the process of preparing our financial
statements, we are required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves us estimating our current tax exposure under the most recent tax
laws and assessing temporary differences resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and liabilities, which are
included in our balance sheets.
We assess the likelihood that we will be able to recover our deferred tax assets. We consider
all available evidence, both positive and negative, including our historical levels of income and
losses, expectations and risks associated with estimates of future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If we
do not consider it more likely than not that we will recover our deferred tax assets, we will
record a valuation allowance against the deferred tax assets that we estimate will not ultimately
be recoverable. At June 30, 2010 and December 31, 2009, we believed that the amount of our deferred
income taxes would not be ultimately recovered. Accordingly, we recorded a full valuation allowance
for deferred tax assets. However, should there be a change in our ability to recover our deferred
tax assets, we would recognize a benefit to our tax provision in the period in which we determine
that it is more likely than not that we will recover our deferred tax assets.
Employee Stock-Based Compensation
We follow the fair value method of accounting for employee stock-based compensation
arrangements in accordance with ASC 718, Compensation Stock Compensation. We record expense for
stock-based compensation, which includes stock options, restricted stock awards and purchases of
common stock under the Employee Stock Purchase Plan. The expense amount that is recorded is based
on the fair value of the award and is recognized as compensation expense. Expense is recognized
over the vesting period of the award.
We used the Black-Scholes option-pricing model to estimate the fair value of stock-based
awards as of the grant date. The Black-Scholes model, by its design, is complex, and dependent upon
key data inputs estimated by management. We determine expected volatility using the historical
method, which is based on the daily historical daily trading data of our common stock over the
expected term of the option. Effective during the three months ended March 31, 2010, we began using
the safe harbor method to calculate the expected term, as permitted by SAB 110. We believe that the
use of this method is most appropriate for us considering the very limited, relevant historical
experience of stock option exercises.
Recent Accounting Pronouncements
See Note 2 to the accompanying unaudited condensed financial statements included in Part I,
Item 1 of this Quarterly Report on Form 10-Q for information on recent accounting pronouncements.
Results of Operations
Three and six months ended June 30, 2010 and 2009
We reduced our net loss by approximately $0.5 million for the three months ended June 30, 2010
as compared with the three months ended June 30, 2009. These favorable results occurred because of
lower research and development costs, lower restructuring and asset impairment costs and the
receipt of a refund of escrow funds related to VAT payments that was received in the three months
ended June 30, 2010. We significantly reduced our net loss by $5.5 million for the six months ended
June 30, 2010 as compared with the six months ended June 30, 2009. These favorable results were due
to the royalty revenue from Zogenix and lower operating
19
expenses as compared with the prior year period. Operating expenses were lower despite our
continued investment in our liposomal ciprofloxacin program, including the expenses related to our
two ongoing clinical trials.
We recorded no revenue in each of the three months ended June 30, 2010 and 2009. Total revenue
was $4.0 million for the six months ended June 30, 2010 as compared with no revenue for the six
months ended June 30, 2009. For the six months ended June 30, 2010, we recorded $4.0 million in
royalty revenue related to the milestone payment that was due upon the initial commercialization of
Zogenixs DosePro product. We are also entitled to recurring quarterly royalty payments based on
sales of the DosePro product. We anticipate recording this recurring royalty revenue beginning with
the three months ending September 30, 2010 since the terms of the asset sale agreement provides for
royalty payments to be based on cash received by Zogenix on their product sales and there is a
sixty day period following the end of the quarter for Zogenix to complete their royalty reporting.
We have been informed by Zogenix that wholesalers distributing the SUMAVEL DosePro product were
given net 90 day payments terms for the first quarter sales, resulting in the effective delay of
first quarter 2010 royalties until the second quarter 2010 royalty payment due in late August 2010.
After first quarter 2010, the payment terms for wholesalers reverted to net 30 days. Consequently,
we recorded no royalty revenue in the three months ended June 30, 2010.
For the six months ended June 30, 2009, the Company did not record any revenue since all
amounts invoiced under the Lung Rx collaboration agreement were deferred and not recognized as
revenue until a subsequent period.
Operating expenses were $4.1 million for the three months ended June 30, 2010 which
represented a $0.4 million decrease from the three months ended June 30, 2009. Research and
development expenses decreased $0.2 million and restructuring and impairment expenses also
decreased by $0.2 million as compared with the three months ended June 30, 2009. Operating expenses
were $8.2 million for the six months ended June 30, 2010, which represented a $1.4 million decrease
as compared with the six months ended June 30, 2009. Research and development expenses decreased
$1.1 million, general and administrative expenses decreased $0.1 million and restructuring and
impairment expenses decreased $0.2 million as compared with the six months ended June 30, 2009.
The decrease in research and development expenses was due to lower AERx-related expenses for
headcount, contract manufacturing and depreciation expenses. AERx-related expenses decreased due to
the termination of the Lung Rx collaboration in June 2009 and the subsequent suspension of
AERx-related development activity. These decreases were partially offset by higher direct clinical
expenses related to our liposomal ciprofloxacin Phase 2b trials.
Liquidity and Capital Resources
As of June 30, 2010, we had cash and cash equivalents of $9.6 million and total working
capital of $7.8 million. We believe that cash and cash equivalents on hand at June 30, 2010, as
well as anticipated recurring royalty payments from Zogenix, will be sufficient to enable us to
fund our operations at least through the fourth quarter of 2010.
On June 21, 2010, we closed the June 2010 Private Placement in which we sold 34,702,512 shares
of our common stock and warrants to purchase an aggregate of 7,527,214 shares of our common stock
to accredited investors (which included three existing significant investors) under the terms of a
securities purchase agreement that we entered into with the investors on June 18, 2010. At the
closing of the June 2010 Private Placement, we received approximately $4.1 million in aggregate
gross proceeds from the sale of the common stock and the warrants. After deducting for fees and
expenses, the aggregate net proceeds from the sale of the common stock and the warrants were
approximately $3.7 million. The warrants have an exercise price of $0.1184 per share and are
exercisable after we have called and held a special meeting of our shareholders to vote on a
proposal to approve an amendment to our Amended and Restated Articles of Incorporation to increase
the number of authorized shares of our common stock and we have received the requisite shareholder
approval for the shareholder proposal. The warrants also include a mandatory exercise provision
whereby we have the right to require the holders to exercise the warrants after we have received
the requisite shareholder approval for the shareholder proposal. The warrants expire the earlier
of 10 business days after the date on which we have received the requisite shareholder approval for
the shareholder proposal and 90 days after the issuance date of the warrants. Assuming the
warrants are fully exercised at an exercise price of $0.1184 per share, we would receive
approximately $0.9 million in additional aggregate net proceeds from the exercise of the warrants.
We are currently exploring means to fund the further development of the cystic fibrosis
indication for ARD-3100, as well as the anticipated costs of our Phase 3 liposomal ciprofloxacin
bronchiectasis trials, focusing primarily on establishing funded partnering agreements and through
sale or out-licensing of non-strategic assets.
Six months ended June 30, 2010
20
Total cash and cash equivalents increased by $5.7 million for the six months ended June 30,
2010. The increase in cash was primarily due to the net proceeds of $3.7 million from the sale of
common stock in the June 2010 Private Placement and the net proceeds from the sale of short-term
investments of $5.2 million. This increase was partially offset by cash used in operations of $3.3
million. Cash used for operations was favorably impacted by the receipt of the $4.0 million
milestone payment from Zogenix.
Six months ended June 30, 2009
As of June 30, 2009 we had cash, cash equivalents and short-term investments of $15.8 million,
down from $19.1 million at December 31, 2008. The $3.3 million decrease consisted of a decrease of
$9.6 million in cash and cash equivalents offset by an increase of $6.3 million in short-term
investments. The overall decrease primarily resulted from the use of cash to fund operations,
partially offset by the $3.9 million in proceeds from the registered direct offering of our common
stock.
Net cash used in operating activities for the six months ended June 30, 2009 was $7.3 million
and primarily resulted from our net loss of $9.8 million, partially offset by non-cash expenses for
depreciation, stock based compensation and facility lease exit expenses. Net cash used by investing
activities was $6.3 million for the six months ended June 30, 2009 and represented the net purchase
of short-term investments. Net cash provided by financing activities for the six months ended June
30, 2009 was $4.0 million which was primarily due to the registered direct offering of our common
stock.
Off-Balance Sheet Financings and Liabilities
Other than contractual obligations incurred in the normal course of business, we do not have
any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or
contingent interests in transferred assets or any obligation arising out of a material variable
interest in an unconsolidated entity. We have one inactive, wholly-owned subsidiary domiciled in
the United Kingdom.
|
|
|
Item 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The disclosures in this section are not required since the Company qualifies as a smaller
reporting company.
|
|
|
Item 4. |
|
CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Based on their evaluation as of the end of the period covered by this report, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended (the, Exchange Act)) were effective as of the end of the period covered by this report
to ensure that information that we are required to disclose in reports that management files or
submits under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms.
Our disclosure controls and procedures are designed to provide reasonable assurance of
achieving their objectives, and our Chief Executive Officer and Chief Financial Officer have
concluded that these controls and procedures are effective at the reasonable assurance level. We
believe that a control system, no matter how well designed and operated, cannot provide absolute
assurance that the objectives of the control system are met, and no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if any, within a company
have been detected.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during
our most recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
21
PART II: OTHER INFORMATION
|
|
|
Item 1. |
|
LEGAL PROCEEDINGS |
Arbitration Proceedings against Lung Rx, Inc.
On June 1, 2009, we received a written notice from United Therapeutics Corporation (United)
terminating the Exclusive License, Development and Commercialization Agreement, dated August 30,
2007 (the Lung Rx Agreement), between us and Lung Rx, Inc., a wholly-owned subsidiary of United
(Lung Rx), effective July 1, 2009. Lung Rx did not assert the existence of any technical problems
with our AERx technology or any safety or efficacy concerns.
We believe that Lung Rx was not entitled to terminate the Lung Rx Agreement. Accordingly, on
September 14, 2009, we commenced non-binding arbitration proceedings against Lung Rx before the
American Arbitration Association, alleging breach by Lung Rx of the Lung Rx Agreement and seeking a
license fee, milestone payments, royalties, development costs and expenses, and attorneys fees
from Lung Rx.
In June 2010, a panel of arbitrators dismissed the arbitration proceedings on procedural
grounds. We continue to review our options and may elect to pursue litigation in this matter in
the future.
In addition to the other information contained in this Quarterly Report on Form 10-Q, and risk
factors set forth in the 2009 Annual Report on Form 10-K and our other filings with the SEC, the
following risk factors should be considered carefully before you decide whether to buy, hold or
sell our common stock. Our business, financial condition, results of operations and stock price
could be materially adversely affected by any of these risks. Additional risks not presently known
to us or that we currently deem immaterial may also impair our business, financial conditions,
results of operations and stock price.
The risk factors included herein include any material changes to and supersede the risk
factors associated with our business previously disclosed in Part I, Item 1A, Risk Factors of the
2009 Annual Report on Form 10-K. We have marked with a double asterisk (**) those risk factors that
reflect substantive changes from the risk factors included in the 2009 Annual Report on Form 10-K.
Risks Related to Our Business
We are an early-stage company.
You must evaluate us in light of the uncertainties and complexities present in an early-stage
company. All of our potential products are in an early stage of research or development. Our
potential products require extensive research, development and pre-clinical and clinical testing.
Our potential products also may involve lengthy regulatory reviews before they can be sold. Because
none of our product candidates has yet received approval by the FDA, we cannot assure you that our
research and development efforts will be successful, any of our potential products will be proven
safe and effective or regulatory clearance or approval to sell any of our potential products will
be obtained. We cannot assure you that any of our potential products can be manufactured in
commercial quantities or at an acceptable cost or marketed successfully. We may abandon the
development of some or all of our product candidates at any time and without prior notice. We must
incur substantial up-front expenses to develop and commercialize products and failure to achieve
commercial feasibility, demonstrate safety, achieve clinical efficacy, obtain regulatory approval
or successfully manufacture and market products will negatively impact our business.
We will need additional capital, and we may not be able to obtain it on a timely basis, or at all.
We will need to commit substantial funds to develop our product candidates and we may not be
able to obtain sufficient funds on acceptable terms or at all, especially in light of the current
difficult financing environment. Our operations to date have consumed substantial amounts of cash
and have generated no significant direct product revenues. We expect negative operating cash flows
to continue for at least the foreseeable future. Our future capital requirements will depend on
many factors, including:
|
|
|
our progress in the application of our delivery and formulation technologies, which may
require further refinement of these technologies;
|
22
|
|
|
the number of product development programs we pursue and the pace of each program; |
|
|
|
our progress with formulation development; |
|
|
|
the scope, rate of progress, results and costs of preclinical testing and clinical
trials; |
|
|
|
the time and costs associated with seeking regulatory approvals; |
|
|
|
our ability to outsource the manufacture of our product candidates and the costs of doing
so; |
|
|
|
the time and costs associated with establishing in-house resources to market and sell
certain of our products; |
|
|
|
our ability to establish collaborative arrangements with others and the terms of those
arrangements; |
|
|
|
the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims, and |
|
|
|
our need to acquire licenses, or other rights for our product candidates. |
Since inception, we have financed our operations primarily through private placements and
public offerings of our capital stock, contract research funding and interest earned on
investments. We believe that our cash and cash equivalents at June 30, 2010 and anticipated future
recurring royalty payments will be sufficient to fund operations at least through the fourth
quarter of 2010. We will need to obtain substantial additional funds before we would be able to
bring any of our product candidates to market. Our estimates of future capital use are uncertain,
and changing circumstances, including those related to implementation of, or further changes to,
our development strategy, could cause us to consume capital significantly faster than currently
expected, and our expected sources of funding may not be sufficient. If adequate funds are not
available, we will be required to delay, reduce the scope of, or eliminate one or more of our
product development programs and reduce personnel-related costs, or to obtain funds through
arrangements with collaborators or other sources that may require us to relinquish rights to or
sell certain of our technologies or products that we would not otherwise relinquish or sell. If we
are able to obtain funds through the issuance of debt securities or borrowing, the terms may
significantly restrict our operations. If we are able to obtain funds through the issuance of
equity securities, our shareholders may suffer significant dilution and our stock price may drop.
In addition, we currently have no authorized, unreserved shares of common stock available for
future issuance. Accordingly, we do not have authorized shares of common stock available for
issuance for future capital-raising activities and other corporate purposes and, therefore, will be
required to seek shareholder approval to amend our amended and restated articles of incorporation
to increase the number of authorized shares. There is no assurance that we would be able to obtain
any such shareholder approval.
We have a history of losses, we expect to incur losses for at least the foreseeable future, and we
may never attain or maintain profitability.
We have never been profitable and have incurred significant losses in each year since our
inception. As of June 30, 2010, we have an accumulated deficit of $352.8 million. We have not had
any significant direct product sales and do not anticipate receiving revenues from the sale of any
of our products for at least the next few years, if ever. While our shift in development strategy
has resulted in reduced operating and capital expenditures, we expect to continue to incur
substantial losses over at least the next several years as we:
|
|
|
continue drug product development efforts; |
|
|
|
conduct preclinical testing and clinical trials; |
|
|
|
pursue additional applications for our existing delivery technologies; |
|
|
|
outsource the commercial-scale production of our products; and
|
23
|
|
|
establish a sales and marketing force to commercialize certain of our proprietary
products if these products obtain regulatory approval. |
To achieve and sustain profitability, we must, alone or with others, successfully develop,
obtain regulatory approval for, manufacture, market and sell our products. We expect to incur
substantial expenses in our efforts to develop and commercialize products and we may never generate
sufficient product or contract research revenues to become profitable or to sustain profitability.
We are dependent upon Zogenix and its partners to successfully market and sell the SUMAVEL DosePro
needle-free delivery system in order to realize value from this asset.
We have no control over decisions made by Zogenix and/or its partners and collaborators on the
marketing, sale or continued development of the SUMAVEL DosePro product and any subsequent products
utilizing the DosePro technology. Any delay in, or failure to receive royalties could adversely
affect our financial position and we may not be able to find another source of cash to continue our
operations.
The results of later stage clinical trials of our product candidates may not be as favorable as
earlier trials and that could result in additional costs and delay or prevent commercialization of
our products.
Although we believe the limited and preliminary data we have regarding our potential products
are encouraging, the results of initial preclinical testing and clinical trials do not necessarily
predict the results that we will get from subsequent or more extensive preclinical testing and
clinical trials. Clinical trials of our product candidates may not demonstrate that they are safe
and effective to the extent necessary to obtain regulatory approvals and/or collaborative
partnerships. Many companies in the biopharmaceutical industry have suffered significant setbacks
in advanced clinical trials, even after receiving promising results in earlier trials. If we cannot
adequately demonstrate through the clinical trial process that a therapeutic product we are
developing is safe and effective, regulatory approval of that product would be delayed or
prevented, which would impair our reputation, increase our costs and prevent us from earning
revenues. For example, while our Phase 2a clinical trials with inhaled liposomal ciprofloxacin
showed promising initial efficacy and safety results both in patients with cystic fibrosis and
non-cystic fibrosis bronchiectasis, there is no guarantee that longer term studies or studies in
larger patient populations will confirm these results or that we will satisfy all efficacy and
safety endpoints required by the regulatory authorities.
If our clinical trials are delayed because of patient enrollment or other problems, we would incur
additional costs and delay the potential receipt of revenues.
Before we or any future collaborators can file for regulatory approval for the commercial sale
of our potential products, the FDA will require extensive preclinical safety testing and clinical
trials to demonstrate their safety and efficacy. Completing clinical trials in a timely manner
depends on, among other factors, the timely enrollment of patients. Our ability to recruit patients
depends on a number of factors, including the size of the patient population, the proximity of
patients to clinical sites, the eligibility criteria for the study and the existence of competing
clinical trials. Delays in planned patient enrollment in our current or future clinical trials may
result in increased costs, program delays, or both, and the loss of potential revenues.
We are subject to extensive regulation, including the requirement of approval before any of our
product candidates can be marketed. We may not obtain regulatory approval for our product
candidates on a timely basis, or at all.
We and our products are subject to extensive and rigorous regulation by the federal
government, principally the FDA, and by state and local government agencies. Both before and after
regulatory approval, the development, testing, manufacture, quality control, labeling, storage,
approval, advertising, promotion, sale, distribution and export of our potential products are
subject to regulation. Pharmaceutical products that are marketed abroad are also subject to
regulation by foreign governments. Our products cannot be marketed in the United States without FDA
approval. The process for obtaining FDA approval for drug products is generally lengthy, expensive
and uncertain. To date, we have not sought or received approval from the FDA or any corresponding
foreign authority for any of our product candidates.
Even though we intend to apply for approval of most of our products in the United States under
Section 505(b)(2) of the United States Food, Drug and Cosmetic Act, which applies to reformulations
of approved drugs and which may require smaller and shorter safety and efficacy testing than that
for entirely new drugs, the approval process will still be costly, time-consuming and uncertain.
We, or our collaborators, may not be able to obtain necessary regulatory approvals on a timely
basis, if at all, for any of our potential products. Even if granted, regulatory approvals may
include significant limitations on the uses for which products may be marketed. Failure to comply
with applicable regulatory requirements can, among other things, result in warning letters,
imposition of civil penalties or other monetary payments, delay in approving or refusal to approve
a product candidate, suspension or withdrawal of
24
regulatory approval, product recall or seizure, operating restrictions, interruption of
clinical trials or manufacturing, injunctions and criminal prosecution.
Regulatory authorities may delay or not approve our product candidates even if the product
candidates meet safety and efficacy endpoints in clinical trials or the approvals may be too
limited for us to earn sufficient revenues.
The FDA and other foreign regulatory agencies can delay approval of, or refuse to approve, our
product candidates for a variety of reasons, including failure to meet safety and efficacy
endpoints in our clinical trials. Our product candidates may not be approved even if they achieve
their endpoints in clinical trials. Regulatory agencies, including the FDA, may disagree with our
trial design and our interpretations of data from preclinical studies and clinical trials. Even if
a product candidate is approved, it may be approved for fewer or more limited indications than
requested or the approval may be subject to the performance of significant post-marketing studies.
In addition, regulatory agencies may not approve the labeling claims that are necessary or
desirable for the successful commercialization of our product candidates. Any limitation, condition
or denial of approval would have an adverse affect on our business, reputation and results of
operations.
Even if we are granted initial FDA approval for any of our product candidates, we may not be able
to maintain such approval, which would reduce our revenues.
Even if we are granted initial regulatory approval for a product candidate, the FDA and
similar foreign regulatory agencies can limit or withdraw product approvals for a variety of
reasons, including failure to comply with regulatory requirements, changes in regulatory
requirements, problems with manufacturing facilities or processes or the occurrence of unforeseen
problems, such as the discovery of previously undiscovered side effects. If we are able to obtain
any product approvals, they may be limited or withdrawn or we may be unable to remain in compliance
with regulatory requirements. Both before and after approval we, our future collaborators and our
products are subject to a number of additional requirements. For example, certain changes to the
approved product, such as adding new indications, certain manufacturing changes and additional
labeling claims are subject to additional FDA review and approval. Advertising and other
promotional material must comply with FDA requirements and established requirements applicable to
drug samples. We, our future collaborators and our manufacturers will be subject to continuing
review and periodic inspections by the FDA and other authorities, where applicable, and must comply
with ongoing requirements, including the FDAs Good Manufacturing Practices, or GMP, requirements.
Once the FDA approves a product, a manufacturer must provide certain updated safety and efficacy
information, submit copies of promotional materials to the FDA and make certain other required
reports. Product approvals may be withdrawn if regulatory requirements are not complied with or if
problems concerning safety or efficacy of the product occur following approval. Any limitation or
withdrawal of approval of any of our products could delay or prevent sales of our products, which
would adversely affect our revenues. Further continuing regulatory requirements involve expensive
ongoing monitoring and testing requirements.
Because our proprietary liposomal ciprofloxacin programs rely on the FDAs and European Medicines
Agencys grant of orphan drug designation for potential market exclusivity, the product may not be
able to obtain market exclusivity and could be barred from the market in the US for up to seven
years or European Union for up to ten years.
The FDA has granted orphan drug designation for our proprietary liposomal ciprofloxacin drug
product candidate for the management of cystic fibrosis and bronchiectasis. Orphan drug
designation is intended to encourage research and development of new therapies for diseases that
affect fewer than 200,000 patients in the United States. The designation provides the opportunity
to obtain market exclusivity for seven years from the date of the FDAs approval of a new drug
application, or NDA. However, the market exclusivity is granted only to the first chemical entity
to be approved by the FDA for a given indication. Therefore, if another inhaled ciprofloxacin
product were to be approved by the FDA for a cystic fibrosis or bronchiectasis indication before
our product, then we may be blocked from launching our product in the United States for seven
years, unless we are able to demonstrate to the FDA clinical superiority of our product on the
basis of safety or efficacy. For example, Bayer HealthCare is developing an inhaled powder
formulation of ciprofloxacin for the treatment of respiratory infections in cystic fibrosis and
bronchiectasis. Bayer has obtained orphan drug status for their inhaled powder formulation of
ciprofloxacin in the United States and European Union for the treatment of cystic fibrosis.
In August 2009, the European Medicines Agency (EMEA) granted orphan drug designation to our
inhaled liposomal ciprofloxacin drug product candidate for the treatment of lung infections
associated with cystic fibrosis. Under European guidelines, Orphan Medicinal Product Designation
provides 10 years of potential market exclusivity if the product candidate is the first product
candidate for the indication approved for marketing in the European Union. We may seek to develop
additional products that incorporate drugs that have received orphan drug designations for specific
indications. In each case, if our product is not the first to be approved by the FDA or EMEA for a
given indication, we may not be able to access the target market in the United States and/or the
European Union, which would adversely affect our ability to earn revenues.
25
** We have limited manufacturing capacity and will have to depend on contract manufacturers and
collaborators; if they do not perform as expected, our revenues and customer relations will
suffer.
We have limited capacity to manufacture our requirements for the development and
commercialization of our product candidates. We intend to use contract manufacturers to produce our
products. We may not be able to enter into or maintain satisfactory contract manufacturing
arrangements. For example, our agreement with sigma-tau Group to manufacture liposomal
ciprofloxacin may be terminated for unforeseen reasons, or we may not be able to reach mutually
satisfactory agreements with sigma-tau Group to manufacture these at a commercial scale. There may
be a significant delay before we find an alternative contract manufacturer or we may not find an
alternative contract manufacturer at all.
Further, we, our contract manufacturers and our future collaborators are required to comply
with the FDAs GMP requirements that relate to product testing, quality assurance, manufacturing
and maintaining records and documentation. We, our contract manufacturers or our future
collaborators may not be able to comply with the applicable GMP and other FDA regulatory
requirements for manufacturing, which could result in an enforcement or other action, prevent
commercialization of our product candidates and impair our reputation and results of operations.
Our dependence on future collaborators and other contracting parties may delay or terminate
certain of our programs, and any such delay or termination would harm our business prospects and
stock price.
Our commercialization strategy for certain of our product candidates depends on our ability to
enter into agreements with collaborators to obtain assistance and funding for the development and
potential commercialization of our product candidates. Specifically, we may be unable to find a
collaboration partner for our inhaled liposomal ciprofloxacin program and this may delay our
development activities. Even if we are able to find one or more partners, collaborations may
involve greater uncertainty for us, as we have less control over certain aspects of our
collaborative programs than we do over our proprietary development and commercialization programs.
We may determine that continuing a collaboration under the terms provided is not in our best
interest, and we may terminate the collaboration. Our collaborators could delay or terminate their
agreements, and our products subject to collaborative arrangements may never be successfully
commercialized.
Further, our future collaborators may pursue alternative technologies or develop alternative
products either on their own or in collaboration with others, including our competitors, and the
priorities or focus of our collaborators may shift such that our programs receive less attention or
resources than we would like, or they may be terminated altogether. Any such actions by our
collaborators may adversely affect our business prospects and ability to earn revenues. In
addition, we could have disputes with our future collaborators, such as the interpretation of terms
in our agreements. Any such disagreements could lead to delays in the development or
commercialization of any potential products or could result in time-consuming and expensive
litigation or arbitration, which may not be resolved in our favor.
Even with respect to certain other programs that we intend to commercialize ourselves, we may
enter into agreements with collaborators to share in the burden of conducting clinical trials,
manufacturing and marketing our product candidates or products. In addition, our ability to apply
our proprietary technologies to develop proprietary drugs will depend on our ability to establish
and maintain licensing arrangements or other collaborative arrangements with the holders of
proprietary rights to such drugs. We may not be able to establish such arrangements on favorable
terms or at all, and our future collaborative arrangements may not be successful.
In order to market our proprietary products, we are likely to establish our own sales, marketing
and distribution capabilities. We have no experience in these areas, and if we have problems
establishing these capabilities, the commercialization of our products would be impaired.
We intend to establish our own sales, marketing and distribution capabilities to market
products to concentrated, easily addressable prescriber markets. We have no experience in these
areas, and developing these capabilities will require significant expenditures on personnel and
infrastructure. While we intend to market products that are aimed at a small patient population, we
may not be able to create an effective sales force around even a niche market. In addition, some of
our product candidates will require a large sales force to call on, educate and support physicians
and patients. While we intend to enter into collaborations with one or more pharmaceutical
companies to sell, market and distribute such products, we may not be able to enter into any such
arrangement on acceptable terms, if at all. Any collaboration we do enter into may not be effective
in generating meaningful product royalties or other revenues for us.
If any products that we or our future collaborators may develop do not attain adequate market
acceptance by healthcare professionals and patients our business prospects and results of
operations will suffer.
Even if we or our future collaborators successfully develop one or more products, such
products may not be commercially acceptable to healthcare professionals and patients, who will have
to choose our products over alternative products for the same
26
disease indications, and many of these alternative products will be more established than
ours. For our products to be commercially viable we will need to demonstrate to healthcare
professionals and patients that our products afford benefits to the patients that are
cost-effective as compared to the benefits of alternative therapies. Our ability to demonstrate
this depends on a variety of factors, including:
|
|
|
the demonstration of efficacy and safety in clinical trials; |
|
|
|
the existence, prevalence and severity of any side effects; |
|
|
|
the potential or perceived advantages or disadvantages compared to alternative
treatments; |
|
|
|
the timing of market entry relative to competitive treatments; |
|
|
|
the relative cost, convenience, product dependability and ease of administration; |
|
|
|
the strength of marketing and distribution support; |
|
|
|
the sufficiency of coverage and reimbursement of our product candidates by governmental
and other third-party payors; and |
|
|
|
the product labeling or product insert required by the FDA or regulatory authorities in
other countries. |
Our product revenues will be adversely affected if, due to these or other factors, the
products we or our future collaborators are able to commercialize do not gain significant market
acceptance.
We depend upon our proprietary technologies, and we may not be able to protect our potential
competitive proprietary advantage.
Our business and competitive position is dependent upon our and our future collaborators
ability to protect our proprietary technologies related to various aspects of pulmonary drug
delivery and drug formulation. While our intellectual property rights may not provide a significant
commercial advantage for us, our patents and know-how are intended to provide protection for
important aspects of our technology, including methods for aerosol generation, devices used to
generate aerosols, breath control, compliance monitoring, certain pharmaceutical formulations,
design of dosage forms and their manufacturing and testing methods. In addition, we are maintaining
as non-patented trade secrets some of the key elements of our manufacturing technologies, for
example, those associated with production of liposomal ciprofloxacin.
Our ability to compete effectively will also depend to a significant extent on our and our
future collaborators ability to obtain and enforce patents and maintain trade secret protection
over our proprietary technologies. The coverage claimed in a patent application typically is
significantly reduced before a patent is issued, either in the United States or abroad.
Consequently, any of our pending or future patent applications may not result in the issuance of
patents and any patents issued may be subjected to further proceedings limiting their scope and may
in any event not contain claims broad enough to provide meaningful protection. Any patents that are
issued to us or our future collaborators may not provide significant proprietary protection or
competitive advantage, and may be circumvented or invalidated. In addition, unpatented proprietary
rights, including trade secrets and know-how, can be difficult to protect and may lose their value
if they are independently developed by a third party or if their secrecy is lost. Further, because
development and commercialization of pharmaceutical products can be subject to substantial delays,
patents may expire and provide only a short period of protection, if any, following
commercialization of products.
We may infringe on the intellectual property rights of others, and any litigation could force us
to stop developing or selling potential products and could be costly, divert management attention
and harm our business.
We must be able to develop products without infringing the proprietary rights of other
parties. Because the markets in which we operate involve established competitors with significant
patent portfolios, including patents relating to compositions of matter, methods of use and methods
of drug delivery, it could be difficult for us to use our technologies or develop products without
infringing the proprietary rights of others. We may not be able to design around the patented
technologies or inventions of others and we may not be able to obtain licenses to use patented
technologies on acceptable terms, or at all. If we cannot operate without infringing on the
proprietary rights of others, we will not earn product revenues.
If we are required to defend ourselves in a lawsuit, we could incur substantial costs and the
lawsuit could divert managements attention, regardless of the lawsuits merit or outcome. These
legal actions could seek damages and seek to enjoin testing,
27
manufacturing and marketing of the accused product or process. In addition to potential
liability for significant damages, we could be required to obtain a license to continue to
manufacture or market the accused product or process and any license required under any such patent
may not be made available to us on acceptable terms, if at all.
Periodically, we review publicly available information regarding the development efforts of
others in order to determine whether these efforts may violate our proprietary rights. We may
determine that litigation is necessary to enforce our proprietary rights against others. Such
litigation could result in substantial expense, regardless of its outcome, and may not be resolved
in our favor.
Furthermore, patents already issued to us or our pending patent applications may become
subject to dispute, and any disputes could be resolved against us. For example, Eli Lilly and
Company brought an action against us seeking to have one or more employees of Eli Lilly named as
co-inventors on one of our patents. This case was determined in our favor in 2004, but we may face
other similar claims in the future and we may lose or settle cases at significant loss to us. In
addition, because patent applications in the United States are currently maintained in secrecy for
a period of time prior to issuance, patent applications in certain other countries generally are
not published until more than 18 months after they are first filed, and publication of discoveries
in scientific or patent literature often lags behind actual discoveries, we cannot be certain that
we were the first creator of inventions covered by our pending patent applications or that we were
the first to file patent applications on such inventions.
We are in a highly competitive market, and our competitors have developed or may develop
alternative therapies for our target indications, which would limit the revenue potential of any
product we may develop.
We are in competition with pharmaceutical, biotechnology and drug delivery companies,
hospitals, research organizations, individual scientists and nonprofit organizations engaged in the
development of drugs and therapies for the disease indications we are targeting. Our competitors
may succeed before we can, and many already have succeeded, in developing competing technologies
for the same disease indications, obtaining FDA approval for products or gaining acceptance for the
same markets that we are targeting. If we are not first to market, it may be more difficult for
us and our future collaborators to enter markets as second or subsequent competitors and become
commercially successful. We are aware of a number of companies that are developing or have
developed therapies to address indications we are targeting, including major pharmaceutical
companies such as Bayer, Genentech (now a part of Roche), Gilead Sciences, GlaxoSmith Kline,
Novartis, Johnson & Johnson and Pfizer. Certain of these companies are addressing these target
markets with pulmonary products that are similar to ours. These companies and many other potential
competitors have greater research and development, manufacturing, marketing, sales, distribution,
financial and managerial resources and experience than we have and many of these companies may have
products and product candidates that are on the market or in a more advanced stage of development
than our product candidates. Our ability to earn product revenues and our market share would be
substantially harmed if any existing or potential competitors brought a product to market before we
or our future collaborators were able to, or if a competitor introduced at any time a product
superior to or more cost-effective than ours.
If we do not continue to attract and retain key employees, our product development efforts will be
delayed and impaired.
We depend on a small number of key management and technical personnel. Our success also
depends on our ability to attract and retain additional highly qualified management and development
personnel. There is a shortage of skilled personnel in our industry, we face competition in our
recruiting activities, and we may not be able to attract or retain qualified personnel. Losing any
of our key employees, particularly our President and Chief Executive Officer, Dr. Igor Gonda, who
plays a central role in our strategy shift to a specialty pharmaceutical company, could impair our
product development efforts and otherwise harm our business. Any of our employees may terminate
their employment with us at will.
If we market our products in other countries, we will be subject to different laws and we may not
be able to adapt to those laws, which could increase our costs while reducing our revenues.
If we market any approved products in foreign countries, we will be subject to different laws,
particularly with respect to intellectual property rights and regulatory approval. To maintain a
proprietary market position in foreign countries, we may seek to protect some of our proprietary
inventions through foreign counterpart patent applications. Statutory differences in patentable
subject matter may limit the protection we can obtain on some of our inventions outside of the
United States. The diversity of patent laws may make our expenses associated with the development
and maintenance of intellectual property in foreign jurisdictions more expensive than we
anticipate. We probably will not obtain the same patent protection in every market in which we may
otherwise be able to potentially generate revenues. In addition, in order to market our products in
foreign jurisdictions, we and our future collaborators must obtain required regulatory approvals
from foreign regulatory agencies and comply with extensive regulations regarding safety and
quality. We may not be able to obtain regulatory approvals in such jurisdictions and we may have to
incur significant costs in obtaining or maintaining any foreign regulatory approvals. If approvals
to market our products are delayed, if we fail to receive these
28
approvals, or if we lose previously received approvals, our business would be impaired as we
could not earn revenues from sales in those countries.
We may be exposed to product liability claims, which would hurt our reputation, market position
and operating results.
We face an inherent risk of product liability as a result of the clinical testing of our
product candidates in humans and will face an even greater risk upon commercialization of any
products. These claims may be made directly by consumers or by pharmaceutical companies or others
selling such products. We may be held liable if any product we develop causes injury or is found
otherwise unsuitable during product testing, manufacturing or sale. Regardless of merit or eventual
outcome, liability claims would likely result in negative publicity, decreased demand for any
products that we may develop, injury to our reputation and suspension or withdrawal of clinical
trials. Any such claim will be very costly to defend and also may result in substantial monetary
awards to clinical trial participants or customers, loss of revenues and the inability to
commercialize products that we develop. Although we currently have product liability insurance, we
may not be able to maintain such insurance or obtain additional insurance on acceptable terms, in
amounts sufficient to protect our business, or at all. A successful claim brought against us in
excess of our insurance coverage would have a material adverse effect on our results of operations.
If we cannot arrange for adequate third-party reimbursement for our products, our revenues will
suffer.
In both domestic and foreign markets, sales of our potential products will depend in
substantial part on the availability of adequate reimbursement from third-party payors such as
government health administration authorities, private health insurers and other organizations.
Third-party payors often challenge the price and cost-effectiveness of medical products and
services. Significant uncertainty exists as to the adequate reimbursement status of newly approved
health care products. Any products we are able to successfully develop may not be reimbursable by
third-party payors. In addition, our products may not be considered cost-effective and adequate
third-party reimbursement may not be available to enable us to maintain price levels sufficient to
realize a profit. Legislation and regulations affecting the pricing of pharmaceuticals may change
before our products are approved for marketing and any such changes could further limit
reimbursement. If any products we develop do not receive adequate reimbursement, our revenues will
be severely limited.
Our use of hazardous materials could subject us to liabilities, fines and sanctions.
Our laboratory and clinical testing sometimes involves the use of hazardous and toxic
materials. We are subject to federal, state and local laws and regulations governing how we use,
manufacture, handle, store and dispose of these materials. Although we believe that our safety
procedures for handling and disposing of such materials comply in all material respects with all
federal, state and local regulations and standards, there is always the risk of accidental
contamination or injury from these materials. In the event of an accident, we could be held liable
for any damages that result and such liability could exceed our financial resources. Compliance
with environmental and other laws may be expensive and current or future regulations may impair our
development or commercialization efforts.
If we are unable to effectively implement or maintain a system of internal control over financial
reporting, we may not be able to accurately or timely report our financial results and our stock
price could be adversely affected.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our
internal control over financial reporting as of the end of each fiscal year, and to include a
management report assessing the effectiveness of our internal control over financial reporting in
our Annual Report on Form 10-K for that fiscal year. Our ability to comply with the annual internal
control report requirements will depend on the effectiveness of our financial reporting and data
systems and controls across our company. We expect these systems and controls to involve
significant expenditures and to become increasingly complex as our business grows. To effectively
manage this complexity, we will need to continue to improve our operational, financial and
management controls and our reporting systems and procedures. Any failure to implement required new
or improved controls, or difficulties encountered in the implementation or operation of these
controls, could harm our operating results and cause us to fail to meet our financial reporting
obligations, which could adversely affect our business and reduce our stock price.
Risks Related to Our Common Stock
Our stock price is likely to remain volatile.
The market prices for securities of many companies in the drug delivery and pharmaceutical
industries, including ours, have historically been highly volatile, and the market from time to
time has experienced significant price and volume fluctuations unrelated to the operating
performance of particular companies. Prices for our common stock may be influenced by many factors,
including:
29
|
|
|
investor perception of us; |
|
|
|
market conditions relating to our segment of the industry or the securities markets in
general; |
|
|
|
investor perception of the value of the royalty stream from Zogenix; |
|
|
|
sales of our stock by certain large institutional shareholders to meet liquidity concerns
during the current economic climate; |
|
|
|
research analyst recommendations and our ability to meet or exceed quarterly performance
expectations of analysts or investors; |
|
|
|
failure to establish new collaborative relationships, specifically those related to our
inhaled liposomal ciprofloxacin program; |
|
|
|
fluctuations in our operating results; |
|
|
|
announcements of technological innovations or new commercial products by us or our
competitors; |
|
|
|
publicity regarding actual or potential developments relating to products under
development by us or our competitors; |
|
|
|
developments or disputes concerning patents or proprietary rights; |
|
|
|
delays in the development or approval of our product candidates; |
|
|
|
regulatory developments in both the United States and foreign countries; |
|
|
|
concern of the public or the medical community as to the safety or efficacy of our
products, or products deemed to have similar safety risk factors or other similar
characteristics to our products; |
|
|
|
future sales or expected sales of substantial amounts of common stock by shareholders; |
|
|
|
our ability to raise financing; and |
|
|
|
economic and other external factors. |
In the past, class action securities litigation has often been instituted against companies
promptly following volatility in the market price of their securities. Any such litigation
instigated against us would, regardless of its merit, result in substantial costs and a diversion
of managements attention and resources.
Our common stock is quoted on the OTC Bulletin Board, which may provide less liquidity for our
shareholders than the national exchanges.
On November 10, 2006, our common stock was delisted from the Nasdaq Capital Market due to
non-compliance with Nasdaqs continued listing standards. Our common stock is currently quoted on
the OTC Bulletin Board. As compared to being listed on a national exchange, being quoted on the OTC
Bulletin Board may result in reduced liquidity for our shareholders, may cause investors not to
trade in our stock and may result in a lower stock price. In addition, investors may find it more
difficult to obtain accurate quotations of the share price of our common stock.
We have implemented certain anti-takeover provisions, which may make an acquisition less likely or
might result in costly litigation or proxy battles.
Certain provisions of our amended and restated Articles of Incorporation and the California
Corporations Code could discourage a party from acquiring, or make it more difficult for a party to
acquire, control of our company without approval of our board of directors. These provisions could
also limit the price that certain investors might be willing to pay in the future for shares of our
common stock. Certain provisions allow our board of directors to authorize the issuance, without
shareholder approval, of preferred stock with rights superior to those of the common stock. We are
also subject to the provisions of Section 1203 of the California Corporations Code, which requires
us to provide a fairness opinion to our shareholders in connection with their consideration of any
proposed interested party reorganization transaction.
30
We have adopted a shareholder rights plan, commonly known as a poison pill. We have also
adopted an Executive Officer Severance Plan and a Form of Change of Control Agreement, both of
which may provide for the payment of benefits to our officers in connection with an acquisition.
The provisions of our amended and restated Articles of Incorporation, our poison pill, our
severance plan and our change of control agreements, and provisions of the California Corporations
Code may discourage, delay or prevent another party from acquiring us or reduce the price that a
buyer is willing to pay for our common stock.
One of our shareholders may choose to pursue a lawsuit or engage in a proxy battle with
management to limit our use of one or more of these anti-takeover protections. Any such lawsuit or
proxy battle would, regardless of its merit or outcome, result in substantial costs and a diversion
of managements attention and resources.
We have never paid dividends on our capital stock, and we do not anticipate paying cash dividends
for at least the foreseeable future.
We have never declared or paid cash dividends on our capital stock. We do not anticipate
paying any cash dividends on our common stock for at least the foreseeable future. We currently
intend to retain all available funds and future earnings, if any, to fund the development and
growth of our business. Therefore, our shareholders will not receive any funds absent a sale of
their shares. We cannot assure shareholders of a positive return on their investment if they sell
their shares, nor can we assure that shareholders will not lose the entire amount of their
investment.
**A small number of shareholders own a large percentage of our common stock and can influence the
outcome of matters submitted to our shareholders for approval.
A small number of our shareholders own a large percentage of our common stock and can,
therefore, influence the outcome of matters submitted to our shareholders for approval. Based on
information known to us as of June 28, 2010, our three largest investors, collectively, control in
excess of a majority of our outstanding common stock, as well as warrants to purchase 7,226,125
shares that are exercisable upon shareholder approval. As a result, these shareholders have the
ability to influence the outcome of matters submitted to our shareholders for approval, including
certain proposed amendments to our amended and restated articles of incorporation (for example,
amendments to increase the number of our authorized shares) and any proposed merger, consolidation
or sale of all or substantially all of our assets. These shareholders may support proposals and
actions with which you may disagree. The concentration of ownership could delay or prevent a change
in control of our company or otherwise discourage a potential acquirer from attempting to obtain
control of our company, which in turn could reduce the price of our common stock.
**You may experience significant dilution of your ownership interests because of the future
issuance of additional shares of our common stock.
We are required to or may issue in the future additional shares of our common stock, resulting
in the dilution of the ownership interests of our current stockholders. As of the date hereof,
there were (i) 137,778,964 shares of our common stock outstanding, (ii) 12,221,036 shares reserved
for issuance upon the exercise of options or restricted stock units granted or available for grant
under our equity compensation plans, (iii) 7,527,214 shares of our common stock issuable pursuant
to the terms and conditions of the warrants that were issued in the June 2010 Private Placement and
(iv) 26,000,000 shares of our common stock issuable pursuant to the terms and conditions of our
July 30, 2010 stock purchase agreement with Novo Nordisk A/S. The future issuance of any such
additional shares of our common stock or other securities may create downward pressure on the
trading price of our common stock.
**Our common stock may be considered a penny stock.
The SEC has adopted regulations which generally define penny stock to be an equity security
that has a market price of less than $5.00 per share, subject to specific exemptions. The market
price for our common stock has been below $5.00 per share and so long as our stock trades for less
than $5.00 per share, it will be considered a penny stock according to SEC rules. This
designation requires any broker or dealer selling these securities to disclose certain information
concerning the transaction, obtain a written agreement from the purchaser and determine that the
purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability
of brokers or dealers to sell our common stock and may affect the ability of investors to sell
their shares.
|
|
|
Item 2. |
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
On June 21, 2010, we closed the June 2010 Private Placement, in which we sold 34,702,512
shares of common stock and warrants to purchase an aggregate of 7,527,214 shares of common stock to
accredited investors (which included a few existing significant investors) under the terms of a
securities purchase agreement that was entered into with the investors on June 18, 2010. At the
closing
31
of the June 2010 Private Placement, we received approximately $4.1 million in aggregate gross
proceeds from the sale of the common stock and the warrants. After deducting for fees and
expenses, the aggregate net proceeds from the sale of the common stock and the warrants were
approximately $3.7 million. The warrants have an exercise price of $0.1184 per share and are
exercisable after we have called and held a special meeting of its shareholders to vote on a
proposal to approve an amendment to our amended and restated articles of incorporation to increase
the number of authorized shares of common stock and has received the requisite shareholder approval
for the shareholder proposal. The warrants also include a mandatory exercise provision whereby we
have the right to require the holders to exercise the warrants after we have received the requisite
shareholder approval for the shareholder proposal. The warrants expire the earlier of 10 business
days after the date on which the requisite shareholder approval for the shareholder proposal is
received and 90 days after the issuance date of the warrants. Assuming the warrants are fully
exercised at an exercise price of $0.1184 per share, we would receive approximately $0.9 million in
additional aggregate net proceeds from the exercise of the warrants. The common stock and the
warrants were offered and sold to the investors without registration under the Securities Act of
1933, as amended, in reliance on the exemption from the registration requirements of the Securities
Act afforded by Section 4(2) thereof and Rule 506 of Regulation D promulgated thereunder.
|
|
|
Item 3. |
|
DEFAULTS UPON SENIOR SECURITIES |
Not applicable.
Item 4. (REMOVED AND RESERVED)
|
|
|
Item 5. |
|
OTHER INFORMATION |
Not applicable.
32
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.1 (1)
|
|
Securities Purchase Agreement, June 18, 2010, by and among Aradigm Corporation and
the investors listed on the Schedule of Buyers attached thereto. |
|
|
|
10.2 (2)
|
|
Form of Registration Rights Agreement by and among Aradigm Corporation and the
investors listed on the signature pages thereto. |
|
|
|
10.3 (3)
|
|
Form of Warrant to be issued to the Buyers under the Securities Purchase Agreement. |
|
|
|
31.1
|
|
Certification of the Principal Executive Officer required by Rule 13a-14(a) under
the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification of the Principal Financial Officer required by Rule 13a-14(a) under
the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1
|
|
Certification of the Principal Executive Officer and Principal Financial Officer
required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the
United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
|
|
|
(1) |
|
Incorporated by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K filed on June 21, 2010. |
|
(2) |
|
Incorporated by reference to Exhibit 10.2 to the Companys Current Report on
Form 8-K filed on June 21, 2010. |
|
(3) |
|
Incorporated by reference to Exhibit 10.3 to the Companys Current Report on
Form 8-K filed on June 21, 2010. |
|
|
|
Aradigm and AERx are registered trademarks of Aradigm Corporation. |
|
* |
|
Other names and brands may be claimed as the property of others. |
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
ARADIGM CORPORATION
|
|
|
/s/ Igor Gonda
|
|
|
Igor Gonda |
|
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
|
/s/ Nancy E. Pecota
|
|
|
Nancy E. Pecota |
|
|
Vice President, Finance and Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
|
Dated: August 13, 2010
34
INDEX TO EXHIBITS
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.1 (1)
|
|
Securities Purchase Agreement, June 18, 2010, by and among Aradigm Corporation and the
investors listed on the Schedule of Buyers attached thereto. |
|
|
|
10.2 (2)
|
|
Form of Registration Rights Agreement by and among Aradigm Corporation and the
investors listed on the signature pages thereto. |
|
|
|
10.3 (3)
|
|
Form of Warrant to be issued to the Buyers under the Securities Purchase Agreement. |
|
|
|
31.1
|
|
Certification of the Principal Executive Officer required by Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification of the Principal Financial Officer required by Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
32.1
|
|
Certification of the Principal Executive Officer and Principal Financial Officer
required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United
States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
(1) |
|
Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form
8-K filed on June 21, 2010. |
|
(2) |
|
Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form
8-K filed on June 21, 2010. |
|
(3) |
|
Incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form
8-K filed on June 21, 2010. |
35