e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2008
Or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number 0-28402
Aradigm Corporation
(Exact name of registrant as specified in its charter)
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California
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94-3133088 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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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 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. (Check one):
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Large accelerated filer
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller reporting company
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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.
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(Class)
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(Outstanding at October 31, 2008) |
Common
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55,076,979 |
ARADIGM CORPORATION
TABLE OF CONTENTS
p 2 of 42
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ARADIGM CORPORATION
CONDENSED BALANCE SHEETS
(In thousands, except share data)
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September 30, |
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December 31, |
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2008 |
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2007 |
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(Unaudited) |
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(Note 1) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
21,319 |
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$ |
29,964 |
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Short-term investments |
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10,546 |
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Receivables |
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413 |
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500 |
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Restricted cash |
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314 |
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152 |
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Prepaid and other current assets |
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502 |
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971 |
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Total current assets |
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22,548 |
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42,133 |
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Property and equipment, net |
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5,238 |
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3,223 |
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Notes receivable from officers and employees |
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34 |
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33 |
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Restricted cash |
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153 |
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Other assets |
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253 |
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271 |
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Total assets |
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$ |
28,073 |
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$ |
45,813 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
1,122 |
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$ |
1,658 |
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Accrued clinical and cost of other studies |
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126 |
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789 |
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Accrued compensation |
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1,029 |
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1,252 |
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Deferred revenue |
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1,145 |
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880 |
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Facility lease exit obligation |
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353 |
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376 |
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Other accrued liabilities |
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722 |
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584 |
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Total current liabilities |
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4,497 |
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5,539 |
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Deferred rent |
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222 |
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283 |
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Facility lease exit obligation |
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1,115 |
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1,373 |
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Other non-current liabilities |
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86 |
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248 |
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Note payable and accrued interest to related party |
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8,369 |
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8,071 |
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Total liabilities |
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14,289 |
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15,514 |
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Commitments and contingencies |
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Shareholders equity: |
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Preferred stock, 2,950,000 shares authorized, none outstanding
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Common stock, no par value; authorized shares: 150,000,000 at
September 30, 2008 and 100,000,000 at December 2007; issued
and outstanding shares: 54,923,839 at September 30, 2008 and
54,772,705 at December 31, 2007 |
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343,136 |
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342,355 |
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Accumulated other comprehensive income |
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10 |
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Accumulated deficit |
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(329,352 |
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(312,066 |
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Total shareholders equity |
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13,784 |
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30,299 |
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Total liabilities and shareholders equity |
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$ |
28,073 |
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$ |
45,813 |
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See accompanying Notes to Condensed Financial Statements
p 3 of 42
ARADIGM CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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Three Months Ended |
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Nine months Ended |
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September 30, |
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September 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenues: |
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Contract revenues from related parties |
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$ |
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$ |
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$ |
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$ |
23 |
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Contract revenues from unrelated parties |
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197 |
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230 |
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251 |
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920 |
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Total revenues |
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197 |
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230 |
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$ |
251 |
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943 |
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Operating expenses: |
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Research and development |
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3,199 |
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3,899 |
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12,892 |
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11,147 |
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General and administrative |
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1,615 |
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1,757 |
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4,989 |
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6,372 |
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Restructuring and lease exit activities |
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19 |
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2,059 |
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61 |
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2,157 |
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Total operating expenses |
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4,833 |
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7,715 |
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17,942 |
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19,676 |
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Loss from operations |
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(4,636 |
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(7,485 |
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(17,691 |
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(18,733 |
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Interest income |
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146 |
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684 |
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709 |
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2,020 |
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Interest expense |
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(105 |
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(101 |
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(303 |
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(293 |
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Other income (expense), net |
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(1 |
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(1 |
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16 |
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Net loss |
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$ |
(4,596 |
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$ |
(6,902 |
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$ |
(17,286 |
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$ |
(16,990 |
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Basic and diluted net loss per common share |
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$ |
(0.08 |
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$ |
(0.13 |
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$ |
(0.32 |
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$ |
(0.34 |
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Shares used in computing basic and diluted net loss per common share |
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54,165 |
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53,948 |
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54,111 |
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49,617 |
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See accompanying Notes to Condensed Financial Statements
p 4 of 42
ARADIGM CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Nine months Ended |
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September 30, |
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2008 |
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2007 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(17,286 |
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$ |
(16,990 |
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Adjustments to reconcile net loss to cash used in operating activities: |
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Impairment loss on property and equipment |
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180 |
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Amortization and accretion of investments |
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1 |
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(26 |
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Depreciation and amortization |
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590 |
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589 |
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Stock-based compensation |
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638 |
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1,097 |
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Loss on retirement and sale of property and equipment |
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1 |
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10 |
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Facility lease exit cost |
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1,459 |
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Changes in operating assets and liabilities: |
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Receivables |
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87 |
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341 |
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Prepaid and other current assets |
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469 |
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190 |
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Restricted cash |
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(9 |
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(302 |
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Other assets |
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17 |
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168 |
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Accounts payable |
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(563 |
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(378 |
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Accrued compensation |
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(223 |
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(175 |
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Other accrued liabilities |
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(495 |
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894 |
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Deferred revenue |
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265 |
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440 |
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Facility lease exit obligation |
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(281 |
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(235 |
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Deferred rent |
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(61 |
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(114 |
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Net cash used in operating activities |
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(16,850 |
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(12,852 |
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Cash flows from investing activities: |
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Capital expenditures |
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(2,473 |
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(946 |
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Purchases of available-for-sale investments |
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(1,235 |
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(13,494 |
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Proceeds from sales and maturities of available-for-sale investments |
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11,770 |
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1,500 |
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Proceeds from sales and of property and equipment |
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11 |
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Net cash provided by (used in) investing activities |
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8,062 |
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(12,929 |
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Cash flows from financing activities: |
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Proceeds from public offering of common stock, net |
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33,178 |
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Proceeds from issuance of common stock, net |
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143 |
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103 |
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Advances to officers and employees on notes receivable |
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(1 |
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Net cash provided by financing activities |
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143 |
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33,280 |
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Net increase (decrease) in cash and cash equivalents |
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(8,645 |
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7,499 |
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Cash and cash equivalents at beginning of period |
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29,964 |
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27,013 |
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Cash and cash equivalents at end of period |
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$ |
21,319 |
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$ |
34,512 |
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Supplemental disclosure of non-cash financing activities: |
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Conversion of convertible preferred stock to common stock |
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$ |
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$ |
23,669 |
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Supplemental disclosure of non-cash investing activities: |
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Purchases of property and equipment through accounts payable |
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$ |
605 |
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$ |
307 |
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See accompanying Notes to Condensed Financial Statements
p 5 of 42
ARADIGM CORPORATION
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
September 30, 2008
1. Organization and Basis of Presentation
Organization
Aradigm Corporation (the Company, we, our) is a California corporation focused on the
development and commercialization of drugs delivered by inhalation for the treatment of severe
respiratory diseases by pulmonologists. The Companys principal activities to date have included
research and development, securing operating facilities, expanding commercial production
capabilities, recruiting management and technical personnel, and obtaining financing. The Company
does not anticipate receiving any revenue from the sale of products in the near term. The Companys
ability to continue its development and commercialization activities is dependent upon the ability
of management to obtain additional financing as required. Management believes that cash, cash
equivalents and short-term investments as of September 30, 2008 are sufficient to enable the
Company to meet its obligations through at least the second quarter of 2009. Management plans to
continue to obtain funds through collaborative arrangements, equity issuances and debt
arrangements. If we are unable to complete a debt or equity offering or otherwise obtain sufficient
financing when and if needed, we may be required to reduce, defer, or discontinue one or more of
our product development programs, or we may not be able to continue as a going concern entity. The
Company operates as a single operating segment.
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance with
U.S. 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 U.S. generally
accepted accounting principles have been condensed or omitted pursuant to the Securities and
Exchange Commissions rules and regulations. In the opinion of management, the financial statements
reflect all adjustments, which are only of a normal recurring nature, necessary for a fair
presentation. The accompanying unaudited condensed financial statements should be read in
conjunction with the financial statements and notes thereto included with the Companys Annual
Report on Form 10-K for the year ended December 31, 2007, as filed with the Securities and Exchange
Commission (SEC). 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, 2007 has been derived from the audited financial statements at
that date, but does not include all of the information and footnotes required by U.S. generally
accepted accounting principles for complete financial statements.
Reclassifications
The Company reclassified restructuring activity expenses incurred during 2007 from the general and
administrative expense line item to the restructuring and lease exit activities line item in the
accompanying unaudited condensed statements of operations to conform to the presentation for the
current periods.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. 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 the revenue
recognition, assumptions for valuing options and warrants, and income taxes. Actual results could
differ from these estimates.
Revenue Recognition
Contract revenues consist of revenues from grants, collaboration agreements and feasibility
studies. The Company recognizes revenue under the provisions of the SEC Staff Accounting
Bulletin No. 104, Revenue Recognition (SAB 104) and Emerging Issues Task
p 6 of 42
Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21).
Revenue for arrangements not having multiple deliverables, as outlined in EITF 00-21, is recognized
once costs are incurred and collectability is reasonably assured. Under some agreements the
Companys collaborators have the right to withhold reimbursement of costs incurred until the work
performed under the agreement is mutually agreed upon. For these agreements, revenue is recognized
upon acceptance of the work and confirmation of the amount to be paid by the collaborator.
Deferred revenue represents the portion of all refundable and nonrefundable research payments
received that have not been earned. In accordance with contract terms, milestone payments from
collaborative research agreements are considered reimbursements for costs incurred under the
agreements and, accordingly, are recognized as revenue either upon completion of the milestone
effort, when payments are contingent upon completion of the effort, or are based on actual efforts
expended over the remaining term of the agreement when payments precede the required efforts.
Costs of contract revenues are approximate to or are greater than such revenues, and are included
in research and development expenses. Refundable development and license fee payments are deferred
until specific performance criteria are achieved. Refundable development and license fee payments
are generally not refundable once specific performance criteria are achieved and accepted.
Collaborative license and development agreements that require the Company to provide multiple
deliverables, such as a license, research and product steering committee services and other
performance obligations, are accounted for in accordance with EITF
00-21. Under EITF 00-21, delivered items are evaluated to determine 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. Deliverables that do not meet these criteria are combined and
accounted for as a single unit of accounting. The appropriate revenue recognition criteria are
identified and applied to each separate unit of accounting.
Accounting for Costs Associated with Exit or Disposal Activities
In accordance with Statement of Financial Accounting Standards (SFAS) No. 146, Accounting for
Costs Associated with Exit or Disposal Activities (SFAS 146), the Company recognizes a liability
for the cost associated with an exit or disposal activity measured initially at its fair value in
the period in which the liability is incurred, except for liabilities for one-time termination
benefits that are incurred over time. According to SFAS 146, 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.
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.
Income Taxes
The Company uses the asset and liability method to account for income taxes as required by SFAS No.
109, Accounting for Income Taxes. Under this method, deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes as well as net operating
loss and tax credit carryforwards. Valuation allowances are established to reduce deferred tax
assets to amounts more likely than not to be realized. The Company currently maintains a full
valuation allowance.
Stock-Based Compensation Expense
The Company measures stock-based compensation at the grant date based on the awards fair value and
recognizes the expense ratably over the requisite vesting period, net of estimated forfeitures, for
all stock-based awards granted after January 1, 2006 and all stock-based awards granted prior to,
but not vested as of, January 1, 2006.
The Company has elected to calculate an awards fair value based on the Black-Scholes
option-pricing model. The Black-Scholes model requires various assumptions, including expected
option life and volatility. If any of the assumptions used in the Black-Scholes model or the
estimated forfeiture rate change significantly, stock-based compensation expense may differ
materially in the future from that recorded in the current period.
p 7 of 42
Recently Issued Accounting Pronouncements
In February 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No.
FAS 157-2, Effective Date of FASB Statement No. 157 (FSP FAS 157-2), which defers the effective
date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring basis (at least
annually), for fiscal years beginning after November 15, 2008 and interim periods within those
fiscal years for items within the scope of FSP FAS 157-2. Management does not expect that the
adoption of FSP FAS 157-2 will have a material impact on the Companys financial position and
results of operations.
In November 2007, the EITF issued EITF Issue No. 07-1, Accounting for Collaborative Arrangements
Related to the Development and Commercialization of Intellectual Property (EITF 07-1). Companies
may enter into arrangements with other companies to jointly develop, manufacture, distribute, and
market a product. Often the activities associated with these arrangements are conducted by the
collaborators without the creation of a separate legal entity (that is, the arrangement is operated
as a virtual joint venture). The arrangements generally provide that the collaborators will
share, based on contractually defined calculations, the profits or losses from the associated
activities. Periodically, the collaborators share financial information related to product
revenues generated (if any) and costs incurred that may trigger a sharing payment for the combined
profits or losses. The consensus requires collaborators in such an arrangement to present the
result of activities for which they act as the principal on a gross basis and report any payments
received from (made to) other collaborators based on other applicable GAAP or, in the absence of
other applicable GAAP, based on analogy to authoritative accounting literature or a reasonable,
rational, and consistently applied accounting policy election. EITF 07-1 is effective for
collaborative arrangements in place at the beginning of the annual period beginning after
December 15, 2008. Management does not expect that the adoption of EITF 07-1 will have a material
impact on the Companys financial position and results of operations.
3. Stock-Based Compensation
The following table shows the effect of SFAS 123R, Share Based Payment on stock-based compensation
expense included in the statement of operations for the three and nine month periods ended
September 30, 2008 and 2007 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Research and development expense |
|
$ |
66 |
|
|
$ |
183 |
|
|
$ |
427 |
|
|
$ |
438 |
|
General and administrative expense |
|
|
90 |
|
|
|
225 |
|
|
|
211 |
|
|
|
659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation with adoption of SFAS 123R |
|
$ |
156 |
|
|
$ |
408 |
|
|
$ |
638 |
|
|
$ |
1,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation without the adoption of SFAS 123R |
|
$ |
2 |
|
|
$ |
14 |
|
|
$ |
67 |
|
|
$ |
84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on basic and diluted net loss per common share |
|
$ |
|
|
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Following are the components of total stock-based compensation expense recognized for the three and
nine month periods ended September 30, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Employee stock option plans and employee stock purchase plan (ESPP) |
|
$ |
97 |
|
|
$ |
376 |
|
|
$ |
423 |
|
|
$ |
959 |
|
Restricted stock awards to employees |
|
|
57 |
|
|
|
18 |
|
|
|
148 |
|
|
|
54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total employee stock-based compensation expense |
|
|
154 |
|
|
|
394 |
|
|
|
571 |
|
|
|
1,013 |
|
Stock options and restricted stock awards to consultants |
|
|
2 |
|
|
|
14 |
|
|
|
67 |
|
|
|
84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation |
|
$ |
156 |
|
|
$ |
408 |
|
|
$ |
638 |
|
|
$ |
1,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No stock-based employee compensation cost was capitalized for the three or nine month periods ended
September 30, 2008 or 2007. Because the Company incurred net losses during each of those periods,
there was no recognized tax benefit associated with stock-based compensation expense.
As of September 30, 2008, there was $1.5 million of total unrecognized compensation costs, net of
forfeitures, related to non-vested stock options, stock purchases and restricted stock awards to
employees, which is expected to be recognized over a weighted average period of 2.8 years.
p 8 of 42
Valuation Assumptions
The fair value of options was estimated at the date of grant using the Black-Scholes option pricing
model. The weighted-average assumptions used for the three and nine months ended September 30, 2008
and 2007 and the resulting estimates of weighted-average fair value per share of options granted
and shares purchased during these periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine months ended September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Employee Stock Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Volatility |
|
|
67.1 |
% |
|
|
72.8 |
% |
|
|
67.7 |
% |
|
|
81.2 |
% |
Risk-free interest rate |
|
|
2.8 |
% |
|
|
4.0 |
% |
|
|
2.8 |
% |
|
|
4.9 |
% |
Expected life (years) |
|
|
4.0 |
|
|
|
4.0 |
|
|
|
3.8 |
|
|
|
4.0 |
|
Weighted-average fair
value of options
granted during the
periods |
|
$ |
0.30 |
|
|
$ |
0.76 |
|
|
$ |
0.33 |
|
|
$ |
0.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESPP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Volatility |
|
|
59.9 |
% |
|
|
82.7 |
% |
|
|
59.9 |
% |
|
|
82.7 |
% |
Risk-free interest rate |
|
|
1.6 |
% |
|
|
4.8 |
% |
|
|
1.6 |
% |
|
|
4.8 |
% |
Expected life (years) |
|
|
0.8 |
|
|
|
1.3 |
|
|
|
0.8 |
|
|
|
1.3 |
|
Weighted-average fair
value of employee
stock purchases during
the periods |
|
$ |
0.39 |
|
|
$ |
0.61 |
|
|
$ |
0.39 |
|
|
$ |
0.61 |
|
Stock Option Activity
Following is a summary of the status of the Companys stock option plans at September 30, 2008 and
changes during the nine months then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Weighted- |
|
average |
|
|
|
|
Number |
|
average |
|
remaining |
|
Aggregate |
|
|
of |
|
exercise |
|
contractual |
|
intrinsic |
|
|
shares |
|
price |
|
life in years |
|
value |
Options outstanding at December 31, 2007 |
|
|
3,493,154 |
|
|
$ |
5.37 |
|
|
|
8.34 |
|
|
$ |
167,000 |
|
Options granted |
|
|
898,000 |
|
|
|
0.80 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(3,750 |
) |
|
|
1.15 |
|
|
|
|
|
|
|
|
|
Options cancelled |
|
|
(124,961 |
) |
|
|
11.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at September 30, 2008 |
|
|
4,262,443 |
|
|
|
4.25 |
|
|
|
7.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at September 30, 2008 |
|
|
2,178,921 |
|
|
$ |
7.06 |
|
|
|
6.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. Net Loss Per Share
The Company computes basic net loss per share using the weighted-average number of shares of common
stock outstanding less the weighted-average number of shares subject to repurchase. The effects of
including the incremental shares associated with options, warrants and unvested restricted stock
were antidilutive, and therefore were not included in diluted weighted average common shares
outstanding for the three or nine month periods ended September 30, 2008 and 2007.
The following securities were excluded from the calculation of diluted loss per share for the three
and nine months ended September 30, 2008 and 2007, respectively, as their effect would be
anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
2008 |
|
2007 |
Outstanding stock options |
|
|
4,262 |
|
|
|
2,849 |
|
Unvested restricted stock |
|
|
754 |
|
|
|
50 |
|
Warrants to purchase common stock |
|
|
417 |
|
|
|
836 |
|
Performance bonus stock award |
|
|
|
|
|
|
100 |
|
p 9 of 42
5. Comprehensive Loss
Comprehensive loss includes net loss and other comprehensive income (loss). Other comprehensive
income (loss) includes certain changes in shareholders equity that are excluded from net loss.
Comprehensive loss and its components were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net loss |
|
$ |
(4,596 |
) |
|
$ |
(6,902 |
) |
|
$ |
(17,286 |
) |
|
$ |
(16,990 |
) |
Other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) on available-for-sale securities |
|
|
(1 |
) |
|
|
(8 |
) |
|
|
(10 |
) |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(4,597 |
) |
|
$ |
(6,910 |
) |
|
$ |
(17,296 |
) |
|
$ |
(17,002 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
6. Cash, Cash Equivalents and Short-Term Investments
The following summarizes the fair value of the Companys cash, cash equivalents and short-term
investments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Cash and money market funds |
|
$ |
2,013 |
|
|
$ |
1,345 |
|
Commercial paper |
|
|
13,522 |
|
|
|
28,619 |
|
U.S. government agency notes |
|
|
5,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
21,319 |
|
|
$ |
29,964 |
|
|
|
|
|
|
|
|
Short-term investments: |
|
|
|
|
|
|
|
|
Corporate and U.S. government agency notes |
|
$ |
|
|
|
$ |
10,546 |
|
|
|
|
|
|
|
|
The Company considers all highly liquid investments with a maturity of three months or less at the
purchase date to be cash equivalents. The Company places its cash, cash equivalents and short term
investments in money market funds, commercial paper and corporate and government notes.
Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (SFAS 157).
SFAS 157 applies to all fair value measurements not otherwise specified in an existing standard,
clarifies how to measure fair value and expands fair value disclosures. SFAS No. 157 does not
significantly change the Companys previous practice with regard to asset valuation. All of the
Companys fair market value measurements utilize quoted prices in active markets for its short-term
investments, and as such, are valued at Level 1 of the fair value hierarchy defined in SFAS 157.
7. Related Parties
CyDex
On August 31, 2007, the Company and CyDex Pharmaceuticals, Inc. (CyDex) entered into a
Collaboration Agreement (the CyDex Agreement), which contemplates that the parties will
collaborate on the development and commercialization of products that utilize our AERx® pulmonary
delivery technology and CyDexs solubilization and stabilization technologies to deliver
combinations of inhaled corticosteroids, anticholinergics and beta-2 agonists for the treatment of
asthma and chronic obstructive pulmonary diseases (COPD). John Siebert, a member of our Board of
Directors, was the Chief Executive Officer and a member of the board of directors of CyDex until
October 2008.
Under the terms of the CyDex Agreement, the parties will share in the revenue from sales and
licensing of such products to a third party for further development and commercialization. Details
of each collaboration project will be determined by a joint steering committee consisting of
members appointed by each of the parties. Costs of each collaboration project will be borne 60% by
the Company and 40% by CyDex. Revenues from each collaboration project will be shared in the same
ratio. The CyDex Agreement commenced on August 31, 2007, and unless terminated earlier, will extend
for a minimum period of two years. Either party may terminate the Agreement upon advance notice to
the other party, and the non-terminating party will retain an option to continue the development
and commercialization of any terminated product, subject to payment of a royalty to the terminating
party. The Company has not recognized any revenue under the agreement since inception. The Company
incurred expenses under the agreement of $25,000 during the third quarter of 2008, $120,000 during
the first nine months of 2008 and none in the first nine months of 2007.
p 10 of 42
Novo Nordisk
In May 2008, the Second Amended and Restated License Agreement between Novo Nordisk and Aradigm
(the July 3, 2006 License Agreement) was terminated, ending a business collaboration between the
two companies to develop a pulmonary delivery system for administering insulin by inhalation using
the AERx insulin Diabetes Management System (iDMS). There are various consequences for the
Company as a result of the termination by Novo Nordisk of the July 3, 2006 License Agreement,
including the following:
All rights to the inhaled insulin program. Novo Nordisk must enable the Company to continue to
pursue commercialization of inhaled insulin. In order to do this, Novo Nordisk must:
|
|
|
Supply the Company with insulin for use in continuing development of inhaled insulin. |
|
|
|
|
Identify in writing the patent claims that describe the insulin formulation used by Novo
Nordisk in its development of inhaled insulin so that the Company can make such formulation
(and permitted alternatives). |
|
|
|
|
Provide the Company full access to the data generated in the development of inhaled
insulin, including data from all the clinical trials, as well as relevant sections of
applicable regulating filings. |
Transfer of technology. Novo Nordisk transferred the AERx iDMS technology documentation to the
Company. The technology transfer also included certain AERx iDMS-related development and
production equipment at its fair market value.
Intellectual Property transfer. In September 2008, Novo Nordisk transferred to the Company, at no
charge, a portfolio of U.S. and foreign patents related to inhaled insulin. The Company assumes
responsibility for the maintenance of this portfolio.
Prior to the Companys follow-on public offering completed on January 30, 2007, Novo Nordisk and
its affiliate, Novo Nordisk Pharmaceuticals, Inc., were considered related parties. At
December 31, 2006, Novo Nordisk beneficially owned 1,573,674 shares of the Companys common stock,
representing 10.6% of the Companys total outstanding common stock (9.8% on an as-converted basis).
As a result of the Companys public offering on January 30, 2007, Novo Nordisks ownership was
reduced to approximately 3.0% of the Companys stock on an as-converted basis, and as of September
30, 2008 and December 31, 2007, Novo Nordisk owned less than 1% of the Companys common stock.
Pursuant to the July 3, 2006 License Agreement, Novo Nordisk loaned the Company a principal amount
of $7.5 million under a Promissory Note and Security Agreement (Promissory Note). The
Promissory Note bears interest accruing at 5% per annum and the principal, along with the accrued
interest, is payable in three equal payments of $3.5 million at July 2, 2012, July 1, 2013 and
June 30, 2014. The balance outstanding under the Promissory Note, including accrued interest, was
$8.4 million and $8.1 million as of September 30, 2008 and December 31, 2007, respectively. The
Promissory Note does contain a number of covenants that include restrictions in the event of
changes to corporate structure, change in control and certain asset transactions. The Promissory
Note was also secured by a pledge of the net royalty stream payable to the Company by Novo Nordisk
pursuant to the July 3, 2006 License Agreement. The termination of the July 3, 2006 License
Agreement does not accelerate any of the payment provisions under the Promissory Note.
8. Revenue and Deferred Revenue
Payments from and amounts billed to collaborators, revenue recognized and deferred revenue were as
follows (thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2008 |
|
Deferred revenue beginning balance |
|
$ |
1,168 |
|
|
$ |
880 |
|
Amounts billed or received for collaborator funded programs |
|
|
174 |
|
|
|
516 |
|
Revenues recognized for collaborator funded programs |
|
|
(197 |
) |
|
|
(251 |
) |
|
|
|
|
|
|
|
Deferred revenue September 30, 2008 |
|
|
1,145 |
|
|
|
1,145 |
|
Less: non-current portion of deferred revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of deferred revenue |
|
$ |
1,145 |
|
|
$ |
1,145 |
|
|
|
|
|
|
|
|
p 11 of 42
The Company receives payments from collaborator-funded programs that are generally early-stage
feasibility programs. These programs may not necessarily develop into long-term development
agreements with the collaborators.
9. Property Tax Assessment
In March 2008, the Company received assessments of $508,000 from the Alameda County Tax Collector
for personal property taxes for the period July 2004 through June 2007, for which the Company
recorded an expense of $194,000 in the second quarter of 2008. Of the $508,000 total assessment,
$194,000 relates to property owned and used by the Company during the assessment periods, and
$314,000 relates to property the Company sold to Novo Nordisk as part of a January 26, 2005
restructuring agreement (the January 26, 2005 Agreement) and owned by Novo Nordisk during the tax
assessment period. Under the terms of the January 26, 2005 Agreement, Novo Nordisk is responsible
for tax assessments on property it owned during the assessment period, and therefore the Company
believes the likelihood that the Company will ultimately bear the cost of the related $314,000
assessment is remote. Accordingly, no accrual was recorded for this portion of the assessment.
Management has filed an appeal with the Alameda County Tax Collector to dispute portions of the
total assessment, and believes there is at least a reasonable possibility that the Companys
$194,000 liability ultimately will be reduced upon resolution of the appeal. However, at this time
management cannot estimate the ultimate outcome of the appeal. Accordingly, managements current
best estimate of the Companys ultimate liability for the property tax assessment is $194,000.
10. Sublease Agreement and Lease Exit Liability
On July 18, 2007, the Company entered into a sublease agreement with Mendel Biotechnology, Inc.
(Mendel) to lease approximately 48,000 square feet of the Companys 72,000 square foot facility
in Hayward, CA. During the year ended December 31, 2007, the Company recorded a $2.1 million lease
exit liability and related expense for the expected loss on the sublease, in accordance with SFAS
146, 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 subleased 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, which consisted 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 lease exit activities in the
accompanying condensed statements of operations. The lease exit liability activity from inception
in July 2007 through September 30, 2008 is as follows (in thousands):
|
|
|
|
|
Loss on sublease to Mendel in July 2007 |
|
$ |
2,063 |
|
Accretion of imputed interest expense |
|
|
39 |
|
Lease payments |
|
|
(353 |
) |
|
|
|
|
Balance at December 31, 2007 |
|
|
1,749 |
|
Accretion of imputed interest expense |
|
|
22 |
|
Lease payments |
|
|
(117 |
) |
|
|
|
|
Balance at March 31, 2008 |
|
|
1,654 |
|
Accretion of imputed interest expense |
|
|
20 |
|
Lease payments |
|
|
(109 |
) |
|
|
|
|
Balance at June 30, 2008 |
|
|
1,565 |
|
Accretion of imputed interest expense |
|
|
20 |
|
Lease payments |
|
|
(117 |
) |
|
|
|
|
Balance at September 30, 2008 |
|
$ |
1,468 |
|
|
|
|
|
11. 2006 Restructuring
During 2006, the Company announced the implementation of a strategic restructuring of its business
operations to focus resources on advancing the current product pipeline and developing products
focused on respiratory disease, leveraging the Companys core expertise and intellectual property.
The Company accounted for the restructuring activity in accordance with SFAS 146. The restructuring
included a reduction in force, the majority of which were research personnel. The Company recorded
the final remaining charge of $98,000 from the 2006 restructuring during the second quarter of
2007. The Company also paid the severance-related expenses in full by the end of 2007. These
charges are included in the restructuring and lease exit activities expense line item in the
accompanying condensed statements of operations.
p 12 of 42
12. Tekmira License Agreement
In February 2008, the Company signed an amendment to its license agreement from December 2004 with
Tekmira Pharmaceuticals Corporation (Tekmira), formerly known as Inex Pharmaceuticals
Corporation. Under the amended agreement, Tekmira granted the Company a license to certain
technology relating to the delivery of liposomal ciprofloxacin. The Company paid Tekmira $250,000
upon execution of the amendment. Should the Company utilize the technology licensed from Tekmira,
the Company may be required to make milestone payments of up to $4.75 million in the aggregate for
each disease indication, up to a maximum of two indications, pursued by the Company for liposomal
ciprofloxacin. Should the Company commercialize products incorporating the licensed technology,
Tekmira will have the right to royalty payments.
13. Feasibility Study
In March 2008, the Company entered into an agreement with a third party to conduct a feasibility
study. The purpose of the study was to evaluate in the laboratory the delivery of certain
compounds using the AERx system. The Company was to be fully reimbursed for costs it incurred
under the agreement. The agreement had an initial one year term with potential successive one year
renewals. In September 2008, the third party notified the Company that the study was terminating.
The Company billed and recorded as deferred revenue $148,000 and $248,000 in the third quarter and
first nine months of 2008, respectively, related to the agreement. The Company recognized revenue
of $193,000 and $248,000 in the third quarter and first nine months of 2008, respectively, under
the agreement.
14. Manufacturing and Supply Agreement
On August 8, 2007, the Company entered into a Manufacturing and Supply Agreement (the Enzon
Agreement) with Enzon Pharmaceuticals, Inc. (Enzon) related to its ARD-3100 and ARD-3150
programs, inhaled formulations of liposomal ciprofloxacin for the treatment and control of
respiratory infections common to patients with cystic fibrosis and bronchiectasis. Under the Enzon
Agreement, Enzon will manufacture and supply the Company with ciprofloxacin formulations and other
products that may be identified by management. For manufacturing the initial products, the Company
will pay Enzon costs and fees totaling $3.3 million in addition to costs and fees for stability
studies or other services that may be agreed by both parties. The agreement commenced on August 8,
2007, and extends for a period of five years unless terminated earlier by either party. The
Company incurred research and development expenses under the Enzon Agreement of $108,000 and
$36,000 for the third quarter of 2008 and 2007, respectively, and $1.3 million and $36,000 for the
first nine months of 2008 and 2007, respectively.
15. Shareholders Equity
On January 30, 2007, the Company received $33.9 million from the closing of its public offering of
37,950,000 shares of common stock in an underwritten public offering with net proceeds, after
underwriting discount and expenses, of approximately $33.2 million. This public offering triggered
the automatic conversion of all outstanding shares of Series A convertible preferred stock to
common stock and eliminated the Series A liquidation preference of $41.9 million, equal to the
original issue price plus all accrued and unpaid dividends (as adjusted for any stock dividends,
combinations, splits, recapitalizations and other similar events). Following the offering, the
1,544,626 shares of Series A convertible preferred stock were converted to 1,235,699 shares of
common stock, and no liquidation preference or other preferential rights remained.
On December 21, 2007, the Company filed a shelf registration statement on Form S-3 (No. 333-148263)
covering the sale of $60 million of common stock. The registration statement became effective on
January 25, 2008.
On April 1, 2008, the Company issued 147,384 shares of common stock pursuant to the ESPP at an
average price of $0.94 per share.
On May 15, 2008, the shareholders approved an amendment to Aradigms Amended and Restated Articles
of Incorporation to increase the authorized number of shares of common stock from 100,000,000 to
150,000,000 shares. The shareholders also approved an amendment to the 2005 Equity Incentive Plan
to increase the aggregate number of shares of common stock authorized for issuance under such plan
by 2,700,000 shares, and an amendment to the ESPP to increase the aggregate number of shares of
common stock authorized for issuance under such plan by 1,000,000 shares. As of September 30, 2008,
the Company had 3,761,386 shares of common stock available for future issuance under the 2005
Equity Incentive Plan.
p 13 of 42
In September 2008 the Company adopted an amended and restated shareholder rights plan, which
replaced the rights plan originally adopted in August 1998. Pursuant to the rights plan, as
amended and restated, the Company distributed rights to purchase shares of Series A Junior
Participating Preferred Stock as a dividend at the rate of one right for each share of common stock
outstanding. The rights are designed to guard against partial tender offers and other abusive and
coercive tactics that might be used in an attempt to gain control of the Company or to deprive the
Companys shareholders of their interest in the Companys long-term value. The shareholder rights
plan seeks to achieve these goals by encouraging a potential acquirer to negotiate with the
Companys board of directors. The rights will expire at the close of business on September 8,
2018.
16. Subsequent Event
On October 31, 2008 Zogenix, Inc.
(Zogenix), a private company to which the Company sold its assets related to the Intraject
(now rebranded under the name
DoseProTM) needle-free delivery system, received a Complete Response
Letter from the Food and Drug Administration (FDA) on its New Drug Application submitted
in December 2007 for the migraine drug sumatriptan. Zogenix believes that it has timely and
clear direction from the FDA to address the issue raised in the Complete Response Letter.
The Company will be entitled to a milestone payment upon initial commercialization and royalty
payments upon any commercialization of products that may be developed and sold using the DosePro
technology.
In November 2008, the Company received
$2.75 million from Lung Rx, Inc. (Lung Rx), which included the first milestone payment of
$2.0 million and $750,000 for development costs.
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion below contains forward-looking statements that are based on the beliefs of
management, as well as assumptions made by, and information currently available to, management. Our
future results, performance or achievements could 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, those discussed in this section as well as in the section entitled Risk Factors and
elsewhere in our filings with the Securities and Exchange Commission.
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, our dependence on collaborators for certain programs, 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 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. Further, even if
our product candidates appear promising at various stages of development, our share price may
decrease such that we are unable to raise additional capital without dilution that may be
unacceptable to our shareholders.
Investors are cautioned not to place undue reliance on the forward-looking statements contained
herein. We undertake no obligation to update these forward-looking statements in light of events or
circumstances occurring after the date hereof 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. We have not been profitable since inception and expect to incur additional operating
losses over at least the next several years as we expand product development efforts, preclinical
testing and clinical trial activities, and possible sales and marketing efforts, and as we secure
production capabilities from outside contract manufacturers. To date, we have not had any
significant product sales and do not anticipate receiving any revenues from the sale of products in
the near term. As of September 30, 2008, we had an accumulated deficit of $329.4 million.
Historically, we have funded our operations primarily through public offerings and private
placements of our capital stock, proceeds from equipment lease financings, license fees and
milestone payments from collaborators, proceeds from the January 2005 restructuring transaction
with Novo Nordisk, borrowings from Novo Nordisk, sale of Intraject related assets and interest
earned on investments. On January 30,
2007, we closed the sale of 37,950,000 shares of common stock in an underwritten public offering
with net proceeds, after underwriting discount and expenses, of approximately $33.2 million (See
Note 15 of the notes to the condensed financial statements).
p 14 of 42
Recently our business has focused on opportunities for product development for treatment of severe
respiratory disease that we could develop and commercialize in the United States without a partner.
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. We intend to commercialize our
respiratory product candidates with our own focused sales and marketing force addressing pulmonary
specialty doctors in the United States, 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. Our lead development candidate in Phase 2
clinical trials 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 bronchiectasis. The same formulation could also be potentially used
also for the prevention and treatment of inhaled anthrax.
Historically, our development activities consisted primarily of collaborations and product
development agreements with third parties. The most notable collaboration was with Novo Nordisk on
the AERx iDMS for the treatment of Type I and Type II diabetes. This program began in 1998 and
included nine Phase 3 clinical trials in Type I and Type II diabetes patients. On April 30, 2008,
Novo Nordisk announced that following recent reports of lung cancer in Type II diabetes patients
treated with Exubera*, an inhaled insulin product from Pfizer, the likelihood of achieving a
positive benefit/risk ratio for future pulmonary diabetes projects had become more uncertain, and
as a result, Novo Nordisk had decided to stop all research and development activities in the field.
In May 2008, the July 3, 2006 License Agreement between us and Novo Nordisk was terminated.
Pursuant to the License Agreement, on September 25, 2008, Novo Nordisk assigned, at no charge to
us; the inhaled insulin-related patents, which Novo purchased from us in July 2006, as well as
certain related patents that originate from Novo Nordisk. The portfolio includes both U.S. and
foreign patents. We assume the responsibility for the maintenance of this portfolio.
Our current collaborations include a collaboration with Lung Rx, Inc. (Lung Rx), a wholly owned
subsidiary of United Therapeutics Corporation (United Therapeutics), for the development of
inhalation treatments for pulmonary arterial hypertension, and a collaboration with CyDex
Pharmaceuticals, Inc. (CyDex) for inhalation treatments of asthma and chronic obstructive
pulmonary disease. We have a proprietary program for smoking cessation treatment for which we are
currently seeking a partner.
In August 2006, we sold all of our 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 private company.
Zogenix is responsible for further development and commercialization efforts of Intraject (now rebranded under the
name
DoseProTM). We received a $4 million initial payment from Zogenix,
and we will be entitled to a milestone
payment upon initial commercialization, and royalty payments upon any commercialization of products that may be
developed and sold using the DosePro technology. 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 (SumavelTM DosePro). The NDA was accepted for filing by the FDA in March 2008.
Zogenix has publicly stated that if Sumavel DosePro is approved by the FDA, Zogenix intends to launch the product
in the first quarter of 2009 in the U.S. On October 31, 2008 Zogenix received a Complete Response Letter from the
FDA on its NDA. Zogenix believes that it has timely and clear direction from the FDA to address the issue raised in
the Complete Response Letter. In March 2008, 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.
Product Candidates
Product candidates in development include both our own proprietary products and products under
development with collaborators. They consist of approved drugs combined with our inhalation
delivery and/or formulation technologies. The following table shows the disease indication and
stage of development for each product candidate in our portfolio.
p 15 of 42
|
|
|
|
|
Product Candidate |
|
Indication |
|
Stage of Development |
Proprietary Programs Under Development |
|
|
|
|
ARD-3100 (Liposomal ciprofloxacin)
|
|
Cystic Fibrosis
|
|
Phase 2 |
ARD-3150 (Liposomal ciprofloxacin)
|
|
Bronchiectasis
|
|
Phase 2 |
ARD-1100 (Liposomal ciprofloxacin)
|
|
Inhalation Anthrax
|
|
Preclinical |
ARD-1600 (Nicotine)
|
|
Tobacco Smoking Cessation
|
|
Phase 1 Completed |
|
|
|
|
|
Collaborative Programs Under Development |
|
|
|
|
ARD-1550 (Inhaled treprostinil) (1)
|
|
Pulmonary Arterial Hypertension
|
|
Bridging study |
ARD-1500 (Inhaled liposomal treprostinil)
|
|
Pulmonary Arterial Hypertension
|
|
Preclinical |
ARD-1700 (combination products) (2)
|
|
Asthma, COPD
|
|
Preclinical |
|
|
|
(1) |
|
A bridging clinical study began in April 2008 to compare delivery with the AERx Essence® system
against the nebulizer used in the completed Phase 3 TRIUMPH (TReprostinil Sodium Inhalation Used
in the Management of Pulmonary Arterial Hypertension) study with our partner Lung Rx. |
|
(2) |
|
The Asthma and COPD program is being conducted pursuant to the Collaboration Agreement with CyDex. |
In addition to these programs, we are continually evaluating opportunities for product development
where we can apply our expertise and intellectual property to produce better therapies and where we
believe the investment could provide significant value to our shareholders. We periodically
conduct feasibility studies with other parties in an effort to identify formulations and
combinations that may be suitable candidates for additional development.
Proprietary Programs Under Development:
Liposomal Ciprofloxacin
This product candidate is currently in Phase 2 programs for respiratory infections associated with
cystic fibrosis and bronchiectasis. Ciprofloxacin is an FDA-approved anti-infective agent and is
widely used for the treatment of a variety of bacterial infections. Today ciprofloxacin is
delivered by oral or intravenous administration. We believe that delivering this potent antibiotic
directly to the lung may improve its safety and efficacy in the treatment of pulmonary infections.
We believe that our novel sustained release formulation of ciprofloxacin may be able to maintain
therapeutic concentrations of the antibiotic within infected lung tissues, while reducing systemic
exposure and the resulting side effects seen with currently marketed ciprofloxacin products. To
achieve this sustained release, we employ liposomes, which are lipid-based nanoparticles dispersed
in water that encapsulate the drug during storage and release the drug slowly upon contact with
fluid covering the airways and the lung. In an animal experiment, ciprofloxacin delivered to the
lung of mice appeared to be rapidly absorbed into the bloodstream, with no drug detectable four
hours after administration. In contrast, the liposomal formulation of ciprofloxacin produced
significantly higher levels of ciprofloxacin in the lung at all time points and was still
detectable at 12 hours. We also believe that for certain respiratory disease indications it may be
possible that a liposomal formulation enables better interaction of the drug with the disease
target, leading to improved effectiveness over other therapies. We have at present three target
indications that share much of the laboratory and production development efforts, as well as a
common safety data base.
ARD-3100 and ARD 3150-Liposomal Ciprofloxacin for the Treatment of Infections in Cystic
Fibrosis and Non-CF Bronchiectasis Patients
We have two proprietary liposomal ciprofloxacin programs for the treatment and control of
respiratory infections associated with chronic diseases one common to patients with cystic
fibrosis, or CF, and the other for infections associated with non-cystic fibrosis bronchiectasis.
CF is a genetic disease that causes thick, sticky mucus to form in the lungs, pancreas and other
organs. In the lungs, the mucus tends to block the airways, causing lung damage and making these
patients highly susceptible to lung infections. According to the Cystic Fibrosis Foundation, CF
affects roughly 30,000 children and adults in the United States and roughly 70,000 children and
adults worldwide. According to the American Lung Association, the direct medical care costs for an
individual with CF are currently estimated to be in excess of $40,000 per year.
p 16 of 42
The inhalation route affords direct administration of the drug to the infected part of the lung,
maximizing the dose to the affected site and minimizing the wasteful exposure to the rest of the
body where it could cause side effects. Therefore, treatment of CF-related lung infections by
direct administration of antibiotics to the lung may improve both the safety and efficacy of
treatment compared to systemic administration by other routes, as well as improving patient
convenience as compared to injections. Oral and injectable forms of ciprofloxacin are approved for
the treatment of Pseudomonas aeruginosa, a lung infection to which CF patients are vulnerable.
Currently, there is only one inhalation antibiotic approved for the treatment of this infection,
which is administered twice a day. We believe that local lung delivery via inhalation of
ciprofloxacin in a sustained release formulation could provide a convenient, effective and safe
treatment of the debilitating and often life-threatening lung infections that afflict patients with
CF. In particular, an important consideration in the development of new treatments for this
disease is the reduction of the burden of therapy for patients, their relatives and healthcare
providers. Our goal is to develop a convenient, once-a-day inhalation product in order to reduce
the amount of time and effort associated with administration of the therapy.
Our liposomal ciprofloxacin CF program represents the first program in which we would like to
retain full ownership and development rights for the United States. We believe we have the
preclinical development, clinical and regulatory expertise to advance this product through
development in the most efficient manner.
We are also developing inhaled liposomal ciprofloxacin for pulmonary infections associated with
non-CF bronchiectasis a chronic pulmonary disease with symptoms similar to cystic fibrosis
affecting over 100,000 patients in the United States. This is an orphan drug disease with an unmet
medical need; there is currently no approved drug treatment in the United States for this
indication.
Development
We received orphan drug designations from the FDA for this product for the management of CF, and
for the treatment of respiratory infections associated with non-CF bronchiectasis. As a designated
orphan drug, liposomal ciprofloxacin is eligible for tax credits based upon its clinical
development costs, as well as assistance from the FDA to coordinate study design. The designation
also provides the opportunity to obtain market exclusivity for seven years from the date of New
Drug Application ( NDA) approval.
We initiated preclinical studies for liposomal ciprofloxacin in 2006 and we also continued to work
on new innovative formulations for this product with the view to maximize the safety, efficacy and
convenience to patients. In October 2007, we completed a Phase 1 clinical trial in 20 healthy
volunteers in Australia. This was a safety, tolerability and pharmacokinetic study that included
single dose escalation followed by dosing for one week. Administration of the liposomal
formulation by inhalation was well tolerated and no serious adverse reactions were reported. The
pharmacokinetic profile obtained by measurement of blood levels of ciprofloxacin following the
inhalation of the liposomal formulation was consistent with the profile from sustained release of
ciprofloxacin; the blood levels of ciprofloxacin were much lower than those that would be observed
following administration of therapeutic doses of ciprofloxacin by injection or via the
gastrointestinal tract. We believe that this is a desirable pharmacokinetic profile likely to
result in reduction of the incidence and severity of systemic side effects of ciprofloxacin and to
be less likely to lead to evolution of resistant microorganisms.
In June 2008, we completed a multi-center 14-day treatment Phase 2a trial in Australia and New
Zealand in 21 CF patients to investigate safety, efficacy and pharmacokinetics, with the primary
efficacy endpoint being the reduction in the density of the pathogenic microorganism Pseudomonas
aeruginosa. 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 Pseudomonas CFU 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.
Following the trial we intend to finalize development plans and budgets for this program in
conjunction with discussions with the FDA. In order to expedite anticipated time to market and
increase patient acceptance, we elected to deliver our initial formulation of ciprofloxacin via
nebulizer, as most CF patients already own a nebulizer and are familiar with this method of drug
delivery. We intend to examine the potential for delivery of ciprofloxacin via our AERx delivery
system as well, as it could provide additional convenience for the patient in the form of a small
portable device with a faster administration time than a nebulizer.
p 17 of 42
In June 2008, we initiated a multicenter Phase 2 clinical trial of our inhaled liposomal
ciprofloxacin in adult patients with non-CF bronchiectasis. As of October 2008 and following an
antibiotic washout period, all of the intended 36 patients were enrolled to receive daily inhaled
liposomal ciprofloxacin for a period of 28 consecutive days. We intend to release data from this
trial no later than the first quarter of 2009. The primary efficacy endpoint will be treatment of
respiratory infection measured as the change in the density of Pseudomonas aeruginosa bacterial
colony forming units (CFU) in the sputum over the treatment period. Secondary endpoints will
include pulmonary function measurements and respiratory symptoms. The study is being conducted in
leading bronchiectasis centers in the United Kingdom.
ARD-1100 Liposomal Ciprofloxacin for the Treatment of Inhalation Anthrax
The third of our liposomal ciprofloxacin programs is for the prevention and treatment of pulmonary
anthrax infections. Anthrax spores are naturally occurring in soil throughout the world. Anthrax
infections are most commonly acquired through skin contact with infected animals and animal
products or, less frequently, by inhalation or ingestion of spores. With inhalation anthrax, once
symptoms appear, fatality rates are high even with the initiation of antibiotic and supportive
therapy. Further, a portion of the anthrax spores, once inhaled, may remain dormant in the lung for
several months and germinate. Anthrax has been identified by the Centers for Disease Control as a
likely potential agent of bioterrorism. In the fall of 2001, when anthrax-contaminated mail was
deliberately sent through the United States Postal Service to government officials and members of
the media, five people died and many more became sick. These attacks highlighted the concern that
inhalation anthrax as a bioterror agent represents a real and current threat.
Ciprofloxacin is approved by the FDA for use orally and via injection for the treatment of
inhalation anthrax (post-exposure) since 2000. Our ARD-1100 research and development program was
funded by Defence Research and Development Canada, or DRDC, a division of the Canadian Department
of National Defence. We believe that our product candidate may potentially be able to deliver a
long-acting formulation of ciprofloxacin directly into the lung and could have fewer side effects
and be more effective to prevent and treat inhalation anthrax than currently available therapies.
Development
We began our research into liposomal ciprofloxacin under a technology demonstration program funded
by the DRDC as part of their interest in developing products to counter bioterrorism. The DRDC had
already demonstrated the feasibility of inhaled liposomal ciprofloxacin for post-exposure
prophylaxis of Francisella tularensis, a potential bioterrorism agent similar to anthrax. Mice were
exposed to a lethal dose of F. tularensis and then 24 hours later were exposed via inhalation to a
single dose of free ciprofloxacin, liposomal ciprofloxacin or saline. All the mice in the control
group and the free ciprofloxacin group were dead within 11 days post-infection; in contrast, all
the mice in the liposomal ciprofloxacin group were still alive 14 days post-infection. The same
results were obtained when the mice received the single inhaled treatment as late as 48 or 72 hours
post-infection. The DRDC funded our development efforts to date and additional development of this
program is dependent on negotiating for and obtaining continued funding from DRDC or on identifying
other collaborators or sources of funding. We plan to use our preclinical and clinical safety data
from our CF program to supplement the data needed to have this product candidate considered for
approval for use in treating inhalation anthrax and possibly other inhaled life-threatening
bioterrorism infections.
We anticipate developing this drug for approval under FDA regulations relating to the approval of
new drugs or biologics for potentially fatal diseases where human efficacy studies cannot be
conducted ethically or practically. These regulations allow for a drug to be evaluated and
approved by the FDA on the basis of demonstrated safety in humans combined with studies in animal
models to show effectiveness. Our intention is to continue the development of this potential
product for the treatment and prevention of anthrax only if we can obtain future funding for it
from a partner, or secure a government contract for it.
Smoking Cessation Therapy
ARD-1600 (Nicotine) Tobacco Smoking Cessation Therapy
According to the National Center for Health Statistics (NCHS), 21% of the U.S. population age 18
and above currently smoke cigarettes. The World Health Organization estimates that 650 million
people worldwide are smokers, which results in a health cost equivalent to $200 billion, $75
billion in the U.S. alone. Further, the NCHS indicates that nicotine dependence is the most common
form of chemical dependence in this country. Quitting tobacco use is difficult and often requires
multiple attempts, as users frequently relapse because of withdrawal symptoms. Our goal is to
develop an inhaled nicotine product that would address effectively the acute craving for cigarettes
and, through gradual reduction of the peak nicotine levels, wean-off the patients from cigarette
smoking and from the nicotine addiction.
p 18 of 42
Development
The initial laboratory work on this program was partly funded under grants from the National
Institutes of Health. In October 2007, we completed the first human clinical trial delivering
aqueous solutions of nicotine using the palm-size AERx Essence system. Our randomized, open-label,
single-site Phase 1 trial evaluated arterial plasma pharmacokinetics and subjective acute cigarette
craving when one of three nicotine doses was administered to 18 adult male smokers. Blood levels of
nicotine rose much more rapidly following a single-breath inhalation compared to published data on
other approved nicotine delivery systems. Cravings for cigarettes were measured on a scale from
0-10 before and after dosing for up to four hours. Prior to dosing, mean craving scores were 5.5,
5.5 and 5.0, respectively, for the three doses. At five minutes following inhalation of the
nicotine solution through the AERx Essence device, craving scores were reduced to 1.3, 1.7 and 1.3,
respectively, and did not return to pre-dose baseline during the four hours of monitoring. Nearly
all subjects reported an acute reduction in craving or an absence of craving immediately following
dosing. No serious adverse reactions were reported in the study.
We believe these results provide the foundation for further research with the AERx Essence device
as a means toward smoking cessation. We are currently exploring collaborations with government and
non-government organizations to further develop this product.
Collaborative Programs Under Development:
ARD-1550 and 1500 Treprostinil for the Treatment of Pulmonary Arterial Hypertension
The ARD-1550 program is a collaboration with Lung Rx and is investigating an inhaled aqueous
formulation of a prostacyclin analogue for administration using our AERx delivery system for the
treatment of pulmonary arterial hypertension, or PAH. In April 2008, we initiated a bridging
clinical trial in conjunction with our agreement with Lung Rx to evaluate lung distribution,
pharmacokinetics and safety of inhaled treprostinil delivered by the AERx Essence system versus
delivery with the Nebu-Tec OPTINEB(1)-ir nebulizer. Lung Rx used the latter device in its Phase 3
TRIUMPH study of inhaled treprostinil in patients with PAH. PAH is a rare disease that results in
the progressive narrowing of the arteries of the lungs, causing continuous high blood pressure in
the pulmonary artery and eventually leading to heart failure. According to Datamonitor, in 2005 the
more than 146,000 people worldwide affected by PAH purchased over $800 million of PAH-related
medical treatments, and sales are expected to reach $2.0 billion per year by 2015.
In November 2008, we announced data from the clinical trial, which showed that the AERx Essence delivery system
efficiently delivered aerosolized treprostinil deeper into the lung than delivery by the OPTINEB nebulizer. Inhaled
treprostinil was well tolerated from both delivery systems, and no serious adverse events were reported in the study.
The AERx Essence delivery system is expected to deliver medication to the patient in 2 to 4 breaths, significantly
reducing the burden of therapy for PAH patients.
Prostacyclin analogues are an important class of drugs used for the treatment of pulmonary arterial
hypertension. However, the current methods of administration of these drugs are burdensome on
patients. Treprostinil is marketed by United Therapeutics under the name Remodulin* and is
administered by intravenous or subcutaneous infusion. Remodulin accounted for approximately $200
million of United Therapeutics revenue in 2007. We believe that the ARD-1550 product candidate
could offer a non-invasive, more direct and patient-friendly approach compared to currently
available treatments. Actelion Pharmaceuticals Ltd. markets in the United States another
prostacyclin analogue, iloprost, under the name Ventavis* that is administered six to nine times
per day using a nebulizer, with each treatment lasting four to ten minutes. We believe
administration of treprostinil by inhalation using our convenient palm-sized AERx delivery system
may be able to deliver an adequate dose for the treatment of PAH in a small number of breaths.
Based on our previous work with United Therapeutics, we also believe that in the future our
sustained release formulation (ARD-1500) may lead to a reduction in the number of daily
administrations that are needed to be effective when compared to existing inhaled therapies.
Development
We conducted two collaborative research projects on inhaled treprostinil using Aradigms AERx
delivery system. The first project was with an aqueous formulation of treprostinil.
The second project involved development of a slow-acting liposomal formulation of treprostinil
(ARD-1500), with the view to achieve once-a-day dosing. On August 30, 2007, we signed an Exclusive
License, Development and Commercialization Agreement with Lung Rx pursuant to which we granted Lung
Rx a license, which becomes exclusive upon the payment of specified sums, to develop and
commercialize inhaled treprostinil using our AERx Essence technology for the treatment of PAH and
other potential therapeutic indications. As a part of this collaboration, we began a bridging
study for this product, ARD-1550, in April 2008 to compare an aqueous solution of treprostinil
delivered by inhalation using the AERx Essence system to the nebulizer used in the United
Therapeutics Phase 3 trial and announced results in November 2008.
We are now in discussions with Lung Rx regarding the next steps
required on the clinical, manufacturing and
regulatory paths toward the approval and launch of this product. Lung Rx will be responsible for funding the
remainder of the development of treprostinil in the AERx delivery system through registration and commercial
launch.
p 19 of 42
ARD-1300 Hydroxychloroquine for the Treatment of Asthma
The ARD-1300 program was investigating a novel aerosolized formulation of hydroxychloroquine, or
HCQ, as a treatment for asthma under collaboration with APT, a privately held biotechnology
company. Data from studies in which HCQ was orally administered to humans suggested that HCQ could
be effective in the treatment of asthma. We and APT have hypothesized that targeted delivery of HCQ
to the airways may enhance the effectiveness of the treatment of asthma relative to systemic
delivery of HCQ while reducing side effects by decreasing exposure of the drug to other parts of
the body.
Development
APT funded all activities in the development of this program. The ARD-1300 program advanced into
Phase 2 clinical trials following positive preclinical testing and Phase 1 clinical results. The
results of the Phase 2a clinical study of inhaled HCQ as a treatment for patients with
moderate-persistent asthma did not meet the pre-specified clinical efficacy endpoints. As a result,
in September 2008, our agreement with APT was terminated. No serious adverse effects were noted or
associated with the aerosolized HCQ or with the AERx system.
ARD-1700 (combination products) and Other Potential Applications
To date, we have demonstrated in human clinical trials effective deposition and, where required,
systemic absorption of a wide variety of drugs, including small molecules, peptides and proteins,
using our AERx delivery system. We intend to identify additional pharmaceutical product
opportunities that could potentially utilize our proprietary delivery systems for the pulmonary
delivery of various drug types, including proteins, peptides, oligonucleotides, gene products and
small molecules. We demonstrated in the past our ability to successfully enter into collaborative
arrangements for our programs, and we believe additional opportunities for collaborative
arrangements exist outside of our core respiratory disease focus, for some of which we have data as
well as intellectual property positions. The following are descriptions of two potential
opportunities:
Combination Products for Asthma, Cystic Fibrosis and other Chronic Obstructive Pulmonary Disease
(COPD). Asthma is a common chronic disorder of the lungs characterized by airway inflammation,
airway hyper-responsiveness or airway narrowing due to certain stimuli. Despite several treatment
options, asthma remains a major medical problem associated with high morbidity and large economic
costs to society. According to the American Lung Association, asthma accounted for $14.7 billion in
direct healthcare costs each year in the United States, of which the largest single expenditure, at
$6.2 billion, was prescription drugs. Primary symptoms of asthma include coughing, wheezing,
shortness of breath and tightness of the chest with symptoms varying in frequency and degree.
According to Datamonitor, in 2005 asthma affected 41.5 million people in developed countries, with
9.5 million of those affected being children. The highest prevalence of asthma occurs in the
United States and the United Kingdom. According to the American Lung Association, non-asthma COPD
was the fourth leading cause of death in America, claiming the lives of 118,171 Americans in 2004.
In 2005, an estimated 8.9 million Americans reported a physician diagnosis of chronic bronchitis,
an obstructive disease of the lung. In August 2007, we and CyDex began to collaborate on the
development and commercialization of products that utilize our AERx pulmonary delivery technology
and CyDexs solubilization and stabilization technologies to deliver inhaled corticosteroids,
anticholinergics and beta-2 agonists for the treatment of asthma and COPD. The initial focus of the
collaboration is on formulation development and market research.
Pain Management System. Based on our internal work and a currently-dormant collaboration with
GlaxoSmithKline, we have developed a significant body of preclinical and Phase 1 clinical data on
the use of inhaled morphine and fentanyl, and Phase 2 clinical data on inhaled morphine, with our
proprietary AERx delivery system for the treatment of breakthrough pain in cancer and postsurgical
patients.
Other Programs. We are currently examining our other previously conducted preclinical and
clinical programs to identify molecules that may be suitable for further development consistent
with our current business strategy to focus on the U.S. severe respiratory disease market and sell
or license our non-strategic assets.
Critical Accounting Policies and Estimates
We consider certain accounting policies related to revenue recognition, stock-based compensation,
impairment of long-lived assets, exit/disposal activities and income taxes 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 condensed
financial statements. These estimates include useful lives for property and equipment and related
depreciation calculations,
p 20 of 42
estimated amortization periods for payments received from product development and license
agreements as they relate to the revenue recognition and assumptions for valuing options, warrants
and incomes taxes. Our actual results could differ from these estimates.
Revenue Recognition
Contract revenues consist of revenues from grants, collaboration agreements and feasibility
studies. We recognize revenue under the provisions of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104) and Emerging Issues Task
Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21).
Revenue for arrangements not having multiple deliverables, as outlined in EITF 00-21, is recognized
once costs are incurred and collectability is reasonably assured. Under some agreements our
collaborators have the right to withhold reimbursement of costs incurred until the work performed
under the agreement is mutually agreed upon. For these agreements, we recognize revenue upon
acceptance of the work and confirmation of the amount to be paid by the collaborator. Deferred
revenue represents the portion of all refundable and nonrefundable research payments received that
have not been earned. In accordance with contract terms, milestone payments from collaborative
research agreements are considered reimbursements for costs incurred under the agreements and,
accordingly, are recognized as revenue either upon completion of the milestone effort, when
payments are contingent upon completion of the effort, or are based on actual efforts expended over
the remaining term of the agreement when payments precede the required efforts. Costs of contract
revenues are approximate to or are greater than such revenues, and are included in research and
development expenses. We defer refundable development and license fee payments until specific
performance criteria are achieved. Refundable development and license fee payments are generally
not refundable once specific performance criteria are achieved and accepted.
Collaborative license and development agreements that require us to provide multiple deliverables,
such as a license, research and product steering committee services and other performance
obligations, are accounted for in accordance with EITF 00-21. Under EITF 00-21, delivered items are
evaluated to determine whether such items have value to our 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. Deliverables
that do not meet these criteria are combined and accounted for as a single unit of accounting. The
appropriate revenue recognition criteria are identified and applied to each separate unit of
accounting.
Accounting for Costs Associated with Exit or Disposal Activities
In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities
(SFAS 146), we recognize a liability for the cost associated with an exit or disposal activity
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 SFAS 146,
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.
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.
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
p 21 of 42
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
September 30, 2008 and December 31, 2007, 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.
Stock-Based Compensation Expense
We measure stock-based compensation at the grant date based on the awards fair value and we
recognize the expense ratably over the requisite vesting period, net of estimated forfeitures, for
all stock-based awards granted after January 1, 2006 and all stock-based awards granted prior to,
but not vested as of, January 1, 2006.
We have elected to calculate an awards fair value based on the Black-Scholes option-pricing model.
The Black-Scholes model requires various assumptions, including expected option life and
volatility. If any of the assumptions used in the Black-Scholes model or the estimated forfeiture
rate change significantly, stock-based compensation expense may differ materially in the future
from that recorded in the current period.
Results of Operations
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine months Ended |
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
Increase (Decrease) |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
Three Months |
|
|
Nine months |
|
|
|
($s in thousands) |
|
|
($s in thousands) |
|
Revenues from related parties |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
23 |
|
|
$ |
|
|
|
|
|
% |
|
$ |
(23 |
) |
|
|
(100 |
)% |
Revenues from unrelated parties |
|
|
197 |
|
|
|
230 |
|
|
|
251 |
|
|
|
920 |
|
|
|
(33 |
) |
|
|
(14 |
)% |
|
|
(669 |
) |
|
|
(73 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
197 |
|
|
$ |
230 |
|
|
$ |
251 |
|
|
$ |
943 |
|
|
$ |
(33 |
) |
|
|
(14 |
)% |
|
$ |
(692 |
) |
|
|
(73 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recorded no related party revenue in 2008, and recorded related party revenue from Novo Nordisk
of $23,000 for the first nine months of 2007. The reason for the decrease in 2008 was the
conclusion of the restructuring agreement with Novo Nordisk. We recorded revenues from unrelated
parties of $197,000 and $251,000 for the third quarter and first nine months of 2008, respectively,
primarily related to a feasibility study evaluating the delivery of certain compounds using the
AERx system. We recorded collaborative revenues for the third quarter of 2007 of $192,000 for our
final payment from APT related to ARD-1300, and $38,000 from our transition agreement with Zogenix.
We recorded collaborative revenues for the first nine months of 2007 of $566,000 related to
ARD-1100, $192,000 for our final payment from APT related to ARD-1300, $141,000 from our transition
agreement with Zogenix and $21,000 from Respironics. The primary reason for the decrease in
unrelated party revenue in 2008 compared to 2007 was our focus towards advancing our own product
candidates.
Research and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine months Ended |
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
Increase (Decrease) |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
Three Months |
|
|
Nine months |
|
|
|
($s in thousands) |
|
|
($s in thousands) |
|
Collaborative |
|
$ |
430 |
|
|
$ |
(46 |
) |
|
$ |
1,777 |
|
|
$ |
759 |
|
|
$ |
476 |
|
|
|
1,035 |
% |
|
$ |
1,018 |
|
|
|
134 |
% |
Self-initiated |
|
|
2,769 |
|
|
|
3,945 |
|
|
|
11,115 |
|
|
|
10,388 |
|
|
|
(1,176 |
) |
|
|
(30 |
)% |
|
|
727 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses |
|
$ |
3,199 |
|
|
$ |
3,899 |
|
|
$ |
12,892 |
|
|
$ |
11,147 |
|
|
$ |
(700 |
) |
|
|
(18 |
)% |
|
$ |
1,745 |
|
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses represent proprietary research expenses and costs related to
contract research revenue, including salaries, payments to contract manufacturers and contract
research organizations, contractor and consultant fees, stock-based compensation expense and other
support costs including facilities, depreciation and travel. The increase in collaborative program
expenses in the third quarter and first nine months of 2008 compared to the same periods in 2007
was primarily due to activities related to the ARD-1550 bridging study and the AERx technology
feasibility study with another third party. Research and development expense for self-initiated
projects decreased in the third quarter of 2008 from the third quarter of 2007, primarily due to
lower spending for ARD-3100 and ARD-1600. On a year-to-date basis, research and development
expense for self-initiated projects increased in 2008 over the comparable period in 2007 as a
result of the focus on advancing our current product candidates, including
p 22 of 42
primarily ARD-3100, and the AERx technology contract manufacturing capabilities. The decrease in
total research and development costs for the third quarter of 2008 from the third quarter of 2007
was primarily due to lower spending for clinical supply manufacturing and testing. For the
year-to-date period, total research and development costs increased in 2008 over 2007, primarily
attributable to higher clinical supply manufacturing and clinical trial costs. Stock-based
compensation expense included in research and development was $66,000 and $183,000 for the third
quarter of 2008 and 2007, respectively and $427,000 and $438,000 for the first nine months of 2008
and 2007, respectively. We expect that our research and development expenses will decrease over the
next few quarters in order to balance the desirability of continuing the development of our product
candidates against the need to contain our expenditures.
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine months Ended |
|
|
|
|
September 30, |
|
September 30 |
|
Increase (Decrease) |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Three Months |
|
Nine months |
|
|
(in thousands) |
|
($s in thousands) |
General and administrative expenses |
|
$ |
1,615 |
|
|
$ |
1,757 |
|
|
$ |
4,989 |
|
|
$ |
6,372 |
|
|
$ |
(142 |
) |
|
|
(8 |
)% |
|
$ |
(1,383 |
) |
|
|
(22 |
)% |
General and administrative expenses are comprised of salaries, legal fees including patent related
costs, insurance, marketing research, contractor and consultant fees, stock-based compensation
expense and other support costs including facilities, depreciation and travel. General and
administrative expenses for the third quarter of 2008 decreased from the comparable period in 2007,
primarily due to a reduction in headcount. For the first nine months of 2008, general and
administrative expenses decreased from the comparable period in 2007 primarily due to a reduction
in headcount, as well as a reduction in building rent stemming from the subleasing of a portion of
our office space to Mendel Biotechnology, Inc. (Mendel) in July 2007. Stock-based compensation
expense included in general and administrative expenses was $90,000 and $225,000 for the third
quarter of 2008 and 2007, respectively, and $211,000 and $659,000 for the first nine months of 2008
and 2007 respectively. We expect that our general and administrative expenses will remain
relatively constant over the next few quarters.
Restructuring and lease exit activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine months Ended |
|
|
|
|
September 30, |
|
September 30 |
|
Increase (Decrease) |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Three Months |
|
Nine months |
|
|
(in thousands) |
|
($s in thousands) |
Restructuring and
lease exit
activities expense |
|
$ |
19 |
|
|
$ |
2,059 |
|
|
$ |
61 |
|
|
$ |
2,157 |
|
|
$ |
(2,040 |
) |
|
|
(99 |
)% |
|
$ |
(2,096 |
) |
|
|
(97 |
)% |
Restructuring and lease exit activities expense in 2008 represented the accretion of interest
associated with the exit obligation recorded in 2007 upon the subleasing of office space to Mendel.
Restructuring and lease exit activities expense in the third quarter of 2007 represented the
recording of the expected loss associated with the subleasing of office space to Mendel, because
the sublease payments we receive from Mendel are less than the amounts we owe on the subleased
space. For the first nine months of 2007, restructuring and lease exit activities expense
consisted of the recording of the Mendel sublease loss and related interest accretion, as well as
$98,000 of severance-related costs relating to our 2006 restructuring efforts.
Interest income, interest expense and other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine months Ended |
|
|
|
|
September 30, |
|
September 30, |
|
Increase (Decrease) |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Three Months |
|
Nine months |
|
|
(in thousands) |
|
($s in thousands) |
Interest income |
|
$ |
146 |
|
|
$ |
684 |
|
|
$ |
709 |
|
|
$ |
2,020 |
|
|
$ |
(538 |
) |
|
|
(79 |
)% |
|
$ |
(1,311 |
) |
|
|
(65 |
)% |
Interest expense |
|
|
(105 |
) |
|
|
(101 |
) |
|
|
(303 |
) |
|
|
(293 |
) |
|
|
4 |
|
|
|
4 |
% |
|
|
10 |
|
|
|
3 |
% |
Other income (expense), net |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
16 |
|
|
|
(1 |
) |
|
|
|
|
|
|
(17 |
) |
|
|
(106 |
)% |
Interest income for the third quarter and first nine months of 2008 decreased from the comparable
periods in 2007 due to lower average invested balances and lower effective interest rates earned.
Interest expense primarily reflects interest on the $7.5 million promissory note issued to Novo
Nordisk in July 2006 with an interest rate of 5%. Other income in the first nine months of 2007
primarily reflected gains on the sale of assets.
p 23 of 42
Liquidity and Capital Resources
As of September 30, 2008, we had cash, cash equivalents and short-term investments of $21.3
million, down from $40.5 million at December 31, 2007. The $19.2 million decrease primarily
resulted from the use of cash and the proceeds from investment maturities to fund operations.
Working capital was $18.1 million at September 30, 2008, down from $36.6 as of December 31, 2007.
The decrease primarily was due to the lower balances of cash, cash equivalents and short-term
investments.
Net cash used in operating activities in the first nine months of 2008 was $16.9 million and
primarily resulted from our net loss of $17.3 million. Net cash provided by investing activities
was $8.1 million in the first nine months of 2008 and represented proceeds from the maturity of
investments, net of investment purchases, of $10.5 million, partly offset by the use of
$2.5 million to purchase property and equipment. Net cash provided by financing activities was
$0.1 million in the first nine months of 2008 and consisted primarily of cash receipts from
employee purchases through the Employee Stock Purchase Plan.
Net cash used in operating activities in the first nine months of 2007 was $12.9 million and
primarily resulted from our net loss of $17.0 million as adjusted for non-cash expenses including
restructuring and lease exit cost and stock-based compensation. Net cash used in investing
activities in the first nine months of 2007 was $12.9 million and reflected primarily purchases of
investments, net of maturities, of $12.0 million. Net cash provided by financing activities was
$33.3 million in the first nine months of 2007 and consisted primarily of proceeds from our public
offering of common stock in January 2007.
As of September 30, 2008, we had an accumulated deficit of $329.4 million and total shareholders
equity of $13.8 million. We believe that our cash and cash equivalents as of September 30, 2008
will be sufficient to enable us to meet our obligations through at least the second quarter of 2009.
Our principal activities to date have included research and development, securing operating
facilities, expanding commercial production capabilities, recruiting management and technical
personnel and obtaining financing. We do not anticipate receiving any revenue from the sale of
products in the near term. Our ability to continue our development and commercialization activities
is dependent upon the ability of management to obtain additional financing as required. We plan to
continue to obtain funds through collaborative arrangements, equity issuances and debt
arrangements. If we are unable to complete a debt or equity offering or otherwise obtain sufficient
financing when and if needed, we may be required to reduce, defer, or discontinue one or more of
our product development programs, or we may not be able to continue as a going concern entity.
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 do not have any majority-owned subsidiaries.
Contractual Obligations
Our non-cancelable contractual obligations and future minimum lease payments as of September 30,
2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 and |
|
|
|
Total |
|
|
2008(1) |
|
|
2009-2010 |
|
|
2011-2012 |
|
|
later |
|
|
|
(In thousands) |
|
Operating lease obligations |
|
$ |
17,065 |
|
|
$ |
601 |
|
|
$ |
4,532 |
|
|
$ |
4,060 |
|
|
$ |
7,872 |
|
Promissory note (2) |
|
|
10,543 |
|
|
|
|
|
|
|
|
|
|
|
3,514 |
|
|
|
7,029 |
|
Unconditional capital purchase obligations |
|
|
581 |
|
|
|
581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconditional purchase obligations |
|
|
1,737 |
|
|
|
1,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual commitments |
|
|
29,926 |
|
|
|
2,919 |
|
|
|
4,532 |
|
|
|
7,574 |
|
|
|
14,901 |
|
|
Less-sublease payments from Mendel (3) |
|
|
(3,881 |
) |
|
|
(223 |
) |
|
|
(1,828 |
) |
|
|
(1,830 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual commitments, net |
|
$ |
26,045 |
|
|
$ |
2,696 |
|
|
$ |
2,704 |
|
|
$ |
5,744 |
|
|
$ |
14,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the three months ending December 31, 2008. |
|
(2) |
|
Represents total principal and interest payments due on the Novo Nordisk promissory note through the 2014 maturity
date. As of September 30, 2008, the balance outstanding on the note was $8.4 million. The note contains a number of
covenants that include restrictions in the event of changes to corporate structure, change in control and certain asset
transactions. |
p 24 of 42
|
|
|
(3) |
|
Included to demonstrate the effect of the sublease with Mendel entered into in July 2007. Mendel has the option to
terminate the sublease early on September 1, 2012 for a termination fee of $225,000. In the event that the sublease is not
terminated early in 2012, $4.0 million in additional payments will be received through August 2016. |
Recently Issued Accounting Pronouncements
In February 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No.
FAS 157-2, Effective Date of FASB Statement No. 157 (FSP FAS 157-2), which defers the effective
date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring basis (at least
annually), for fiscal years beginning after November 15, 2008 and interim periods within those
fiscal years for items within the scope of FSP FAS 157-2. We do not expect that the adoption of
FSP FAS 157-2 will have a material impact on our financial position and results of operations.
In November 2007, the EITF issued EITF Issue No. 07-1, Accounting for Collaborative
Arrangements Related to the Development and Commercialization of Intellectual Property
(EITF 07-1). Companies may enter into arrangements with other companies to jointly develop,
manufacture, distribute, and market a product. Often the activities associated with these
arrangements are conducted by the collaborators without the creation of a separate legal entity
(that is, the arrangement is operated as a virtual joint venture). The arrangements generally
provide that the collaborators will share, based on contractually defined calculations, the profits
or losses from the associated activities. Periodically, the collaborators share financial
information related to product revenues generated (if any) and costs incurred that may trigger a
sharing payment for the combined profits or losses. The consensus requires collaborators in such an
arrangement to present the result of activities for which they act as the principal on a gross
basis and report any payments received from (made to) other collaborators based on other applicable
GAAP or, in the absence of other applicable GAAP, based on analogy to authoritative accounting
literature or a reasonable, rational, and consistently applied accounting policy election. EITF
07-1 is effective for collaborative arrangements in place at the beginning of the annual period
beginning after December 15, 2008. We do not expect that the adoption of EITF 07-1 will have a
material impact on our financial position and results of operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosures
In the normal course of business, our financial position is routinely subject to a variety of
risks, including market risk associated with interest rate movement. We regularly assess these
risks and have established policies and business practices to protect against these and other
exposures. As a result, we do not anticipate material potential losses in these areas.
As of September 30, 2008, we had cash and cash equivalents of $21.3 million. The fair market value
of our fixed rate cash equivalents will decline if market interest rates increase. Because the
maturities of our fixed rate cash equivalents are very short, we expect that if such decreases in
fair value occur, they will be immaterial and, therefore, we believe our exposure to interest rate
changes is immaterial. Declining interest rates over time would reduce our interest income from
cash, cash equivalents and short-term investments.
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 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.
p 25 of 42
Changes in Internal Controls over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during this
most recent fiscal quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II: OTHER INFORMATION
Item 1A. RISK FACTORS
In addition to the other information contained in this Form 10-Q, and risk factors set forth in our
most recent SEC filings, the following risk factors should be considered carefully in evaluating
our business. Our business, financial condition, or results of operations 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 and operations.
The risk factors included herein include any material changes to and supersede the risk factors
associated with our business previously disclosed in Item 1A to Part I of our Annual Report on Form
10-K for the fiscal year ended December 31, 2007. We have marked with an asterisk (*) those risk
factors that reflect substantive changes from the risk factors included in our Annual Report Form
10-K filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2007.
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 drug delivery 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 changed our product development strategy, and if we do not successfully implement this
strategy our business and reputation will be damaged.
Since our inception in 1991, we have focused on developing drug delivery technologies to be
partnered with other companies. In May 2006, we began transitioning our business focus from
development of delivery technologies to the application of our pulmonary drug delivery technologies
and expertise to development of novel drug products to treat or prevent respiratory diseases. As
part of this transition we have implemented workforce reductions in an effort to reduce our
expenses and improve our cash flows. We are in the early stages of implementing various aspects of
our strategy, and we may not be successful in implementing our strategy. Even if we are able to
implement the various aspects of our strategy, it may not be successful.
* We will need additional capital, and we may not be able to obtain it.
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. Our operations to date have
consumed substantial amounts of cash and have generated no 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:
p 26 of 42
|
|
|
our progress in the application of our delivery and formulation technologies, which may
require further refinement of these technologies; |
|
|
|
|
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 and maintain 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, proceeds from equipment lease financings, contract research funding
and interest earned on investments. We believe that our cash and cash equivalents at September 30,
2008 will be sufficient to fund operations at least through the end of the second quarter of 2009.
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 our new development strategy 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.
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 September 30, 2008, we have an accumulated deficit of $329.4 million. We have not
had any product sales and do not anticipate receiving any revenues from product sales for at least
the next few years, if ever. While our recent shift in development strategy may result in reduced
capital expenditures, we expect to continue to incur substantial losses over at least the next
several years as we:
|
|
|
expand 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 |
|
|
|
|
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.
p 27 of 42
* Our dependence on 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. 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 existing collaborators could delay or terminate their agreements, and our
products subject to collaborative arrangements may never be successfully commercialized. For example, Novo
Nordisk had control over and responsibility for development and commercialization of the AERx iDMS program.
In January 2008, Novo Nordisk announced that it was terminating the AERx iDMS program and gave us a 120-day
notice terminating the July 3, 2006 License Agreement between the companies. In May 2008, this termination
became effective, ending our collaboration with Novo Nordisk for the AERx iDMS program. Identifying new
collaborators for the further development and potential commercialization of the AERx iDMS program may take a
significant amount of time and resources and ultimately may not be successful. Lung Rx may also elect to terminate
our collaboration agreement. Further, some portion of the money we received from Lung Rx for development costs
is pre-payment for future costs. If Lung Rx terminates our agreement we may have to remit to Lung Rx a portion of
that pre-payment. If, due to delays or otherwise, we do not receive development funds or achieve milestones set
forth in the agreements governing our collaborations, if we cannot timely find replacement collaborators, or if any of
our collaborators breach or terminate their collaborative agreements or do not devote sufficient resources or priority
to our programs, our business prospects and our stock price would suffer. For example, Zogenix may not receive
approval or launch their migraine drug sumatriptan using the DosePro
needle-free delivery system, in which case we
may not receive a milestone payment and/or receive royalty payments.
Further, our existing or 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. 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 existing or future collaborators regarding, for example, 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 existing or future collaborative arrangements may not be successful.
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. 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.
If our clinical trials are delayed because of patient enrollment or other problems, we would incur
additional costs and postpone the potential receipt of revenues.
Before we or our 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 collaborators and 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.
p 28 of 42
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, our collaborators 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 regulatory approval, product recall or seizure,
operating restrictions, interruption of clinical trials or manufacturing, injunctions and criminal
prosecution.
Regulatory authorities may 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 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 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.
p 29 of 42
* Because two of our key proprietary programs, the ARD-3100 and ARD-3150 liposomal ciprofloxacin
programs, rely on the FDAs granting 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 for up
to seven years.
The FDA has granted orphan drug designation for our proprietary liposomal ciprofloxacin 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 and Nektar Therapeutics are developing an inhaled powder formulation of ciprofloxacin
for the treatment of respiratory infections in cystic fibrosis. 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 for a given
indication, we will be unable to access the target market in the United States, which would
adversely affect our ability to earn revenues.
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 key components,
assemblies and subassemblies in the clinical and commercial manufacturing of our products. We may
not be able to enter into or maintain satisfactory contract manufacturing arrangements.
Specifically, our agreement with an affiliate of Novo Nordisk to supply devices and dosage forms to
us for use in the development of our products that incorporate our proprietary AERx technology
expired on January 27, 2008. We may not be able to find a replacement contract manufacturer at
satisfactory terms.
We may decide to invest in additional clinical manufacturing facilities in order to internally
produce critical components of our product candidates and to handle critical aspects of the
production process, such as assembly of the disposable unit-dose packets and filling of the
unit-dose packets. If we decide to produce components of any of our product candidates in-house,
rather than use contract manufacturers, it will be costly and we may not be able to do so in a
timely or cost-effective manner or in compliance with regulatory requirements.
With respect to some of our product development programs targeted at large markets, either our
collaborators or we will have to invest significant amounts to attempt to provide for the
high-volume manufacturing required to take advantage of these product markets, and much of this
spending may occur before a product is approved by the FDA for commercialization. Any such effort
will entail many significant risks. For example, the design requirements of our products may make
it too costly or otherwise infeasible for us to develop them at a commercial scale, or
manufacturing and quality control problems may arise as we attempt to expand production. Failure to
address these issues could delay or prevent late-stage clinical testing and commercialization of
any products that may receive FDA approval.
Further, we, our contract manufacturers and our 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 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.
We rely on a small number of vendors and contract manufacturers to supply us with specialized
equipment, tools and components; if they do not perform as we need them to, we will not be able to
develop or commercialize products.
We rely on a small number of vendors and contract manufacturers to supply us and our collaborators
with specialized equipment, tools and components for use in development and manufacturing
processes. These vendors may not continue to supply such specialized equipment, tools and
components, and we may not be able to find alternative sources for such specialized equipment and
tools. Any inability to acquire or any delay in our ability to acquire necessary equipment, tools
and components would increase our expenses and could delay or prevent our development of products.
p 30 of 42
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 development programs 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 collaborations 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 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 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 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 patient that are cost-effective as compared to the benefits of alternative
therapies. Our ability to demonstrate this depends on a variety of factors, including:
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|
|
the demonstration of efficacy and safety in clinical trials; |
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|
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|
the existence, prevalence and severity of any side effects; |
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|
the potential or perceived advantages or disadvantages compared to alternative treatments; |
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|
the timing of market entry relative to competitive treatments; |
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|
the relative cost, convenience, product dependability and ease of administration; |
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|
the strength of marketing and distribution support; |
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|
the sufficiency of coverage and reimbursement of our product candidates by governmental and
other third-party payors; and |
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|
|
|
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 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 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 disposable unit-dose packets for our AERx delivery system.
Our ability to compete effectively will also depend to a significant extent on our and our
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
p 31 of 42
or our 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 early and provide only a short period of protection, if any, following commercialization of
products.
In July 2006, we assigned 23 issued United States patents to Novo Nordisk along with
corresponding non-United States counterparts and certain related pending applications. In August
2006, Novo Nordisk brought suit against Pfizer, Inc. claiming infringement of certain claims in one
of the assigned United States patents. In December 2006, Novo Nordisks motion for a preliminary
injunction in this case was denied. Subsequently, Novo Nordisk and Pfizer settled this litigation
out of court. In September 2008, Novo Nordisk informed us that they do not wish to maintain the
assigned patents, and they assigned these patents back to us, at no charge to us. These patents may
become the subject of future litigation. The patents encompass, in some instances, technology
beyond inhaled insulin and, if all or any of these patents are invalidated, it could harm our
ability to obtain market exclusivity with respect to other product candidates. We will no longer
be able to rely upon Novo Nordisk to defend or enforce our rights related to the patents. If we
are required to defend an action based on these patents or seek to enforce our rights under these
patents, we could incur substantial costs and the action could divert managements attention,
regardless of the lawsuits merit or outcome.
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, 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. If any of our collaboration partners terminate an agreement with us, we may face
increased risk and/or costs associated with defense of intellectual property that was associated
with the collaboration.
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 collaborators to enter markets as second or subsequent competitors and
p 32 of 42
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, Eli Lilly, Genentech, Gilead Sciences, Merck & Co., Novartis 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 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 marketing, management, manufacturing,
engineering and development personnel. There is a shortage of skilled personnel in our industry, we
face intense 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.
Acquisition of complementary businesses or technologies could result in operating difficulties and
harm our results of operations.
While we have not identified any definitive targets, we may acquire products, businesses or
technologies that we believe are complementary to our business strategy. The process of
investigating, acquiring and integrating any business or technology into our business and
operations is risky and we may not be able to accurately predict or derive the benefits of any such
acquisition. The process of acquiring and integrating any business or technology may create
operating difficulties and unexpected expenditures, such as:
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diversion of our management from the development and commercialization of our pipeline
product candidates; |
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difficulty in assimilating and efficiently using the acquired assets or personnel; and |
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inability to retain key personnel. |
In addition to the factors set forth above, we may encounter other unforeseen problems with
acquisitions that we may not be able to overcome. Any future acquisitions may require us to issue
shares of our stock or other securities that dilute the ownership interests of our other
shareholders, expend cash, incur debt, assume liabilities, including contingent or unknown
liabilities, or incur additional expenses related to write-offs or amortization of intangible
assets, any of which could materially adversely affect our operating results.
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 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 approvals, or if we lose previously
received approvals, our business would be impaired as we could not earn revenues from sales in
those countries.
p 33 of 42
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 involve 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. Section 404 also currently requires our
independent registered public accounting firm, beginning with our fiscal year ending December 31,
2009, to attest to, and report on our internal control over financial reporting. 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 and to the extent that we make and integrate acquisitions. 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:
p 34 of 42
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investor perception of us; |
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market conditions relating to our segment of the industry or the securities markets in general; |
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research analyst recommendations and our ability to meet or exceed quarterly performance
expectations of analysts or investors; |
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failure to maintain existing or establish new collaborative relationships; |
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fluctuations in our operating results; |
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announcements of technological innovations or new commercial products by us or our
competitors; |
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publicity regarding actual or potential developments relating to products under development
by us or our competitors; |
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developments or disputes concerning patents or proprietary rights; |
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delays in the development or approval of our product candidates; |
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regulatory developments in both the United States and foreign countries; |
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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; |
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period-to-period fluctuations in financial results; |
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future sales or expected sales of substantial amounts of common stock by shareholders; |
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our ability to raise financing; and |
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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 was delisted from the Nasdaq Capital Market; this delisting may reduce the
liquidity of our common stock and the price may decline.
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. This delisting may reduce the liquidity of our common stock, 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 make it less likely that we would be
acquired and that you would receive a premium price for your shares.
Certain provisions of our 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.
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
p 35 of 42
connection with an acquisition. The provisions of our 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.
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. As a result, capital appreciation, if any, of our common stock will be your sole source
of potential gain for at least the foreseeable future.
p 36 of 42
Item 6. EXHIBITS
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Exhibit |
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Number |
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Description |
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3.1 (1)
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Amended and Restated Articles of Incorporation of the Company. |
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10.29 (1) #
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Development and License Agreement, dated June 2, 1998, by and between the Company and Novo Nordisk A/S. |
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10.30 (1) #
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First Amendment to Development and License Agreement, dated October 22, 2001, by and between the Company and Novo Nordisk A/S. |
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10.31 (2) +
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2005 Equity Incentive Plan, as amended |
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10.32 (2) +
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Employee Stock Purchase Plan, as amended |
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10.33
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Amended and Restated Rights Agreement, dated as of September 5, 2008, by and between the Company and ComputerShare Trust Company, N.A. |
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31.1
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Certification by the Companys Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2
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Certification by the Companys Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1
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Certification by the Companys Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
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# |
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The Commission has granted the Companys request for an extension to
the confidential treatment with respect to portions of this exhibit. |
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+ |
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Represents a management contract or compensatory plan or arrangement. |
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(1) |
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Incorporated by reference to the Companys Form 10-Q filed on August 8, 2008. |
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(2) |
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Incorporated by reference to the Companys definitive proxy statement filed
on April 7, 2008. |
Aradigm, AERx, AERx Essence, and AERx Strip are registered trademarks of Aradigm Corporation.
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* |
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Other names and brands may be claimed as the property of others. |
p 37 of 42
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.
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ARADIGM CORPORATION
(Registrant) |
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/s/ Igor Gonda |
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Dr. Igor Gonda
President and Chief Executive Officer |
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/s/ Nancy E. Pecota |
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Nancy E. Pecota
Chief Financial Officer |
Dated: November 12, 2008
p 38 of 42
INDEX TO EXHIBITS
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Exhibit |
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Number |
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Description |
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3.1 (1)
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Amended and Restated Articles of Incorporation of the Company. |
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10.29 (1) #
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Development and License Agreement, dated June 2, 1998, by and between the Company and Novo Nordisk A/S. |
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10.30 (1) #
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First Amendment to Development and License Agreement, dated October 22, 2001, by and between the Company and Novo Nordisk A/S. |
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10.31 (2) +
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2005 Equity Incentive Plan, as amended |
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10.32 (2) +
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Employee Stock Purchase Plan, as amended |
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10.33
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Amended and Restated Rights Agreement, dated as of September 5, 2008, by and between the Company and ComputerShare Trust Company, N.A. |
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31.1
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Certification by the Companys Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2
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Certification by the Companys Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1
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Certification by the Companys Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
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# |
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The Commission has granted the Companys request for an extension to
the confidential treatment with respect to portions of this exhibit. |
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+ |
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Represents a management contract or compensatory plan or arrangement. |
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(1) |
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Incorporated by reference to the Companys Form 10-Q filed on August 8, 2008. |
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(2) |
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Incorporated by reference to the Companys definitive proxy statement filed
on April 7, 2008. |
p 39 of 42