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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the fiscal year ended December 31, 2009
or
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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: 000-28402
Aradigm Corporation
(Exact Name of Registrant as Specified in Its Charter)
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California
(State or Other Jurisdiction of
Incorporation or Organization)
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94-3133088
(I.R.S. Employer
Identification No.) |
3929 Point Eden Way, Hayward, CA 94545
(Address of Principal Executive Offices)
Registrants telephone number, including area code:
(510) 265-9000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. 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.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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(Do not check if a 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
The aggregate market value of the registrants common stock held by non-affiliates of the
registrant, based upon the closing price of a share of the registrants common stock on June 30,
2009 was: $25,181,543.
The number of shares of the registrants common stock outstanding as of February 28, 2010 was:
102,381,116
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Registrants Proxy Statement for the 2010 Annual Meeting of Shareholders are
incorporated by reference into Part III of this Annual Report on Form 10-K. Except as expressly
incorporated by reference, the Registrants Proxy Statement for the 2010 Annual Meeting of
Shareholders shall not be deemed to be a part of this Annual Report on Form 10-K.
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements that are based on the
current beliefs of management, as well as current assumptions made by, and information currently
available to, management. All statements contained in this Annual Report on Form 10-K, other than
statements that are purely historical, are forward-looking statements. Words such as anticipate,
expect, intend, plan, believe, may, will, could, continue, seek, estimate, or
the negative thereof and similar expressions also identify forward-looking statements. These
forward-looking statements are subject to risks and uncertainties that could cause our future
actual results, performance or achievements to differ materially from those expressed in, or
implied by, any such forward-looking statements as a result of certain factors, including, but not
limited to, those risks and uncertainties discussed in this section, as well as in the section
entitled Risk Factors, and elsewhere in this Annual Report on Form 10-K and our other filings
with the United States Securities and Exchange Commission (the SEC). Forward-looking statements
include our belief that our cash, cash equivalents and short-term investments as of December 31,
2009 and the Zogenix milestone payment received in February 2010 and the quarterly royalty payments
will be sufficient to enable us to meet our obligations through 2010.
These forward-looking statements and our business are subject to significant risks including,
but not limited to, our ability to obtain additional financing, our ability to implement our
product development strategy, the success of product development efforts, obtaining and enforcing
patents important to our business, clearing the lengthy and expensive regulatory approval process
and possible competition from other products. Even if product candidates appear promising at
various stages of development, they may not reach the market or may not be commercially successful
for a number of reasons. Such reasons include, but are not limited to, the possibilities that the
potential products may be found to be ineffective during clinical trials, may fail to receive
necessary regulatory approvals, may be difficult to manufacture on a large scale, are uneconomical
to market, may be precluded from commercialization by proprietary rights of third parties or may
not gain acceptance from health care professionals and patients.
You are cautioned not to place undue reliance on the forward-looking statements contained
herein, which speak only as of the date of the filing of this Annual Report on Form 10-K. We
undertake no obligation to update these forward-looking statements in light of events or
circumstances occurring after the date of the filing of this Annual Report on Form 10-K or to
reflect the occurrence of unanticipated events.
PART I
Item 1. Business
Overview
We are an emerging specialty pharmaceutical company focused on the development and
commercialization of drugs delivered by inhalation for the treatment of severe respiratory diseases
by pulmonologists. Over the last decade, we invested a large amount of capital to develop drug
delivery technologies, particularly the development of a significant amount of expertise in
pulmonary drug delivery. We also invested considerable effort into the generation of a large
volume of laboratory and clinical data demonstrating the performance of our AERx®
pulmonary drug delivery platform and other proprietary technologies, including our liposomal
formulations for inhalation. We have not been profitable since inception and expect to incur
additional operating losses over at least the next several years as we expand product development
efforts, preclinical testing, 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 generating any revenues from the sale of
our products in the near term. However, we do expect to generate milestone and royalty revenue in
2010 from the Intraject technology platform that we sold to Zogenix in 2006. As of December 31,
2009, we had an accumulated deficit of $348.4 million. Historically, we have funded our operations
primarily through public offerings and private placements of our capital stock, license fees and
milestone payments from collaborators, proceeds from the January 2005 restructuring transaction
with Novo Nordisk related to our inhaled insulin program, borrowings from Novo Nordisk, the sale of
Intraject-related assets and interest earned on investments.
Over the last four years, our business has focused on opportunities for product development
for the treatment of severe respiratory diseases that we could develop and commercialize in the
United States or European Union without a partner, or be able to retain co-marketing rights in the
United States or European Union for such products. 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. When compared to the discovery and development of
new chemical entities, we believe that our strategy will allow us to reduce cost, development time
and risk of failure. It is our longer term strategy to commercialize our respiratory product
candidates with our own focused sales and marketing force addressing pulmonary specialty
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doctors in the United States or European Union, 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 potentially be used for the prevention and treatment of bioterrorism agents such as
inhaled anthrax, tularemia and plague. In the near term given our current financial resources, our
focus will be on completing Phase 2b clinical trials of liposomal ciprofloxacin in bronchiectasis.
Pulmonary delivery by inhalation is already a widely used and well accepted method of
administration of a variety of drugs for the treatment of respiratory diseases. Compared to other
routes of administration, inhalation provides local delivery of the drug to the respiratory tract
which offers a number of potential advantages, including rapid onset of action, less drug required
to achieve the desired therapeutic effect, and reduced side effects because the rest of the body
has lower exposure to the drug. We believe that there still are significant unmet medical needs in
the respiratory disease market, both to replace existing therapies that over prolonged use in
patients demonstrate reduced efficacy or increased side effects, as well as to provide novel
treatments to patient populations and for disease conditions that are inadequately treated.
In addition to its use in the treatment of respiratory diseases, there is also an increasing
awareness of the value of the inhalation route of delivery to administer drugs via the lung for the
systemic treatment of disease elsewhere in the body. For many drugs, the large and highly
absorptive area of the lung enables bioavailability and fast absorption as a result of pulmonary
delivery that could otherwise only be obtained by injection. We believe that the features of our
AERx delivery system make it more attractive for many systemic drug applications than alternative
methods. We believe particular opportunities exist for the use of our pulmonary delivery
technology for the delivery of biologics, including proteins, antibodies and peptides that today
must be delivered by injection, as well as small molecule drugs, where rapid absorption is
desirable. We intend to pursue selected opportunities for systemic delivery via inhalation by
seeking collaborations and government grants that will fund development and commercialization.
We believe that our proprietary formulation and delivery technologies and our experience in
the development and management of pulmonary clinical programs uniquely position us to benefit from
opportunities in the respiratory disease market as well as other pharmaceutical markets that would
benefit from the efficient, non-invasive inhalation delivery of drugs.
Our Strategy
We have transitioned our business model to a specialty pharmaceutical company focused on
development and commercialization of a portfolio of drugs delivered by inhalation for the treatment
and prevention of respiratory diseases. We have chosen to focus on respiratory diseases based on
the expertise of our management team and the history of our company. We have significant experience
in the treatment of respiratory diseases and specifically in the development of inhalation products
that are uniquely suited for their treatment. We have a portfolio of proprietary technologies that
may potentially address significant unmet medical needs for better products in the global
respiratory market. There are five key elements of our strategy:
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Develop a proprietary portfolio of products for the treatment of respiratory
diseases. We believe our expertise in the development of pulmonary pharmaceutical products
should enable us to advance and commercialize respiratory products for a variety of
indications. We select for development those product candidates that can benefit from our
experience in pulmonary delivery and that we believe are likely to provide a superior
therapeutic profile or other valuable benefits to patients when compared to existing
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Accelerate the regulatory approval process. We believe our management teams expertise
in pharmaceutical inhalation products, new indications and reformulations of existing drugs
will enable us to pursue the most appropriate regulatory pathway for our product candidates.
Because our current product candidates incorporate FDA-approved drugs, we believe that the
most expedient review and approval pathway for these product candidates in the United States
will be under Section 505(b)(2) of the Food, Drug and Cosmetic Act, or the FDCA.
Section 505(b)(2) permits the FDA to rely on scientific literature or on the FDAs prior
findings of safety and/or effectiveness for approved drug products. By choosing to develop
new applications or reformulations of FDA-approved drugs, we believe that we can
substantially reduce or potentially eliminate the significant time, expenditure and risks
associated with preclinical testing of new chemical entities and biologics, as well as
utilize knowledge of these approved drugs to reduce the risk, time and cost of the clinical
trials needed to obtain drug approval. In addressing niche market opportunities, we have
already been granted or intend to pursue orphan drug designation for our products when
appropriate. Orphan drug designation may be granted to drugs and biologics that treat rare
life-threatening diseases that affect fewer than 200,000 persons in the United States. Such
designation provides a company with the possibility of market exclusivity for seven years as
well as regulatory assistance, reduced filing fees and possible tax credits. |
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Develop our own sales and marketing capacity for products in niche markets. It is our
longer term strategy to develop our own targeted sales and marketing force for those of our
products prescribed primarily by the approximately 11,000 pulmonologists, or their
subspecialty associates, in the United States. We expect to begin establishing a sales force
as we approach commercialization of the first of such products. We believe that by
developing a small sales group dedicated to interacting with disease-specific physicians in
the respiratory field, we can create greater value from our products for our shareholders.
For markets where maximizing sales of the product would depend on marketing to primary
healthcare providers that are only addressable with a large sales force, we plan to enter
into co-marketing arrangements. We also intend to establish collaborative relationships to
commercialize our products in cases where we cannot meet these goals with a small sales
force or when we need collaborators with relevant expertise and capabilities, such as the
ability to address international markets. Through such collaborations, we may also utilize
our collaborators resources and expertise to conduct large late-stage clinical development. |
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Exploit the broad applicability of our delivery technology through product development
collaborations. We continue to believe that companies can benefit by collaborating with us
when our proprietary delivery technologies create new pharmaceutical and biologics products.
We intend to continue to exploit the broad applicability of our delivery technologies for
systemic applications of our validated technologies in collaborations with companies and
organizations that will fund development and commercialization. We intend to continue to
out-license technologies and product opportunities that we have already developed to a
certain stage and that are outside of our core strategic focus. Collaborations and
out-licensing may generate additional revenues while we progress towards the development and
potential launch of our own proprietary products. |
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Outsource manufacturing activities. We intend to outsource the late stage clinical and
commercial scale manufacturing of our products to conserve our capital for product
development. We believe that the required late stage clinical and commercial manufacturing
capacity can be obtained from contract manufacturers. With this approach, we seek
manufacturers whose expertise should allow us to reduce risk and the costs normally incurred
if we were to build, operate and maintain large-scale production facilities ourselves. |
Proprietary Programs Under Development
Liposomal Ciprofloxacin
Ciprofloxacin has been approved by the FDA as an 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. Our novel sustained
release formulation of ciprofloxacin provides high and prolonged concentrations of the antibiotic
within the infected sputum from the lung while reducing systemic exposure. We believe the latter
may reduce the frequency and severity of the 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 gradually upon contact with fluid covering the airways and the lung. In an animal
experiment, ciprofloxacin delivered to the lungs 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 post dosing. 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 under development three disease indications for this formulation that
share much of the laboratory and production development efforts, as well as a common safety data
base.
ARD-3100 Liposomal Ciprofloxacin for the Treatment of Infections in Cystic Fibrosis (CF)
Patients
One of our programs uses our proprietary liposomal formulation of ciprofloxacin for the
treatment and control of respiratory infections common to patients with cystic fibrosis, or CF. 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.
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
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of ciprofloxacin are approved for the treatment of Pseudomonas aeruginosa, a lung infection to
which CF patients are vulnerable. Currently, there is only one inhaled antibiotic approved for the
treatment of this infection which is given twice a day by nebulization. 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. We think that once a day dosing of inhaled liposomal
ciprofloxacin could also be a welcome reduction in the burden of therapy for this patient
population. We have received orphan drug designation from the FDA for this product for the
management of CF.
We believe we have the preclinical development, clinical and regulatory expertise to advance
this product through development. We intend to retain marketing or co-marketing rights for the
inhaled liposomal ciprofloxacin formulations in at least one of the major markets such as United
States or the European Union.
Development
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 from liposomes, supporting once daily dosing; 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 a reduction of the incidence and severity of systemic
side effects of ciprofloxacin and to be less likely to lead to systemic emergence of resistant
micro-organisms. Further, we believe that once a day dosing of this product could provide a
significant reduction in the burden of therapy for CF patients and their healthcare providers.
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 of once daily
inhaled liposomal ciprofloxacin. The primary efficacy endpoint in this Phase 2a study was the
change from baseline in the sputum Pseudomonas aeruginosa colony forming units (CFU), an objective
measure of the reduction in pulmonary bacterial load. Data analysis in 21 patients who completed
the study demonstrated that the CFUs decreased by a mean 1.43 log over the 14-day treatment period
(p<0.0001). Evaluation one week after study treatment was discontinued showed that the
Pseudomonas bacterial density in the lung was still reduced from the baseline without additional
antibiotic use. Pulmonary function testing as measured by the forced expiratory volume in one
second (FEV1) showed a significant mean increase of 6.86% from baseline after 14 days of treatment
(p=0.04). The study drug was well tolerated, and there were no serious adverse events reported
during the trial.
In order to expedite anticipated time to market and increase market acceptance, we have
elected to deliver our formulation via nebulizer, as most CF patients already own a nebulizer and
are familiar with this method of drug delivery.
ARD-3100 and ARD-3150 Liposomal Ciprofloxacin for the Treatment of Infections in Non-Cystic
Fibrosis Bronchiectasis (BE) Patients
Bronchiectasis is a chronic condition characterized by abnormal dilatation of the bronchi and
bronchioles associated with chronic infection. It is frequently observed in patients with CF.
However, it is a condition that affects over 110,000 people without CF in the United States and
many more in other countries, and results from a cycle of inflammation, recurrent infection, and
bronchial wall damage. There is currently no drug specifically approved for the treatment of
non-CF bronchiectasis in the US. We were granted orphan drug designation in the US for the
management of this condition with inhaled liposomal ciprofloxacin. We believe we have the
preclinical development, clinical and regulatory expertise to advance this product through
development. We intend to retain marketing or co-marketing rights for the inhaled liposomal
ciprofloxacin formulations in the United States or another major market such as the European Union.
We have been testing two formulations of inhaled liposomal ciprofloxacin (ARD-3100 and ARD-3150)
that differ in the proportion of rapidly available and slow release ciprofloxacin.
Development
Pre-clinical activities described above for ARD-3100 are also utilized by the ARD-3150
program.
In December 2008, we completed an open-label, four week treatment study of efficacy, safety
and tolerability of once daily inhaled liposomal ciprofloxacin formulation ARD-3100 in patients
with non-CF bronchiectasis. The study was conducted at eight leading centers in the United Kingdom
and enrolled a total of 36 patients. The patients were randomized into two equal size groups, one
receiving 3 mL of inhaled liposomal ciprofloxacin and the other receiving 6 mL of inhaled liposomal
ciprofloxacin, once-a-day for the
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four-week treatment period. The primary efficacy endpoint was the change from baseline in the
sputum Pseudomonas aeruginosa CFU, the standard objective measure of the reduction in pulmonary
bacterial load. The 3 mL and 6 mL doses of inhaled liposomal ciprofloxacin in the evaluable patient
population demonstrated significant mean decreases against baseline in the Pseudomonas aeruginosa
CFUs over the 28-day treatment period of 3.5 log (p<0.001) and 4.0 log (p<0.001) units,
respectively.
With regard to safety, there were no statistically significant changes in lung function for
the evaluable patient population at the end of treatment as measured by the normalized forced
expiratory volume in one second (FEV1% predicted). Inhaled liposomal ciprofloxacin was well
tolerated: no bronchodilator use was mandated or needed before administration of the study drug. In
the 3 mL group, respiratory drug-related adverse reactions were only mild. Three serious adverse
events were observed in each dose group, with only one of the six classified as possibly
drug-related in the 6 mL group. This particular patient suffered from a recurrent episode of a
viral infection (shingles) early in the treatment period that might have been a confounding factor
leading ultimately to a respiratory exacerbation requiring hospitalization.
In November 2009, the first patient was dosed in the ORBIT-2 (Once-daily Respiratory
Bronchiectasis Inhalation Treatment) trial, a 6-month, multicenter, international Phase 2b clinical
trial of inhaled ciprofloxacin with the ARD-3150 formulation in 40 adult patients with non-cystic
fibrosis bronchiectasis. The randomized, double-blind, placebo-controlled trial is being conducted
in Australia and New Zealand. Following a 14 day screening period, the patients will be treated
once-a-day for 28 days with either the active drug, or placebo, followed by a 28 day off-treatment
period. This on-off sequence will be repeated three times. The primary endpoint is defined as the
mean change in Pseudomonas aeruginosa density in sputum (colony forming units CFU per gram)
from baseline to day 28 of the active treatment group versus placebo. Safety and tolerability
assessments of the treatment versus placebo group will be performed and secondary efficacy
endpoints will include long term microbiological responses, time to an exacerbation, severity of
exacerbations, length of time to resolve exacerbations, and changes in spirometry and in quality of
life measurements.
ORBIT-2 will explore whether the novel formulation ARD-3150, which has a different drug
release profile than ARD-3100, may have additional therapeutic benefits. We expect that the 6-month
study will also generate valuable data on the long term impact of once daily inhaled ciprofloxacin
in patients with severe bronchiectasis.
In February 2010, the first patient was dosed in the U.S. as part of the ORBIT-1 trial, an
international, randomized, double-blind, placebo-controlled Phase 2b study designed to evaluate
inhaled liposomal ciprofloxacin with the ARD-3100 formulation in patients with BE under a U.S. IND.
The ORBIT-1 trial will randomize 96 patients, who will receive for four weeks, either one of two
different once-daily inhaled doses (100 or 150 mg ciprofloxacin delivered by inhalation as 2 or 3
mL of liposomal dispersion, respectively) or once-daily inhaled placebo. The primary efficacy
endpoint will be the change from baseline in sputum Pseudomonas aeruginosa colony forming units
(CFUs). Secondary endpoints will include quality of life measurements and improvement of outcomes
with respect to exacerbations. Lung function changes will be monitored for safety.
The results from each of these trials, expected in the second half of 2010, will produce an
extensive data base of information from which we hope to select the optimum product and the most
appropriate endpoints to test in Phase 3. In order to expedite anticipated time to market and
increase market acceptance, we have elected to deliver our formulations via an approved,
widely-accepted nebulizer system for each of these Phase 2b trials.
The CF and BE programs incorporate formulation and manufacturing processes and the early
preclinical safety data developed for our inhalation anthrax program discussed below. We believe
our inhaled liposomal ciprofloxacin could also be explored for the treatment of other serious
respiratory infections, such as those occurring in asthma and severe COPD patients.
We intend to finalize development plans and budgets for the CF and BE programs in conjunction
with discussions with the FDA. We are seeking partnerships for these programs in order to reduce
the overall cost to us of development and to bring additional expertise for the global development
and commercialization of inhaled liposomal ciprofloxacin for multiple indications.
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 then 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 and other types of inhaled bacterial (e.g. tularemia and plague) bioterror
agents represents a real and current threat.
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Ciprofloxacin has been 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
received funding from the Defence Research and Development Canada, or DRDC, a division of the
Canadian Department of National Defence. We believe that our product candidate may be able to
deliver a long-acting formulation of ciprofloxacin directly into the lung and could potentially
have fewer side effects and be more effective to prevent and treat inhalation anthrax and other
inhaled bacterial bioterrorism agents than currently available therapies.
Development
We began our research into liposomal ciprofloxacin for the treatment of inhalation anthrax
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 Francisella
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 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 has provided funding for our development efforts to date and additional development of this
program is dependent on negotiating for and obtaining additional funding from DRDC or other
collaborators or sources of funding. We plan to use our preclinical and clinical safety data from
our BE and CF programs to supplement the data needed to have this product candidate considered for
approval for use in treating inhalation anthrax and possibly tularemia and plague.
If we can obtain sufficient additional funding, we would anticipate developing this drug for
approval under FDA regulations relating to the approval of new drugs or biologics for potentially
fatal diseases where human studies cannot be conducted ethically or practically. Unlike most drugs,
which require large, well controlled Phase 3 clinical trials in patients with the disease or
condition being targeted, 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.
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 Organizations (WHO) recent report
states that tobacco smoking is the single most preventable cause of death in the world today.
Already tobacco kills more than five million people per year more than tuberculosis, HIV/AIDS and
malaria combined. The WHO warns that by 2030, the death toll could exceed eight million a year.
Unless urgent action is taken, tobacco could kill one billion people during this century. According
to the National Institute on Drug Abuse, more than $75 billion of total U.S. healthcare costs each
year is attributable directly to smoking. However, this cost is well below the total cost to
society because it does not include burn care from smoking-related fires, perinatal care for low
birth-weight infants of mothers who smoke, and medical care costs associated with disease caused by
secondhand smoke. In addition to healthcare costs, the costs of lost productivity due to smoking
effects are estimated at $82 billion per year, bringing a conservative estimate of the economic
burden of smoking to more than $150 billion per year.
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 often
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.
Development
The initial laboratory work on this program was partly funded under grants from the National
Institutes of Health.
We have encouraging data from our 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
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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 seeking collaborations with government and
non-government organizations to further develop this product.
Other Potential Applications
We have demonstrated in human clinical trials to date effective deposition and, where
required, systemic absorption of a wide variety of drugs, including small molecules, peptides and
proteins, using our AERx delivery system. In particular, Aradigm and its former collaboration
partner Novo Nordisk generated a substantial amount of preclinical and clinical data on the
delivery of insulin using the AERx inhaler for the treatment of Type I and Type II diabetes. In
October 2008, Novo Nordisk transferred to us, at no charge, a portfolio of inhaled insulin related
patents pursuant to a license agreement between us and Novo that was terminated in May 2008. The
portfolio includes both U.S. and foreign patents. In addition to the patent portfolio, Novo
transferred to us a significant preclinical safety database that was developed during the
Aradigm/Novo Nordisk collaboration, the rights to a miniaturized second-generation AERx electronic
insulin inhaler and data from Novos inhaled insulin clinical program, which included nine Phase 3
trials in Type 1 and Type 2 diabetes patients. We continue to maintain the intellectual property
portfolio related to inhaled insulin and seek to license or sell this asset.
We are regularly examining our previously conducted preclinical and clinical programs to
identify product candidates that may be suitable for further development consistent with our
current business strategy. We previously demonstrated the feasibility of delivering a variety of
small molecules, peptides, oligonucleotides, proteins and gene therapies via our proprietary AERx
delivery system but we have not been able to continue their development due to a variety of
reasons, most notably the lack of funding provided from collaborators. We seek to identify
partners who may wish to license or buy these assets, in order to raise non-dilutive capital from
these non-core assets.
Zogenix DosePro Technology
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 DosePro*). In conjunction
with the sale, we received a $4 million initial payment from Zogenix, with an additional milestone
payment of $4 million and royalty payments payable upon any commercialization of products in the
U.S. and other countries, including the European Union, developed and sold using the DosePro
technology.
In December 2007, Zogenix submitted a New Drug Application, or NDA, with the U.S. FDA for the
migraine drug sumatriptan using the needle-free injector DosePro, branded as SUMAVEL* DosePro. The
NDA was accepted for filing by the FDA in March 2008. Also 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.
In July 2009, Zogenix was granted approval by the FDA of the SUMAVEL DosePro (sumatriptan
injection) needle-free delivery system for the treatment of acute migraine and cluster headache. In
August 2009, Zogenix and Astellas Pharma US, Inc. entered into an exclusive co-promotion agreement
in the U.S. for the SUMAVEL DosePro needle-free delivery system. Under the announced terms of the
agreement, Zogenix and Astellas will collaborate on the promotion and marketing of SUMAVEL DosePro
with Zogenix focusing their sales activities primarily on the neurology market while Astellas will
focus mostly on primary care physicians. Zogenix will have responsibility for manufacturing and
distribution of the product.
In October 2009, Zogenix and Desitin announced that Desitin has filed for European regulatory
approval of SUMAVEL DosePro needle-free delivery system following the successful completion of a
European pivotal bioequivalence trial. We will be entitled to receive royalty payments upon the
commercialization of SUMAVEL DosePro in the European Union.
On January 13, 2010, Zogenix and Astellas announced the U.S. commercial launch of SUMAVEL
DosePro. In February 2010, we received from Zogenix the $4 million milestone payable upon the
initial commercialization of SUMAVEL DosePro and we will earn quarterly royalty payments on all
SUMAVEL DosePro sales beginning with the quarter ended March 31, 2010.
Pulmonary Drug Delivery Background
Pulmonary delivery describes the delivery of drugs by inhalation and is a common method of
treatment of many respiratory diseases, including asthma, chronic bronchitis, cystic fibrosis and
bronchiectasis. The current global market for inhalation products
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includes delivery through metered-dose inhalers, dry powder inhalers and nebulizers. The
advantage of inhalation delivery for the diagnosis, prevention and treatment of lung disease is
that the active agent is delivered in high concentration directly to the desired targets in the
respiratory tract while keeping the bodys exposure to the rest of the drug, and resulting side
effects, at a minimum. Over the last two decades, there has also been increased interest in the use
of the inhalation route for systemic delivery of drugs throughout the body, either for the purpose
of rapid onset of action or to enable noninvasive delivery of drugs that are not orally
bioavailable.
The AERx Delivery Technology
The AERx delivery technology provides an efficient and reproducible means of targeting drugs
to the diseased parts of the lung, or to the lung for systemic absorption, through a combination of
fine mist generation technology and breath control mechanisms. Similar to nebulizers, the AERx
delivery technology is capable of generating aerosols from simple liquid drug formulations,
avoiding the need to develop complex dry powder or other formulations. However, in contrast to
nebulizers, AERx is a hand-held unit that can deliver the required dosage typically in one or two
breaths in a matter of seconds due to its enhanced efficiency compared to nebulization treatments,
which commonly last about 15 minutes. We believe the ability to make small micron-size droplets
from a hand-held device that incorporates breath control will be the preferred method of delivery
for many medications.
We have demonstrated in the laboratory and in many human clinical trials that our AERx
delivery system enables pulmonary delivery of a wide range of pharmaceuticals in liquid
formulations for local or systemic effects. Our proprietary technologies focus principally on
delivering liquid medications through small particle aerosol generation and controlling patient
inhalation technique for efficient and reproducible delivery of the aerosol drug to the deep lung.
We have developed these proprietary technologies through an integrated approach that combines
expertise in physics, engineering and pharmaceutical sciences.
The various forms of our AERx technology have been extensively tested in the laboratory and in
over 50 human clinical trials with 19 different small molecules, peptides and proteins. We also
conducted two human clinical trials (with treprostinil and with nicotine) with the latest version
of our inhalation technology, the AERx Essence® system. This system retains the key features of
breath control and aerosol quality of the previous generations of the AERx technology, but the
patient is provided with a much smaller, palm-sized device. The device is easy to use and maintain
and it does not require any batteries or external electrical power.
In June 2009, we received a notice from United Therapeutics Corporation, on behalf of their
wholly-owned subsidiary Lung Rx, Inc., seeking to terminate the Exclusive License, Development and
Commercialization Agreement (the Lung Rx Agreement), which was a collaboration agreement to
develop and commercialize inhaled treprostinil using our AERx Essence technology for the treatment
of pulmonary arterial hypertension and other potential therapeutic indications. Shortly
thereafter, we suspended all development of the AERx delivery system and terminated all employees
solely dedicated to working on this technology. In addition, we reviewed AERx production fixed
assets for impairment and recorded a $1.6 million impairment charge during the quarter ended
September 30, 2009. While the development of our AERx product candidate is currently dormant, we
believe that we could restart the development effort if sufficient funding or a collaboration is
secured. We seek to identify partners who may wish to license or buy this asset in order to raise
non-dilutive capital.
Formulation Technologies
We have a number of formulation technologies for drugs delivered by inhalation. We have
proprietary knowledge and trade secrets relating to the formulation of drugs to achieve products
with adequate stability and safety, and for the manufacture and testing of inhaled drug
formulations. We have been exploring the use of liposomal formulations of drugs that may be used
for the prevention and treatment of respiratory diseases. Liposomes 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. We are developing liposomal formulations
specifically for those drugs that currently need to be dosed several times a day, or when the slow
release of the drug is likely to improve the efficacy and safety profile. We believe a liposomal
formulation will provide extended duration of protection and treatment against lung infection,
greater convenience for the patient and reduced systemic levels of the drug. The formulation may
also enable better interaction of the drug with the disease target, potentially leading to greater
efficacy. We have applied this technology to ciprofloxacin and treprostinil. We are also examining
other potential applications of this formulation technology for respiratory therapies.
Intellectual Property and Other Proprietary Rights
Our success will depend, to a significant extent, on our ability to obtain, expand and protect
our intellectual property estate, enforce patents, maintain trade secret protection and operate
without infringing the proprietary rights of other parties. As of February 28, 2010, we had 97
issued United States patents, with 36 additional United States patent applications pending. In
addition, we had 102 issued
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foreign patents and additional 78 foreign patent applications pending. The bulk of our
patents and patent applications contain claims directed toward our proprietary delivery
technologies, 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 have purchased three United States patents
containing claims that are relevant to our inhalation technologies. The bulk of our patents,
including fundamental patents directed toward our proprietary AERx delivery technology, expire
between 2013 and 2023. For certain of our formulation technologies we have in-licensed some
technology and will seek to supplement such intellectual property rights with complementary
proprietary processes, methods and formulation technologies, including through patent applications
and trade secret protection. Because patent positions can be highly uncertain and frequently
involve complex legal and factual questions, the breadth of claims obtained in any application or
the enforceability of our patents cannot be predicted.
In December 2004, as part of our research and development efforts funded by the DRDC for the
development of liposomal ciprofloxacin for the treatment of biological terrorism-related inhalation
anthrax, we obtained worldwide exclusive rights to a patented liposomal formulation technology for
the pulmonary delivery of ciprofloxacin from Tekmira Pharmaceuticals Corporation, formerly known as
Inex Pharmaceuticals Corporation, and may have the ability to expand the exclusive license to other
fields. We do not use Tekmiras liposomal formulation technology and developed our own proprietary
technology for our liposomal ciprofloxacin program.
We seek to protect our proprietary position by protecting inventions that we determine are or
may be important to our business. We do this, when we are able, through the filing of patent
applications with claims directed toward the devices, methods and technologies we develop. Our
ability to compete effectively will depend to a significant extent on our ability and the ability
of our collaborators 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 or, to the extent
patents have been issued or will be issued, these patents may be subjected to further proceedings
limiting their scope and may in any event not contain claims broad enough to provide meaningful
protection. Patents that are issued to us or our collaborators may not provide significant
proprietary protection or competitive advantage, and may be circumvented or invalidated.
We also rely on our trade secrets and the know-how of our officers, employees, consultants and
other service providers. Our policy is to require our officers, employees, consultants and advisors
to execute proprietary information and invention assignment agreements upon commencement of their
relationships with us. These agreements provide that all confidential information developed or made
known to the individual during the course of the relationship shall be kept confidential except in
specified circumstances. These agreements also provide that all inventions developed by the
individual on behalf of us shall be assigned to us and that the individual will cooperate with us
in connection with securing patent protection for the invention if we wish to pursue such
protection. These agreements may not provide meaningful protection for our inventions, trade
secrets or other proprietary information in the event of unauthorized use or disclosure of such
information.
We also execute confidentiality agreements with outside collaborators and consultants.
However, disputes may arise as to the ownership of proprietary rights to the extent that outside
collaborators or consultants apply technological information developed independently by them or
others to our projects, or apply our technology or proprietary information to other projects, and
any such disputes may not be resolved in our favor. Even if resolved in our favor, such disputes
could result in substantial expense and diversion of management attention.
In addition to protecting our own intellectual property rights, 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, methods of delivery and products in those
markets, it may be difficult for us to develop products without infringing the proprietary rights
of others.
We would incur substantial costs if we are required to defend ourselves in suits, regardless
of their merit. These legal actions could seek damages and seek to enjoin development, testing,
manufacturing and marketing of the allegedly infringing product. In addition to potential
liability for significant damages, we could be required to obtain a license to continue to
manufacture or market the allegedly infringing product and any license required under any such
patent may not be available to us on acceptable terms, if at all.
We may determine that litigation is necessary to enforce our proprietary rights against
others. Such litigation could result in substantial expense and diversion of management attention,
regardless of its outcome and any litigation may not be resolved in our favor.
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Competition
We are in a highly competitive industry. We are in competition with pharmaceutical and
biotechnology companies, hospitals, research organizations, individual scientists and nonprofit
organizations engaged in the development of drugs and other therapies for the respiratory disease
indications we are targeting. Our competitors may succeed, and many have already succeeded, in
developing competing products, obtaining FDA approval for products or gaining patient and physician
acceptance of products before us for the same markets and indications that we are targeting. Many
of these companies, and large pharmaceutical companies in particular, have greater research and
development, regulatory, manufacturing, marketing, financial and managerial resources and
experience than we have and many of these companies may have products and product candidates that
are in a more advanced stage of development than our product candidates. If we are not first to
market for a particular indication, it may be more difficult for us or our collaborators to enter
markets unless we can demonstrate our products are clearly superior to existing therapies.
Examples of competitive therapies include:
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ARD-3100 and ARD-3150. There is no product approved in the United States specifically
for the treatment of bronchiectasis. Currently marketed inhaled antibiotics for the
management of infections associated with cystic fibrosis are TOBI* marketed by Novartis and
Cayston* marketed by Gilead Sciences. Inhaled products under development to treat
respiratory infections in CF and non-CF BE include dry powder tobramycin under development
by Novartis, dry powder ciprofloxacin by Bayer, liposomal amikacin by Transave,
levofloxacin by Mpex Pharmaceuticals and liposomal tobramycin by Axentis. Bayer was granted
orphan drug designation in the U.S. and in the European Union for their inhaled
ciprofloxacin product in development for the treatment of infections associated with cystic
fibrosis. |
Several of these products have substantial current sales and long histories of effective and
safe use. In addition, we believe there are a number of additional drug candidates in various
stages of development that, if approved, could compete with any future products we may develop.
Moreover, one or more of our competitors that have developed or are developing pulmonary drug
delivery technologies, such as Alkermes, MAP, Mannkind or Alexza Pharmaceuticals, or other
competitors with alternative drug delivery methods, may negatively impact our potential competitive
position.
We believe that our respiratory expertise and pulmonary delivery and formulation technologies
provide us with an important competitive advantage for our potential products. We intend to compete
by developing products that are safer, more efficacious, more convenient, less costly, earlier to
market, marketed with smaller sales forces or cheaper to develop than existing products, or any
combination of the foregoing.
Government Regulation
United States
The research, development, testing, manufacturing, labeling, advertising, promotion,
distribution, marketing and export, among other things, of any products we develop are subject to
extensive regulation by governmental authorities in the United States and other countries. The FDA
regulates drugs in the United States under the FDCA and implementing regulations thereunder.
If we fail to comply with the FDCA or FDA regulations, we and our products could be subject to
regulatory actions. These may include delay in approval or refusal by the FDA to approve pending
applications, injunctions ordering us to stop sale of any products we develop, seizure of our
products, warning letters, imposition of civil penalties or other monetary payments, criminal
prosecution, and recall of our products. Any such events would harm our reputation and our results
of operations.
Before one of our drugs may be marketed in the United States, it must be approved by the FDA.
None of our product candidates has received such approval. We believe that our products currently
in development will be regulated by the FDA as drugs.
The steps required before a drug may be approved for marketing in the United States generally
include:
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preclinical laboratory and animal tests, and formulation studies; |
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the submission to the FDA of an Investigational New Drug application, or IND, for human
clinical testing that must become effective before human clinical trials may begin; |
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adequate and well controlled human clinical trials to establish the safety and efficacy
of the product candidate for each indication for which approval is sought;
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the submission to the FDA of a New Drug Application, or NDA, and FDAs acceptance of the
NDA for filing; |
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satisfactory completion of an FDA inspection of the manufacturing facilities at which the
product is to be produced to assess compliance with the FDAs Good Manufacturing Practices,
or GMP; and |
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FDA review and approval of the NDA. |
Preclinical Testing
The testing and approval process requires substantial time, effort, and financial resources,
and the receipt and timing of approval, if any, is highly uncertain. Preclinical tests include
laboratory evaluations of product chemistry, toxicity, and formulation, as well as animal studies.
The results of the preclinical studies, together with manufacturing information and analytical
data, are submitted to the FDA as part of the IND. The IND automatically becomes effective 30 days
after receipt by the FDA, unless the FDA raises concerns or questions about the conduct of the
proposed clinical trials as outlined in the IND prior to that time. In such a case, the IND
sponsor and the FDA must resolve any outstanding FDA concerns or questions before clinical trials
can proceed. Submission of an IND may not result in FDA authorization to commence clinical trials.
Once an IND is in effect, the protocol for each clinical trial to be conducted under the IND must
be submitted to the FDA, which may or may not allow the trial to proceed.
In July 2009, we received clearance from the FDA for our IND for inhaled liposomal
ciprofloxacin for the treatment of non-cystic fibrosis bronchiectasis.
Clinical Trials
Clinical trials involve the administration of the investigational drug to human subjects under
the supervision of qualified investigators and healthcare personnel. Clinical trials are conducted
under protocols detailing, for example, the parameters to be used in monitoring patient safety and
the safety and effectiveness criteria, or end points, to be evaluated. Clinical trials are
typically conducted in three defined phases, but the phases may overlap or be combined. Each trial
must be reviewed and approved by an independent institutional review board overseeing the
institution conducting the trial before it can begin.
These phases generally include the following:
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Phase 1. Phase 1 clinical trials usually involve the initial introduction of the drug
into human subjects, frequently healthy volunteers. In Phase 1, the drug is usually
evaluated for safety, including adverse effects, dosage tolerance, absorption, distribution,
metabolism, excretion and pharmacodynamics. |
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Phase 2. Phase 2 usually involves studies in a limited patient population with the
disease or condition for which the drug is being developed to (1) preliminarily evaluate the
efficacy of the drug for specific, targeted indications; (2) determine dosage tolerance and
appropriate dosage; and (3) identify possible adverse effects and safety risks. |
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Phase 3. If a drug is found to be potentially effective and to have an acceptable safety
profile in Phase 2 studies, the clinical trial program will be expanded, usually to further
evaluate clinical efficacy and safety by administering the drug in its final form to an
expanded patient population at geographically dispersed clinical trial sites. Phase 3
studies usually include several hundred to several thousand patients. |
In November 2009, the first patient was dosed in the ORBIT-2 (Once-daily Respiratory
Bronchiectasis Inhalation Treatment) trial, a 6-month, multicenter, international Phase 2b clinical
trial of inhaled ciprofloxacin (ARD-3150) in 40 adult patients with non-cystic fibrosis
bronchiectasis.
In February 2010, the first patient was dosed in the U.S. as part of the ORBIT-1 trial, an
international, randomized, double-blind, placebo-controlled Phase 2b study designed to evaluate
inhaled liposomal ciprofloxacin (ARD-3100) in 96 patients with non-cystic fibrosis bronchiectasis
under a U.S. IND.
Phase 1, Phase 2, or Phase 3 clinical trials may not be completed successfully within any
specified period of time, if at all. Further, we or the FDA may suspend clinical trials at any
time on various grounds, including a finding that the patients are being exposed to an unacceptable
health risk.
Assuming successful completion of the required clinical testing, the results of preclinical
studies and clinical trials, together with detailed information on the manufacture and composition
of the product, are submitted to the FDA in the form of an NDA requesting approval to market the
product for one or more indications. Before approving an application, the FDA usually will inspect
the facility
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or facilities at which the product is manufactured, and will not approve the product unless
continuing GMP compliance is satisfactory. If the FDA determines the NDA is not acceptable, the FDA
may outline the deficiencies in the NDA and often will request additional information or additional
clinical trials. Notwithstanding the submission of any requested additional testing or information,
the FDA ultimately may decide that the application does not satisfy the regulatory criteria for
approval.
If regulatory approval of a product is granted, such approval will usually entail limitations
on the indicated uses for which the product may be marketed. Once approved, the FDA may withdraw
the product approval if compliance with pre- and post-marketing regulatory requirements and
conditions of approvals are not maintained, if GMP compliance is not maintained or if problems
occur after the product reaches the marketplace. In addition, the FDA may require post-marketing
studies, referred to as Phase 4 studies, to monitor the effect of approved products and may limit
further marketing of the product based on the results of these post-marketing studies.
After approval, certain changes to the approved product, such as adding new indications,
certain manufacturing changes, or additional labeling claims are subject to further FDA review and
approval. Post-approval marketing of products can lead to new findings about the safety or efficacy
of the products. This information can lead to a product sponsor making, or the FDA requiring,
changes in the labeling of the product or even the withdrawal of the product from the market.
Section 505(b)(2) Applications
Some of our product candidates may be eligible for submission of applications for approval
under the FDAs Section 505(b)(2) approval process, which requires less information than the NDAs
described above. Section 505(b)(2) applications may be submitted for drug products that represent
a modification (e.g., a new indication or new dosage form) of an eligible approved drug and for
which investigations other than bioavailability or bioequivalence studies are essential to the
drugs approval. Section 505(b)(2) applications may rely on the FDAs previous findings for the
safety and effectiveness of the listed drug, scientific literature, and information obtained by the
505(b)(2) applicant needed to support the modification of the listed drug. For this reason,
preparing Section 505(b)(2) applications is generally less costly and time-consuming than preparing
an NDA based entirely on new data and information from a full set of clinical trials. The law
governing Section 505(b)(2) or FDAs current policies may change in such a way as to adversely
affect our applications for approval that seek to utilize the Section 505(b)(2) approach. Such
changes could result in additional costs associated with additional studies or clinical trials and
delays.
The FDCA provides that reviews and/or approvals of applications submitted under Section
505(b)(2) may be delayed in various circumstances. For example, the holder of the NDA for the
listed drug may be entitled to a period of market exclusivity, during which the FDA will not
approve, and may not even review a Section 505(b)(2) application from other sponsors. If the
listed drug is claimed by a patent that the NDA holder has listed with the FDA, the Section
505(b)(2) applicant must submit a patent certification. If the 505(b)(2) applicant certifies that
the patent is invalid, unenforceable, or not infringed by the product that is the subject of the
Section 505(b)(2), and the 505(b)(2) applicant is sued within 45 days of its notice to the entity
that holds the approval for the listed drug and the patent holder, the FDA will not approve the
Section 505(b)(2) application until the earlier of a court decision favorable to the Section
505(b)(2) applicant or the expiration of 30 months. The regulations governing marketing
exclusivity and patent protection are complex, and it is often unclear how they will be applied in
particular circumstances.
In addition, both before and after approval is sought, we are required to comply with a number
of FDA requirements. For example, we are required to report certain adverse reactions and
production problems, if any, to the FDA, and to comply with certain limitations and other
requirements concerning advertising and promotion for our products. Also, quality control and
manufacturing procedures must continue to conform to continuing GMP after approval, and the FDA
periodically inspects manufacturing facilities to assess compliance with continuing GMP. In
addition, discovery of problems, such as safety problems, may result in changes in labeling or
restrictions on a product manufacturer or NDA holder, including removal of the product from the
market.
Orphan Drug Designation
The FDA may grant orphan drug designation to drugs intended to treat a rare disease or
condition which generally is a disease or condition that affects fewer than 200,000 individuals in
the United States. A sponsor may request orphan drug designation of a previously unapproved drug,
or of a new indication for an already marketed drug. Orphan drug designation must be requested
before an NDA is submitted. If the FDA grants orphan drug designation, which it may not, the
identity of the therapeutic agent and its potential orphan status are publicly disclosed by the
FDA. Orphan drug designation does not convey an advantage in, or shorten the duration of, the
review and approval process. If a drug which has orphan drug designation subsequently receives the
first FDA approval for the indication for which it has such designation, the drug is entitled to
orphan drug exclusivity, meaning that the FDA may not approve any other applications to market the
same drug for the same indication for a period of seven years, unless the subsequent application is
able to demonstrate clinical superiority in efficacy or safety. Orphan drug designation does not
prevent competitors from developing or marketing different drugs for that indication, or the same
drug for other indications.
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We have obtained orphan drug designation from the FDA for inhaled liposomal ciprofloxacin for
the management of cystic fibrosis and non-cystic fibrosis bronchiectasis. We may seek orphan drug
designation for other eligible product candidates we develop. However, our liposomal ciprofloxacin
may not receive orphan drug marketing exclusivity. Also, it is possible that our competitors could
obtain approval, and attendant orphan drug designation or exclusivity, for products that would
preclude us from marketing our liposomal ciprofloxacin for this indication for some time.
Foreign regulatory authorities may also provide for orphan drug designations in countries
outside the United States. For example, under European guidelines, Orphan Medicinal Product
Designation provides 10 years of potential market exclusivity if the product candidate is the first
product candidate for the indication approved for marketing in the European Union. Orphan drug
designation also allows the candidates sponsor to seek assistance from the European Medicines
Agency (EMEA) in optimizing the candidates clinical development through participation in designing
the clinical protocol and preparing the marketing application. Additionally, a drug candidate
designated by the Commission as an Orphan Medicinal Product may qualify for a reduction in
regulatory fees as well as a European Union-funded research grant.
In August 2009, the EMEA granted Orphan Drug Designation to our inhaled liposomal
ciprofloxacin drug product candidate for the treatment of lung infections associated with cystic
fibrosis.
International Regulation
We are also subject to foreign regulatory requirements governing clinical trials, product
manufacturing, marketing and product sales. Our ability to market and sell our products in
countries outside the United States will depend upon receiving marketing authorization(s) from
appropriate regulatory authorities. We will only be permitted to commercialize our products in a
foreign country if the appropriate regulatory authority is satisfied that we have presented
adequate evidence of safety, quality and efficacy. Whether or not FDA approval has been obtained,
approval of a product by the comparable regulatory authorities of foreign countries must be
obtained prior to the commencement of marketing of the product in those countries. Approval of a
product by the FDA does not assure approval by foreign regulators. Regulatory requirements, and
the approval process, vary widely from country to country, and the time, cost and data needed to
secure approval may be longer or shorter than that required for FDA approval. The regulatory
approval and oversight process in other countries includes all of the risks associated with the FDA
process described above.
Scientific Advisory Board
We have assembled a scientific advisory board comprised of scientific and product development
advisors who provide expertise, on a consulting basis from time to time, in the areas of
respiratory diseases, allergy and immunology, pharmaceutical development and drug delivery,
including pulmonary delivery, but are employed elsewhere on a full-time basis. As a result, they
can only spend a limited amount of time on our affairs. We access scientific and medical experts
in academia, as needed, to support our scientific advisory board. The scientific advisory board
assists us on issues related to potential product applications, product development and clinical
testing. Its members, and their affiliations and areas of expertise, include:
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Area of Expertise |
Peter R. Byron, Ph.D.
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Medical College of Virginia, Virginia
Commonwealth University
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Aerosol Science/Pharmaceutics |
Peter S. Creticos, M.D.
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The Johns Hopkins University School
of Medicine
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Allergy/Immunology/Asthma |
Stephen J. Farr, Ph.D.
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Zogenix, Inc.
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Pulmonary Delivery/Pharmaceutics |
Michael Konstan, M.D.
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Rainbow Babies and Childrens Hospital
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Pulmonary Diseases/Cystic Fibrosis |
Babatunde Otulana, M.D.
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Aerovance, Inc.
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Pulmonary Diseases/Cystic
Fibrosis/Regulatory |
Adam Wanner, M.D.
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University of Miami
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Chronic Obstructive Pulmonary
Diseases (COPD) |
Martin Wasserman, Ph.D.
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Roche, AtheroGenics (retired)
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Asthma |
In addition to our scientific advisory board, for certain indications and programs we assemble
groups of experts to assist us on issues specific to such indications and programs.
14
Employees
As of December 31, 2009, we had fifteen employees. Ten employees are involved in research and
development and product development and five employees are involved in finance and administration.
Five employees have advanced scientific degrees.
Our employees are not represented by any collective bargaining agreement.
We also utilize an international network of consultants and contractors, such as clinical
research organizations (CROs), clinical manufacturing organizations (CMOs) and various specialists
in areas, such as regulatory affairs and business and corporate development.
Corporate History and Website Information
We were incorporated in California in 1991. Our principal executive offices are located at
3929 Point Eden Way, Hayward, California 94545, and our main telephone number is (510) 265-9000.
Investors can obtain access to this Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q,
our Current Reports on Form 8-K and all amendments to these reports, free of charge, on our website
at http://www.aradigm.com as soon as reasonably practicable after such filings are
electronically filed with the Securities and Exchange Commission or SEC. Information contained on
our website is not part of this Annual Report on Form 10-K or of our other filings with the SEC.
The public may read and copy any material we file with the SEC at the SECs Public Reference Room
at 100 F Street, N.W., Washington, D.C., 20549. The public may obtain information on the operations
of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet
site, http://www.sec.gov that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC.
We have adopted a code of ethics, which is part of our Code of Business Conduct and Ethics
that applies to all of our employees, including our principal executive officer, our principal
financial officer and our principal accounting officer. This code of ethics is posted on our
website. If we amend or waive a provision of our Code of Business Conduct and Ethics, we would post
such amendment or waiver on our website, as required by applicable rules.
Executive Officers and Directors
Our directors and executive officers and their ages as of February 28, 2010 are as follows:
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Name |
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Age |
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Position |
Igor Gonda, Ph.D.
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62 |
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President, Chief Executive Officer and Director |
Nancy E. Pecota
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50 |
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Vice President, Finance and Chief Financial Officer |
D. Jeffery Grimes
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46 |
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Vice President, Legal Affairs, General Counsel |
Frank H. Barker(1)(2)(3)
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79 |
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Director |
John M. Siebert, Ph.D.(1)(2)(3)
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69 |
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Director |
Virgil D. Thompson(1)(2)(3)
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70 |
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Chairman of the Board and Director |
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(1) |
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Member of the Audit Committee. |
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(2) |
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Member of the Compensation Committee. |
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(3) |
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Member of the Nominating and Corporate Governance Committee. |
Igor Gonda, Ph.D. has served as our President and Chief Executive Officer since August 2006
and as a director since September 2001. From December 2001 to August 2006, Dr. Gonda was the Chief
Executive Officer and Managing Director of Acrux Limited, a publicly traded specialty
pharmaceutical company located in Melbourne, Australia. From July 2001 to December 2001, Dr. Gonda
was our Chief Scientific Officer and, from October 1995 to July 2001, was our Vice President,
Research and Development. From February 1992 to September 1995, Dr. Gonda was a Senior Scientist
and Group Leader at Genentech, Inc. His key responsibilities at Genentech were the development of
the inhalation delivery of rhDNase (Pulmozyme) for the treatment of cystic fibrosis and
non-parenteral methods of delivery of biologics. Prior to that, Dr. Gonda held academic positions
at the University of Aston in Birmingham, United Kingdom, and the University of Sydney, Australia.
Dr. Gonda holds a B.Sc. in Chemistry and a Ph.D. in Physical Chemistry from Leeds University,
United Kingdom. Dr. Gonda was the Chairman of our Scientific Advisory Board until August 2006.
Nancy E. Pecota has served as our Vice President, Finance and Chief Financial Officer since
September 2008. From October 2005 to July 2008, Ms. Pecota was the Chief Financial Officer for
NuGEN Technologies, Inc., a privately held life sciences tools company. From August 2003 to
September 2005, Ms. Pecota was a consultant for early to mid-stage biopharmaceutical companies
assisting
15
them in developing fundable business models and assessing and improving internal financial
preparation and reporting processes. From March 2001 to April 2003, she was Vice President, Finance
and Administration at Signature BioScience, Inc., a privately held biopharmaceutical company. Prior
to that, she was Director, Finance and Accounting for ACLARA BioSciences, Inc., a publicly traded
biotechnology company. Ms. Pecota holds a B.S. in Economics from San Jose State University.
D. Jeffery Grimes has served as our Vice President, Legal Affairs, General Counsel and
Secretary since June 2007. From May 2005 to June 2007, Mr. Grimes was an attorney in the Trademark
& Brands department at Intel. From May 2002 to January 2005, Mr. Grimes was Assistant General
Counsel at Connetics Corporation, a publicly-traded specialty pharmaceutical company focused on
dermatology. From February 2000 to April, 2002, he was Vice President, Corporate Counsel &
Secretary of GN ReSound, Inc. and Beltone Electronics Corporation, both subsidiaries of a
Danish-based multinational leading medical device company for hearing devices. Prior to becoming
in-house counsel, Mr. Grimes was a commercial litigator for seven years. Mr. Grimes holds
J.D./M.B.A. degrees and a B.S. in Finance from University of Colorado, Boulder. Mr. Grimes is a
member of the Biotechnology Industry Organization General Counsel Committee.
Frank H. Barker has been a director since May 1999. From January 1980 to January 1994, Mr.
Barker served as a company group chairman of Johnson & Johnson, Inc., a diversified health care
company, and was Corporate Vice President from January 1989 to January 1996. Mr. Barker retired
from Johnson & Johnson, Inc. in January 1996. Mr. Barker holds a B.A. in Business Administration
from Rollins College, Winter Park, Florida.
John M. Siebert, Ph.D. has been a director since November 2006. From May 2003 to October 2008,
Dr. Siebert was the Chairman and Chief Executive Officer of CyDex, Inc., a privately held specialty
pharmaceutical company. From September 1995 to April 2003, he was President and Chief Executive
Officer of CIMA Labs Inc., a publicly traded drug delivery company, and from July 1995 to September
1995 he was President and Chief Operating Officer of CIMA Labs. From 1992 to 1995, Dr. Siebert was
Vice President, Technical Affairs at Dey Laboratories, Inc., a privately held pharmaceutical
company. From 1988 to 1992, he worked at Bayer Corporation. Prior to that, Dr. Siebert was employed
by E.R. Squibb & Sons, Inc., G.D. Searle & Co. and The Procter & Gamble Company. Dr Siebert holds
a B.S. in Chemistry from Illinois Benedictine University, an M.S. in Organic Chemistry from Wichita
State University and a Ph.D. in Organic Chemistry from the University of Missouri. Dr. Siebert is
the Chairman of our audit committee and the designated audit committee financial expert.
Virgil D. Thompson has been a director since June 1995 and has been Chairman of the Board
since January 2005. Since July 2009, Mr. Thompson has been Chief Executive Officer and a director
of Spinnaker Biosciences, Inc., a privately held ophthalmic drug delivery company. From November
2002 until June 2007, Mr. Thompson served as President and Chief Executive Officer of Angstrom
Pharmaceuticals, Inc., a privately held pharmaceutical company. From September 2000 to November
2002, Mr. Thompson was President, Chief Executive Officer and a director of Chimeric Therapies,
Inc., a privately held biotechnology company. From May 1999 until September 2000, Mr. Thompson was
the President, Chief Operating Officer and a director of Savient Pharmaceuticals, a publicly traded
specialty pharmaceutical company. From January 1996 to April 1999, Mr. Thompson was the President
and Chief Executive Officer and a director of Cytel Corporation, a publicly traded
biopharmaceutical company that was subsequently acquired by IDM Pharma, Inc. From 1994 to 1996,
Mr. Thompson was President and Chief Executive Officer of Cibus Pharmaceuticals, Inc., a privately
held drug delivery device company. From 1991 to 1993, Mr. Thompson was President of Syntex
Laboratories, Inc., a U.S. subsidiary of Syntex Corporation, a publicly traded pharmaceutical
company. Mr. Thompson holds a B.S. in Pharmacy from Kansas University and a J.D. from The George
Washington University Law School. Mr. Thompson is a director and chairman of the board of Questcor
Pharmaceuticals, Inc., a publicly traded pharmaceutical company, and a director of Savient
Pharmaceuticals.
Except for historical information contained herein, the discussion in this Annual Report on
Form 10-K contains forward-looking statements, including, without limitation, statements regarding
timing and results of clinical trials, the establishment of corporate partnering arrangements, the
anticipated commercial introduction of our products and the timing of our cash requirements. These
forward-looking statements involve certain risks and uncertainties that could cause actual results
to differ materially from those in such forward-looking statements. Potential risks and
uncertainties include, without limitation, those mentioned in this report and in particular the
factors described below.
16
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 products require extensive research, development and pre-clinical and clinical
testing. Our potential products also may involve lengthy regulatory reviews before they can be
sold. Because none of our product candidates has yet received approval by the FDA, we cannot
assure you that our research and development efforts will be successful, any of our potential
products will be proven safe and effective or regulatory clearance or approval to sell any of our
potential products will be obtained. We cannot assure you that any of our potential products can be
manufactured in commercial quantities or at an acceptable cost or marketed successfully. We may
abandon the development of some or all of our product candidates at any time and without prior
notice. We must incur substantial up-front expenses to develop and commercialize products and
failure to achieve commercial feasibility, demonstrate safety, achieve clinical efficacy, obtain
regulatory approval or successfully manufacture and market products will negatively impact our
business.
We will need additional capital, and we may not be able to obtain it on a timely basis or at
all.
We will need to commit substantial funds to develop our product candidates and we may not be
able to obtain sufficient funds on acceptable terms or at all, especially in light of the current
difficult financing environment resulting from the worldwide economic upheaval and recession. Our
operations to date have consumed substantial amounts of cash and have generated no significant
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:
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our progress in the application of our delivery and formulation technologies, which may
require further refinement of these technologies; |
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the number of product development programs we pursue and the pace of each program; |
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our progress with formulation development; |
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the scope, rate of progress, results and costs of preclinical testing and clinical
trials; |
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the time and costs associated with seeking regulatory approvals; |
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our ability to outsource the manufacture of our product candidates and the costs of doing
so; |
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the time and costs associated with establishing in-house resources to market and sell
certain of our products; |
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our ability to establish collaborative arrangements with others and the terms of those
arrangements; |
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the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims, and |
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our need to acquire licenses, or other rights for our product candidates. |
Since inception, we have financed our operations primarily through private placements and
public offerings of our capital stock, contract research funding and interest earned on
investments. We believe that our cash and cash equivalents at December 31, 2009 plus the Zogenix
royalty milestone payment received in February 2010 and the quarterly Zogenix royalty payments will
be sufficient to fund operations at least through 2010. We will need to obtain substantial
additional funds before we would be able to bring any of our product candidates to market. Our
estimates of future capital use are uncertain, and changing circumstances, including those related
to implementation of, or further changes to, our development strategy, could cause us to consume
capital significantly faster than currently expected, and our expected sources of funding may not
be sufficient. If adequate funds are not available, we will be required to delay, reduce the scope
of, or eliminate one or more of our product development programs and reduce personnel-related
costs, or to obtain funds through arrangements with collaborators or other sources that may require
us to relinquish rights to or sell certain of our technologies or products that we would not
otherwise relinquish or sell. If we are able to obtain funds through the issuance of debt
securities or borrowing, the terms may significantly restrict our operations. If we are able to
obtain funds through the issuance of equity securities, our shareholders may suffer significant
dilution and our stock price may drop.
17
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 December 31, 2009, we have an accumulated deficit of $348.4 million. We have not
had any significant product sales and do not anticipate receiving any revenues from product sales
for at least the next few years, if ever, with the exception of the milestone and royalty revenue
from Zogenix. While our shift in development strategy has resulted in reduced operating expenses
and capital expenditures, we expect to continue to incur substantial losses over at least the next
several years as we:
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continue drug product development efforts; |
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conduct preclinical testing and clinical trials; |
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pursue additional applications for our existing delivery technologies; |
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outsource the commercial-scale production of our products; and |
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establish a sales and marketing force to commercialize certain of our proprietary
products if these products obtain regulatory approval. |
To achieve and sustain profitability, we must, alone or with others, successfully develop,
obtain regulatory approval for, manufacture, market and sell our products. We expect to incur
substantial expenses in our efforts to develop and commercialize products and we may never generate
sufficient product or contract research revenues to become profitable or to sustain profitability.
We are dependent upon Zogenix and its partners to successfully market and sell the SUMAVEL
DosePro needle-free delivery system in order to realize value from this asset.
We have no control over decisions made by Zogenix and/or its partners and collaborators on the
marketing, sale or continued development of the SUMAVEL DosePro product and any subsequent products
utilizing the DosePro technology. Any delay in, or failure to receive royalties could adversely
affect our financial position and we may not be able to find another source of cash to continue our
operations.
The results of later stage clinical trials of our product candidates may not be as favorable as
earlier trials and that could result in additional costs and delay or prevent commercialization of
our products.
Although we believe the limited and preliminary data we have regarding our potential products
are encouraging, the results of initial preclinical testing and clinical trials do not necessarily
predict the results that we will get from subsequent or more extensive preclinical testing and
clinical trials. Clinical trials of our product candidates may not demonstrate that they are safe
and effective to the extent necessary to obtain collaborative partnerships and/or 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. For example, while our Phase 2a clinical trials with inhaled liposomal ciprofloxacin
showed promising initial efficacy and safety results both in patients with cystic fibrosis and
non-cystic fibrosis bronchiectasis, there is no guarantee that the current Phase 2b program or
longer term preclinical and clinical studies and studies in larger patient populations will confirm
these results or that we will satisfy all efficacy and safety endpoints required by the regulatory
authorities for these and other indications.
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 any future collaborators can file for regulatory approval for the commercial sale
of our potential products, the FDA will require extensive preclinical safety testing and clinical
trials to demonstrate their safety and efficacy. Completing clinical trials in a timely manner
depends on, among other factors, the timely enrollment of patients. Our ability to recruit
patients depends on a number of factors, including the size of the patient population, the
proximity of patients to clinical sites, the eligibility criteria for the study and the existence
of competing clinical trials. Delays in planned patient enrollment in our current or future
clinical trials may result in increased costs, program delays, or both, and the loss of potential
revenues.
18
We are subject to extensive regulation, including the requirement of approval before any of
our product candidates can be marketed. We may not obtain regulatory approval for our product
candidates on a timely basis, or at all.
We and our products are subject to extensive and rigorous regulation by the federal
government, principally the FDA, and by state and local government agencies. Both before and after
regulatory approval, the development, testing, manufacture, quality control, labeling, storage,
approval, advertising, promotion, sale, distribution and export of our potential products are
subject to regulation. Pharmaceutical products that are marketed abroad are also subject to
regulation by foreign governments. Our products cannot be marketed in the United States without FDA
approval. The process for obtaining FDA approval for drug products is generally lengthy, expensive
and uncertain. To date, we have not sought or received approval from the FDA or any corresponding
foreign authority for any of our product candidates.
Even though we intend to apply for approval of most of our products in the United States under
Section 505(b)(2) of the United States Food, Drug and Cosmetic Act, which applies to reformulations
of approved drugs and which may require smaller and shorter safety and efficacy testing than that
for entirely new drugs, the approval process will still be costly, time-consuming and uncertain. We
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 delay or not approve our product candidates even if the product
candidates meet safety and efficacy endpoints in clinical trials or the approvals may be too
limited for us to earn sufficient revenues.
The FDA and other foreign regulatory agencies can delay approval of, or refuse to approve, our
product candidates for a variety of reasons, including failure to meet safety and / or 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
that can be long and costly. 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 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 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 may involve expensive ongoing monitoring and testing
requirements.
Because our proprietary liposomal ciprofloxacin programs rely on the FDAs and European Medicines
Agencys grant of orphan drug designation for potential market exclusivity, the product may not be
able to obtain market exclusivity and could be barred from the market in the US for up to seven
years or European Union for up to ten years.
The FDA has granted orphan drug designation for our proprietary liposomal ciprofloxacin drug
product candidate for the management of cystic fibrosis and bronchiectasis. Orphan drug
designation is intended to encourage research and development of
new therapies for diseases that affect fewer than 200,000 patients in the United States. The
designation provides the opportunity to
19
obtain market exclusivity for seven years from the date of
the FDAs approval of a new drug application, or NDA. However, the market exclusivity is granted
only to the first chemical entity to be approved by the FDA for a given indication. Therefore, if
another inhaled ciprofloxacin product were to be approved by the FDA for a cystic fibrosis or
bronchiectasis indication before our product, then we may be blocked from launching our product in
the United States for seven years, unless we are able to demonstrate to the FDA clinical
superiority of our product on the basis of safety or efficacy. For example, Bayer HealthCare is
developing an inhaled powder formulation of ciprofloxacin for the treatment of respiratory
infections in cystic fibrosis and bronchiectasis. Bayer has obtained orphan drug status for their
inhaled powder formulation of ciprofloxacin in the United States and European Union for the
treatment of cystic fibrosis.
In August 2009, the European Medicines Agency (EMEA) granted orphan drug designation to our
inhaled liposomal ciprofloxacin drug product candidate for the treatment of lung infections
associated with cystic fibrosis. Under European guidelines, Orphan Medicinal Product Designation
provides 10 years of potential market exclusivity if the product candidate is the first product
candidate for the indication approved for marketing in the European Union. We may seek to develop
additional products that incorporate drugs that have received orphan drug designations for specific
indications. In each case, if our product is not the first to be approved by the FDA or EMEA for a
given indication, we may not be able to access the target market in the United States and/or the
European Union, which would adversely affect our ability to earn revenues.
We have very limited manufacturing capacity in the company and depend on contract manufacturers
and collaborators; if they do not perform as expected, our revenues and customer relations will
suffer.
We have very limited capacity to manufacture in-house. For most of our preclinical and clinical
supplies we use contract manufacturers to produce the formulations, key components, assemblies and
subassemblies required for our product candidates. We may not be able to enter into or maintain
satisfactory contract manufacturing arrangements. For example, our agreement with Enzon
Pharmaceuticals, Inc. (Enzon) may be terminated for unforeseen reasons. In addition, Enzon
recently announced the sale its specialty pharmaceuticals division, including their contract
manufacturing operation, to an Italian pharmaceutical company, sigma-tau Group. There may be a
significant delay before we find an acceptable alternative contract manufacturer if our arrangement
with Enzon (now, sigma-tau Group) was to end.
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. 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 candidates targeted at large markets, such as the ARD-1600
(Nicotine) Tobacco Smoking Cessation Therapy, either our future collaborators or we will have to
invest significant amounts 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 unfeasible 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 and our contract manufacturers are required to comply with the FDAs GMP
requirements that relate to product testing, quality assurance, manufacturing and maintaining
records and documentation. We and 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.
Our dependence on future collaborators and other contracting parties may delay or terminate
certain of our programs, and any such delay or termination would harm our business prospects and
stock price.
Our commercialization strategy for certain of our product candidates depends on our ability to
enter into agreements with collaborators to obtain assistance and funding for the development and
potential commercialization of our product candidates. Collaborations may involve greater
uncertainty for us, as we have less control over certain aspects of our collaborative programs than
we do over our proprietary development and commercialization programs. We may determine that
continuing a collaboration under the terms provided is not in our best interest, and we may
terminate the collaboration. Our collaborators could delay or terminate their agreements, and our
products subject to collaborative arrangements may never be successfully commercialized.
Further, our future collaborators may pursue alternative technologies or develop alternative
products either on their own or in collaboration with others, including our competitors, and the
priorities or focus of our collaborators may shift such that our programs
20
receive less attention or
resources than we would like, or they may be terminated altogether. Any such actions by our
collaborators may adversely affect our business prospects and ability to earn revenues. In
addition, we could have disputes with our existing or future collaborators, such as the
interpretation of terms in our agreements. For example, we currently have a disagreement with
United Therapeutics concerning its right to terminate the Lung Rx Agreement, and we are currently
in arbitration with Lung Rx regarding this disagreement. 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.
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 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.
In order to market our proprietary products, we are likely to establish our own sales, marketing
and distribution capabilities. We have no experience in these areas, and if we have problems
establishing these capabilities, the commercialization of our products would be impaired.
We intend to establish our own sales, marketing and distribution capabilities to market
products to concentrated, easily addressable prescriber markets. We have no experience in these
areas, and developing these capabilities will require significant expenditures on personnel and
infrastructure. While we intend to market products that are aimed at a small patient population,
we may not be able to create an effective sales force around even a niche market. In addition,
some of our product candidates will require a large sales force to call on, educate and support
physicians and patients. While we intend to enter into collaborations with one or more
pharmaceutical companies to sell, market and distribute such products, we may not be able to enter
into any such arrangement on acceptable terms, if at all. Any collaborations we do enter into may
not be effective in generating meaningful product royalties or other revenues for us.
If any products that we 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 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
patients that are cost-effective as compared to the benefits of alternative therapies. Our ability
to demonstrate this depends on a variety of factors, including:
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the demonstration of efficacy and safety in clinical trials; |
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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. |
21
Our product revenues will be adversely affected if, due to these or other factors, the
products we 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 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
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.
Our ability to compete effectively will also depend to a significant extent on our 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 may not provide significant
proprietary protection or competitive advantage, and may be circumvented or invalidated. In
addition, unpatented proprietary rights, including trade secrets and know-how, can be difficult to
protect and may lose their value if they are independently developed by a third party or if their
secrecy is lost. Further, because development and commercialization of pharmaceutical products can
be subject to substantial delays, patents may expire and provide only a short period of protection,
if any, following commercialization of products.
We may infringe on the intellectual property rights of others, and any litigation could force us
to stop developing or selling potential products and could be costly, divert management attention
and harm our business.
We must be able to develop products without infringing the proprietary rights of other
parties. Because the markets in which we operate involve established competitors with significant
patent portfolios, including patents relating to compositions of matter, methods of use and methods
of drug delivery, it could be difficult for us to use our technologies or develop products without
infringing the proprietary rights of others. We may not be able to design around the patented
technologies or inventions of others and we may not be able to obtain licenses to use patented
technologies on acceptable terms, or at all. If we cannot operate without infringing on the
proprietary rights of others, we will not earn product revenues.
If we are required to defend ourselves in a lawsuit, we could incur substantial costs and the
lawsuit could divert managements attention, regardless of the lawsuits merit or outcome. These
legal actions could seek damages and seek to enjoin testing, manufacturing and marketing of the
accused product or process. In addition to potential liability for significant damages, we could
be required to obtain a license to continue to manufacture or market the accused product or process
and any license required under any such patent may not be made available to us on acceptable terms,
if at all.
Periodically, we review publicly available information regarding the development efforts of
others in order to determine whether these efforts may violate our proprietary rights. We may
determine that litigation is necessary to enforce our proprietary rights against others. Such
litigation could result in substantial expense, regardless of its outcome, and may not be resolved
in our favor.
Furthermore, patents already issued to us or our pending patent applications may become
subject to dispute, and any disputes could be resolved against us. For example, Eli Lilly and
Company brought an action against us seeking to have one or more employees of Eli Lilly named as
co-inventors on one of our patents. This case was determined in our favor in 2004, but we may face
other similar claims in the future and we may lose or settle cases at significant loss to us. In
addition, because patent applications in the United
States are currently maintained in secrecy for a period of time prior to issuance, patent
applications in certain other countries generally are not published until more than 18 months after
they are first filed, and publication of discoveries in scientific or patent literature often lags
behind actual discoveries, we cannot be certain that we were the first creator of inventions
covered by our pending patent applications or that we were the first to file patent applications on
such inventions.
We are in a highly competitive market, and our competitors have developed or may develop
alternative therapies for our target indications, which would limit the revenue potential of any
product we may develop.
We are in competition with pharmaceutical, biotechnology and drug delivery companies,
hospitals, research organizations, individual scientists and nonprofit organizations engaged in the
development of drugs and therapies for the disease indications we are targeting. Our competitors
may succeed before we can, and many already have succeeded, in developing competing technologies
for
22
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 to enter markets as second or subsequent competitors and become commercially successful. We are
aware of a number of companies that are developing or have developed therapies to address
indications we are targeting, including major pharmaceutical companies such as Bayer, Genentech
(now a part of Roche), Gilead Sciences, Glaxo Smith Kline, 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 were able to, or if a competitor introduced at
any time a product superior to or more cost-effective than ours.
If we do not continue to attract and retain key employees, our product development efforts will be
delayed and impaired.
We depend on a small number of key management and technical personnel. Our success also
depends on our ability to attract and retain additional highly qualified management, clinical,
regulatory and development personnel. There is a shortage of skilled personnel in our industry, we
face competition in our recruiting activities, and we may not be able to attract or retain
qualified personnel. Losing any of our key employees, particularly our President and Chief
Executive Officer, Dr. Igor Gonda, 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 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.
23
We may be exposed to product liability claims, which would hurt our reputation, market position
and operating results.
We face an inherent risk of product liability as a result of the clinical testing of our
product candidates in humans and will face an even greater risk upon commercialization of any
products. These claims may be made directly by consumers or by pharmaceutical companies or others
selling such products. We may be held liable if any product we develop causes injury or is found
otherwise unsuitable during product testing, manufacturing or sale. Regardless of merit or
eventual outcome, liability claims would likely result in negative publicity, decreased demand for
any products that we may develop, injury to our reputation and suspension or withdrawal of clinical
trials. Any such claim will be very costly to defend and also may result in substantial monetary
awards to clinical trial participants or customers, loss of revenues and the inability to
commercialize products that we develop. Although we currently have product liability insurance, we
may not be able to maintain such insurance or obtain additional insurance on acceptable terms, in
amounts sufficient to protect our business, or at all. A successful claim brought against us in
excess of our insurance coverage would have a material adverse effect on our results of operations.
If we cannot arrange for adequate third-party reimbursement for our products, our revenues will
suffer.
In both domestic and foreign markets, sales of our potential products will depend in
substantial part on the availability of adequate reimbursement from third-party payors such as
government health administration authorities, private health insurers and other organizations.
Third-party payors often challenge the price and cost-effectiveness of medical products and
services. Significant uncertainty exists as to the adequate reimbursement status of newly approved
health care products. Any products we are able to successfully develop may not be reimbursable by
third-party payors. In addition, our products may not be considered cost-effective and adequate
third-party reimbursement may not be available to enable us to maintain price levels sufficient to
realize a profit. Legislation and regulations affecting the pricing of pharmaceuticals may change
before our products are approved for marketing and any such changes could further limit
reimbursement. If any products we develop do not receive adequate reimbursement, our revenues will
be severely limited.
Our use of hazardous materials could subject us to liabilities, fines and sanctions.
Our laboratory and clinical testing sometimes involves the use of hazardous and toxic
materials. We are subject to federal, state and local laws and regulations governing how we use,
manufacture, handle, store and dispose of these materials. Although we believe that our safety
procedures for handling and disposing of such materials comply in all material respects with all
federal, state and local regulations and standards, there is always the risk of accidental
contamination or injury from these materials. In the event of an accident, we could be held liable
for any damages that result and such liability could exceed our financial resources. Compliance
with environmental and other laws may be expensive and current or future regulations may impair our
development or commercialization efforts.
If we are unable to effectively implement or maintain a system of internal control over financial
reporting, we may not be able to accurately or timely report our financial results and our stock
price could be adversely affected.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our
internal control over financial reporting as of the end of each fiscal year, and to include a
management report assessing the effectiveness of our internal control over financial reporting in
our Annual Report on Form 10-K for that fiscal year. Section 404 also currently requires our
independent registered public accounting firm, beginning with our Annual Report on Form 10-K for
the fiscal year ending December 31, 2010, 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:
24
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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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investor perception of the value of the royalty stream from Zogenix; |
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sales of our stock by certain large institutional shareholders to meet liquidity concerns
during the current economic climate or bankruptcy of the institutions holding the shares of
investors in our company, resulting in large quantities of our shares being traded at
discount prices; |
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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 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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future sales or expected sales of substantial amounts of common stock by shareholders; |
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our ability to raise capital through the sale of securities (including debt securities)
or non-core assets; 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 is quoted on the OTC Bulletin Board, which may provide less liquidity for our
shareholders than the national exchanges.
On November 10, 2006, our common stock was delisted from the Nasdaq Capital Market due to
non-compliance with Nasdaqs continued listing standards. Our common stock is currently quoted on
the OTC Bulletin Board. As compared to being listed on a national exchange, being quoted on the OTC
Bulletin Board may result in reduced liquidity for our shareholders, may cause investors not to
trade in our stock and may result in a lower stock price. In addition, investors may find it more
difficult to obtain accurate quotations of the share price of our common stock.
We have implemented certain anti-takeover provisions, which may make an acquisition less likely or
might result in costly litigation or proxy battles.
Certain provisions of our 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
25
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 entered into change of control agreements, both of
which may provide for the payment of benefits to our officers in 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.
One of our shareholders may choose to pursue a lawsuit or engage in a proxy battle with
management to limit our use of one or more of these anti-takeover protections. Any such lawsuit or
proxy battle would, regardless of its merit or outcome, result in substantial costs and a diversion
of managements attention and resources.
We have never paid dividends on our capital stock, and we do not anticipate paying cash dividends
for at least the foreseeable future.
We have never declared or paid cash dividends on our capital stock. We do not anticipate
paying any cash dividends on our common stock for at least the foreseeable future. We currently
intend to retain all available funds and future earnings, if any, to fund the development and
growth of our business. Therefore, our stockholders will not receive any funds absent a sale of
their shares. We cannot assure stockholders of a positive return on their investment if they sell
their shares, nor can we assure that stockholders will not lose the entire amount of their
investment.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2009, we leased one building with an aggregate of 72,000 square feet of
office and laboratory facilities at 3929 Point Eden Way, Hayward, California. This building serves
as our Corporate office and our research and development facility with a lease expiration of July
2016. In 2007, we entered into a long-term sublease with Mendel Biotechnology, Inc. (Mendel).
The sublease with Mendel is for 48,000 square feet and expires concurrently with our lease. In
April 2009, the Company entered into an amendment to its sublease agreement with Mendel to sublease
to Mendel an additional 1,550 square feet. Mendel may terminate the sublease early on September 1,
2012 for a termination fee of $225,000. The sublease with Mendel substantially reduced our net
outstanding lease commitment (see Note 9 to the audited financial statements included in this
Annual Report on Form 10-K). Our current building is expected to meet our facility requirements
for the foreseeable future.
Item 3. Legal Proceedings
Arbitration Proceedings against Lung Rx, Inc.
On June 1, 2009, we received a written notice from United Therapeutics Corporation (United)
terminating the Exclusive License, Development and Commercialization Agreement, dated August 30,
2007 (the Lung Rx Agreement), between us and Lung Rx, Inc., a wholly-owned subsidiary of United
(Lung Rx), effective July 1, 2009. Lung Rx did not assert the existence of any technical
problems with our AERx technology or any safety or efficacy concerns.
We believe that Lung Rx was not entitled to terminate the Lung Rx Agreement. Accordingly, on
September 14, 2009, we commenced arbitration proceedings against Lung Rx before the American
Arbitration Association, alleging breach by Lung Rx of the
Lung Rx Agreement and seeking a license fee, milestone payments, royalties, development costs
and expenses, and attorneys fees from Lung Rx. The arbitration is in the early stages.
Item 4. (Removed and Reserved)
26
PART II
Item 5. Market for the Registrants Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Since December 21, 2006, our common stock has been quoted on the OTC Bulletin Board, an
electronic quotation service for securities traded over-the-counter, under the symbol ARDM.
Between June 20, 1996 and May 1, 2006 our common stock was listed on the Nasdaq Global Market
(formerly the Nasdaq National Market). Between May 2, 2006 and November 9, 2006, our common stock
was listed on the Nasdaq Capital Market (formerly the Nasdaq Small Cap Market). As of November 9,
2006, we were delisted from the Nasdaq Capital Market. Between November 10, 2006 and December 20,
2006, our common stock was quoted on the Pink Sheets.
The following table sets forth the high and low closing sale prices of our common stock for
the periods indicated.
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High |
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Low |
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2008 |
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First Quarter |
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$ |
1.58 |
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$ |
1.11 |
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Second Quarter |
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1.09 |
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|
|
0.62 |
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Third Quarter |
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|
0.80 |
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|
0.39 |
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Fourth Quarter |
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|
0.40 |
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0.20 |
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2009 |
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First Quarter |
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$ |
0.29 |
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$ |
0.07 |
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Second Quarter |
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|
0.34 |
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|
0.10 |
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Third Quarter |
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|
0.28 |
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|
0.17 |
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Fourth Quarter |
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0.20 |
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0.14 |
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As of February 28, 2010, there were approximately 112 holders of record of our common stock.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock and we do not currently
intend to pay any cash dividends on our capital stock for at least the foreseeable future. We
expect to retain future earnings, if any, to fund the development and growth of our business. Any
future determination to pay dividends on our capital stock will be, subject to applicable law, at
the discretion of our board of directors and will depend upon, among other factors, our results of
operations, financial condition, capital requirements and contractual restrictions in loan
agreements or other agreements.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with the Managements
Discussion and Analysis of Financial Condition and Results of Operations and the financial
statements and notes thereto included in this Annual Report on Form 10-K.
We derive the selected financial data for 2009 and 2008 from our audited financial statements
and notes contained in this Annual Report on Form 10-K. The selected data for 2007, 2006 and 2005
was derived from financial statements not included in this Annual Report on Form 10-K.
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Years Ended December 31, |
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2009 |
|
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2008 |
|
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2007 |
|
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2006 |
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2005 |
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(In thousands, except share data) |
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Statements of operations data: |
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Contract revenues |
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$ |
4,883 |
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$ |
251 |
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|
$ |
961 |
|
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$ |
4,814 |
|
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$ |
10,507 |
|
Total operating expenses |
|
|
18,310 |
|
|
|
23,257 |
|
|
|
27,353 |
|
|
|
38,918 |
|
|
|
41,069 |
|
Loss from operations |
|
|
(13,427 |
) |
|
|
(23,006 |
) |
|
|
(26,392 |
) |
|
|
(34,104 |
) |
|
|
(30,562 |
) |
Gain on sale of patent and royalty interest to related party |
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20,000 |
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|
|
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Net interest income (expense) |
|
|
(356 |
) |
|
|
373 |
|
|
|
2,180 |
|
|
|
1,054 |
|
|
|
1,311 |
|
Net loss |
|
|
(13,772 |
) |
|
|
(22,608 |
) |
|
|
(24,201 |
) |
|
|
(13,027 |
) |
|
|
(29,215 |
) |
Basic and diluted net loss per share |
|
|
(0.15 |
) |
|
|
(0.42 |
) |
|
|
(0.48 |
) |
|
|
(0.89 |
) |
|
|
(2.01 |
) |
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Shares used in computing basic and diluted net loss per share |
|
|
92,348 |
|
|
|
54,162 |
|
|
|
50,721 |
|
|
|
14,642 |
|
|
|
14,513 |
|
27
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As of December 31, |
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2009 |
|
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2008 |
|
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2007 |
|
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2006 |
|
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2005 |
|
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(In thousands) |
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Balance sheet data: |
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Cash, cash equivalents and short-term investments |
|
$ |
9,131 |
|
|
$ |
19,140 |
|
|
$ |
40,510 |
|
|
$ |
27,514 |
|
|
$ |
27,694 |
|
Working capital |
|
|
7,411 |
|
|
|
17,313 |
|
|
|
36,594 |
|
|
|
25,405 |
|
|
|
21,087 |
|
Total assets |
|
|
11,965 |
|
|
|
25,519 |
|
|
|
45,813 |
|
|
|
32,226 |
|
|
|
39,497 |
|
Note payable and accrued interest to former related party |
|
|
8,896 |
|
|
|
8,472 |
|
|
|
8,071 |
|
|
|
7,686 |
|
|
|
|
|
Convertible preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,669 |
|
|
|
23,669 |
|
Accumulated deficit |
|
|
(348,446 |
) |
|
|
(334,674 |
) |
|
|
(312,066 |
) |
|
|
(287,865 |
) |
|
|
(274,838 |
) |
Total shareholders equity (deficit) |
|
|
(173 |
) |
|
|
8,756 |
|
|
|
30,299 |
|
|
|
(3,947 |
) |
|
|
7,171 |
|
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The discussion below contains forward-looking statements that are based on the current beliefs
of management, as well as current assumptions made by, and information currently available to,
management. All statements contained in the discussion below, other than statements that are purely
historical, are forward-looking statements. These forward-looking statements are subject to risks
and uncertainties that could cause our future actual results, performance or achievements to differ
materially from those expressed in, or implied by, any such forward-looking statements as a result
of certain factors, including, but not limited to, those risks and uncertainties discussed in this
section, as well as in the section entitled Risk Factors, and elsewhere in our other filings with
the SEC. See Cautionary Note Regarding Forward-Looking Statements elsewhere in this Annual
Report on Form 10-K.
Our business is subject to significant risks including, but not limited to, our ability to
obtain additional financing, our ability to implement our product development strategy, the success
of product development efforts, obtaining and enforcing patents important to our business, clearing
the lengthy and expensive regulatory approval process and possible competition from other products.
Even if product candidates appear promising at various stages of development, they may not reach
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, 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 our
products in the near term. However, we do expect to generate milestone and royalty revenue in 2010
from the Intraject technology platform that we sold to Zogenix in 2006. As of December 31, 2009,
we had an accumulated deficit of $348.4 million. Historically, we have funded our operations
primarily through public offerings and private placements of our capital stock, license, milestone
and development payments from collaborators, proceeds from the January 2005 restructuring
transaction with Novo Nordisk related to our inhaled insulin program, borrowings from Novo Nordisk,
the sale of Intraject-related assets and interest earned on investments.
28
Over the last four years, our business has focused on opportunities for product development
for the treatment of severe respiratory diseases that we could develop and commercialize in the
United States or European Union without a partner, or be able to retain co-marketing rights in the
United States or European Union for such products. 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. It is our longer term strategy to commercialize our respiratory product
candidates with our own focused marketing and sales force addressing pulmonary specialty doctors in
the United States or European Union, where we believe that a proprietary sales force will enhance
the return to our shareholders. Where our products can benefit a broader population of patients in
the United States or in other countries, we may enter into co-development, co-promotion or other
marketing arrangements with collaborators, thereby reducing costs and increasing revenues through
license fees, milestone payments and royalties. In the near term given our current financial
resources, our focus will be on completing Phase 2b clinical trials of liposomal ciprofloxacin in
bronchiectasis.
Currently, our lead development candidate is a proprietary liposomal formulation of the
antibiotic ciprofloxacin that is delivered by inhalation for the treatment of infections associated
with the severe respiratory diseases cystic fibrosis and non-cystic fibrosis bronchiectasis. We
received orphan drug designations for both of these indications in the U.S and for cystic fibrosis
in the European Union . We reported the results of two successful Phase 2a trials with this
product candidate in cystic fibrosis (CF) and non-cystic fibrosis bronchiectasis, respectively.
In June 2008, we completed an open label, multi-center 14-day treatment Phase 2a trial in
Australia and New Zealand in 21 CF patients with once daily dosing of 6 mL of inhaled liposomal
ciprofloxacin (ARD-3100). The primary efficacy endpoint in this Phase 2a study was the change from
baseline in the sputum Pseudomonas aeruginosa colony forming units (CFU), an objective measure of
the reduction in pulmonary bacterial load. Data analysis in 21 patients who completed the study
demonstrated that the CFUs decreased by a mean 1.43 log against baseline 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).
In December 2008, we completed an open-label, four week treatment study with once daily
inhaled liposomal ciprofloxacin (ARD-3100) in patients with non-CF bronchiectasis. The study was
conducted at eight leading centers in the United Kingdom and enrolled a total of 36 patients. The
patients were randomized into two equal size groups, one receiving 3 mL of inhaled liposomal
ciprofloxacin and the other receiving 6 mL of inhaled liposomal ciprofloxacin, once-a-day for the
four-week treatment period. The primary efficacy endpoint was the change from baseline in the
sputum of Pseudomonas aeruginosa CFUs, the standard objective measure of the reduction in pulmonary
bacterial load. The 3 mL and 6 mL doses of inhaled liposomal ciprofloxacin in the evaluable patient
population demonstrated significant mean decreases against baseline in the CFUs over the 28-day
treatment period of 3.5 log (p<0.001) and 4.0 log (p<0.001) units, respectively.
In November 2009, the first patient was dosed in the ORBIT-2 (Once-daily Respiratory
Bronchiectasis Inhalation Treatment) trial, a 6-month, multicenter, international Phase 2b clinical
trial of inhaled ciprofloxacin (ARD-3150) in 40 adult patients with non-cystic fibrosis
bronchiectasis. The randomized, double-blind, placebo-controlled trial is being conducted in
Australia and New Zealand. Following a 14 day screening period, the patients will be treated
once-a-day for 28 days with either the active drug, or placebo, followed by a 28 day off-treatment
period. This on-off sequence will be repeated three times. The primary endpoint is defined as the
mean change in Pseudomonas aeruginosa density in sputum (colony forming units CFU per gram)
from baseline to day 28 of the active treatment group versus placebo. Safety and tolerability
assessments of the treatment versus placebo group will be performed and secondary efficacy
endpoints will include long term microbiological responses, time to an exacerbation, severity of
exacerbations, length of time to resolve exacerbations, and changes in spirometry and in quality of
life measurements.
The study will explore whether the novel formulation ARD-3150, which has a different drug
release profile than ARD-3100, may have additional therapeutic benefits. We expect the 6-month
study will also generate valuable data on the long term impact of once daily inhaled ciprofloxacin
in patients with severe bronchiectasis.
In February 2010, the first patient was dosed in the U.S. as part of the ORBIT-1 trial, an
international, randomized, double-blind, placebo-controlled Phase 2b study designed to evaluate
inhaled liposomal ciprofloxacin (ARD-3100) in patients with BE under a U.S. IND. The ORBIT-1 trial
will randomize 96 patients, who will receive for four weeks, either one of two different once-daily
inhaled doses (100 or 150 mg ciprofloxacin delivered by inhalation as 2 or 3 mL of liposomal
dispersion, respectively) or once-daily inhaled placebo. The primary efficacy endpoint will be the
change from baseline in sputum Pseudomonas aeruginosa colony forming units
29
(CFUs). Secondary endpoints will include quality of life measurements and improvement of
outcomes with respect to exacerbations. Lung function changes will be monitored for safety.
The results from each of these trials, expected in the second half of 2010, will produce an
extensive data base of information from which we hope to select the optimum product and the most
appropriate endpoints to test in Phase 3. In order to expedite anticipated time to market and
increase market acceptance, we have elected to deliver our formulations via widely used and
approved nebulizers for each of these Phase 2b trials.
In August 2009, the European Medicines Agency (EMEA) granted Orphan Drug Designation to our
inhaled liposomal ciprofloxacin drug product candidate for the treatment of lung infections
associated with cystic fibrosis. Under European guidelines, Orphan Medicinal Product Designation
provides 10 years of potential market exclusivity if the product candidate is the first product
candidate for the indication approved for marketing in the European Union. Orphan drug designation
also allows the candidates sponsor to seek assistance from the EMEA in optimizing the candidates
clinical development through participation in designing the clinical protocol and preparing the
marketing application. Additionally, a drug candidate designated by the Commission as an Orphan
Medicinal Product may qualify for a reduction in regulatory fees as well as a European Union-funded
research grant. We had previously been granted orphan drug designations by the U.S. Food and Drug
Administration for inhaled liposomal ciprofloxacin for the management of CF and for non-cystic
fibrosis bronchiectasis.
On June 1, 2009, we received a written notice from United Therapeutics Corporation, on behalf
of its wholly-owned subsidiary Lung Rx, Inc., seeking to terminate our collaboration agreement (the
Lung Rx Agreement) effective July 1, 2009. Lung Rx did not assert the existence of any technical
problems with our AERx technology or any safety or efficacy concerns. We believe that Lung Rx was
not entitled to terminate the Lung Rx Agreement and, per the terms of the Lung Rx Agreement, we
have requested formal non-binding arbitration of this dispute. There is no assurance that the
non-binding arbitration will result in a favorable outcome for us. We discontinued all business
activities that we were undertaking to support the collaboration and eliminated the positions of
personnel who were devoting all or substantially all of their time to supporting the collaboration.
In addition, we reviewed all AERx technology production assets for impairment. During the quarter
ended September 30, 2009, we recorded an impairment charge of $1.6 million. The charge represented
managements estimate of the excess of the net book value of the assets less the expected future
cash flows. Our Research and Development depreciation expense was immediately reduced by $0.5
million (on an annualized basis) as a result of the impairment. In addition, we recognized all of
the previously deferred revenue from the Lung Rx Agreement.
On July 16, 2009, Zogenix, Inc. announced that it was granted approval by the FDA of the
SUMAVEL DosePro (sumatriptan injection) needle-free delivery system for the treatment of acute
migraine and cluster headache. On August 3, 2009, Zogenix and Astellas Pharma US, Inc. (Astellas)
announced that they had entered into an exclusive co-promotion agreement in the U.S. for the
SUMAVEL DosePro needle-free delivery system. SUMAVEL DosePro became commercially available in
January 2010. Under the announced terms of the agreement, Zogenix and Astellas will collaborate on
the promotion and marketing of SUMAVEL DosePro with Zogenix focusing their sales activities
primarily on the neurology market while Astellas will focus mostly on primary care physicians.
Zogenix will have responsibility for manufacturing and distribution of the product.
We received a $4 million milestone payment in February 2010 upon the first commercial sale of
SUMAVEL DosePro. In addition, we will be entitled to quarterly royalty payments from Zogenix
beginning with the quarter ending March 31, 2010. Our royalty payments will be based on sales of
the DosePro product with payment due 60 days after the end of each calendar quarter.
Critical Accounting Policies and Estimates
We consider certain accounting policies related to revenue recognition, impairment of
long-lived assets, exit/disposal activities, research and development, income taxes and stock-based
compensation to be critical accounting policies that require the use of significant judgments and
estimates relating to matters that are inherently uncertain and may result in materially different
results under different assumptions and conditions. The preparation of financial statements in
conformity with United States generally accepted accounting principles requires us to make
estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes to the financial statements. These estimates include useful lives for property
and equipment and related depreciation calculations, estimated amortization periods for payments
received from product development and license agreements as they relate to the revenue recognition,
and assumptions for valuing options, warrants and other stock-based compensation. 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 104, Topic 13, Revenue Recognition Revised and Updated (SAB 104)
and Accounting Standards Codification (ASC) 605-25, Revenue Arrangements-Multiple Element
30
Arrangements (ASC 605-25). Revenue for arrangements not having multiple deliverables, as
outlined in ASC 605-25, is recognized once costs are incurred and collectability is reasonably
assured.
Collaborative license and development agreements often require us to provide multiple
deliverables, such as a license, research and development, product steering committee services and
other performance obligations. These agreements are accounted for in accordance with ASC 605-25.
Under this standard, 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 exist.
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. Under the Lung Rx Agreement, we were obligated to provide multiple
deliverables including the transfer of AERx technology and any future improvements thereto during
the term of the Lung Rx Agreement and participation on a product steering committee during the term
of the Lung Rx Agreement. Thus, all of the deliverables under the Lung Rx Agreement were treated
as a single unit of accounting under ASC 605-25 since the fair value of the undelivered performance
obligations associated with these activities could not be objectively determined and the activities
were not economically independent of each other. Revenue continued to be deferred under the Lung
Rx agreement until the quarter ended September 30, 2009 when all revenue was recognized as we no
longer had any performance obligations under the agreement due to our determination that the
likelihood of future collaborations with Lung Rx was remote.
Royalty revenue will be earned under the terms of the asset sale agreement with Zogenix. We
will recognize revenue when the amounts under this agreement can be determined and when
collectability is probable. We have no performance obligations under this agreement. We anticipate
recognizing revenue from quarterly royalty payments one quarter in arrears since we believe that we
will not be able to determine quarterly royalty earnings until we receive our royalty statements
and payments from Zogenix.
Impairment of Long-Lived Assets
In accordance with Accounting Standards Codification (ASC) 360-10, Property, Plant &
equipment Overall, we review for impairment whenever events or changes in circumstances indicate
that the carrying amount of property and equipment may not be recoverable. Determination of
recoverability is based on an estimate of undiscounted future cash flows resulting from the use of
the asset and its eventual disposition. In the event that such cash flows are not expected to be
sufficient to recover the carrying amount of the assets, we write down the assets to their
estimated fair values and recognize the loss in the statements of operations.
Accounting for Costs Associated with Exit or Disposal Activities
In accordance with ASC 420, Exit or Disposal Cost Obligations (ASC 420), we recognize a
liability for the cost associated with an exit or disposal activity that is measured initially at
its fair value in the period in which the liability is incurred, except for a liability for
one-time termination benefits that is incurred over time. According to ASC 420, costs to terminate
an operating lease or other contracts are (a) costs to terminate the contract before the end of its
term or (b) costs that will continue to be incurred under the contract for its remaining term
without economic benefit to the entity. In periods subsequent to initial measurement, changes to
the liability are measured using the risk-free interest rate that was used to measure the liability
initially. We recorded losses under this standard for the Mendel sublease in 2007 and for the
sublease of additional space in 2009 since the sublease rate was less than the rental rate that we
are paying.
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 that are reimbursed under
collaborative and government grants approximate the revenue recognized under such agreements. We
expense research and development costs as 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. In addition, we evaluate our tax positions to ensure that a minimum
recognition threshold is met before we
31
recognize the tax position in the financial statements. The aforementioned differences result
in deferred tax assets and liabilities, which are included in our balance sheets.
We assess the likelihood that we will be able to recover our deferred tax assets. We consider
all available evidence, both positive and negative, including our historical levels of income and
losses, expectations and risks associated with estimates of future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If
we do not consider it more likely than not that we will recover our deferred tax assets, we will
record a valuation allowance against the deferred tax assets that we estimate will not ultimately
be recoverable. At December 31, 2009 and 2008, 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
We account for stock-based payment arrangements in accordance with ASC 718, Compensation-Stock
Compensation and ASC 505-50, Equity-Equity Based Payments to Non-Employees which requires the
recognition of compensation expense, using a fair-value based method, for all costs related to
stock-based payments including stock options, restricted stock awards and stock issued under the
employee stock purchase plan. These ASC topics require companies to estimate the fair value of
stock based payment awards on the date of the grant using an option pricing model.
We recorded $873,000 and $877,000 of stock-based compensation expense for the years ended
December 31, 2009 and 2008, respectively. Stock-based compensation expense is recorded to research
and development and general and administrative expenses based on the function of the related
employee. This charge had no impact on our cash flows for the periods presented.
We use the Black-Scholes option pricing model to estimate the fair value of stock-based awards
as of the grant date. The Black-Scholes model is complex and dependent upon key data input
estimates. The primary data inputs with the greatest degree of judgment are the estimated lives of
the stock options and the estimated volatility of our stock price. The Black-Scholes model is
highly sensitive to changes in these two inputs. The expected term of the options represents the
period of time that options granted are expected to be outstanding. We use a lattice model to
estimate the expected term as an input into the Black-Scholes option pricing model. We determine
expected volatility using the historical method, which is based on the historical daily trading
data of our common stock over the expected term of the option. For more information about our
accounting for stock based compensation, see Note 10 to the audited financial statements included
in this Annual Report on Form 10-K.
Recent Accounting Pronouncements
See Note 1 to the audited financial statements included in this Annual Report on Form 10-K for
information on recent accounting pronouncements.
Results of Operations
Years Ended December 31, 2009 and 2008
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Increase |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Contract revenue |
|
$ |
4,883 |
|
|
$ |
251 |
|
|
$ |
4,632 |
|
|
|
1,845 |
% |
Revenue increased over the prior year primarily due to the recognition of all previously deferred
amounts under the Lung Rx Agreement. We recognized the Lung Rx Agreement revenue after receipt of
a notice from United Therapeutics that terminated the Lung Rx Agreement and the subsequent
evaluation that further collaboration with Lung Rx was remote.
Research and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Decrease |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Research and development expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaborative |
|
$ |
1,362 |
|
|
$ |
2,111 |
|
|
$ |
(749 |
) |
|
|
(35 |
)% |
Self-initiated |
|
|
10,044 |
|
|
|
14,388 |
|
|
|
(4,344 |
) |
|
|
(30 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses |
|
$ |
11,406 |
|
|
$ |
16,499 |
|
|
$ |
(5,093 |
) |
|
|
(31 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
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, and depreciation. Overall, the decrease in research and
development expenses was consistent with our ongoing expense reduction efforts including reductions
in headcount and other operating expenses such as technology development.
The $0.7 million decrease in collaborative program expenses in 2009 as compared with 2008, was
primarily due to the suspension of Lung Rx-related development activities during the year. After
the suspension of this project, we did not have any collaborative research arrangements. The $4.3
million decrease in research and development expense for self-initiated program expenses was
primarily due to lower headcount, lower consulting expense and lower licensed technology expense.
Total direct costs of our clinical trials remained relatively constant between the two years. Note
that direct clinical expenses are expected to increase in the first half of 2010 as we conduct our
Phase 2b trials.
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Decrease |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
General and administrative expenses |
|
$ |
5,030 |
|
|
$ |
6,679 |
|
|
$ |
(1,649 |
) |
|
|
(25 |
)% |
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 decreased from 2008 primarily due to a lower headcount, lower
consulting fees, lower property taxes and lower marketing expenses. We expect that our general and
administrative expenses will remain relatively constant over the next few quarters.
Restructuring and Asset Impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Increase |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Restructuring and asset impairment expenses |
|
$ |
1,874 |
|
|
$ |
79 |
|
|
$ |
1,795 |
|
|
|
2,272 |
% |
Restructuring and impairment expenses in 2009 represent the impairment of the AERx
production-related fixed assets, additional lease exit expenses related to the sublease of
additional space to Mendel and the recurring accretion expense associated with the 2007 facility
lease exit obligation. The significant increase of restructuring and impairment expenses was
primarily due to the impairment of AERx technology fixed assets of $1.6 million.
Interest Income, Interest Expense and Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Decrease |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Interest income, interest expense and other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
72 |
|
|
$ |
781 |
|
|
$ |
(709 |
) |
|
|
(91 |
)% |
Interest expense |
|
|
(428 |
) |
|
|
(408 |
) |
|
|
(20 |
) |
|
|
(5 |
)% |
Other income (expense) |
|
|
(4 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income, interest expense and other income (expense) |
|
$ |
(360 |
) |
|
$ |
373 |
|
|
$ |
(733 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income in 2009 decreased from 2008 due to lower average invested balances and
significantly lower effective interest rates earned. Substantially all of the interest expense for
2009 and 2008 relates to the Promissory Note from Novo Nordisk. See Note 8 to the audited
financial statements included in this Annual Report on Form 10-K.
33
Liquidity and Capital Resources
As of December 31, 2009, we had cash, cash equivalents and short-term investments of $9.1
million and total working capital of $7.4 million. Our principal requirements for cash are to fund
operations, clinical trials and research activities. We assess our liquidity primarily by the
amount of our cash and cash equivalents and short term investments less our current liabilities.
Net cash used in operating activities in 2009 was $14.1 million reflecting our net loss of
$13.8 million. Net cash used in operating activities was more than our net loss due to the
significant decrease in deferred revenue, partially offset by recurring non-cash expenses for
depreciation and stock based compensation and a non-cash non-recurring expense for the impairment
of AERx technology assets. The decrease in deferred revenue was due to the recognition of revenue
under the Lung Rx Agreement. In 2008, net cash used in operating activities was $19.0 million
reflecting our net loss of $22.6 million partially offset by non-cash stock-based compensation
expense and depreciation expense.
Net cash used by investing activities was $2.7 million during 2009. Cash was used by the net
purchase of short-term investments partially offset by negative capital expenditures of $0.2
million. Capital expenditures were negative due to the reversal of a previously accrued item. Net
cash provided by investing activities in 2008 was $5.6 million. Proceeds from the net maturity of
short-term investments were $8.1 million which was partially offset by capital expenditures of $2.5
million.
Cash provided by financing activities was $4.0 million in 2009 as compared with $0.2 million
in 2008. Cash was primarily provided in 2009 from the proceeds from a registered direct public
offering of common stock.
Our research and development efforts have required a commitment of substantial funds to
conduct the costly and time-consuming research and preclinical and clinical testing activities
necessary to develop and refine our technology and proposed products and to bring any such products
to market. Our long term capital requirements will depend on many factors, including continued
progress with preclinical studies and clinical trials and the results thereof, the time and costs
involved in obtaining regulatory approvals, the cost of development and the rate of scale-up of our
production technologies, the cost involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims, and the need to acquire licenses or other rights to new technology. In
the near term given our current financial resources, our focus will be on completing our Phase 2b
clinical trials of liposomal ciprofloxacin in bronchiectasis.
Since inception, we have funded our operations primarily through public offerings and private
placements of our capital stock, license fees and milestone payments from collaborators, proceeds
from the January 2005 restructuring transaction with Novo Nordisk related to our inhaled insulin
program, borrowings from Novo Nordisk, the sale of Intraject-related assets and interest earned on
investments.
We continue to review our planned operations through the end of 2010, and beyond. We believe
that our capital expenditures for 2010 will be insignificant.
We have incurred significant losses and negative cash flows from operations since our
inception. At December 31, 2009, we had an accumulated deficit of $348.4 million, working capital
of $7.4 million, and shareholders deficit of $0.2 million. We believe that cash, cash equivalents
and short term investments at December 31, 2009, together with the proceeds from the Zogenix
milestone payment and quarterly royalty payments, will be sufficient to enable us to meet our
obligations at least through 2010.
Off-Balance Sheet Financings and Liabilities
Other than contractual obligations incurred in the normal course of business, we do not have
any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or
contingent interests in transferred assets or any obligation arising out of a material variable
interest in an unconsolidated entity. We have one inactive, wholly-owned subsidiary domiciled in
the United Kingdom.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The disclosures in this section are not required since the Company qualifies as a smaller
reporting company.
34
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Aradigm Corporation
We have audited the accompanying balance sheets of Aradigm Corporation as of December 31, 2009
and 2008, and the related statements of operations, shareholders equity (deficit) and cash flows
for the years then ended. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. We were not engaged to perform an audit of the Companys internal control over
financial reporting. Our audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the Companys internal control over
financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management and evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements audited by us present fairly, in all material
respects, the financial position of Aradigm Corporation at December 31, 2009 and 2008 and the
results of its operations and its cash flows for the years then ended, in conformity with U.S.
generally accepted accounting principles.
/s/ Odenberg Ullakko Muranishi & Co LLP
San Francisco, California
March 22, 2010
35
ARADIGM CORPORATION
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands, except |
|
|
|
share data) |
|
ASSETS |
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
3,903 |
|
|
$ |
16,741 |
|
Short-term investments |
|
|
5,228 |
|
|
|
2,399 |
|
Receivables |
|
|
155 |
|
|
|
393 |
|
Restricted cash |
|
|
|
|
|
|
225 |
|
Prepaid and other current assets |
|
|
328 |
|
|
|
387 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
9,614 |
|
|
|
20,145 |
|
Property and equipment, net |
|
|
2,166 |
|
|
|
5,093 |
|
Notes receivable |
|
|
52 |
|
|
|
34 |
|
Other assets |
|
|
133 |
|
|
|
247 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
11,965 |
|
|
$ |
25,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
572 |
|
|
$ |
739 |
|
Accrued clinical and cost of other studies |
|
|
670 |
|
|
|
94 |
|
Accrued compensation |
|
|
341 |
|
|
|
1,051 |
|
Facility lease exit obligation |
|
|
263 |
|
|
|
318 |
|
Other accrued liabilities |
|
|
357 |
|
|
|
630 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
2,203 |
|
|
|
2,832 |
|
Deferred rent, non-current |
|
|
136 |
|
|
|
199 |
|
Facility lease exit obligation, non-current |
|
|
828 |
|
|
|
1,056 |
|
Deferred revenue, non-current |
|
|
|
|
|
|
4,122 |
|
Other non-current liabilities |
|
|
75 |
|
|
|
82 |
|
Note payable and accrued interest |
|
|
8,896 |
|
|
|
8,472 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
12,138 |
|
|
|
16,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity (deficit): |
|
|
|
|
|
|
|
|
Preferred stock, 2,950,000 shares authorized, none outstanding |
|
|
|
|
|
|
|
|
Common stock, no par value; authorized shares: 150,000,000
at December 31, 2009 and 2008; issued and outstanding
shares: 102,381,116 at December 31, 2009; 55,029,384 at
December 31, 2008 |
|
|
348,271 |
|
|
|
343,426 |
|
Accumulated other comprehensive income |
|
|
2 |
|
|
|
4 |
|
Accumulated deficit |
|
|
(348,446 |
) |
|
|
(334,674 |
) |
|
|
|
|
|
|
|
Total shareholders equity (deficit) |
|
|
(173 |
) |
|
|
8,756 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity (deficit) |
|
$ |
11,965 |
|
|
$ |
25,519 |
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
36
ARADIGM CORPORATION
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands, except |
|
|
|
share data) |
|
Revenue: |
|
|
|
|
|
|
|
|
Contract revenue |
|
$ |
4,883 |
|
|
$ |
251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Research and development |
|
|
11,406 |
|
|
|
16,499 |
|
General and administrative |
|
|
5,030 |
|
|
|
6,679 |
|
Restructuring and asset impairment |
|
|
1,874 |
|
|
|
79 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
18,310 |
|
|
|
23,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(13,427 |
) |
|
|
(23,006 |
) |
Interest income |
|
|
72 |
|
|
|
781 |
|
Interest expense |
|
|
(428 |
) |
|
|
(408 |
) |
Other (expense), net |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(13,787 |
) |
|
|
(22,633 |
) |
Income tax benefit |
|
|
15 |
|
|
|
25 |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(13,772 |
) |
|
$ |
(22,608 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share |
|
$ |
(0.15 |
) |
|
$ |
(0.42 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common share |
|
|
92,348 |
|
|
|
54,162 |
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
37
ARADIGM CORPORATION
STATEMENT OF SHAREHOLDERS EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Shareholders |
|
|
|
Common Stock |
|
|
Comprehensive |
|
|
Accumulated |
|
|
Equity |
|
|
|
Shares |
|
|
Amount |
|
|
Income (Loss) |
|
|
Deficit |
|
|
(Deficit) |
|
Balances at December 31, 2007 |
|
|
54,772,705 |
|
|
$ |
342,355 |
|
|
$ |
10 |
|
|
$ |
(312,066 |
) |
|
$ |
30,299 |
|
Issuance of common stock under the employee stock purchase plan |
|
|
300,524 |
|
|
|
190 |
|
|
|
|
|
|
|
|
|
|
|
190 |
|
Issuance of common stock upon exercise of common stock options |
|
|
3,750 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
Stock-based compensation |
|
|
|
|
|
|
877 |
|
|
|
|
|
|
|
|
|
|
|
877 |
|
Reversal of restricted stock award due to forfeiture |
|
|
(47,595 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,608 |
) |
|
|
(22,608 |
) |
Unrealized (loss) on available-for-sale investments |
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,614 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008 |
|
|
55,029,384 |
|
|
|
343,426 |
|
|
|
4 |
|
|
|
(334,674 |
) |
|
|
8,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in a public offering, net of issuance
costs |
|
|
44,663,071 |
|
|
|
3,927 |
|
|
|
|
|
|
|
|
|
|
|
3,927 |
|
Issuance of common stock under the employee stock purchase plan |
|
|
371,036 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
45 |
|
Issuance of common stock upon exercise of common stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock awards |
|
|
2,418,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of restricted stock award due to forfeiture |
|
|
(100,625 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
873 |
|
|
|
|
|
|
|
|
|
|
|
873 |
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,772 |
) |
|
|
(13,772 |
) |
Unrealized (loss) on available-for-sale investments |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,774 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2009 |
|
|
102,381,116 |
|
|
$ |
348,271 |
|
|
$ |
2 |
|
|
$ |
(348,446 |
) |
|
$ |
(173 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
38
ARADIGM CORPORATION
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(13,772 |
) |
|
$ |
(22,608 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Non-cash asset impairment on property and equipment |
|
|
1,654 |
|
|
|
|
|
Facility lease exit costs |
|
|
158 |
|
|
|
|
|
Amortization and accretion of investments |
|
|
21 |
|
|
|
26 |
|
Depreciation and amortization |
|
|
1,067 |
|
|
|
871 |
|
Stock-based compensation expense |
|
|
873 |
|
|
|
877 |
|
Loss on disposition of property and equipment |
|
|
4 |
|
|
|
1 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Receivables |
|
|
238 |
|
|
|
106 |
|
Prepaid and other current assets |
|
|
61 |
|
|
|
584 |
|
Restricted cash |
|
|
225 |
|
|
|
80 |
|
Other assets |
|
|
14 |
|
|
|
24 |
|
Accounts payable |
|
|
(167 |
) |
|
|
(1,113 |
) |
Accrued compensation |
|
|
(710 |
) |
|
|
(201 |
) |
Accrued liabilities |
|
|
720 |
|
|
|
(414 |
) |
Deferred rent |
|
|
(63 |
) |
|
|
(84 |
) |
Deferred revenue |
|
|
(4,122 |
) |
|
|
3,242 |
|
Facility lease exit obligation |
|
|
(325 |
) |
|
|
(375 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(14,124 |
) |
|
|
(18,984 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
185 |
|
|
|
(2,548 |
) |
Purchases of available-for-sale investments |
|
|
(11,438 |
) |
|
|
(3,629 |
) |
Proceeds from maturities of available-for-sale investments |
|
|
8,585 |
|
|
|
11,744 |
|
Notes receivable payments |
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by investing activities |
|
|
(2,686 |
) |
|
|
5,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from public offering of common stock, net |
|
|
3,927 |
|
|
|
|
|
Proceeds from issuance of common stock to Employee Stock Purchase Plan |
|
|
45 |
|
|
|
190 |
|
Proceeds from exercise of common stock options |
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
3,972 |
|
|
|
194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) in cash and cash equivalents |
|
|
(12,838 |
) |
|
|
(13,223 |
) |
Cash and cash equivalents at beginning of year |
|
|
16,741 |
|
|
|
29,964 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
3,903 |
|
|
$ |
16,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
4 |
|
|
$ |
7 |
|
|
|
|
|
|
|
|
Cash paid (received) for income taxes |
|
$ |
(25 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
39
ARADIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization
Aradigm Corporation (the Company) is a California corporation focused on the development and
commercialization of drugs delivered by inhalation for the treatment of severe respiratory
diseases. The Companys principal activities to date have included conducting research and
development and developing collaborations. Management does not anticipate receiving any revenues
from the sale of its products in the upcoming year, except for milestone and royalty revenue from
Zogenix. The Company operates as a single operating segment.
Liquidity and Financial Condition
The Company has incurred significant losses and negative cash flows from operations since its
inception. At December 31, 2009, the Company had an accumulated deficit of $348.4 million, working
capital of $7.4 million and shareholders deficit of $0.2 million. Management believes that cash,
cash equivalents and short-term investments at December 31, 2009, along with the anticipated
Zogenix milestone and royalty payments will be sufficient to enable the Company to meet its
obligations at least through 2010. Management plans to continue to fund the Companys operations
with its cash balance, cash obtained through milestone and royalty payments from Zogenix and
proceeds from the issuance of debt and/or equity securities.
Use of Estimates
The preparation of financial statements, in conformity with United States generally accepted
accounting principles, requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. These estimates include useful
lives for property and equipment and related depreciation calculations, estimated amortization
period for payments received from product development and license agreements as they relate to the
revenue recognition, assumptions for valuing options and warrants, and income taxes. Actual
results could differ from these estimates.
Cash Equivalents
All highly liquid investments with maturities of three months or less at the time of purchase
are classified as cash equivalents.
Investments
Management determines the appropriate classification of the Companys marketable securities,
which consist solely of debt securities, at the time of purchase. All marketable securities are
classified as available-for-sale, carried at estimated fair value and reported in short-term
investments. Unrealized gains and losses on available-for-sale securities are excluded from
earnings and losses and are reported as a separate component in the statement of shareholders
equity (deficit) until realized. Fair values of investments are based on quoted market prices
where available. Investment income is recognized when earned and includes interest, dividends,
amortization of purchase premiums and discounts and realized gains and losses on sales of
securities. The cost of securities sold is based on the specific identification method. The Company
regularly reviews all of its investments for other-than-temporary declines in fair value. When the
Company determines that the decline in fair value of an investment below the Companys accounting
basis is other-than-temporary, the Company reduces the carrying value of the securities held and
records a loss in the amount of any such decline. No such reductions have been required during any
of the periods presented.
Property and Equipment
The Company records property and equipment at cost and calculates depreciation using the
straight-line method over the estimated useful lives of the respective assets. Machinery and
equipment includes external costs incurred for validation of the equipment. The Company does not
capitalize internal validation expense. Computer equipment and software includes capitalized
computer software. All of the Companys capitalized software is purchased; the Company has not
internally developed computer software. Leasehold improvements are depreciated over the shorter of
the term of the lease or useful life of the improvement.
40
The estimated useful lives of property and equipment are as follows:
|
|
|
Computer equipment and software
|
|
3 to 5 years |
Furniture and fixtures
|
|
5 to 7 years |
Lab equipment
|
|
5 to 7 years |
Machinery and equipment
|
|
5 years |
Leasehold improvements
|
|
5 to 17 years |
Impairment of Long-Lived Assets
In accordance with Statement of Accounting Standards Codification (ASC) 360-10, Property
Plant and Equipment Overall, the Company reviews for impairment whenever events or changes in
circumstances indicate that the carrying amount of property and equipment may not be recoverable.
Determination of recoverability is based on an estimate of undiscounted future cash flows resulting
from the use of the asset and its eventual disposition. In the event that such cash flows are not
expected to be sufficient to recover the carrying amount of the assets, the assets are written down
to their estimated fair values and the loss is recognized in the statements of operations (see
Note 12).
Accounting for Costs Associated with Exit or Disposal Activities
In accordance with ASC 420, Exit or Disposal Activities the Company recognizes a liability for
the cost associated with an exit or disposal activity that is measured initially at its fair value
in the period in which the liability is incurred. The Company accounted for the partial sublease
of its headquarters building as an exit activity and recorded the sublease loss in its statement of
operations (see Note 6).
According to ASC 420, costs to terminate an operating lease or other contracts are (a) costs
to terminate the contract before the end of its term or (b) costs that will continue to be incurred
under the contract for its remaining term without economic benefit to the entity. In periods
subsequent to initial measurement, changes to the liability are measured using the risk-free rate
that was used to measure the liability initially.
Revenue Recognition
Contract revenues consist of revenues from grants, collaboration agreements and feasibility
studies. The Company recognizes revenue under the provisions of the Securities and Exchange
Commission issued Staff Accounting Bulletin 10, Topic 13, Revenue Recognition Revised and Updated
(SAB Topic 13) and ASC 605-25, Revenue Recognition-Multiple Elements. Revenue for arrangements
not having multiple deliverables, as outlined in ASC 605-25, is recognized once costs are incurred
and collectability is reasonably assured.
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. Refundable development payments are
deferred until specific performance criteria are achieved. Refundable development 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 ASC 605-25. Under ASC 605-25,
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.
The Company determined that the Lung Rx collaboration agreement, since it comprised of
multiple deliverables without standalone value, should be treated as a single unit of accounting.
41
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. The Company expenses research and development costs as
incurred.
Advertising
Advertising costs are charged to general and administrative expense as incurred. Advertising
expenses for the years ended December 31, 2009 and 2008 were zero and $7,000, respectively.
Stock-Based Compensation
The Company accounts for share-based payment arrangements in accordance with ASC 718,
Compensation-Stock Compensation and ASC 505-50, Equity-Equity Based Payments to Non-Employees which
requires the recognition of compensation expense, using a fair-value based method, for all costs
related to share-based payments including stock options and restricted stock awards and stock
issued under the employee stock purchase plan. These standards require companies to estimate the
fair value of share-based payment awards on the date of the grant using an option-pricing model.
See Note 10 for further discussion of the Companys stock-based compensation plans.
Income Taxes
The Company makes certain estimates and judgments in determining income tax expense for
financial statement purposes. These estimates and judgments occur in the calculation of certain tax
assets and liabilities, which arise from differences in the timing of the recognition of revenue
and expense for tax and financial statement purposes. As part of the process of preparing the
financial statements, the Company is required to estimate its income taxes in each of the
jurisdictions in which it operates. This process involves the estimation of the current tax
exposure under the most recent tax laws and assessing temporary differences resulting from
differing treatment of items for tax and accounting purposes. These differences result in deferred
tax assets and liabilities which are included in the Companys balance sheets.
The Company assesses the likelihood that they will be able to recover their deferred tax
assets. The Company considers all available evidence, both positive and negative, including its
historical levels of income and losses, expectations and risks associated with estimates of future
taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a
valuation allowance. If the Company does not consider it more likely than not that they will
recover their deferred tax assets, they will record a valuation allowance against the deferred tax
assets that they estimate will not ultimately be recoverable. At December 31, 2009 and 2008, the
Company believed that the amount of their deferred income taxes would not be ultimately recovered.
Accordingly, the Company recorded a full valuation allowance for deferred tax assets. However,
should there be a change in the Companys ability to recover its deferred tax assets, they would
recognize a benefit to their tax provision in the period in which they determine that it is more
likely than not that they will recover their deferred tax assets.
Net Loss Per Common Share
Basic net loss per common share is computed using the weighted-average number of shares of
common stock outstanding less the weighted-average number of shares subject to repurchase. Unvested
restricted stock awards subject to repurchase totaled 2,668,000 shares and 704,000 shares for the
years ended December 31, 2009 and 2008, respectively. Potentially dilutive securities were not
included in the net loss per share calculation for the years ended December 31, 2009 and 2008
because the inclusion of such shares would have had an anti-dilutive effect.
Potentially dilutive securities include the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
Outstanding stock options |
|
|
5,088 |
|
|
|
4,185 |
|
Unvested restricted stock |
|
|
2,668 |
|
|
|
704 |
|
42
Significant Concentrations
Financial instruments that potentially subject the Company to concentrations of credit risk
consist primarily of cash, cash equivalents and short-term investments. Risks associated with these
instruments are mitigated by banking with, and only purchasing commercial paper and corporate notes
from, creditworthy institutions. The maximum amount of loss due to credit risk associated with
these financial instruments is their respective fair values as stated in the accompanying balance
sheets.
Comprehensive Income (Loss)
ASC 220, Comprehensive Income requires that an entitys change in equity or net assets during
a period from transactions and other events from non-owner sources be reported. The Company reports
unrealized gains or losses on its available-for-sale securities as other comprehensive income
(loss). Total comprehensive income (loss) has been disclosed on the statement of shareholders
equity (deficit).
Recently Issued Accounting Pronouncements
In September 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-13 Revenue
Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (formerly EITF Issue No. 08-1
Revenue Arrangements with Multiple Deliverables). This standard modifies the revenue recognition
guidance for arrangements that involve the delivery of multiple elements, such as product, license
fees and research and development reimbursements, to a customer at different times as part of a
single revenue generating transaction. This standard provides principles and application guidance
to determine whether multiple deliverables exist, how the individual deliverables should be
separated and how to allocate the revenue in the arrangement among those separate deliverables. The
standard also significantly expands the disclosure requirements for multiple deliverable revenue
arrangements. We will evaluate the impact of this standard for any multiple-deliverable
arrangements that are entered into in the future.
In August 2009, the FASB issued ASU 2009-05 to provide guidance on measuring the fair value of
liabilities under ASC 820, Fair Value Measurements and Disclosures. ASU 2009-05 became effective
for us during the quarter ended December 31, 2009. ASU 2009-05 provides guidance regarding
valuation for liabilities which trade as an asset in an active market. The adoption of ASU 2009-05
did not have an impact on the Companys financial position or results of operations.
In June 2009, the FASB issued SFAS 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No 162 (now
referred to as ASC 105). This guidance states that that the codification will become the source of
authoritative United States generally accepted accounting principles (GAAP). Once the
codification is in effect, all of its content will carry the same level of authority. Thus, the
GAAP hierarchy was modified to include only two levels of GAAP, authoritative and nonauthoritative.
ASC 105 was effective for the Company in the quarter ended September 30, 2009. Beginning with this
period, all references to authoritative accounting guidance refers to the topics contained in the
Accounting Standards Codification. The adoption of ASC 105 did not have an impact on the Companys
financial position or results of operations.
In May 2009, the FASB issued an accounting standard codified in ASC 855, Subsequent Events
(formerly SFAS 165). This standard provides guidance on managements assessment of subsequent
events and includes existing guidance that was previously included in United States generally
accepted auditing standards. In addition, the statement clarifies that management is responsible
for evaluating events and transactions occurring after the balance sheet date and through the
financial statement issuance date that should be disclosed as subsequent events. The evaluation and
assessment must be performed for interim and annual reporting periods. ASC 855 was effective for
the Company for the quarter ended June 30, 2009. In February 2010, the FASB issued ASU 2010-09,
Subsequent Events (ASU 2010-09). ASU 2010-09 updates ASC 855, Subsequent Events and removes the
requirement to disclose the date through which an entity has evaluated subsequent events. ASU
2010-09 became effective immediately. The adoption ASC 855 did not have an impact on the Companys
financial position or results of operations.
In February 2008, the 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. The adoption of FSP FAS 157-2 did not have a material impact on
the Companys financial position and results of operations.
In December 2007, the FASB issued an accounting standard codified in ASC 805, Business
Combinations (formerly 141(R)). This statement establishes principles and requirements for how an
acquirer in a business combination recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and
measures the
43
goodwill acquired in the business combination or a gain from a bargain purchase; and
determines what information to disclose to enable users of the financial statements to evaluate the
nature and financial effects of the business combination. This guidance was effective for the
Company for any acquisitions that would have occurred beginning in January 2009. The Company will
assess the impact of this standard and when a future acquisition occurs.
In November 2007, the FASB issued an accounting standard codified in ASC 808, Collaborative
Arrangements (formerly EITF Issue 07-01). 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. This standard was effective for collaborative arrangements in place at the
beginning of the annual period beginning after December 15, 2008. The adoption of this standard did
not have a material impact on the Companys financial position and results of operations.
In June 2007, the FASB issued an accounting standard codified in ASC 730, Research and
Development (formerly EITF Issue 07-03). This standard provides guidance on whether non-refundable
advance payments for goods that will be used or services that will be performed in future research
and development activities should be accounted for as research and development costs or deferred
and capitalized until the goods have been delivered or the related services have been rendered.
This standard was effective for fiscal years beginning after December 15, 2007. The adoption of
this standard did not have a material impact on the Companys financial position and results of
operations.
In September 2006, the FASB issued an accounting standard codified in ASC 820, Fair Value
Measurements (formerly SFAS 157). Among other requirements, this standard defines fair value and
establishes a framework for measuring fair value and also expands disclosure about the use of fair
value to measure assets and liabilities. This standard was effective beginning the first fiscal
year that began after November 15, 2007. The Company adopted this standard on January 1, 2008 and
adoption has not had a material impact on the Companys financial position and results of
operations.
2. Cash and Cash Equivalents and Short-term Investments
A summary of cash and cash equivalents and short-term investments, classified as
available-for-sale and carried at fair value is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gain |
|
|
(Loss) |
|
|
Fair Value |
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
3,903 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
$ |
500 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
500 |
|
Certificates of
deposit |
|
|
3,183 |
|
|
|
2 |
|
|
|
|
|
|
|
3,185 |
|
U.S. Treasury and agencies |
|
|
1,543 |
|
|
|
|
|
|
|
|
|
|
|
1,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,226 |
|
|
$ |
2 |
|
|
$ |
|
|
|
$ |
5,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
16,741 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
16,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
$ |
2,395 |
|
|
$ |
4 |
|
|
$ |
|
|
|
$ |
2,399 |
|
U.S. Treasury and agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,395 |
|
|
$ |
4 |
|
|
$ |
|
|
|
$ |
2,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All short-term investments at December 31, 2009 and 2008 mature in less than one year.
Unrealized holding gains and losses on securities classified as available-for-sale are recorded in
accumulated other comprehensive income. As of December 31, 2009 and 2008 the difference between the
fair value and amortized cost of available-for-sale securities were gains of $2,000 and $4,000,
respectively.
44
3. Fair Value Measurements
Effective January 1, 2008, the Company adopted SFAS 157, Fair Value Measurements. (now
referred to as ASC 820) which clarifies the definition of fair value, prescribes methods for
measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair
value and expands disclosures about the use of fair value measurements. The fair value hierarchy
has three levels based on the reliability of the inputs used to determine fair value. Level 1
values are based on quoted prices in active markets. Level 2 values are based on significant other
observable inputs. Level 3 values are based on significant unobservable inputs. The following table
presents the fair value level for the cash and cash equivalents and short-term investments which
represents the assets that are measured at fair value on a recurring basis and are categorized
using the fair value hierarchy. The Company does not have any liabilities that are measured at fair
value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
|
|
Description |
|
2009 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Cash and cash equivalents |
|
$ |
3,903 |
|
|
$ |
3,903 |
|
|
$ |
|
|
|
$ |
|
|
Short-term investments |
|
|
5,228 |
|
|
|
|
|
|
|
5,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,131 |
|
|
$ |
3,903 |
|
|
$ |
5,228 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys cash and cash equivalents at December 31, 2009 consist of cash and money market
funds. Money market funds are valued using quoted market prices. The Companys short-term
investments at December 31, 2009 consist of commercial paper, certificates of deposit and U.S.
Treasury and agency notes. The Company uses an independent third party pricing service to value
these securities. The pricing service uses observable inputs such as new issue money market rates,
adjustment spreads, corporate actions and other factors and applies a series of matrices pricing
model. The Company performs a review of prices reported by the pricing service to determine if
they are reasonable estimates of fair value. In addition, the Company performs a review of its
securities to determine the proper classification in accordance with the fair value hierarchy.
4. Property and Equipment
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Machinery and equipment |
|
$ |
4,510 |
|
|
$ |
5,282 |
|
Furniture and fixtures |
|
|
1,138 |
|
|
|
1,142 |
|
Lab equipment |
|
|
2,488 |
|
|
|
2,488 |
|
Computer equipment and software |
|
|
2,630 |
|
|
|
2,636 |
|
Leasehold improvements |
|
|
1,861 |
|
|
|
1,901 |
|
|
|
|
|
|
|
|
Property and equipment at cost |
|
|
12,627 |
|
|
|
13,449 |
|
Less accumulated depreciation and amortization |
|
|
(10,461 |
) |
|
|
(9,512 |
) |
|
|
|
|
|
|
|
Subtotal |
|
|
2,166 |
|
|
|
3,937 |
|
Construction in progress |
|
|
|
|
|
|
1,156 |
|
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
2,166 |
|
|
$ |
5,093 |
|
|
|
|
|
|
|
|
Depreciation expense was $1,067,000 and $871,000 for the years ended December 31, 2009 and
2008, respectively.
5. Restricted Cash
In accordance with the terms of the Companys sublease agreement with Mendel (see Note 6), the
Company maintained a certificate of deposit as collateral against a letter of credit to secure the
refund to Mendel of any unapplied portion of the prepaid rent paid by Mendel. The restriction on
the Companys cash was lifted as the prepaid rent was applied by Mendel. The letter of credit
expired in November 2009 and all of the restricted cash has been remitted to the Companys main
operating bank accounts.
6. Sublease Agreement and Lease Exit Liability:
On July 18, 2007, the Company entered into a sublease agreement with Mendel to lease
approximately 48,000 square feet of the Companys 72,000 square foot headquarters facility located
in Hayward, California. In April 2009, the Company entered into an
45
amendment to its sublease agreement with Mendel to sublease to Mendel an additional 1,550
square feet. The Company recorded an additional sublease loss on the amendment since the monthly
payments the Company expects to receive are less than the Company will owe the lessor for the
subleased space.
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 ASC 420
Exit or Disposal Cost Obligations, because the monthly payments the Company expects to receive
under the sublease are less than the amounts that the Company will owe the lessor for the sublease
space. The fair value of the lease exit liability was determined using a credit-adjusted risk-free
rate to discount the estimated future net cash flows, consisting of the minimum lease payments to
the lessor for the sublease space and payments the Company will
receive under the sublease. The
sublease loss and ongoing accretion expense required to record the lease exit liability at its fair
value using the interest method have been recorded as part of restructuring and asset impairment
expense in the statement of operations. The lease exit liability activity for the years ended
December 31, 2009 and 2008 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
Balance at beginning of year |
|
$ |
1,374 |
|
|
$ |
1,749 |
|
Loss on sublease amendment to Mendel |
|
|
42 |
|
|
|
|
|
Accretion expense |
|
|
61 |
|
|
|
79 |
|
Lease payments |
|
|
(386 |
) |
|
|
(454 |
) |
|
|
|
|
|
|
|
Balance at end of the year |
|
$ |
1,091 |
|
|
$ |
1,374 |
|
|
|
|
|
|
|
|
The Company classified $263,000 of the $1,091,000 lease exit liability in current liabilities
and the remaining $828,000 in non-current liabilities in the accompanying balance sheet at
December 31, 2009. At December 31, 2008, the Company classified $318,000 of the lease exit
liability in current liabilities and $1,056,000 in non-current liabilities.
7. Other Liabilities
Other liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Other accrued liabilities: |
|
|
|
|
|
|
|
|
Accrued expense for services |
|
$ |
302 |
|
|
$ |
389 |
|
Payroll withholding liabilities |
|
|
47 |
|
|
|
76 |
|
Deposits |
|
|
|
|
|
|
153 |
|
Other short term obligations |
|
|
8 |
|
|
|
12 |
|
|
|
|
|
|
|
|
Total other accrued liabilities |
|
$ |
357 |
|
|
$ |
630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-current liabilities: |
|
|
|
|
|
|
|
|
Deposits |
|
$ |
75 |
|
|
$ |
75 |
|
Other long term obligations |
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
Total other non-current liabilities |
|
$ |
75 |
|
|
$ |
82 |
|
|
|
|
|
|
|
|
8. Notes Payable and Accrued Interest
On July 3, 2006, Novo Nordisk, pursuant to the July 3, 2006 License
Agreement, 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 amount outstanding under the Promissory Note, including
accrued interest, was $8.9 million and $8.5 million as of December 31,
2009 and 2008, respectively. The Promissory Note along with the related
accrued interest, is recorded on the balance sheets as a non-current
liability under the notes payable and accrued interest line item.
The Promissory Note contains 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 Company subsequently received a notice of termination of the July 3,
2006 License Agreement by Novo Nordisk in January 2008. The termination
of the July 3, 2006 License Agreement did not accelerate any of the
payment provisions under the Promissory Note. As of March 22, 2010,
there were no covenant violations or any event of default.
46
9. Leases, Commitments and Contingencies
The Company has a lease for a building containing office and laboratory and manufacturing
facilities, which expires in 2016. A portion of this lease obligation was offset by a sublease to
Mendel Biotechnology, Inc. (Mendel). Future minimum non-cancelable lease payments at
December 31, 2009 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating |
|
|
Mendel |
|
|
Net Operating |
|
|
|
Leases |
|
|
Sub-Lease |
|
|
Lease Payments |
|
Year ending December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
$ |
1,850 |
|
|
$ |
(957 |
) |
|
$ |
893 |
|
2011 |
|
|
1,639 |
|
|
|
(986 |
) |
|
|
653 |
|
2012 |
|
|
1,704 |
|
|
|
(896 |
) |
|
|
808 |
|
2013 |
|
|
1,774 |
|
|
|
|
|
|
|
1,774 |
|
2014 |
|
|
1,844 |
|
|
|
|
|
|
|
1,844 |
|
2015 and thereafter |
|
|
2,938 |
|
|
|
|
|
|
|
2,938 |
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
$ |
11,749 |
|
|
$ |
(2,839 |
) |
|
$ |
8,910 |
|
|
|
|
|
|
|
|
|
|
|
In July 2007, the Company entered into a sublease agreement with Mendel to lease approximately
48,000 square feet of its 72,000 square foot headquarters located in Hayward, California. In April
2009, the Company entered into an amendment to its sublease agreement with Mendel to sublease an
additional 1,550 square feet.
The sublease commenced in July 2007 and expires concurrently with the master lease in July
2016. Under the sublease and amendment, Mendel will make monthly base rent payments totaling
$2.6 million (exclusive of the termination fee) through August 2012 that will offset a portion of
the Companys existing building lease obligation. Mendel has the option to terminate the sublease
early on September 1, 2012 for a termination fee of $225,000. If the option to terminate the
sublease is not exercised by Mendel, the Company will receive $4.2 million of additional monthly
base rent payments through the expiration of the sublease in 2016. Mendel will also pay the Company
for its share of all pass through costs such as taxes, operating expenses and utilities based on
the percentage of the facility space occupied by them.
The Companys monthly rent payments fluctuates under the master lease. In accordance with
generally accepted accounting principles, the Company recognizes rent expense on a straight-line
basis. The Company records deferred rent for the difference between the amounts paid and recorded
as expense. At December 31, 2009 and 2008, the Company had $0.1 million and $0.2 million of
deferred rent, respectively.
For the years ended December 31, 2009 and 2008, building rent expense under operating leases
totaled $0.6 million and $0.7 million, respectively.
Indemnification
The Company from time to time enters into contracts that contingently require the Company to
indemnify parties against third party claims. These contracts primarily relate to: (i) real estate
leases, under which the Company may be required to indemnify property owners for environmental and
other liabilities, and other claims arising from the Companys use of the applicable premises, and
(ii) agreements with the Companys officers, directors and employees, under which the Company may
be required to indemnify such persons from certain liabilities arising out of such persons
relationships with the Company. To date, the Company has made no payments related to such
indemnifications and no liabilities have been recorded for these obligations on the balance sheets
at December 31, 2009 or 2008.
Legal Matters
From time to time, the Company is involved in litigation arising out of the ordinary course of
its business. Currently there are no known claims or pending litigation expected to have a material
effect on the Companys overall financial position, results of operations, or liquidity.
47
10. Shareholders Equity
On February 26, 2009, the Company closed a registered direct offering covering the sale of an
aggregate of 44.7 million shares under a shelf registration statement on Form S-3 (No. 333-148263)
that was previously filed by the Company on December 21, 2007 and declared effective by the SEC on
January 25, 2008. The Company received net proceeds, after offering expenses, of $3.9 million.
During 2009, the Company issued 371,036 shares of common stock pursuant to the Employee Stock
Purchase Plan (ESPP) at an average price of $0.12 per share.
Reserved Shares
At December 31, 2009 the Company had 5,088,443 shares reserved for issuance upon exercise of
options under all stock option plans and 763,185 shares of common stock reserved for issuance of
new option grants. The Company had 3,068,880 shares available for future issuances under the ESPP.
The amount of shares available under the ESPP was increased by 2,500,000 on May 15, 2009. On that
date, the Companys shareholders approved an amendment to the ESPP to increase the aggregate number
of shares of common stock authorized for issuance.
Shareholder Rights Plan
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 distributes 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.
Until the rights are distributed, the rights trade with, and are not separable from, the Companys
common stock and are not exercisable. 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.
Stock Option Plans: 1996 Equity Incentive Plan, 2005 Equity Incentive Plan and 1996 Non-Employee
Directors Plan
The 1996 Equity Incentive Plan (the 1996 Plan) and the 2005 Equity Incentive Plan (the 2005
Plan), which amended, restated and retitled the 1996 Plan, were adopted to provide a means by
which officers, non-employee directors, scientific advisory board members and employees of and
consultants to the Company and its affiliates could be given an opportunity to acquire an equity
interest in the Company. All officers, non-employee directors, scientific advisory board members
and employees of and consultants to the Company are eligible to participate in the 2005 Plan.
In April 1996, the Companys Board of Directors adopted and the Companys shareholders
approved the 1996 Plan, which amended and restated an earlier stock option plan. The 1996 Plan
reserved 960,000 shares for future grants. During May 2001, the Companys shareholders approved an
amendment to the Plan to include an evergreen provision. In 2003, the 1996 Plan was amended to
increase the maximum number of shares available for issuance under the evergreen feature of the
1996 Plan by 400,000 shares to 2,000,000 shares. The evergreen provision automatically increased
the number of shares reserved under the 1996 Plan, subject to certain limitations, by 6% of the
issued and outstanding shares of common stock of the Company or such lesser number of shares as
determined by the board of directors on the date of the annual meeting of shareholders of each
fiscal year beginning 2001 and ending 2005. As of December 31, 2009, the Company had 334,257
options outstanding and 224,652 shares were available for future grants under the 1996 Plan.
In March 2005, the Companys board of directors adopted and in May 2005 the Companys
shareholders approved the 2005 Plan, which amended, restated and retitled the 1996 Plan. All
outstanding awards granted under the 1996 Plan remain subject to the terms of the 1996 Plan. All
stock awards granted on or after the adoption date are subject to the terms of the 2005 Plan. No
shares were added to the share reserve under the 2005 Plan other than the shares available for
future issuance under the 1996 Plan. Pursuant to the 2005 Plan, the Company had 2,918,638 shares of
common stock authorized for issuance. Options (net of canceled or expired options) covering an
aggregate of 1,999,252 shares of the Companys common stock had been granted under the 1996 Plan,
and 919,386 shares became available for future grant under the 2005 Plan. In March 2006, the
Companys board of directors amended, and in May 2006 the Companys shareholders approved, the
amendment to the 2005 Plan, increasing the shares of common stock authorized for issuance by
2,000,000. In April 2007, the Companys board of directors amended, and in June 2007, the Companys
shareholders approved the amendment to the 2005 Plan, increasing the shares of common stock
authorized for issuance by 1,600,000 shares. In March 2008, the Companys board of directors
amended, and in May 2008 the Company shareholders approved, the amendment to the 2005 Plan,
increasing the shares of common stock authorized by 2,700,000. As of December 31, 2009,
538,533 shares were available for future grants.
48
Options granted under the 2005 Plan expire no later than 10 years from the date of grant.
Options granted under the 2005 Plan may be either incentive or non-statutory stock options. For
incentive and non-statutory stock option grants, the option price shall be at least 100% and 85%,
respectively, of the fair value on the date of grant, as determined by the Companys board of
directors. If at any time the Company grants an option, and the optionee directly or by attribution
owns stock possessing more than 10% of the total combined voting power of all classes of stock of
the Company, the option price shall be at least 110% of the fair value and shall not be exercisable
more than five years after the date of grant.
Options granted under the 2005 Plan may be immediately exercisable if permitted in the
specific grant approved by the board of directors and, if exercised early may be subject to
repurchase provisions. The shares acquired generally vest over a period of four years from the date
of grant. The 2005 Plan also provides for a transition from employee to consultant status without
termination of the vesting period as a result of such transition. Under the 2005 Plan, employees
may exercise options in exchange for a note payable to the Company, if permitted under the
applicable grant. As of December 31, 2009 and 2008, there were no outstanding notes receivable from
shareholders. Any unvested stock issued is subject to repurchase agreements whereby the Company has
the option to repurchase unvested shares upon termination of employment at the original issue
price. The common stock subject to repurchase has voting rights, but cannot be resold prior to
vesting. No grants with early exercise provisions have been made under the 2005 Plan and no shares
have been repurchased. The Company granted options to purchase 2,078,000 shares and 898,000 shares
during the years ended December 31, 2009 and 2008, respectively, under the 2005 Plan, which
included option grants to the Companys non-employee directors in the amount of 600,000 shares and
125,000 shares during 2009 and 2008, respectively. The 2005 Plan had 4,744,450 option shares
outstanding as of December 31, 2009.
The 1996 Non-Employee Directors Stock Option Plan (the Directors Plan) had 45,000 shares
of common stock authorized for issuance. Options granted under the Directors Plan expire no later
than 10 years from date of grant. The option price shall be at 100% of the fair value on the date
of grant as determined by the board of directors. The options generally vest quarterly over a
period of one year. During 2000, the board of directors approved the termination of the Directors
Plan. No more options can be granted under the plan after its termination. The termination of the
Directors Plan had no effect on the options already outstanding. There were 3,407 and 1,500 shares
cancelled due to option expirations for the years ended December 31, 2009 and 2008, respectively.
As of December 31, 2009, 9,736 outstanding options with exercise prices ranging from $107.81
$120.63 remained with no additional shares available for grant.
The following is a summary of activity under the 1996 Plan, the 2005 Plan and the Directors
Plan as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Shares Available |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
for Grant of |
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise |
|
|
|
Option or Award |
|
|
Shares |
|
|
Price per Share |
|
|
Price |
|
Balance at December 31, 2007 |
|
|
1,837,161 |
|
|
|
3,493,154 |
|
|
$ |
1.02 |
|
|
|
|
|
|
$ |
120.63 |
|
|
$ |
5.37 |
|
Options authorized |
|
|
2,700,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
(898,000 |
) |
|
|
898,000 |
|
|
$ |
0.39 |
|
|
|
|
|
|
$ |
1.57 |
|
|
$ |
0.80 |
|
Options exercised |
|
|
|
|
|
|
(3,750 |
) |
|
$ |
1.15 |
|
|
|
|
|
|
$ |
1.15 |
|
|
$ |
1.15 |
|
Restricted stock awards granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options cancelled |
|
|
202,343 |
|
|
|
(202,343 |
) |
|
$ |
1.23 |
|
|
|
|
|
|
$ |
71.25 |
|
|
$ |
10.65 |
|
Restricted share awards cancelled |
|
|
147,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan shares cancelled and not reauthorized |
|
|
(1,500 |
) |
|
|
|
|
|
$ |
71.25 |
|
|
|
|
|
|
$ |
71.25 |
|
|
$ |
71.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
3,987,599 |
|
|
|
4,185,061 |
|
|
$ |
0.39 |
|
|
|
|
|
|
$ |
120.63 |
|
|
$ |
4.14 |
|
Options granted |
|
|
(2,078,000 |
) |
|
|
2,078,000 |
|
|
$ |
0.15 |
|
|
|
|
|
|
$ |
0.25 |
|
|
$ |
0.22 |
|
Options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards granted |
|
|
(2,418,250 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options cancelled |
|
|
1,174,618 |
|
|
|
(1,174,618 |
) |
|
$ |
0.17 |
|
|
|
|
|
|
$ |
112.50 |
|
|
$ |
4.34 |
|
Restricted share awards cancelled |
|
|
100,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan shares cancelled and not reauthorized |
|
|
(3,407 |
) |
|
|
|
|
|
$ |
41.25 |
|
|
|
|
|
|
$ |
42.19 |
|
|
$ |
41.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
763,185 |
|
|
|
5,088,443 |
|
|
$ |
0.15 |
|
|
|
|
|
|
$ |
120.63 |
|
|
$ |
2.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
The following table summarizes information about stock options outstanding and exercisable as
of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
Number |
|
|
Remaining |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
of |
|
|
Contractual |
|
|
Exercise |
|
|
Number of |
|
|
Exercise |
|
Exercise Price Range |
|
Shares |
|
|
Life (In Years) |
|
|
Price |
|
|
Shares |
|
|
Price |
|
$0.15 - $0.25 |
|
|
1,835,000 |
|
|
|
9.16 |
|
|
$ |
0.22 |
|
|
|
557,059 |
|
|
$ |
0.20 |
|
$0.26 - $0.87 |
|
|
540,000 |
|
|
|
8.59 |
|
|
|
0.63 |
|
|
|
220,311 |
|
|
|
0.69 |
|
$0.88 - $1.70 |
|
|
1,530,950 |
|
|
|
7.37 |
|
|
|
1.51 |
|
|
|
1,050,906 |
|
|
|
1.51 |
|
$1.71 - $3.14 |
|
|
762,400 |
|
|
|
6.62 |
|
|
|
1.86 |
|
|
|
678,470 |
|
|
|
1.85 |
|
$3.15 - $9.45 |
|
|
241,900 |
|
|
|
4.85 |
|
|
|
5.31 |
|
|
|
238,150 |
|
|
|
5.33 |
|
$9.46 - $18.65 |
|
|
67,866 |
|
|
|
2.92 |
|
|
|
15.65 |
|
|
|
67,866 |
|
|
|
15.65 |
|
$18.66 - $29.75 |
|
|
47,300 |
|
|
|
2.08 |
|
|
|
24.33 |
|
|
|
47,300 |
|
|
|
24.33 |
|
$29.76 - $48.75 |
|
|
22,642 |
|
|
|
1.25 |
|
|
|
30.99 |
|
|
|
22,642 |
|
|
|
30.99 |
|
$48.76 - $120.63 |
|
|
40,385 |
|
|
|
0.43 |
|
|
|
99.36 |
|
|
|
40,385 |
|
|
|
99.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,088,443 |
|
|
|
7.72 |
|
|
$ |
2.49 |
|
|
|
2,923,089 |
|
|
$ |
3.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value is the sum of the amounts by which the quoted market price of the
Companys stock exceeded the exercise price of the stock options at December 31, 2009 and 2008 for
those stock options for which the quoted market price was in excess of the exercise price
(in-the-money options). As of December 31, 2009 and 2008, the aggregate intrinsic value of
options outstanding was zero. As of December 31, 2009, options to purchase 2,923,089 shares of
common stock were exercisable and had an aggregate intrinsic value of zero. No stock options were
exercised in 2009 and the total intrinsic value of stock options exercised in 2008 was $200.
A summary of the activity of the Companys unvested restricted stock and performance bonus
stock award activities as for the years ending December 31, 2009 and 2008 is presented below. The
ending balances represent the maximum number of shares that could be earned or vested under the
2005 Plan:
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Weighted Average |
|
|
|
Shares |
|
|
Grant Date Fair Value |
|
Balance at December 31, 2007 |
|
|
870,724 |
|
|
$ |
1.66 |
|
Restricted stock awards granted |
|
|
|
|
|
|
|
|
Restricted share awards vested |
|
|
(19,594 |
) |
|
|
3.63 |
|
Restricted share awards cancelled |
|
|
(147,595 |
) |
|
|
1.66 |
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
703,535 |
|
|
|
1.60 |
|
Restricted stock awards granted |
|
|
2,418,250 |
|
|
|
0.16 |
|
Restricted share awards vested |
|
|
(353,154 |
) |
|
|
0.90 |
|
Restricted share awards cancelled |
|
|
(100,625 |
) |
|
|
0.99 |
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
2,668,006 |
|
|
|
0.41 |
|
|
|
|
|
|
|
|
|
For restricted stock awards, the Company recognizes compensation expense over the vesting
period for the fair value of the stock award on the measurement date. The Companys 2009 restricted
stock awards granted included 600,000 shares with vesting provisions based solely on the
achievement of performance-based milestones. None of the restricted performance-based milestone
awards have yet been achieved. There were no performance-based stock awards granted in 2008. The
Company records expense for these awards if achievement of the award is probable. Expense is
recorded over the estimated service period until the performance-based milestone is achieved.
The total fair value of restricted stock awards that did vest during the years ended December
31, 2009 and 2008 was $66,000 and $16,000, respectively. The Company retained purchase rights to
2,668,000 and 704,000 shares of unvested restricted stock awards issued pursuant to stock purchase
agreements at no cost per share as of December 31, 2009 and 2008, respectively. Total employee
stock-based compensation expense for restricted stock awards was $346,000 and $206,000 for the
years ended December 31, 2009 and 2008, respectively.
Employee Stock Purchase Plan
Employees generally are eligible to participate in the Employee Stock Purchase Plan (ESPP)
if they have been continuously employed by the Company for at least 10 days prior to the first day
of the offering period and are customarily employed at least 20 hours per week and at least five
months per calendar year and are not a 5% or greater shareholder. Shares may be purchased under
50
the ESPP at 85% of the lesser of the fair market value of the common stock on the grant date or
purchase date. Employee contributions, through payroll deductions, are limited to the lesser of
15% of earnings or $25,000.
As of December 31, 2009, a total of 1,481,120 shares had been issued under the ESPP. In April
2008, the Companys board of directors amended, and in May 2008 the Company shareholders approved,
the amendment to the ESPP increasing the shares of common stock authorized by 1,000,000. In April
2009, the Companys board of directors amended, and in May 2009 the Company shareholders approved,
the amendment to the ESPP increasing the number of shares of common stock authorized by 2,500,000.
As of December 31, 2009, there was a balance of 3,068,880 available authorized shares. Compensation
expense was $55,000 and $42,000 for the years ended December 31, 2009 and 2008, respectively. The
fair value of employee stock purchase rights under the ESPP is determined using the Black-Scholes
option pricing model and the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
Employee Stock Purchase Plan |
|
|
|
|
|
|
|
|
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
Volatility factor |
|
|
115.4 |
% |
|
|
64.8 |
% |
Risk-free interest rate |
|
|
0.9 |
% |
|
|
1.7 |
% |
Expected life (years) |
|
|
2.00 |
|
|
|
0.52 |
|
Weighted-average fair value of purchase rights granted during the period |
|
$ |
0.11 |
|
|
$ |
0.15 |
|
Stock-Based Compensation Expense
The Company adopted the fair value recognition provisions of SFAS No. 123(R), Share-based
Payment, (now referred to as ASC 718) effective January 1, 2006. Stock-based compensation expense
is based on the fair value of that portion of stock options and restricted stock awards that are
ultimately expected to vest during the period. Stock-based compensation expense recognized in the
statement of operations during 2009 and 2008 included compensation expense for stock-based awards
granted prior to, but not yet vested, as of December 31, 2005, based on the grant date fair value
estimated in accordance with the pro forma provisions of SFAS 123, and share-based payment awards
granted subsequent to December 31, 2005 based on the grant date fair value estimated in accordance
with SFAS 123(R). For stock options granted after January 1, 2006, the fair value of each award is
amortized using the straight-line single-option method. For share awards granted prior to 2006, the
fair value of each award was amortized using the accelerated multiple-option valuation method
prescribed by SFAS 123(R). Stock-based compensation expense is based on awards ultimately expected
to vest, therefore, it has been reduced for estimated forfeitures. The Companys estimated
forfeiture rate is based on historical experience.
The following table shows share-based compensation expense included in the statement of
operations for the years ended December 31, 2009 and 2008, respectively (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Costs and Expenses |
|
|
|
|
|
|
|
|
Research and development |
|
$ |
305 |
|
|
$ |
553 |
|
General and administrative |
|
|
568 |
|
|
|
324 |
|
|
|
|
|
|
|
|
Total stock-based employee compensation expense |
|
$ |
873 |
|
|
$ |
877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on basic and diluted net loss per common share |
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
There was no capitalized stock-based compensation cost as of December 31, 2009. Since the
Company has cumulative net losses through December 31, 2009, there was no tax benefit associated
with stock-based compensation expense. As of December 31, 2009, $441,000 of total unrecognized
compensation costs, net of forfeitures, related to non-vested awards is expected to be recognized
over a weighted average period of 2.15 years.
Valuation Assumptions
The fair value of options was estimated at the date of grant using the Black-Scholes option
pricing model. Expected volatility is based on the historical volatility of the Companys common
stock for similar terms. The expected term was estimated using a lattice model to estimate the
expected term as an input into the Black-Scholes option pricing model since the Company has limited
recent history regarding the exercise of options The expected term represents the estimated period
of time that stock options are expected to be outstanding, which is less than the contractual term
which is generally ten years. The risk-free interest rate is based on the U.S. Treasury yield. The
expected dividend yield is zero, as the Company does not anticipate paying dividends in the near
future. The weighted average assumptions for employee and non-employee options are as follows:
51
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
|
|
2009 |
|
|
2008 |
|
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
Volatility factor |
|
|
91.6 |
% |
|
|
67.7 |
% |
Risk-free interest rate |
|
|
1.3 |
% |
|
|
2.8 |
% |
Expected term (years) |
|
|
3.7 |
|
|
|
3.8 |
|
Weighted-average fair value of options granted during the periods |
|
$ |
0.14 |
|
|
$ |
0.33 |
|
Stock-Based Compensation for Non-Employees
The Company accounts for options issued to non-employees under ASC 505-50, Equity Equity
Based Payments to Non-Employees, using the Black-Scholes option-pricing model. The value of such
non-employee options are periodically re-measured over their vesting terms.
11. Collaborations and Royalty Agreements
Lung Rx
On August 30, 2007, the Company signed an Exclusive License, Development and Commercialization
Agreement (the Lung Rx Agreement) with Lung Rx, Inc., (Lung Rx), a wholly-owned subsidiary of
United Therapeutics Corporation, pursuant to which the Company granted Lung Rx, upon the payment of
specified amounts, an exclusive license to develop and commercialize inhaled treprostinil using the
Companys AERx Essence technology for the treatment of pulmonary arterial hypertension and other
potential therapeutic indications. The Company has received a total of $4.9 million in milestone,
development and other payments under this agreement. Up until the quarter ended September 30,
2009, the Company had not recognized any revenue under the Lung Rx Agreement due to the existence
of certain undelivered performance obligations.
On June 1, 2009, the Company received a written notice from United Therapeutics Corporation
seeking to terminate the Lung Rx Agreement on July 1, 2009. During the three months ended
September 30, 2009, the Company engaged Lung Rx in discussions about continuing or restructuring
its collaboration with Lung Rx. These discussions were not successful and the Company concluded
that the likelihood of further collaboration with Lung Rx was remote. Therefore, during the three
months ended September 30, 2009, the Company recognized $4.9 million of revenue relating to the
Lung Rx Agreement that had been previously deferred. In accordance with the Companys revenue
recognition policy, all amounts were recognized as revenue in the quarter ended September 30, 2009
since the Company no longer had any performance obligations under the Lung Rx Agreement.
Zogenix
In August 2006, the Company sold all of its assets related to the Intraject needle-free
injector technology platform and products, including 12 United States patents along with foreign
counterparts, to Zogenix, Inc., a private company. Zogenix is responsible for further development
and commercialization efforts of Intraject (now rebranded under the name DosePro). Under the terms
of the asset sale agreement, the Company received a $4.0 million initial payment from Zogenix and
it will be entitled to a $4.0 million milestone payment upon initial U.S. commercialization as well
as royalty payments upon commercialization of DosePro products. In December 2007, Zogenix
submitted a New Drug Application (NDA) with the U.S. Food and Drug Administration (FDA) for the
migraine drug sumatriptan using the needle-free injector DosePro (SUMAVEL DosePro). The NDA was
accepted for filing by the FDA in March 2008. The same month, Zogenix entered into a license
agreement to grant exclusive rights in the European Union to Desitin Pharmaceuticals, GmbH to
develop and commercialize SUMAVEL DosePro in the European Union.
On July 16, 2009, Zogenix announced that it had received approval from the FDA for its NDA for
SUMAVEL DosePro needle-free delivery system. On August 3, 2009, Zogenix and Astellas Pharma US,
Inc. announced that they had entered into an exclusive co-promotion agreement in the U.S. for the
SUMAVEL DosePro needle-free delivery system. Under the announced terms of the agreement, the
companies will collaborate on the promotion and marketing of SUMAVEL DosePro with Zogenix focusing
their sales activities primarily on the neurology market while Astellas will focus mostly on
primary care physicians. Zogenix will have responsibility for manufacturing and distribution of
the product.
The Company did not receive any payments or recognize any revenue under the Zogenix agreement
for the years ended December 31, 2009 and 2008.
52
12. Asset Impairment
In accordance with GAAP, the Company reviews for impairment whenever events or changes in
circumstances indicate that the carrying amount of assets may not be recoverable. For the quarter
ended September 30, 2009, the Company concluded that the termination of the Lung Rx Agreement and
the subsequent suspension of development activities warranted reviewing AERx technology assets for
impairment. The Company determined that the production equipment used to manufacture the AERx
product constituted an asset group that should be reviewed for impairment. These assets are
presently idle and primarily consist of customized AERx production equipment that does not have an
active resale market due to the specialized nature of the assets. The Company determined that the
net book value of these assets exceeded the expected future cash flows.
Accordingly, the Company recorded an impairment charge of $1.6 million to write down the
assets to their estimated fair value. The Company recorded this charge as a component of
restructuring and asset impairment on its Statement of Operations. In addition, the Company
recorded $0.3 million in restructuring and asset impairment expense related to lease exit
activities.
13. Employee Benefit Plans
The Company provides a 401(k) Plan for substantially all full-time employees. Employees can
contribute on a pretax basis up to the 2009 statutory limit of $16,500 (plus an additional $5,500
for employees that are 50 years and older). The Company matches employees contributions on 50% of
the first 6% of an employees contribution. The Companys employer matching contribution expense
was $62,000 and $108,000 in 2009 and 2008, respectively.
14. Income Taxes
In 2009 and 2008, the Company recorded an income tax benefit of $15,000 and $25,000,
respectively. The income tax benefits were a result of the refundable research and development
credit that was enacted in 2008. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial reporting and the
amounts used for tax purposes as well as net operating loss and tax credit carryforwards.
Significant components of the Companys deferred tax assets and liabilities were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Net operating loss carryforwards |
|
$ |
7,962 |
|
|
$ |
2,600 |
|
Research and development credits |
|
|
6,389 |
|
|
|
6,300 |
|
Federal orphan drug credits |
|
|
3,360 |
|
|
|
|
|
Other |
|
|
1,818 |
|
|
|
3,000 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
19,529 |
|
|
|
11,900 |
|
Valuation allowance |
|
|
(19,529 |
) |
|
|
(11,900 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
The Company considers all available evidence, both positive and negative, including historical
levels of taxable income, 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. At December 31, 2009 and 2008, based on the Companys analysis of all
available evidence, both positive and negative, it was considered more likely than not that the
Companys deferred tax assets would not be realized, and as a result, the Company recorded a
valuation allowance for its deferred tax assets. The valuation allowance increased by $7.6 million
during the year ended 2009 and decreased by $115.6 million during the year ended December 31, 2008.
The reduction in the valuation allowance for the year ended December 31, 2008 includes the reversal
of fully reserved deferred tax assets related to net operating loss and credit carryforwards that
may not be available prior to their expiration as a result of federal and state ownership change
limitations. In accordance with ASC 718 Compensation-Stock Compensation, the Company has excluded
from deferred tax assets tax benefits attributable to employee stock option exercises.
The difference between the income tax benefit and the amount computed by applying the federal
statutory income tax rate to loss before income taxes is as follows (in thousands):
53
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
Income tax benefit at federal statutory rate |
|
$ |
(4,825 |
) |
|
$ |
(7,921 |
) |
Expired net operating losses |
|
|
11 |
|
|
|
554 |
|
State taxes (net of federal) |
|
|
(847 |
) |
|
|
(1,461 |
) |
Credits |
|
|
(2,408 |
) |
|
|
(289 |
) |
Other |
|
|
425 |
|
|
|
|
|
Reduction in deferred tax assets due to Section 382 limitations |
|
|
|
|
|
|
124,743 |
|
Change in valuation allowance |
|
|
7,629 |
|
|
|
(115,651 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
(15 |
) |
|
$ |
(25 |
) |
|
|
|
|
|
|
|
As of December 31, 2009, the Company had federal net operating loss carryforwards of
approximately $19.4 million, federal research and development tax credit carryforwards of
approximately $0.1 million and federal orphan drug credit carryforwards of approximately $3.4
million, which expire in the years 2010 through 2029. The Company also had California net operating
loss carryforwards of approximately $20.7 million, which expire in the years 2011 through 2029, and
California research and development tax credit carryforwards of approximately $9.7 million, which
do not expire. None of the federal and state net operating loss carryforwards represent stock
option deductions arising from activity under the Companys stock option plan.
The Company files income tax returns in the U.S. federal jurisdiction and various state
jurisdictions. The Company is subject to U.S. federal and state income tax examinations by tax
authorities for tax years 1995 through 2009 due to net operating losses that are being carried
forward for tax purposes.
The Company adopted the provisions of FIN 48 (now referred to as ASC 740) on January 1, 2007.
The Company did not have any unrecognized tax benefits at January 1, 2007, and does not have any
unrecognized tax benefits at December 31, 2009 and, as a result, there was no effect on the
Companys financial condition or results of operations as a result of implementing FIN 48.
The Companys policy is to recognize interest and penalties accrued on any unrecognized tax
benefits as a component of income tax expense. As of the date of adoption of FIN 48, the Company
did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor
was any interest expense recognized for the years ended December 31, 2009 and 2008.
Federal and state laws limit the use of net operating loss and credit carryforwards in certain
situations where changes occur in the stock ownership of a company. The Company conducted an
analysis of its stock ownership changes under Internal Revenue Code Section 382 as of December 31,
2008 and has reported its deferred tax assets related to net operating loss and credit
carryforwards after recognizing change of control limitations that it believes occurred in 2008.
The reduction in deferred tax assets was offset by a reduction in the valuation allowance. The
Company did not have any subsequent Section 382 limitations for the use of net operating loss in
2009.
15. Quarterly Results of Operations (unaudited)
Following is a summary of the quarterly results of operations for the years ended December 31,
2009 and 2008 (amounts in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
Contract revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
4,883 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
3,726 |
|
|
|
2,927 |
|
|
|
2,426 |
|
|
|
2,327 |
|
General and administrative |
|
|
1,398 |
|
|
|
1,368 |
|
|
|
1,323 |
|
|
|
941 |
|
Restructuring and asset impairment |
|
|
17 |
|
|
|
205 |
|
|
|
1,638 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
5,141 |
|
|
|
4,500 |
|
|
|
5,387 |
|
|
|
3,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(5,141 |
) |
|
|
(4,500 |
) |
|
|
(504 |
) |
|
|
(3,282 |
) |
Net interest income (expense) |
|
|
(76 |
) |
|
|
(91 |
) |
|
|
(93 |
) |
|
|
(96 |
) |
Other income (expense) |
|
|
(1 |
) |
|
|
(3 |
) |
|
|
1 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(5,218 |
) |
|
|
(4,594 |
) |
|
|
(596 |
) |
|
|
(3,379 |
) |
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(5,218 |
) |
|
$ |
(4,594 |
) |
|
$ |
(596 |
) |
|
$ |
(3,364 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share |
|
$ |
(0.07 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common share |
|
|
70,704 |
|
|
|
99,298 |
|
|
|
99,347 |
|
|
|
99,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
Contract revenues |
|
$ |
|
|
|
$ |
54 |
|
|
$ |
197 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
4,329 |
|
|
|
5,364 |
|
|
|
3,199 |
|
|
|
3,607 |
|
General and administrative |
|
|
1,549 |
|
|
|
1,825 |
|
|
|
1,615 |
|
|
|
1,690 |
|
Restructuring and asset impairment |
|
|
22 |
|
|
|
20 |
|
|
|
19 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
5,900 |
|
|
|
7,209 |
|
|
|
4,833 |
|
|
|
5,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(5,900 |
) |
|
|
(7,155 |
) |
|
|
(4,636 |
) |
|
|
(5,315 |
) |
Net interest income (expense) |
|
|
263 |
|
|
|
102 |
|
|
|
41 |
|
|
|
(33 |
) |
Other income (expense) |
|
|
(1 |
) |
|
|
1 |
|
|
|
(1 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
( 5,638 |
) |
|
|
(7,052 |
) |
|
|
(4,596 |
) |
|
|
(5,347 |
) |
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(5,638 |
) |
|
$ |
(7,052 |
) |
|
$ |
(4,596 |
) |
|
$ |
(5,322 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share |
|
$ |
(0.10 |
) |
|
$ |
(0.13 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common share |
|
|
54,007 |
|
|
|
54,159 |
|
|
|
54,165 |
|
|
|
54,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16. Subsequent Events
Zogenix
On January 13, 2010, Zogenix announced the U.S. commercial launch of its SUMAVEL DosePro
product. The U.S. launch entitled the Company to the $4.0 million milestone payment which the
Company announced receiving on February 4, 2010. The Company will be entitled to quarterly royalty
payments beginning with the quarter ending March 31, 2010.
Property Tax Assessment
On February 8, 2010, the Company received a Stipulation Letter from the Office of the Assessor
of the County of Alameda (Assessor). The Assessor reduced the appraised value of the property
subject to the previously received assessment and validated the Companys position on its appeal of
the original audit findings. The Company has not received revised property tax bills or received
refunds of amounts previously paid, but it anticipates that the previously received assessments of
$508,000 will be significantly reduced.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on their evaluation as of the end of the period covered by this report, the Companys
chief executive officer and chief financial officer have concluded that the Companys 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 the
Company is 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.
The Companys disclosure controls and procedures are designed to provide reasonable assurance
of achieving their objectives, and the Companys chief executive officer and chief financial
officer have concluded that these controls and procedures are effective at the reasonable
assurance level. The Company believes that a control system, no matter how well designed and
operated, cannot provide
55
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.
Managements Annual Report on Internal Control Over Financial Reporting
The Companys management is responsible for establishing and maintaining adequate internal
control over financial reporting. A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles.
There are inherent limitations in the effectiveness of any system of internal control,
including the possibility of human error and the circumvention or overriding of controls.
Accordingly, even effective internal controls can provide only reasonable assurances with respect
to financial statement preparation. Further, because of changes in conditions, the effectiveness of
internal control may vary over time.
The Companys management assessed the effectiveness of the Companys internal control over
financial reporting as of December 31, 2009. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission
in Internal Control Integrated Framework. Based on its assessment using the COSO criteria,
management concluded that, as of December 31, 2009, the Companys internal control over financial
reporting is effective.
This annual report does not include an attestation report of the Companys independent
registered public accounting firm regarding internal control over financial reporting. The
Companys internal control over financial reporting was not subject to attestation by the Companys
independent registered public accounting firm pursuant to temporary rules of the SEC that permit
the Company to provide only managements report in this annual report.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during
our most recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item concerning (i) identification and business experience of
the Companys directors, as well as legal proceedings involving such directors and any family
relationships between directors and executive officers of the Company, (ii) the identification of
the members of the Companys audit committee, (iii) the identification of the Audit Committee
Financial Expert and (iv) the Companys Code of Ethics is incorporated by reference from the
section captioned Proposal 1: Election of Directors contained in the Companys Proxy Statement
related to the 2010 Annual Meeting of Shareholders to be filed by the Company with the SEC (the
Proxy Statement).
Identification of Executive Officers
The information required by this Item concerning our executive officers is set forth in Part I
of this Annual Report on Form 10-K.
Section 16(a) Beneficial Reporting Compliance
The information regarding compliance with Section 16(a) of the Securities Exchange Act of
1934, as amended, required by this Item is incorporated by reference from the section captioned
Section 16(a) Beneficial Ownership Reporting Compliance in the Proxy Statement.
56
Item 11. Executive Compensation
The information required by this Item is incorporated by reference from the section captioned
Compensation contained in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this Item is incorporated by reference from the section captioned
Security Ownership of Certain Beneficial Owners and Management and Equity Compensation Plan
Information contained in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by this Item is incorporated by reference from the section captioned
Certain Transactions contained in the Proxy Statement.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference from the section captioned
Proposal 3: Ratification of Selection of Independent Registered Public Accounting Firm contained
in the Proxy Statement.
57
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements.
Included in Part II of this Annual Report on Form 10-K:
|
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Page in |
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Form 10-K |
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Report of Independent Registered Public Accounting Firm |
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35 |
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Balance Sheets December 31, 2009 and 2008 |
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|
36 |
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Statements of Operations Years ended December 31, 2009 and 2008 |
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37 |
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Statements of Shareholders Equity (Deficit) Years ended December 31, 2009 and 2008 |
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38 |
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Statements of Cash Flows Years ended December 31, 2009 and 2008 |
|
|
39 |
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Notes to Financial Statements |
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|
40 |
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(2) Financial Statement Schedules.
All financial statement schedules are omitted because they are not applicable or not required
or because any required information is included in the financial statements or notes thereto.
(3) Exhibits.
|
|
|
Exhibit |
|
|
No. |
|
Description |
3.1(1)
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|
Amended and Restated Articles of Incorporation of the Company. |
3.2(2)
|
|
Bylaws of the Company, as amended. |
3.3(3)
|
|
Certificate of Determination of Series A Junior Participating Preferred Stock. |
3.4(4)
|
|
Amended and Restated Certificate of Determination of Preferences of Series A Convertible Preferred Stock. |
3.5(3)
|
|
Certificate of Amendment of Amended and Restated Articles of Incorporation of the Company. |
3.6(3)
|
|
Certificate of Amendment of Certificate of Determination of Series A Junior Participating Preferred Stock. |
3.7(5)
|
|
Certificate of Amendment of Amended and Restated Articles of Incorporation of the Company. |
3.8(5)
|
|
Certificate of Amendment of Certificate of Determination of Series A Junior Participating Preferred Stock. |
3.9(6)
|
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Certificate of Amendment of Amended and Restated Articles of Incorporation of the Company. |
3.10(17)
|
|
Certificate of Amendment of Amended and Restated Articles of Incorporation of the Company. |
4.1
|
|
Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5, 3.6, 3.7, 3.8, 3.9 and 3.10. |
4.2(1)
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|
Specimen common stock certificate. |
10.1(1)+
|
|
Form of Indemnity Agreement between the Registrant and each of its directors and officers. |
10.2(1)+
|
|
Form of the Companys Incentive Stock Option Agreement under the 2005 Equity Incentive Plan. |
10.3(1)+
|
|
Form of the Companys Non-statutory Stock Option Agreement under the 2005 Equity Incentive Plan. |
10.4(1)+
|
|
1996 Non-Employee Directors Stock Option Plan. |
10.5(1)+
|
|
Form of the Companys Non-statutory Stock Option Agreement under the 1996 Non-Employee Directors Stock
Option Plan. |
10.6(1)+
|
|
Form of the Companys Employee Stock Purchase Plan Offering Document. |
10.7(6)+
|
|
Form of the Companys Restricted Stock Bonus Agreement under the 2005 Equity Incentive Plan. |
10.8(7)
|
|
Promissory Note and Security Agreement, dated July 3, 2006, by and between the Company and Novo Nordisk
A/S. |
10.9(7)
|
|
Amended and Restated Stock Purchase Agreement, dated as of January 26, 2005, by and among the Company,
Novo Nordisk A/S and Novo Nordisk Pharmaceuticals, Inc. |
10.10(7)#
|
|
Asset Purchase Agreement, dated as of August 25, 2006, by and between the Company and Zogenix, Inc. |
10.11(7)+
|
|
Employment Agreement, dated as of August 10, 2006, with Dr. Igor Gonda. |
58
|
|
|
Exhibit |
|
|
No. |
|
Description |
10.12(8)
|
|
Lease Agreement for the property located in Phase V of the Britannia Point Eden Business Park in Hayward,
California, dated January 28, 1998, between the Company and Britannia Point Eden, LLC. |
10.13(9)#
|
|
Restructuring Agreement, dated as of September 28, 2004, by and among the Company, Novo Nordisk A/S and
Novo Nordisk Delivery Technologies, Inc. |
10.14(10)
|
|
Securities Purchase Agreement, dated as of December 17, 2004, by and among the Company and the purchasers
named therein. |
10.15(11)#
|
|
Second Amended and Restated License Agreement, dated as of July 3, 2006, by and between the Company and
Novo Nordisk A/S. |
10.16(12)
|
|
Consulting Agreement effective as of July 2, 2007 by and between the Company and Norman Halleen. |
10.17(13)
|
|
Sublease between the Company and Mendel Biotechnology, Inc., dated July 11, 2007, under the Lease
Agreement by and between the Company and Hayward Point Eden I Limited Partnership, a Delaware limited
partnership, as successor-in-interest to Britannia Point Eden, LLC, as amended, for 3929 Point Eden Way,
Hayward, California. |
10.18(14)
|
|
Manufacturing Agreement between the Company and Enzon Pharmaceuticals, Inc. dated August 8, 2007. |
10.19(15)#
|
|
Exclusive License, Development and Commercialization Agreement, dated as of August 30, 2007, by and
between the Company and Lung Rx, Inc. |
10.20(15)#
|
|
Collaboration Agreement, dated as of August 31, 2007, by and between the Company and CyDex, Inc. |
10.21(16)+
|
|
2005 Equity Incentive Plan, as amended |
10.22(17)+
|
|
Employee Stock Purchase Plan, as amended. |
10.23(18)
|
|
Amended and Restated Rights Agreement, dated as of September 5, 2008 by and between the Company and
ComputerShare Trust Company, N.A. |
10.24(19)
|
|
Separation Agreement between the Company and Dr. Babatunde Otulana, dated as of December 12, 2008. |
10.25(19)
|
|
Consulting Agreement for Independent Contractors between the Company and Dr. Babatunde Otulana, effective
as of January 1, 2009. |
10.26(19)
|
|
International Scientific Advisory Agreement between the Company and Dr. Babatunde Otulana, effective as
of January 1, 2009. |
10.27(20)+
|
|
Amended and Restated form of Change of Control Agreement entered into between the Company and certain of
the Companys senior officers. |
10.28(20)+
|
|
Amended and Restated Executive Officer Severance Benefit Plan. |
10.29(21)+
|
|
Amended and Restated Change of Control Agreement, dated as of July 30, 2009 by and between Aradigm
Corporation and Igor Gonda. |
10.30(21)+
|
|
Amended and Restated Change of Control Agreement, dated as of July 30, 2009 by and between Aradigm
Corporation and Nancy Pecota. |
10.31(21)+
|
|
Amended and Restated Change of Control Agreement, dated as of July 30, 2009 by and between Aradigm
Corporation and Jeffery Grimes. |
10.32(21)
|
|
Security Agreement, dated as of July 30, 2009 by and among Aradigm Corporation, Igor Gonda, Jeffery
Grimes and Nancy Pecota. |
23.1
|
|
Consent of Odenberg Ullakko Muranishi & Co LLP, Independent Registered Public Accounting Firm. |
24.1
|
|
Power of Attorney. Reference is made to the signature page. |
31.1
|
|
Section 302 Certification of the Chief Executive Officer. |
31.2
|
|
Section 302 Certification of the Chief Financial Officer |
32.1
|
|
Section 906 Certification of the Chief Executive Officer and the Chief Financial Officer. |
|
|
|
+ |
|
Represents a management contract or compensatory plan or arrangement. |
|
# |
|
The Commission has granted the Companys request for confidential treatment with respect to portions of
this exhibit. |
|
(1) |
|
Incorporated by reference to the Companys Form S-1 (No. 333-4236) filed on April 30, 1996, as amended. |
|
(2) |
|
Incorporated by reference to the Companys Form 10-Q filed on August 14, 1998. |
|
(3) |
|
Incorporated by reference to the Companys Form 10-K filed on March 29, 2002. |
|
(4) |
|
Incorporated by reference to the Companys Form S-3 (No. 333-76584) filed on January 11, 2002, as amended. |
|
(5) |
|
Incorporated by reference to the Companys Form 10-Q filed on August 13, 2004. |
|
(6) |
|
Incorporated by reference to the Companys Form 10-K filed on March 31, 2006. |
59
|
|
|
(7) |
|
Incorporated by reference to the Companys Form S-1 (No. 333-138169) filed on October 24, 2006, as amended. |
|
(8) |
|
Incorporated by reference to the Companys Form 10-K filed on March 24, 1998, as amended. |
|
(9) |
|
Incorporated by reference to the Companys Form 8-K filed on December 23, 2004. |
|
(10) |
|
Incorporated by reference to the Companys Form 10-Q filed on August 14, 2006. |
|
(11) |
|
Incorporated by reference to the Companys Form 8-K filed on October 13, 2005. |
|
(12) |
|
Incorporated by reference to the Companys Form 8-K filed on July 11, 2007. |
|
(13) |
|
Incorporated by reference to the Companys Form 8-K filed on July 24, 2007. |
|
(14) |
|
Incorporated by reference to the Companys Form 8-K filed on August 14, 2007. |
|
(15) |
|
Incorporated by reference to the Companys Form 10-Q filed on November 14, 2007. |
|
(16) |
|
Incorporated by reference to the Companys definitive proxy statement filed on April 7, 2008. |
|
(17) |
|
Incorporated by reference to the Companys Form 8-K filed on May 21, 2009. |
|
(18) |
|
Incorporated by reference to the Companys Form 10-Q filed on November 12, 2008. |
|
(19) |
|
Incorporated by reference to the Companys Form 8-K filed on December 19, 2008. |
|
(20) |
|
Incorporated by reference to the Companys Form 8-K filed on January 8, 2009. |
|
(21) |
|
Incorporated by reference to the Companys Form 10-Q filed on November 6, 2009. |
(b) Index to Exhibits.
See Exhibits listed under Item 15(a) (3).
(c) Financial Statement Schedules.
All financial statement schedules are omitted because they are not applicable or not required or because the required information is included in the financial statements or notes thereto.
Aradigm, AERx, AERx Essence and AERx Strip are registered trademarks of Aradigm Corporation.
* Other names and brands may be claimed as the property of others.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Hayward, State of California, on the 23rd
day of March 2010.
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ARADIGM CORPORATION
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By: |
/s/ Igor Gonda
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|
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Igor Gonda |
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President and Chief Executive Officer |
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KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints, jointly and severally, Igor Gonda and Nancy E. Pecota, and each one of
them, attorneys-in-fact for the undersigned, each with power of substitution, for the undersigned
in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and
to file the same, with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or their substitutes, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the date
indicated opposite his or her name.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual
Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
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Signature |
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Title |
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Date |
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/s/ Igor Gonda
Igor Gonda
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President, Chief Executive
Officer and Director (Principal
Executive Officer)
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March 23, 2010 |
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/s/ Nancy E. Pecota
Nancy E. Pecota
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Vice President, Finance and Chief
Financial Officer (Principal
Financial and Accounting Officer)
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March 23, 2010 |
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|
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/s/ Virgil D. Thompson
Virgil D. Thompson
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Chairman of the Board and Director
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March 23, 2010 |
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Director
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March 23, 2010 |
Frank H. Barker |
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/s/ John M. Siebert
John M. Siebert
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Director
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March 23, 2010 |
61
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
No. |
|
Description |
3.1(1)
|
|
Amended and Restated Articles of Incorporation of the Company. |
3.2(2)
|
|
Bylaws of the Company, as amended. |
3.3(3)
|
|
Certificate of Determination of Series A Junior Participating Preferred Stock. |
3.4(4)
|
|
Amended and Restated Certificate of Determination of Preferences of Series A Convertible Preferred Stock. |
3.5(3)
|
|
Certificate of Amendment of Amended and Restated Articles of Incorporation of the Company. |
3.6(3)
|
|
Certificate of Amendment of Certificate of Determination of Series A Junior Participating Preferred Stock. |
3.7(5)
|
|
Certificate of Amendment of Amended and Restated Articles of Incorporation of the Company. |
3.8(5)
|
|
Certificate of Amendment of Certificate of Determination of Series A Junior Participating Preferred Stock. |
3.9(6)
|
|
Certificate of Amendment of Amended and Restated Articles of Incorporation of the Company. |
3.10(17)
|
|
Certificate of Amendment of Amended and Restated Articles of Incorporation of the Company. |
4.1
|
|
Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5, 3.6, 3.7, 3.8, 3.9 and 3.10. |
4.2(1)
|
|
Specimen common stock certificate. |
10.1(1)+
|
|
Form of Indemnity Agreement between the Registrant and each of its directors and officers. |
10.2(1)+
|
|
Form of the Companys Incentive Stock Option Agreement under the 2005 Equity Incentive Plan. |
10.3(1)+
|
|
Form of the Companys Non-statutory Stock Option Agreement under the 2005 Equity Incentive Plan. |
10.4(1)+
|
|
1996 Non-Employee Directors Stock Option Plan. |
10.5(1)+
|
|
Form of the Companys Non-statutory Stock Option Agreement under the 1996 Non-Employee Directors Stock
Option Plan. |
10.6(1)+
|
|
Form of the Companys Employee Stock Purchase Plan Offering Document. |
10.7(6)+
|
|
Form of the Companys Restricted Stock Bonus Agreement under the 2005 Equity Incentive Plan. |
10.8(7)
|
|
Promissory Note and Security Agreement, dated July 3, 2006, by and between the Company and Novo Nordisk AS |
10.9(7)
|
|
Amended and Restated Stock Purchase Agreement, dated as of January 26, 2005, by and among the Company,
Novo Nordisk A/S and Novo Nordisk Pharmaceuticals, Inc. |
10.10(7)#
|
|
Asset Purchase Agreement, dated as of August 25, 2006, by and between the Company and Zogenix, Inc. |
10.11(7)+
|
|
Employment Agreement, dated as of August 10, 2006, with Dr. Igor Gonda. |
10.12(8)
|
|
Lease Agreement for the property located in Phase V of the Britannia Point Eden Business Park in Hayward,
California, dated January 28, 1998, between the Company and Britannia Point Eden, LLC. |
10.13(9)#
|
|
Restructuring Agreement, dated as of September 28, 2004, by and among the Company, Novo Nordisk A/S and
Novo Nordisk Delivery Technologies, Inc. |
10.14(10)
|
|
Securities Purchase Agreement, dated as of December 17, 2004, by and among the Company and the purchasers
named therein. |
10.15(11)#
|
|
Second Amended and Restated License Agreement, dated as of July 3, 2006, by and between the Company and
Novo Nordisk A/S. |
10.16(12)
|
|
Consulting Agreement effective as of July 2, 2007 by and between the Company and Norman Halleen. |
10.17(13)
|
|
Sublease between the Company and Mendel Biotechnology, Inc., dated July 11, 2007, under the Lease
Agreement by and between the Company and Hayward Point Eden I Limited Partnership, a Delaware limited
partnership, as successor-in-interest to Britannia Point Eden, LLC, as amended, for 3929 Point Eden Way,
Hayward, California. |
10.18(14)
|
|
Manufacturing Agreement between the Company and Enzon Pharmaceuticals, Inc. dated August 8, 2007. |
10.19(15)#
|
|
Exclusive License, Development and Commercialization Agreement, dated as of August 30, 2007, by and
between the Company and Lung Rx, Inc. |
10.20(15)#
|
|
Collaboration Agreement, dated as of August 31, 2007, by and between the Company and CyDex, Inc. |
10.21 (16)+
|
|
2005 Equity Incentive Plan, as amended |
10.22(17)+
|
|
Employee Stock Purchase Plan, as amended. |
10.23(18)
|
|
Amended and Restated Rights Agreement, dated as of September 5, 2008 by and between the Company and
ComputerShare Trust Company, N.A. |
10.24(19)
|
|
Separation Agreement between the Company and Dr. Babatunde Otulana, dated as of December 12, 2008. |
10.25(19)
|
|
Consulting Agreement for Independent Contractors between the Company and Dr. Babatunde Otulana, effective
as of January 1, 2009. |
62
|
|
|
Exhibit |
|
|
No. |
|
Description |
10.26(19)
|
|
International Scientific Advisory Agreement between the Company and Dr. Babatunde Otulana, effective as
of January 1, 2009. |
10.27(20)+
|
|
Amended and Restated form of Change of Control Agreement entered into between the Company and certain of
the Companys senior officers. |
10.28(20)+
|
|
Amended and Restated Executive Officer Severance Benefit Plan. |
10.29(21)+
|
|
Amended and Restated Change of Control Agreement, dated as of July 30, 2009 by and between Aradigm
Corporation and Igor Gonda. |
10.30(21)+
|
|
Amended and Restated Change of Control Agreement, dated as of July 30, 2009 by and between Aradigm
Corporation and Nancy Pecota. |
10.31(21)+
|
|
Amended and Restated Change of Control Agreement, dated as of July 30, 2009 by and between Aradigm
Corporation and Jeffery Grimes. |
10.32(21)
|
|
Security Agreement, dated as of July 30, 2009 by and among Aradigm Corporation, Igor Gonda, Jeffery
Grimes and Nancy Pecota. |
23.1
|
|
Consent of Odenberg Ullakko Muranishi & Co LLP, Independent Registered Public Accounting Firm. |
24.1
|
|
Power of Attorney. Reference is made to the signature page. |
31.1
|
|
Section 302 Certification of the Chief Executive Officer. |
31.2
|
|
Section 302 Certification of the Chief Financial Officer. |
32.1
|
|
Section 906 Certification of the Chief Executive Officer and the Chief Financial Officer. |
|
|
|
+ |
|
Represents a management contract or compensatory plan or arrangement. |
|
# |
|
The Commission has granted the Companys request for confidential treatment with respect to portions of
this exhibit. |
|
(1) |
|
Incorporated by reference to the Companys Form S-1 (No. 333-4236) filed on April 30, 1996, as amended. |
|
(2) |
|
Incorporated by reference to the Companys Form 10-Q filed on August 14, 1998. |
|
(3) |
|
Incorporated by reference to the Companys Form 10-K filed on March 29, 2002. |
|
(4) |
|
Incorporated by reference to the Companys Form S-3 (No. 333-76584) filed on January 11, 2002, as amended. |
|
(5) |
|
Incorporated by reference to the Companys Form 10-Q filed on August 13, 2004. |
|
(6) |
|
Incorporated by reference to the Companys Form 10-K filed on March 31, 2006. |
|
(7) |
|
Incorporated by reference to the Companys Form S-1 (No. 333-138169) filed on October 24, 2006, as amended. |
|
(8) |
|
Incorporated by reference to the Companys Form 10-K filed on March 24, 1998, as amended. |
|
(9) |
|
Incorporated by reference to the Companys Form 8-K filed on December 23, 2004. |
|
(10) |
|
Incorporated by reference to the Companys Form 10-Q filed on August 14, 2006. |
|
(11) |
|
Incorporated by reference to the Companys Form 8-K filed on October 13, 2005. |
|
(12) |
|
Incorporated by reference to the Companys Form 8-K filed on July 11, 2007. |
|
(13) |
|
Incorporated by reference to the Companys Form 8-K filed on July 24, 2007. |
|
(14) |
|
Incorporated by reference to the Companys Form 8-K filed on August 14, 2007. |
|
(15) |
|
Incorporated by reference to the Companys Form 10-Q filed on November 14, 2007. |
|
(16) |
|
Incorporated by reference to the Companys definitive proxy statement filed on April 7, 2008. |
|
(17) |
|
Incorporated by reference to the Companys Form 8-K filed on May 21, 2009. |
|
(18) |
|
Incorporated by reference to the Companys Form 10-Q filed on November 12, 2008. |
|
(19) |
|
Incorporated by reference to the Companys Form 8-K filed on December 19, 2008. |
|
(20) |
|
Incorporated by reference to the Companys Form 8-K filed on January 8, 2009. |
|
(21) |
|
Incorporated by reference to the Companys Form 10-Q filed on November 6, 2009. |
63