e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2006
Or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the transition period from to .
Commission File Number 0-28402
Aradigm Corporation
(Exact name of registrant as specified in its charter)
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California
(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 including zip code)
(510) 265-9000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer. See details of accelerated filer or large accelerated filer as
defined in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
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(Class)
Common
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(Outstanding at October 31, 2006)
14,776,412 |
ARADIGM CORPORATION
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ARADIGM CORPORATION
CONDENSED BALANCE SHEETS
(In thousands, except share data)
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September 30, |
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December 31, |
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2006 |
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2005 |
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(Unaudited) |
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(Note 1) |
ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
32,280 |
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$ |
27,694 |
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Short-term investments |
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504 |
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Receivables |
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623 |
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400 |
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Current portion of notes receivable from officers and employees
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62 |
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Prepaid expenses and other current assets |
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790 |
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874 |
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Total current assets |
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34,197 |
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29,030 |
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Property and equipment, net |
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2,471 |
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9,875 |
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Non-current portion of notes receivable from officers and employees |
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151 |
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129 |
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Other assets |
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451 |
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463 |
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Total assets |
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$ |
37,270 |
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$ |
39,497 |
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LIABILITIES, CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS
EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
705 |
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$ |
3,034 |
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Accrued clinical and cost of other studies |
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205 |
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398 |
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Accrued compensation |
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2,471 |
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3,814 |
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Deferred revenue |
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104 |
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222 |
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Other accrued liabilities |
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496 |
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475 |
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Total current liabilities |
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3,981 |
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7,943 |
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Non-current portion of deferred rent |
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927 |
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714 |
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Note payable to related party |
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7,593 |
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Commitments and contingencies |
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Convertible preferred stock, no par value; 2,050,000 shares
authorized; issued and outstanding shares: 1,544,626 at September
30, 2006 and December 31, 2005; liquidation preference of $41,866
at September 30, 2006 and December 31, 2005 |
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23,669 |
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23,669 |
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Shareholders equity: |
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Common stock, no par value; authorized shares; 100,000,000 at
September 30, 2006 and 150,000,000 at December 31, 2005; issued
and outstanding shares: 14,776,412 at September 30, 2006 and
14,562,809 at December 31, 2005 |
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283,578 |
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282,004 |
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Accumulated other comprehensive income |
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3 |
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5 |
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Accumulated deficit |
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(282,481 |
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(274,838 |
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Total shareholders equity |
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1,100 |
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7,171 |
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Total liabilities, convertible preferred stock and
shareholders equity |
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$ |
37,270 |
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$ |
39,497 |
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See accompanying Notes to Condensed Financial Statements
3
ARADIGM CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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Three months ended |
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September 30, |
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2006 |
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2005 |
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Contract and milestone revenues (including amounts from related parties
2006 - $9 2005 - $200) |
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$ |
1,126 |
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$ |
719 |
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Operating expenses: |
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Research and development |
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4,547 |
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6,471 |
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General and administrative |
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3,514 |
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2,326 |
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Restructuring and asset impairment |
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347 |
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Total operating expenses |
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8,408 |
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8,797 |
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Loss from operations |
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(7,282 |
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(8,078 |
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Gain on sale of patent and royalty interest (to related parties) |
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20,000 |
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Interest income |
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459 |
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342 |
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Interest expense |
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(95 |
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Other income (expense) |
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(7 |
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8 |
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Net income (loss) |
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$ |
13,075 |
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$ |
(7,728 |
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Basic net income (loss) per common share |
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$ |
0.89 |
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$ |
(0.53 |
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Diluted net income (loss) per common share |
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$ |
0.82 |
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$ |
(0.53 |
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Shares used in computing basic net income (loss) per common share |
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14,660 |
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14,518 |
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Shares used in computing diluted net income (loss) per common share |
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15,982 |
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14,518 |
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See accompanying Notes to Condensed Financial Statements
4
ARADIGM CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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Nine months ended |
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September 30, |
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2006 |
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2005 |
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Contract and milestone revenues (including amounts
from related parties: 2006 - $59; 2005 - $7,911) |
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$ |
4,006 |
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$ |
9,645 |
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Operating expenses: |
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Research and development |
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17,645 |
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20,858 |
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General and administrative |
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9,051 |
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8,274 |
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Restructuring and asset impairment |
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5,717 |
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Total operating expenses |
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32,413 |
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29,132 |
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Loss from operations |
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(28,407 |
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(19,487 |
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Gain on sale
of patent and royalty interest (to related parties) |
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20,000 |
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Interest income |
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839 |
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980 |
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Interest expense |
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(101 |
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Other income (expense) |
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26 |
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(37 |
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Net loss |
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$ |
(7,643 |
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$ |
(18,544 |
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Basic and diluted net (loss) per common share |
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$ |
(0.52 |
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$ |
(1.28 |
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Shares used in computing basic and diluted net (loss) per common share |
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14,625 |
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14,497 |
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See accompanying Notes to Condensed Financial Statements
5
ARADIGM CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Nine months ended |
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September 30, |
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2006 |
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2005 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(7,643 |
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$ |
(18,544 |
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Adjustments to reconcile net loss to cash used in operating activities: |
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Non-cash asset impairment charge on property and equipment |
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4,014 |
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Depreciation and amortization |
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698 |
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1,074 |
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Stock-based compensation expense related to employee stock options and
employee stock purchases |
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1,286 |
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Loss on retirement and sale of property and equipment |
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21 |
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25 |
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Cost of warrants and stock options for services |
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94 |
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Amortization of deferred compensation |
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10 |
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Amortization and accretion of investments |
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6 |
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Gain on sale of patents and royalty interest |
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(20,000 |
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Changes in operating assets and liabilities: |
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Receivables |
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(222 |
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(187 |
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Prepaid and other current assets |
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84 |
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629 |
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Other assets |
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12 |
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(111 |
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Accounts payable |
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(2,329 |
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(975 |
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Accrued compensation |
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(1,344 |
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421 |
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Other accrued liabilities |
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(79 |
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(795 |
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Deferred rent |
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214 |
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(1,283 |
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Deferred revenue |
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(118 |
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(7,201 |
) |
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Net cash used in operating activities |
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(25,406 |
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(26,837 |
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Cash flows from investing activities: |
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Capital expenditures |
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(1,329 |
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(4,047 |
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Proceeds from the sale of property and equipment |
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4,000 |
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50,292 |
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Purchases of available-for-sale investments |
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(507 |
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(5,330 |
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Proceeds from maturities and sales of available-for-sale investments |
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4,457 |
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Proceeds from sale of patents and royalty interest |
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20,000 |
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Net cash provided by (used in) investing activities |
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(22,164 |
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45,372 |
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Cash flows from financing activities: |
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Proceeds from issuance of note payable to related party |
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7,500 |
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Proceeds from issuance of common stock, net |
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286 |
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457 |
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Proceeds from exercise of options and warrants for common stock |
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2 |
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42 |
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Payments received on notes receivable from officers and employees |
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40 |
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58 |
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Net cash provided by financing activities |
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7,828 |
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557 |
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Net increase in cash and cash equivalents |
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4,586 |
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19,092 |
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Cash and cash equivalents at beginning of period |
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27,694 |
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14,308 |
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Cash and cash equivalents at end of period |
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$ |
32,280 |
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$ |
33,400 |
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See accompanying Notes to Condensed Financial Statements
6
ARADIGM CORPORATION
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
September 30, 2006
1. Organization and Basis of Presentation
Organization
Aradigm Corporation (the Company) is a California corporation focused on the development and
commercialization of a portfolio of drugs delivered by inhalation for the treatment of severe
respiratory diseases by pulmunologists. The Companys principal activities to date have included
obtaining financing, recruiting management and technical personnel, securing operating facilities,
conducting research and development, and expanding commercial production capabilities. The Company
does not anticipate receiving any revenue from the sale of products in the upcoming year. The
Companys ability to continue its development and commercialization activities is dependent upon
the ability of management to obtain additional financing as required. The Company operates as a
single operating segment.
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance
with U.S. generally accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote
disclosures normally included in financial statements prepared in accordance with U.S. generally
accepted accounting principles have been condensed or omitted pursuant to the Securities and
Exchange Commissions rules and regulations. In the opinion of management, the financial statements
reflect all adjustments, which are only of a normal recurring nature, necessary for a fair
presentation. The accompanying condensed financial statements should be read in conjunction with
the financial statements and notes thereto included with the Companys Annual Report on Form 10-K
for the year ended December 31, 2005, as filed with the Securities and Exchange Commission. The
results of the Companys operations for the interim periods presented are not necessarily
indicative of operating results for the full fiscal year or any future interim period.
The balance sheet at December 31, 2005 has been derived from the audited financial statements
at that date, but does not include all of the information and footnotes required by U.S. generally
accepted accounting principles for complete financial statements.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. These estimates include useful lives for
property and equipment and related depreciation calculations, estimated amortization period for
payments received from product development and license agreements as they relate to the revenue
recognition of deferred revenue and assumptions for valuing options, and warrants. Actual results
could differ from these estimates.
Revenue Recognition
Contract revenues consist of revenues from collaboration agreements and feasibility studies.
The Company recognizes revenues under the provisions of the Securities and Exchange Commission issued Staff
Accounting Bulletin, or SAB, No. 104, Revenue Recognition. Under collaboration agreements,
revenues are recognized as costs are incurred. Deferred revenue represents the portion of all
refundable and nonrefundable research payments received that have not been earned. In accordance
with contract terms, milestone payments from collaborative research agreements are considered
reimbursements for costs incurred under the agreements and, accordingly, are generally recognized
as revenues either upon the 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
agreements when payments precede the required efforts. Costs of contract revenues are approximately
equal to or are greater than such revenues.
7
These costs are included in research and development expenses when incurred. Refundable development
and license fee payments are deferred until the specified performance criteria are achieved.
Refundable development and license fee payments are generally not refundable once the specific
performance criteria are achieved and accepted.
Impairment or Disposal of Long-Lived Assets
In accordance with Statement of Financial Accounting Standard, or SFAS, No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, 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. The Company recorded a non-cash impairment charge of $4.0 million during the nine
months ended September 30, 2006 related to the Companys estimate of the net realizable value of the
Intraject-related assets, based on the expected sale of those assets. (See note 8 and note 10)
Recent Accounting Pronouncements
In September 2006, the SEC Staff published Staff Accounting Bulletin (SAB) No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements, (SAB 108). SAB 108 addresses quantifying the financial statement effects of
misstatements and considering the effects of prior year uncorrected errors on the income
statements as well as the balance sheets. SAB 108 does not change the requirements under SAB 99
regarding qualitative considerations in assessing the materiality of misstatements. The Company
will adopt SAB 108 in the fourth quarter of 2006 and is currently evaluating the impact on its
financial statements from the adoption of this guidance.
In September 2006, the FASB issued FASB Statement (SFAS) No. 157, Fair Value Measurement,
(SFAS 157). SFAS 157 provides enhanced guidance for using fair value to measure assets and
liabilities. The guidance clarifies the principle for assessing fair value based on the assumptions
market participants would use when pricing the asset or liability. In support of this principle,
the guidance establishes a fair value hierarchy that prioritizes the information used to develop
those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active
markets and the lowest priority to unobservable data such as companies own data. Under this
guidance, fair value measurements would be separately disclosed by level within the fair value
hierarchy. SFAS 157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. The Company is currently
evaluating SFAS 157 and expects to adopt this guidance beginning on January 1, 2008.
3. Stock-Based Compensation
Prior to January 1, 2006, the Company accounted for its stock-based employee compensation
arrangements under the intrinsic value method prescribed by Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB No. 25), as allowed by SFAS No.123, Accounting
for Stock-Based Compensation (SFAS No. 123), as amended by SFAS No. 148, Accounting for
Stock-Based Compensation Transition and Disclosure (SFAS No. 148). As a result, no expense was
recognized for options to purchase the Companys common stock that were granted with an exercise
price equal to fair market value at the date of grant and no expense was recognized in connection
with purchases under the Companys employee stock purchase plan.
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123
(revised 2004) Share-Based Payment (SFAS No. 123R), which replaces SFAS No. 123 and supersedes
APB No. 25. SFAS No. 123R requires all share-based payments to employees, including grants of
employee stock options, restricted stock awards and employee stock purchases related to the
Companys employee stock purchase plan, to be recognized in the financial statements based on their
fair values. Subsequent to the effective date, the pro forma disclosures previously permitted under
SFAS No. 123 are no longer an alternative to financial statement recognition. Effective January 1,
2006, the Company has adopted SFAS No. 123R using the modified-prospective transition method. Under this
method, compensation cost recognized during the three-month and nine-month periods ended September
30, 2006 includes: (a) compensation cost for all
8
share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant
date fair value estimated in accordance with the original provisions of SFAS No. 123 amortized on a
straight-line basis over the options vesting period, and (b) compensation cost for all share-based
payments, including employee stock options, restricted stock awards and employee stock purchases
related to the Companys employee stock purchase plan, granted subsequent to January 1, 2006, based
on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R amortized
on a straight-line basis over the awards vesting period. Results for prior periods have not been
restated. As a result of adopting SFAS No. 123R on January 1, 2006, the Companys net loss for the
three-month and nine month periods ended September 30, 2006 is higher by $425,000 and $1.3 million
respectively, than if it had continued to account for stock-based employee compensation under APB
No.25. Basic and diluted net loss per common share for the three-month and nine-month periods ended
September 30, 2006 are $0.03 and $0.09 higher respectively, than if the Company had continued to
account for share based compensation under APB No.25. As stock-based compensation expense
recognized in the statement of operations for the periods subsequent to the adoption of SFAS No.
123R is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.
SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary,
in subsequent periods if actual forfeitures differ from those estimates. In the Companys pro forma
information required under SFAS No. 123 for the periods prior to January 1, 2006, the Company
accounted for forfeitures as they occurred. Since the Company continues to operate at a net loss,
the adoption of SFAS No.123R had no tax-related effects on cash flow from operations and cash flow
from financing activities for the three-month and nine-month periods ended September 30, 2006.
Employee Stock Plans
As of September 30, 2006, the Company had outstanding shares or options under the following
share-based compensation plans:
2005 Equity Incentive Plan
The
1996 Equity Incentive Plan (the 1996 Plan) and the 2005
Equity Incentive Plan (the 2005 Plan), which amended,
restated and retitled the 1996 Plan, were adopted to provide a means by which selected officers, directors, scientific
advisory board members and employees of and consultants to the Company and its affiliates could be
given an opportunity to acquire an equity interest in the Company. All
employees, directors, scientific advisory board members and consultants of 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.
Options granted under the 1996 Plan may be immediately exercisable if permitted in the
specific grant approved by the Companys board of directors and, if exercised early, the issued
shares may be subject to repurchase provisions. The shares acquired generally vest over a period of
four years from the date of grant. The 1996 Plan also provides for a transition from employee to
consultant status without termination of the vesting period as a result of such transition. 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 does not have resale rights prior to vesting. The
Company has repurchased a total of 7,658 shares in accordance with these agreements through
December 31, 1998. Subsequently, no grants with early exercise provisions have been made under the
1996 Plan and no shares have been repurchased.
In March 2005, the Companys board of directors adopted and in May 2005 the Companys
shareholders approved the 2005 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
9
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 initially had
2,918,638 shares of common stock available for future 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.
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 September 30, 2006 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.
During 2006, the Company granted options to purchase 2,361,000 shares of common stock under
the 2005 Plan. As of September 30, 2006, the Company had 1,293,151 shares of common stock
available for future issuance under the 2005 Plan (including 22,157
shares forfeited under restricted
stock awards).
1996 Non-Employee Directors Plan
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 was no
activity in the Directors Plan during the year ended December 31, 2005 or the nine months ended
September 30, 2006. As of September 30, 2006, options to purchase an aggregate of 21,186 remain
outstanding with exercise prices ranging from $41.25 $120.63, with no additional shares available
for grant.
Employee Stock Purchase Plan
In April 1996, the Companys Board of Directors adopted the Employee Stock Purchase Plan (the
Purchase Plan) and the shareholders of the Company approved the adoption of the Purchase Plan in
June 1996. Employees generally are eligible to participate in the Purchase Plan 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 stockholder. Shares may be purchased under the Purchase
Plan 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
fifteen percent of earnings or $25,000.
As of September 30, 2006 a total of 709,153 shares have been issued under the Purchase Plan,
leaving a balance of 340,847 shares available for future issuance.
10
Pro Forma Information for Periods Prior to Adoption of SFAS No.123R
The following table illustrates the effect on net loss and net loss per common share had
the Company applied the fair value recognition provisions of SFAS No. 123 to
account for the Companys employee stock
option and employee stock purchase plans for the three and nine months ended September 30, 2005.
For purposes of pro forma disclosure, the estimated fair value of the stock awards, as prescribed
by SFAS No. 123, is amortized, on a straight line basis, to expense over the vesting period of such
awards (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three months |
|
|
Nine months |
|
|
|
ended |
|
|
ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2005 |
|
Net loss, as reported |
|
$ |
(7,728 |
) |
|
$ |
(18,544 |
) |
Add: Stock-based employee compensation expense included in
reported net loss |
|
|
3 |
|
|
|
10 |
|
Less: Total stock-based employee compensation expense
determined under fair value method |
|
|
(827 |
) |
|
|
(2,432 |
) |
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(8,552 |
) |
|
$ |
(20,966 |
) |
|
|
|
|
|
|
|
Basic and diluted net loss per share, as reported |
|
$ |
(0.53 |
) |
|
$ |
(1.28 |
) |
|
|
|
|
|
|
|
Basic and diluted pro forma loss per share |
|
$ |
(0.59 |
) |
|
$ |
(1.45 |
) |
|
|
|
|
|
|
|
Note that the above pro forma disclosure was not presented for the three and nine months ended
September 30, 2006 because stock-based employee compensation has been accounted for and recognized
in the statement of operations using the fair value recognition method under SFAS No. 123R for
these periods.
Valuation Assumptions
SFAS No.123 and SFAS No.123R require companies to estimate the fair value of stock-based
payment awards on the date of grant using an option-pricing model. The Company has elected to use
the Black-Scholes option-pricing model to determine the fair-value of stock based awards under SFAS
No.123 and SFAS No.123R. The Black-Scholes option-pricing model incorporates various assumptions
including volatility, expected life, and risk-free interest rates. The expected volatility is based
on the historical volatility of the Companys common stock over the most recent period commensurate
with the expected life of the Companys stock options. The expected life of an award is based on
historical experience and on the terms and conditions of the stock awards granted to employees.
The assumptions used for the three and nine months ended September 30, 2006 and 2005 and the
resulting estimates of weighted-average fair value per share of options granted and shares
purchased during these periods are as follows:
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Employee Stock Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Volatility factor |
|
|
87.4 |
% |
|
|
86.3 |
% |
|
|
86.7 |
% |
|
|
97.8 |
% |
Risk-free interest rate |
|
|
4.8 |
% |
|
|
4.1 |
% |
|
|
4.9 |
% |
|
|
3.7 |
% |
Expected life (years) |
|
|
4.2 |
|
|
|
4.0 |
|
|
|
4.2 |
|
|
|
4.0 |
|
Weighted-average fair value of
options granted during the
periods |
|
$ |
1.22 |
|
|
$ |
3.50 |
|
|
$ |
1.42 |
|
|
$ |
4.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Volatility factor |
|
|
85.7 |
% |
|
|
87.3 |
% |
|
|
85.7 |
% |
|
|
87.3 |
% |
Risk-free interest rate |
|
|
4.8 |
% |
|
|
3.5 |
% |
|
|
4.8 |
% |
|
|
3.5 |
% |
Expected life (years) |
|
|
0.7 |
|
|
|
1.2 |
|
|
|
0.7 |
|
|
|
1.2 |
|
Weighted-average fair value of
employee stock purchases during
the periods |
|
$ |
1.33 |
|
|
$ |
2.67 |
|
|
$ |
1.33 |
|
|
$ |
2.67 |
|
Adoption of SFAS No.123R
The following table shows the effect of stock-based compensation expense included in the
condensed statement of operations under SFAS No.123R for the three and nine months ended September
30, 2006 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three months |
|
|
Nine months |
|
|
|
ended |
|
|
ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2006 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
Research and
development |
|
$ |
196 |
|
|
$ |
665 |
|
General and
administrative |
|
|
229 |
|
|
|
614 |
|
|
|
|
|
|
|
|
Total stock-based
compensation expense |
|
$ |
425 |
|
|
$ |
1,279 |
|
|
|
|
|
|
|
|
Impact on basic and
diluted net loss per
share |
|
$ |
(0.03 |
) |
|
$ |
(0.09 |
) |
|
|
|
|
|
|
|
There was no capitalized stock-based employee compensation cost as of September 30,
2006. Since the Company incurred net losses in 2006, there was no recognized tax benefit during the
three and nine months ended September 30, 2006 associated with stock-based compensation expense.
For restricted common stock issued at discounted prices, the Company recognizes compensation
expense over the vesting period for the difference between the exercise or purchase price and the
fair market value on the measurement date. There are 101,405 shares subject to restricted share
awards issued and outstanding as of September 30, 2006. Total compensation expense for restricted
stock awards recognized by the Company under SFAS No. 123R was $25,374 and $66,999 for the three
and nine months ended September 30, 2006, respectively.
Stock Option Activity
A summary of the status of the Companys stock option plans at September 30, 2006 and changes
during the nine months then ended is presented in the table below (share numbers and aggregate
intrinsic value in thousands):
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Weighted- |
|
average |
|
|
|
|
Number |
|
average |
|
remaining |
|
Aggregate |
|
|
of |
|
exercise |
|
contractual |
|
intrinsic |
|
|
shares |
|
price |
|
life ( in years) |
|
value |
Options
outstanding at
January 1, 2006 |
|
|
1,730 |
|
|
$ |
19.47 |
|
|
|
7.10 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
2,361 |
|
|
|
2.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(645 |
) |
|
|
2.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options cancelled |
|
|
(836 |
) |
|
|
10.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding
at September 30,
2006 |
|
|
3,254 |
|
|
|
9.29 |
|
|
|
8.4 |
|
|
|
120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable
at September 30,
2006 |
|
|
1,294 |
|
|
$ |
19.92 |
|
|
|
6.48 |
|
|
$ |
30 |
|
During the three and nine months ended September 30, 2006, the Company granted options to
purchase approximately 1,216,100 and 2,361,000 shares of common stock respectively, with an
estimated weighted-average fair value of $1.22 per share and $1.42 per share, respectively, on the
date of grant. There were no options exercised during the three months ended September 30, 2006.
The following table summarizes information about stock options outstanding and exercisable at
September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
remaining |
|
Weighted- |
|
|
|
|
|
Weighted- |
|
|
Number |
|
contractual |
|
average |
|
Number |
|
Average |
Range of |
|
outstanding |
|
life |
|
exercise |
|
exercisable |
|
Exercise |
Exercise Price |
|
(in thousands) |
|
(in years) |
|
price |
|
(in thousands) |
|
Price |
$1.29-$1.70 |
|
|
616 |
|
|
|
9.71 |
|
|
$ |
1.50 |
|
|
|
98 |
|
|
$ |
1.38 |
|
$1.80-$1.80 |
|
|
685 |
|
|
|
9.91 |
|
|
$ |
1.80 |
|
|
|
91 |
|
|
$ |
1.80 |
|
$1.87-$1.87 |
|
|
500 |
|
|
|
9.86 |
|
|
$ |
1.87 |
|
|
|
0 |
|
|
$ |
0.00 |
|
$3.14-$5.20 |
|
|
330 |
|
|
|
8.54 |
|
|
$ |
3.93 |
|
|
|
103 |
|
|
$ |
4.61 |
|
$5.30-$5.95 |
|
|
330 |
|
|
|
8.05 |
|
|
$ |
5.65 |
|
|
|
238 |
|
|
$ |
5.64 |
|
$6.25-$17.20 |
|
|
335 |
|
|
|
6.78 |
|
|
$ |
11.76 |
|
|
|
306 |
|
|
$ |
11.78 |
|
$17.25-$60.00 |
|
|
331 |
|
|
|
4.56 |
|
|
$ |
28.44 |
|
|
|
331 |
|
|
$ |
28.44 |
|
$60.31-$112.50 |
|
|
120 |
|
|
|
2.67 |
|
|
$ |
81.49 |
|
|
|
120 |
|
|
$ |
81.49 |
|
$115.00-$115.00 |
|
|
1 |
|
|
|
4.08 |
|
|
$ |
115.00 |
|
|
|
1 |
|
|
$ |
115.00 |
|
$120.63-$120.63 |
|
|
7 |
|
|
|
3.36 |
|
|
$ |
120.63 |
|
|
|
7 |
|
|
$ |
120.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,254 |
|
|
|
|
|
|
|
|
|
|
|
1,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average period over which compensation expense related to these options is expected to
be recognized is 1.39 years.
4. Net Income (Loss) Per Share
The calculation of basic and diluted net income (loss) per share is summarized as follows (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
13,075 |
|
|
$ |
(7,728 |
) |
|
$ |
(7,643 |
) |
|
$ |
(18,544 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Weighted average number of
common shares outstanding |
|
|
14,660 |
|
|
|
14,518 |
|
|
|
14,625 |
|
|
|
14,497 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards |
|
|
86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred
stock |
|
|
1,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculating
diluted net income (loss) per
share |
|
|
15,982 |
|
|
|
14,518 |
|
|
|
14,625 |
|
|
|
14,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share |
|
|
0.89 |
|
|
|
(0.53 |
) |
|
|
(0.52 |
) |
|
|
(1.28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share |
|
|
0.82 |
|
|
|
(0.53 |
) |
|
|
(0.52 |
) |
|
|
(1.28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
13
The effects of including the incremental shares associated with options and warrants are
antidilutive, and are not included in diluted weighted average common shares outstanding for the
three months ended September 30, 2006. For the three months ended September 30, 2005
and nine months ended September 30, 2006 and 2005, the Company excluded common stock equivalents
consisting of outstanding stock options from the calculation of diluted loss per share because
these securities were anti-dilutive due to the net loss in the respective period. The
following securities were excluded from the calculation of diluted loss per share for the three
months ended September 30, 2006 and 2005 and nine months ended September 30, 2006 and 2005 as their
effect would be anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Common stock
equivalents from
stock options |
|
|
2,919 |
|
|
|
1,654 |
|
|
|
2,232 |
|
|
|
1,730 |
|
Convertible shares |
|
|
|
|
|
|
1,236 |
|
|
|
1,236 |
|
|
|
1,236 |
|
Unearned restricted
stock |
|
|
|
|
|
|
|
|
|
|
86 |
|
|
|
|
|
Warrants to
purchase common
shares |
|
|
2,120 |
|
|
|
2,130 |
|
|
|
2,120 |
|
|
|
2,130 |
|
5. Comprehensive Income (Loss)
Comprehensive income (loss) includes net income (loss) and other comprehensive income (loss),
which for the Company is primarily comprised of unrealized holding gains and losses on the
Companys available-for-sale securities that are excluded from the statement of operations in
computing net loss and reported separately in stockholders equity (deficit). Comprehensive income
(loss) and its components are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net income (loss) |
|
$ |
13,075 |
|
|
$ |
(7,728 |
) |
|
$ |
(7,634 |
) |
|
$ |
(18,544 |
) |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss)
on available-for-sale securities |
|
|
4 |
|
|
|
4 |
|
|
|
(2 |
) |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
13,079 |
|
|
$ |
(7,724 |
) |
|
$ |
(7,636 |
) |
|
$ |
(18,541 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
6. Cash, Cash Equivalents and Investments
The following summarizes the fair value of the Companys cash, cash equivalents and
investments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September |
|
|
December |
|
|
|
30, 2006 |
|
|
31, 2005 |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Money market fund |
|
$ |
1,426 |
|
|
$ |
1,321 |
|
Commercial paper |
|
|
30,854 |
|
|
|
26,373 |
|
|
|
|
|
|
|
|
|
|
$ |
32,280 |
|
|
$ |
27,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments: |
|
|
|
|
|
|
|
|
Corporate and government notes |
|
$ |
504 |
|
|
$ |
|
|
The Company considers all highly liquid investments purchased with a maturity of three months
or less to be cash equivalents. All short-term investments at September 30, 2006 mature in less
than one year. The Company places its cash and cash equivalents in money market funds, commercial
paper and corporate and government notes.
14
7. Reverse Stock Split
On January 4, 2006, the Company filed a Certificate of Amendment to its Amended and Restated
Certificate of Incorporation with the California Secretary of State effecting a 1-for-5 reverse
split of the Companys common stock. All share and per share amounts have been retroactively
restated in the accompanying condensed financial statements, notes to the condensed financial
statements and elsewhere in this document for all periods presented.
8. Restructuring and Asset Impairment
On May 15, 2006 the Company announced the implementation of a strategic restructuring of its
business operations to focus resources on advancing the current product pipeline and developing
products focused on respiratory disease, leveraging the Companys core expertise and intellectual
property. The Company accounted for the restructuring activity in accordance with FAS No. 146,
Accounting for Costs Associated with Exit or Disposal. The restructuring included a reduction in
force of 36 employees, the majority of which were research personnel. For the three and nine months
ended September 30, 2006, the Company recorded a net restructuring charge of $333,000 and $1.7
million respectively, primarily related to the reduction in its workforce. This expense is included
in the restructuring and asset impairment expense line item on the statement of operations. On
August 25, 2006, the Company recorded an additional restructuring charge of $566,000 in severance
expense related to the resignation of V. Bryan Lawlis, the Companys former President and Chief
Executive Officer, and Bobba Venkatadri, the Companys former Senior Vice President of Operations,
offset by a reduction of previously recognized severance costs of $233,000 related to the departure
of employees in connection with the sale of Intraject-related assets to Zogenix. The Company
expects to pay the severance-related expenses in full by the end of 2007. The accrual for the
employee related expenses is included in accrued compensation in the accompanying balance sheet as
of September 30, 2006.
The Company recorded non-cash impairment charges of $4.0 million during the three months ended
June 30, 2006, which were incurred to write down its Intraject-related assets to their net
realizable value. The net realizable value did not include any potential future contingent
milestones or royalties. The Company sold these assets to Zogenix during the three months ended
September 30, 2006 for an initial payment of $4.0 million and recorded an additional impairment
charge of $14,000. (See note 10)
The following table summarizes the adjustments to the Companys restructuring and asset
impairment expenses during the nine months ended September 30, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
Restructuring |
|
|
Non-cash |
|
|
|
|
|
|
|
|
|
|
September 30, |
|
Type of Liability |
|
Charges |
|
|
impairment |
|
|
Adjustments |
|
|
Payments |
|
|
2006 |
|
Nine months ended September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and related benefits |
|
$ |
1,866 |
1 |
|
$ |
|
|
|
$ |
(233 |
) 2 |
|
$ |
(948 |
) |
|
$ |
685 |
|
Out-placement services |
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
(42 |
) |
|
|
28 |
|
Impairment on Intraject-related assets |
|
|
|
|
|
|
4,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,936 |
|
|
$ |
4,014 |
|
|
$ |
(233 |
) |
|
$ |
(990 |
) |
|
$ |
713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1. |
|
Initial restructuring charges of $1.3 million and an increase of $566,000 in severance
charges related to V. Bryan Lawlis the Companys former President and Chief Executive Officer,
and Bobba Venkatadri the Companys former Senior Vice President of Operations. |
|
2. |
|
Reduction of $233,000 related to former employees transferred as part of the sale of
Intraject-related assets to Zogenix. |
9. Related Party Transactions
Novo Nordisk, A/S and its affiliates, Novo Nordisk Pharmaceuticals, Inc. and NNDT, are
considered related parties, and at September 30, 2006 owned approximately 10.8% of the Companys
total outstanding common stock (9.9% on an as-converted basis).
On July 3, 2006, the Company and Novo Nordisk A/S entered into a Second Amended and Restated
License Agreement (the License Agreement) to reflect: (i) the transfer by the Company of
certain intellectual property, including all right, title and interest to its patents that contain
claims that pertain generally to breath control or specifically to the
pulmonary delivery of
monomeric insulin and monomeric insulin analogs, together with interrelated patents, which are
linked via terminal disclaimers, as well as certain pending patent applications and continuations
thereof by the Company for a cash payment to the
15
Company of $12.0 million, with the Company
retaining exclusive, royalty-free control of these patents outside the field of glucose control;
(ii) a reduction by 100 basis points of each royalty rate payable by Novo Nordisk to the Company
for a cash payment to the Company of $8.0 million; and (iii) a loan to the Company in the principal
amount of $7.5 million.
The $12.0 million and the $8.0 million are included in gain on sale of patent and royalty
interest line item in the accompanying statements of operations for the three and nine month
periods ended September 30, 2006. The loan 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 loan is secured by a pledge of the net royalty
stream payable to the Company by Novo Nordisk pursuant to the License Agreement.
10. Sale of Intraject-Related Assets
In August 2006, the Company sold all of its assets related to the Intraject technology
platform and products, including 12 United States patents along with any foreign counterparts
corresponding to those United States patents, to Zogenix, Inc., a newly created private company
that has some officers who were former officers of Aradigm. Zogenix is responsible for further
development and commercialization efforts of Intraject. The Company received a $4.0 million initial
payment and will be entitled to a milestone payment upon initial commercialization and royalty
payments upon any commercialization of products that may be developed and sold using the Intraject
technology. The Company recorded non-cash impairment charges of $14,000 and $4.0 million during the
three and nine months ended September 30, 2006, respectively, which were incurred to write down its
Intraject-related assets to their net realizable value. The net book value of these assets at the
time of sale was $4.0 million The net realizable value did not include any potential future
contingent milestones or royalties. The Company sold these assets to Zogenix during the three
months ended September 30, 2006 for an initial payment of $4.0 million.
On August 25, 2006, pursuant to the sale of its Intraject platform, the Company entered into an
agreement with Zogenix for transitional support through December 31, 2006. The Company is to be
reimbursed for the provision of consulting services, information technology and document control
support and office
facilities. For the three months ended September 30, 2006 the Company recorded revenues of $360,000
from Zogenix.
11. Subsequent Event
On October 24, 2006 the Company announced that it had filed a preliminary registration
statement on Form S-1 with the Securities and Exchange Commission for a proposed public offering of
up to twenty-three million shares (including an over-allotment option of up to three million
shares) of its common stock. The Company expects proceeds from the offering will be used primarily
to fund the Companys ARD-3100 (liposomal ciprofloxacin) program, to complete the development of
its Essence delivery platform and for general corporate and working capital purposes. Upon completion of the proposed public offering, the Company expects all
shares of its convertible preferred stock will be converted to common stock and the associated
liquidation preference will be eliminated.
On November 8, 2006 the Company was informed by the Nasdaq Listing Qualifications Panel, that
the Companys shares were to be delisted from the Nasdaq capital market, due to non-compliance with
the continued listing standards. The Company intends to request a review of his decision, but
neither said request or a granting of a review will stay the delisting. The company expects to be
immediately eligible for quotation on the Pink Sheets, and will investigate other quotation and
trading alternatives.
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion below contains forward-looking statements that are based on the beliefs of
management, as well as assumptions made by, and information currently available to, management. Our
future results, performance or achievements could differ materially from those expressed in, or
implied by, any such forward-looking statements as a result of certain factors, including, but not
limited to, those discussed in this section as well as in the section entitled Risk Factors and
elsewhere in our filings with the Securities and Exchange Commission.
16
Our
business is subject to significant risks including, but not limited
to, the success of product development efforts, our dependence on
collaborators for certain programs, obtaining and enforcing patents
important to our business, clearing the lengthy and expensive
regulatory approval process and possible competition from other
products. Even if product candidates appear promising at various
stages of development, they may not reach the market or may not be
commercially successful for a number of reasons. Such reasons
include, but are not limited to, the possibilities that the potential
products may be found to be ineffective during clinical trials, may
fail to receive necessary regulatory approvals, may be difficult to
manufacture on a large scale, are uneconomical to market, may be
precluded from commercialization by proprietary rights of third
parties or may not gain acceptance from health care professionals and
patients.
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 a portfolio of drugs delivered by inhalation for the treatment of severe
respiratory diseases by pulmonologists. Over the last decade, we have 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 have also invested considerable effort into the
generation of a large volume of laboratory and clinical data demonstrating the performance of our
AERx pulmonary drug delivery platform. We have not been profitable since inception and expect to
incur additional operating losses over at least the next several years as we expand product
development efforts, preclinical testing and clinical trial activities and possible sales and
marketing efforts and as we secure production capabilities from outside contract manufacturers. To
date, we have not had any significant product sales and do not anticipate receiving any revenues
from the sale of products for at least the next several years. As of September 30, 2006 we had an
accumulated deficit of $282.5 million. Historically we have funded our operations primarily through
private placements and public offerings of our capital stock, proceeds from equipment lease
financings, license fees and milestone payments from collaborators, proceeds from the January 2005
restructuring transaction with Novo Nordisk and interest earned on investment. In 2006, we received
$27.5 million in proceeds from another restructuring agreement transaction with Novo Nordisk, and
$4.0 million from the sale of assets.
We have performed initial feasibility work and conducted early stage clinical work on a number
of potential products and have been compensated for expenses incurred while performing this work in
several cases pursuant to feasibility study agreements and other collaborative arrangements. We
will seek to develop certain potential products ourselves, including those that can benefit from
our experience in
pulmonary delivery, and that have markets we can address with a targeted sales and marketing
force and that we believe are likely to provide a superior therapeutic profile or other valuable
benefits to patients when compared to existing products. For other potential products with larger
or less concentrated markets we may seek to enter into development and commercialization agreements
with collaborators.
Restructured Relationship with Novo Nordisk
During 2005, our collaborative agreement with Novo Nordisk and its subsidiary, Novo Nordisk
Delivery Technologies, or NNDT, contributed approximately 76% of our total contract revenues. From
the inception of our collaboration in June 1998 through December 31, 2005, we have received from
Novo Nordisk approximately $137.1 million in product development payments, approximately $13.0
million in milestone payments and $35.0 million from the purchase of our common stock by Novo
Nordisk and its affiliates. All product development and milestone payments received to date have
been recognized as revenue.
As of January 26, 2005, we restructured the AERx® iDMS program, pursuant to a
restructuring agreement entered into with Novo Nordisk and NNDT in September 2004. Under the terms
of the restructuring agreement we sold certain equipment, leasehold improvements and other tangible
assets used in the AERx iDMS program to NNDT, for a cash payment of approximately $55.3 million
(before refund of cost advances made by Novo Nordisk). Our expenses related to this transaction
for legal and other consulting costs were approximately $1.1 million. In connection with the
restructuring transaction, we entered into various related agreements with Novo Nordisk and NNDT
effective January 26, 2005, including the following:
|
|
|
an amended and restated license agreement amending the development and license
agreement previously in place with Novo Nordisk, expanding Novo Nordisks development and
manufacturing rights to the AERx® iDMS program and providing for royalties to
us on future AERx® iDMS net sales in lieu of a percentage interest in the
gross profits from the commercialization of the AERx® iDMS, which royalties
run until the later of last patent expiry or |
17
|
|
|
last use of our intellectual property and
which apply to future enhancements or generations of our AERx® delivery
technology; |
|
|
|
|
a three-year agreement under which NNDT agreed to perform contract manufacturing of
AERx® iDMS-identical devices and dosage forms filled with compounds provided
by us in support of preclinical and initial clinical development of other products that
incorporate our AERx® delivery system; and |
|
|
|
|
an amendment of the common stock purchase agreement in place with Novo Nordisk prior
to the closing of the restructuring transaction, (i) deleting the provisions whereby we
can require Novo Nordisk to purchase certain additional amounts of common stock, (ii)
imposing certain restrictions on the ability of Novo Nordisk to sell shares of our common
stock and (iii) providing Novo Nordisk with certain registration and information rights
with respect to these shares. |
As a result of this transaction, we recorded our final project development revenues from Novo
Nordisk in the first quarter of 2005 and, as we were no longer obligated to continue work related
to the non-refundable milestone payment from Novo Nordisk in connection with the commercialization
of AERx®, we recognized the remaining balance of the deferred revenue associated with
the milestone of $5.2 million as revenue in the first quarter of 2005. In 2005 we recorded revenues
of approximately $727,000 from NNDT related to transition and support agreements. As a result of
this transaction, we were released from our contractual obligations relating to future operating
lease payments for two buildings assigned to NNDT and accordingly reversed the deferred rent
liability related to the two buildings of $1.4 million, resulting in a reduction of operating
expenses in 2005. In addition, pursuant to the restructuring agreement, we terminated a
manufacturing and supply agreement and a patent cooperation agreement, each previously in place
with Novo Nordisk and dated October 22, 2001.
On July 3, 2006, we further restructured our relationship with Novo Nordisk by entering into
an intellectual property assignment, a royalty prepayment and an eight-year promissory note with
Novo
Nordisk. The promissory note was secured by the royalty payments on any AERx® iDMS
sales by Novo Nordisk under the license with us. The key features of this restructuring include:
|
|
|
our transfer to Novo Nordisk of the ownership of 23 issued United States patents and
their corresponding non-United States counterparts, if any, as well as related pending
applications, in exchange for $12.0 million paid to us in cash. We
retained exclusive, royalty-free control of these patents outside the field of glucose
control and will continue to be entitled to royalties with respect to any inhaled insulin
products marketed or licensed by Novo Nordisk. |
|
|
|
|
our receipt of a royalty prepayment of $8.0 million in exchange for a one percent
reduction on our average royalty rate for the commercialized AERx® iDMS
product. As a result, we will receive royalty rates under our agreement with Novo
Nordisk that will rise to an average of five percent or higher (instead of six percent or
higher) by the fifth year after commercialization. |
|
|
|
|
our issuance of an eight-year promissory note to Novo Nordisk in connection with our
receipt from Novo Nordisk of a loan in the principal amount of $7.5 million that will be
payable to Novo Nordisk in three equal annual payments commencing in six years at a five
percent annual interest rate. Our obligations under the note are secured by royalty
payments upon any commercialization of the AERx® iDMS product. |
We and Novo Nordisk continue to cooperate and share in technology development, as well as
intellectual property development and defense. Both we and Novo Nordisk have access to any
developments or improvements the other might make to the AERx delivery system, within their
respective fields of use. Novo Nordisk also remains a substantial holder of our common stock and
is restricted from disposing of the common stock until January 1, 2009 or the earlier occurrence of
certain specified events.
In August 2006, Novo Nordisk announced that it had filed a lawsuit against Pfizer claiming
that Pfizers inhaled insulin product, Exubera, which Pfizer has been developing with Nektar
Therapeutics, infringes a patent originally owned by us
and now owned by Novo Nordisk with rights
retained by us
18
outside the field of glucose control. Depending on the outcome of this lawsuit,
which is highly uncertain, we could be entitled to a portion of any proceeds received by Novo
Nordisk from a favorable outcome.
Purchase and Sale of Intraject Technology
In May 2003, we acquired select assets from the Weston Medical Group, a company based in the
United Kingdom, including the Intraject needle-free delivery technology, related manufacturing
equipment and intellectual property and associated transfer costs, for a total of $2.9 million. The
purchase price and additional costs were allocated to the major pieces of purchased commercial
equipment for the production of Intraject and were recorded in property and equipment as
construction in progress. No costs or expenses were allocated to intellectual property or
in-process research and development on a pro-rata basis, because of the lack of market information,
the early stage of development and the immateriality of any allocation to intellectual property or
in-process research and development based on the substantial value of the tangible assets acquired.
In October 2004, we announced positive results from the clinical performance verification
trial of the Intraject needle-free delivery system. Following the results from the configuration
trial, we initiated a pilot pharmacokinetic study comparing Intraject with sumatriptan, a treatment
for migraines, to the currently marketed needle-injected product. In June 2005, we announced
results from this study, which showed that Intraject sumatriptan was bioequivalent to the marketed
injectable product and that patients were able to self-administer using Intraject.
We recorded a non-cash impairment charge of $4.0 million during the nine months ended
September 30, 2006, which was incurred to write down our Intraject-related assets to their net
realizable value.
In August 2006, we sold all of our assets related to the Intraject technology platform and
products, including 12 United States patents along with any foreign counterparts corresponding to
those United States patents, to Zogenix, a newly created private company that has some officers who
were former
officers of our company. Zogenix is responsible for further development and commercialization
efforts of Intraject. We received a $4.0 million initial payment and we are entitled to a
milestone and royalty payments upon any commercialization of products that may be developed and
sold using the Intraject technology.
Product Candidates
Products in development include both our own proprietary products and products under
development with collaborators. They consist of approved drugs combined with our controlled
inhalation delivery and/or
formulation technologies. The following table shows the disease indication and stage of development
for each product candidate in our portfolio.
|
|
|
|
|
Product Candidate |
|
Indication |
|
Stage of Development |
Proprietary Programs Under
Development |
|
|
|
|
ARD-3100 (Liposomal ciprofloxacin)
|
|
Cystic Fibrosis
|
|
Preclinical |
ARD-1100 (Liposomal ciprofloxacin)
|
|
Inhalation Anthrax
|
|
Preclinical |
Collaborative Programs Under Development |
|
|
|
|
AERx iDMS (Insulin)
|
|
Type 1 and Type 2 Diabetes
|
|
In Phase 3 |
ARD-1300 (Hydroxychloroquine)
|
|
Asthma
|
|
In Phase 2 |
ARD-1500 (Liposomal treprostinil)
|
|
Pulmonary Arterial
Hypertension
|
|
Preclinical |
In addition to these programs, we are continually evaluating opportunities for product
development where we can apply our expertise and intellectual property to produce better therapies
and where we believe the investment could provide significant value to our shareholders.
Liposomal Ciprofloxacin
Ciprofloxacin is 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
19
treatment of pulmonary infections. We believe that our
novel sustained release formulation of ciprofloxacin may be able to maintain therapeutic
concentrations of the antibiotic within infected lung tissues, while reducing systemic exposure and
the resulting side effects seen with currently marketed ciprofloxacin products. To achieve this
sustained release, we employ liposomes, which are lipid-based nanoparticles dispersed in water that
encapsulate the drug during storage and release the drug slowly upon contact with fluid covering
the airways and the lung. In an animal experiment, ciprofloxacin delivered to the lung of mice
appeared to be rapidly absorbed into the bloodstream, with no drug detectable four hours after
administration. In contrast, the liposomal formulation of ciprofloxacin produced significantly
higher levels of ciprofloxacin in the lung at all time points and was still detectable at 12 hours.
We also believe that for certain respiratory disease indications it may be possible that a
liposomal formulation enables better interaction of the drug with the disease target, leading to
improved effectiveness over other therapies. We have at present two target indications with
distinct delivery systems 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 Cystic Fibrosis
One of our liposomal ciprofloxacin programs is a proprietary program using our 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 of ciprofloxacin are approved for the treatment of
Pseudamonas aeruginosa, a lung infection to which CF patients are vulnerable. Currently, there is
only one inhalation antibiotic approved for the treatment of this infection. 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.
Our liposomal ciprofloxacin CF program represents the first program in which we intend to
retain full ownership and development rights. We believe we have the preclinical development,
clinical and regulatory knowledge to advance this product through development in the most efficient
manner. We intend to commercialize this program on our own.
Development
We have received orphan drug designation from the FDA for this product for the management of
CF. As a designated orphan drug, liposomal ciprofloxacin is eligible for tax credits based upon its
clinical development costs, as well as assistance from the FDA to coordinate study design. The
designation also provides the opportunity to obtain market exclusivity for seven years from the
date of New Drug Application, or NDA, approval.
We initiated preclinical studies for liposomal ciprofloxacin in 2006 and expect to initiate
human clinical studies in the first half of 2007. We expect to use approximately $20 million of the
net proceeds from this offering to complete preclinical studies and fund early stage clinical
trials and related manufacturing requirements for ARD-3100. In order to reach commercialization of
ARD-3100, we estimate we will need to spend an additional $15 million to $20 million. In order to
expedite anticipated time to market and increase market acceptance, we have elected to deliver
ciprofloxacin via nebulizer, as most CF patients already own a nebulizer and are familiar with this
method of drug delivery. We intend to examine the potential for delivery of ciprofloxacin via our
AERx delivery system. We share the formulation and manufacturing development as well as the safety
data developed for our inhalation anthrax program discussed below in the development of this CF
opportunity. We also intend to explore the utility of
20
liposomal ciprofloxacin for the treatment of
serious infections associated with other respiratory diseases, such as chronic obstructive
pulmonary disease and bronchiectasis.
ARD-1100 Liposomal Ciprofloxacin for the Treatment of Inhalation Anthrax
The second of our liposomal ciprofloxacin programs is for the prevention and treatment of
pulmonary anthrax infections. Anthrax spores are naturally occurring in soil throughout the world.
Anthrax infections are most commonly acquired through skin contact with infected animals and animal
products or, less frequently, by inhalation or ingestion of spores. With inhalation anthrax, once
symptoms appear, fatality rates are high even with the initiation of antibiotic and supportive
therapy. Further, a portion of the anthrax spores, once inhaled, may remain dormant in the lung for
several months and germinate. Anthrax has been identified by the Centers for Disease Control as a
likely potential agent of bioterrorism. In the fall of 2001, when anthrax-contaminated mail was
deliberately sent through the United States Postal Service to government officials and members of
the media, five people died and many more became sick. These attacks highlighted the concern that
inhalation anthrax as a bioterror agent represents a real and current threat.
Ciprofloxacin has been approved orally and via injection for the treatment of inhalation
anthrax (post-exposure) since 2000. This ARD-1100 research and development program has been funded
by Defence Research and Development Canada, or DRDC, a division of the Canadian Department of
National Defence. We believe that this product candidate may potentially be able to deliver a long
acting formulation of ciprofloxacin directly into the lung and could have fewer side effects and be
more effective to prevent and treat inhalation anthrax than currently available therapies.
Development
We began our research into liposomal ciprofloxacin under a technology demonstration program
funded by DRDC as part of their interest to develop products to counter bioterrorism. DRDC had
already demonstrated the feasibility of inhaled liposomal ciprofloxacin for post-exposure
prophylaxis of Francisella tularensis, a potential bioterrorism agent similar to anthrax. Mice were
exposed to a lethal dose
of F. tularensis and then 24 hours later were exposed via inhalation to a single dose of free
ciprofloxacin, liposomal ciprofloxacin or saline. All the mice in the control group and the free
ciprofloxacin group were dead within 11 days post-infection; in contrast, all the mice in the
liposomal ciprofloxacin group were 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 funded our development efforts to date and additional development of this program is
dependent on negotiating for and obtaining continued funding from DRDC or on identifying other
collaborators or sources of funding. We plan to use our preclinical and clinical safety data from
our CF program to supplement the data needed to have this product candidate considered for approval
for use in treating inhalation anthrax and possibly other inhaled life-threatening bioterrorism
infections.
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.
AERx iDMS Inhaled Insulin for the Treatment of Diabetes
AERx iDMS is being developed to control blood glucose levels in patients with diabetes. This
product is currently in Phase 3 clinical trials, and our licensee, Novo Nordisk, is responsible for
all remaining development, manufacturing and commercialization. We will receive royalties from any
sales of this product as well as from future enhancements or generations of this technology.
According to 2005 statistics from the American Diabetes Association, approximately 20.8 million
Americans suffer from either Type 1 or Type 2 diabetes. Over 90% of these Americans have Type 2
diabetes, the prevalence of which is increasing dramatically due to lifestyle factors such as
inappropriate diet and lack of physical activity. Patients with Type 1 diabetes do not have the
ability to produce their own insulin and must administer insulin injections to survive. Patients
with Type 2 diabetes are insulin resistant and unable to efficiently use the insulin that their
bodies produce. While many Type 2 patients can initially maintain adequate control over blood
glucose through diet, exercise and oral medications, most Type 2 patients progress within three
21
years to where they cannot maintain adequate control over their glucose levels and insulin therapy
is needed. However, given the less acute nature of Type 2 diabetes, many of these patients are
reluctant to take insulin by injection despite the risks. Inadequate regulation of glucose levels
in diabetes patients is associated with a variety of short and long-term effects, including
blindness, kidney disease, heart disease, amputation resulting from chronic or extended periods of
reduced blood circulation to body tissue and other circulatory disorders. The global market for
diabetes therapies in 2005 was in excess of $18 billion, according to Business Insights. The
majority of this amount was from sales of oral antidiabetics, while insulin and insulin analogues
accounted for $7.3 billion, a 17% increase over the prior year. Sales of insulin and insulin
analogues are forecast to grow to $9.8 billion in 2011. Type 2 patients consume the majority of
insulin used in the United States. We believe that when patients are provided a non-invasive
delivery alternative to injection, they will be more likely to self-administer insulin as often as
needed to keep tight control over their blood-glucose levels.
We believe that AERx iDMS possesses features that will benefit diabetes patients and will
provide an advantage over competitive pulmonary insulin products or can be used as a replacement
for or adjunct to currently available therapies. Our patented breath control methods and
technologies guide patients into the optimal breathing pattern for effective insulin deposition in
and absorption from the lung. An optimal breathing pattern for insulin delivery depends on several
elements: actuation of drug delivery at the early part of inspiration, control of inspiratory flow
rate, and the state of inflation of the lung after the insulin is deposited, with the fully
inflated lung providing the most desirable absorption profile. We believe a patients ability to
breathe reproducibly will be required to assure adequate safety and efficacy of inhaled insulin for
the treatment of Type 1 and Type 2 diabetes. Our system also allows patients to adjust dosage in
single unit increments, which is key to proper glucose control in diabetes. AERx iDMS offers the
ability for patients and physicians to monitor and review a patients dosing regimen. We believe
the combination of breath control, high efficiency of delivery to the lung and single unit
adjustable dosing in an inhalation device will make AERx iDMS a competitively attractive product.
Development
Over a decade ago, we initiated research and development into the inhalation delivery of
insulin to meet a major unmet medical need in the treatment of Type 1 and Type 2 diabetes: a system
that could provide similar levels of safety and efficacy as injected insulin but with the added
benefit of a non-invasive route of delivery. We successfully completed a Phase 1 clinical study and
filed an Investigational New Drug application, or IND, relating to our AERx iDMS program in 1998.
After our initial work, we entered into a collaboration for our AERx iDMS in June 1998 with a world
leader in the treatment of diabetes, Novo Nordisk. From 1998 to January 2005, we received an
aggregate of $150.1 million from Novo Nordisk to fund development of the AERx delivery system for
delivering insulin, production for preclinical and clinical testing and process development and
scale up. In January 2005, we transferred the partially completed initial commercial production
facility and associated personnel to Novo Nordisk for $55.3 million, and Novo Nordisk assumed
responsibility for continuing production and bringing the facility up to its planned capacity of
750 million dosage forms per year.
AERx iDMS is currently undergoing testing in Phase 3 clinical trials, begun in May 2006 by
Novo Nordisk. These trials follow significant prior clinical work that showed AERx iDMS to be
comparable to injectable insulin in the overall management of Type 1 and Type 2 diabetes. Past
clinical testing has shown:
|
|
|
HbAlc levels, a key marker of blood glucose control, are
statistically the same in patients using AERx iDMS and
patients using subcutaneous insulin injections. |
|
|
|
|
The onset of action of inhaled insulin via AERx iDMS is not
significantly different from subcutaneous injection of
rapid-acting insulin, but significantly faster than
subcutaneous injection of human regular insulin. |
|
|
|
|
The duration of action of inhaled insulin via AERx iDMS is
not significantly different from subcutaneous injection of
human regular insulin, but significantly longer than
subcutaneous injection of rapid-acting insulin. |
|
|
|
|
Although small declines were seen on some pulmonary
function parameters following 12-24 months of dosing on
AERx iDMS, these declines were not considered to be of
clinical significance, and the findings are not expected to
have an impact on overall pulmonary safety of the product. |
22
The Phase 3 clinical trials are expected to include a total of approximately 3,400 Type 1 and
Type 2 diabetes patients. The trials include treatment comparisons with other antidiabetics. The
longest trial is expected to last 27 months. Novo Nordisk announced in October 2006 that it expects
the commercial launch of the product in 2010. As with any clinical program, there are many factors
that could delay the launch or could result in AERx iDMS not receiving or maintaining regulatory
approval.
In January 2005 and in July 2006, we announced restructurings of the AERx iDMS program. Under
the new arrangements, Novo Nordisk is responsible for all further clinical, manufacturing and
commercial development, while we and Novo Nordisk continue to cooperate and share in technology
development, as well as intellectual property development and defense. We will receive royalty
payments on any commercial sales. Novo Nordisk also remains a substantial holder of our common
stock.
ARD-1300 Hydroxychloroquine for the Treatment of Asthma
The ARD-1300 program is currently in Phase 2 clinical trials and is investigating a novel
aerosolized formulation of hydroxychloroquine, or HCQ, as a treatment for asthma under a
collaboration with APT Pharmaceuticals, a privately held biotechnology company. Asthma is a common
chronic disorder of the lungs characterized by airway inflammation, airway hyper-responsiveness or
airway narrowing due to certain stimuli. Despite several treatment options, asthma remains a major
medical problem associated with high morbidity and large economic costs to the society. According
to the American Lung Association, asthma accounts for $11.5 billion in direct healthcare costs
annually in the United States, of which the largest single expenditure, at $5 billion, was
prescription drugs. Primary symptoms of asthma include coughing, wheezing, shortness of breath and
tightness of the chest with symptoms varying in frequency and degree. According to Datamonitor,
asthma affected 41.5 million people in developed countries in 2005, with 9.5 million of those
affected being children. The highest prevalence of asthma occurs in the United States and the
United Kingdom.
The most common treatment for the inflammatory condition causing chronic asthma is inhaled
steroid therapy via metered dose inhalers, dry powder inhalers or nebulizers. While steroids are
effective, they have side effects, including oral thrush, throat irritation, hoarseness and growth
retardation in children, particularly at high doses and with prolonged use. HCQ is an FDA-approved
drug that has been used for over 20 years in oral formulations as an alternative to steroid therapy
for treatment for lupus and rheumatoid arthritis. We believe targeted delivery of HCQ to the airway
will enhance the effectiveness of the treatment of asthma relative to systemic delivery while
reducing side effects by decreasing exposure of the drug to other parts of the body. We believe
that our ARD-1300 product candidate may potentially provide a treatment for asthma that could have
anti-inflammatory properties similar to inhaled steroids but with reduced side effects as compared
to long-term steroid treatment.
Development
APT has funded all activities in the development of this program to date. The ARD-1300 program
has advanced into Phase 2 clinical trials following positive preclinical testing and Phase 1
clinical results. In preclinical testing, the efficacy of once-daily aerosolized HCQ was compared
to that of budesonide, a leading inhaled steroid, in an asthma sheep model. Both drugs
significantly suppressed the clinically relevant late phase asthmatic response and airway
hyper-reactivity to a similar extent during 28 days of administration. However, the HCQ group
showed significant continued suppression of these factors 14 days after cessation of treatment,
with no post-treatment suppression detected in the budesonide group. We then conducted a Phase 1
clinical trial of both single dose and seven day dosing of AERx-delivered HCQ in approximately 30
healthy volunteers that indicated that AERx-delivered HCQ has a favorable safety and tolerability
profile.
We began the Phase 2 clinical trial in March 2006. The Phase 2 clinical trial is a randomized,
double-blind, placebo-controlled, multi-dose study in patients with asthma. The trial enrolled 100
patients with moderate-persistent asthma who were randomized to one of two treatments groups:
either aerosolized placebo or aerosolized HCQ given once daily for 21 consecutive days. Both
treatment groups were administered the drug via our AERx delivery system with efficacy, safety and
tolerability assessments being performed throughout the study. The dosing of patients in the trial
was completed in August 2006, and we are now in the data analysis phase of this trial, with the
results expected to be announced by the end
23
of 2006. The outcome of this Phase 2 clinical study
will form the basis of our and APTs decision as to whether to continue this program and, if so,
what the design and funding of future studies should be.
ARD-1500 Treprostinil for the Treatment of Pulmonary Arterial Hypertension
The ARD-1500 program is being developed as part of a commercial agreement with United
Therapeutics and is investigating a sustained-release liposomal formulation of a prostacyclin
analogue for administration using our AERx delivery system for the treatment of pulmonary arterial
hypertension, or PAH. PAH is a rare disease that results in the progressive narrowing of the
arteries of the lungs, causing continuous high blood pressure in the pulmonary artery and
eventually leading to heart failure. According to Decision Resources, in 2003, the more than
130,000 people worldwide affected by PAH purchased $600 million of PAH-related medical treatments
and sales are expected to reach $1.2 billion per year by 2013.
Prostacyclin analogues are an important class of drugs used for the treatment of pulmonary
arterial hypertension. However, the current methods of administration of these drugs are burdensome
on patients. Treprostinil is marketed by United Therapeutics under the name Remodulin and is
administered by intravenous or subcutaneous infusion. CoTherix markets in the United States another
prostacyclin analogue, iloprost, under the name Ventavis that is administered six to nine times per
day using a nebulizer, with each treatment lasting four to six minutes. We believe administration
of liposomal treprostinil by inhalation using our AERx delivery system may be able to deliver an
adequate dose for the treatment of PAH in a small number of breaths. We also believe that our
sustained release formulation may lead to a reduction in the number of daily administrations that
are needed to be effective when compared to existing therapies. We believe that our ARD-1500
product candidate potentially could offer a non-invasive, more direct and patient-friendly approach
to treatment to replace or complement currently available treatments.
Development
United Therapeutics has funded our activities in this program to date. We have completed
initial preclinical testing of selected formulations and are now examining performance of the
formulations in the
AERx delivery system before a joint decision is taken with our collaborator as to whether and
how to proceed with the next steps of the program.
Additional Potential Product 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. We intend to identify additional pharmaceutical product
opportunities that could potentially utilize our proprietary delivery systems for the pulmonary
delivery of various drug types, including proteins, peptides, oligonucleotides, gene products and
small molecules. We have demonstrated in the past our ability to successfully enter into
collaborative arrangements for our programs, and we believe additional opportunities for
collaborative arrangements exist outside of our core respiratory disease focus, for some of which
we have data as well as intellectual property positions. The following are descriptions of two
potential opportunities:
|
|
|
Smoking Cessation. Based on internal work and work funded
under grants from the National Institutes of Health, we are
developing intellectual property in the area of smoking
cessation. To date, we have two issued United States
patents containing claims directed towards the use of
titrated nicotine replacement therapy for smoking
cessation. |
|
|
|
|
Pain Management System. Based on our internal work and a
currently dormant collaboration with GlaxoSmithKline, we
have developed a significant body of preclinical and Phase
1 clinical data on the use of inhaled morphine and
fentanyl, and Phase 2 clinical data on inhaled morphine,
with our proprietary AERx delivery system for the treatment
of breakthrough pain in cancer and post-surgical patients. |
We are currently examining our previously conducted preclinical and clinical programs to
identify molecules that may be suitable for further development consistent with our current
business strategy. In most cases, we have previously demonstrated the feasibility of delivering
these compounds via our proprietary AERx delivery system but we have not been able to continue
development due to a variety of
24
reasons, most notably the lack of funding from collaborators. If we
identify any such programs during this review, we will consider continuing the development of such
compounds on our own.
Critical Accounting Policies and Estimates
We consider certain accounting policies related to revenue recognition, stock-based
compensation, and impairment of long-lived assets 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 U.S. 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 period for payments received from product development and license agreements as they
relate to the revenue recognition of deferred revenue 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 revenue from collaboration agreements and feasibility studies. We
recognize revenue under the provisions of the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 104, Revenue Recognition (SAB 104). Under the agreements, revenue is
recognized as costs are incurred. Deferred revenue represents the portion of all refundable and
nonrefundable research payments received that have not been earned. In accordance with contract
terms, milestone payments from collaborative research agreements are considered reimbursements for
costs incurred under the agreements and, accordingly, are generally recognized as revenue either
upon the 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 agreements when
payments precede the required efforts. Costs of contract revenues are approximate to or are greater
than such revenue and are
included in research and development expenses. Refundable development and license fee payments are
deferred until the specified performance criteria are achieved. Refundable development and license
fee payments are generally not refundable once the specific performance criteria are achieved and
accepted.
Impairment of Long-Lived Assets
We review for impairment whenever events or changes in circumstances indicate that the
carrying amount of property and equipment may not be recoverable in accordance with Statement of
Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS No.144). Determination of recoverability is based on an estimate of undiscounted
future cash flows resulting from the use of the asset and its eventual disposition. Future cash
flows that are contingent in nature are generally not recognized. 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 on the statements of
operations. We recorded a non-cash impairment charge of $4.0 million during the nine months ended
September 30, 2006 related to our estimate of the net realizable value sale of the
Intraject related assets based on the expected sale of these assets.
Stock-Based Compensation Expense
Effective January 1, 2006, we adopted the fair value recognition provisions of Statement of
Financial Accounting Standard No. 123 (revised 2004) Share-Based Payment,(SFAS No.123R) using the
modified prospective transition method and, therefore, have not restated prior periods results.
Under this method, we recognize compensation expense, net of estimated forfeitures, for all
stock-based payments granted after January 1, 2006 and all stock based payments granted prior to
but not vested as of January 1, 2006.
Under the provisions of SFAS No. 123R, stock-based compensation cost is estimated at the grant
date based on the awards fair value and is recognized as expense, net of estimated forfeitures,
ratably over the requisite vesting period. We have elected to calculate an awards fair value based
on the Black-Scholes option-pricing model. The Black-Scholes model requires various assumptions
including expected option life and volatility. If any of the assumptions used in the Black-Scholes
model or the estimated forfeiture
25
rate change significantly, stock-based compensation expense may
differ materially in the future from that recorded in the current period.
Under SFAS No. 123R, we recognized expense for stock-based compensation of $425,000 and $1.3
million respectively, for the three and nine months ended September 30, 2006.
Results of Operations
Three Months Ended September 30, 2006 and 2005
Revenues:
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
September 30 |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
Change in |
|
|
|
2006 |
|
|
2005 |
|
|
Dollars |
|
|
Percent |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenues |
|
$ |
1,029 |
|
|
$ |
638 |
|
|
$ |
391 |
|
|
|
61 |
% |
Percentage of total revenues |
|
|
91 |
% |
|
|
89 |
% |
|
|
|
|
|
|
|
|
Milestone revenues |
|
|
97 |
|
|
|
81 |
|
|
|
16 |
|
|
|
20 |
% |
Percentage of total revenues |
|
|
9 |
% |
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
1,126 |
|
|
$ |
719 |
|
|
$ |
407 |
|
|
|
57 |
% |
Total revenues consist of contract and milestone revenues. Total contract revenues increased
$391,000 for the three months ended September 30, 2006 over the comparable period in 2005 due to
increases of $438,000 from our ARD-1300 program and $360,000 related to our consulting
agreement with Zogenix, which is offset by decreases in revenues of
$191,000 from a consulting agreement with Novo Nordisk that ended on January 26,
2006, $138,000 related to the ARD-3100 program and $78,000
related to the AERx
Pulmoshield program completed in the second quarter of 2006. Milestone revenues increased $16,000 for
the three months ended September 30, 2006 due to our ARD-1300 development program which continued
from 2005. The Company expects contract revenues to decrease as it decreases its collaborative
activities in favor of self-initiated development activities.
Research and Development:
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|
Three months ended |
|
|
|
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|
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|
September 30, |
|
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|
|
|
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|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
Change in |
|
|
|
2006 |
|
|
2005 |
|
|
Dollars |
|
|
Percent |
|
Research and development expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaborative |
|
$ |
999 |
|
|
$ |
1,140 |
|
|
$ |
(141 |
) |
|
|
(12 |
)% |
Self-initiated |
|
|
3,548 |
|
|
|
5,331 |
|
|
|
(1,783 |
) |
|
|
(33) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development
expense |
|
$ |
4,547 |
|
|
$ |
6,471 |
|
|
$ |
(1,924 |
) |
|
|
(30 |
)% |
Research and development expenses include salaries, payments to contract manufacturers, and
contract research organizations, contractor and consultant fees, stock-based compensation expense,
and other support costs including facilities, depreciation and travel costs. Stock based
compensation expense charged to research and development for the three months ended September 30,
2006 was $196,000 due to the adoption of SFAS No.123R effective January 1, 2006.
Collaborative research and development expense decreased $141,000 due primarily to the
continuing development of our existing AERx programs including the AERx Smoking Cessation and
ARD-1500 programs. Self initiated research and development expense decreased $1.8
million due primarily to the completion of the Intraject program clinical batch registration lot
activities, substantially completed at year-end 2005 and finalized in early 2006. In August 2006,
we sold all of our assets related to the Intraject technology platform to Zogenix, a newly created
private company that is responsible for further development and commercialization efforts of
Intraject.
26
We expect that research and development expenses will remain relatively flat, with the effects
of the recent corporate restructuring initiatives somewhat offset by increased focus on
self-initiated development programs such as the Liposomal Ciprofloxacin program and the other AERx
programs.
General and Administrative:
|
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|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
Change in |
|
|
2006 |
|
2005 |
|
Dollars |
|
Percent |
General and administrative expenses |
|
$ |
3,514 |
|
|
$ |
2,326 |
|
|
$ |
1,188 |
|
|
|
51 |
% |
General and administrative expenses are comprised of salaries, legal fees including those
associated with the establishment and protection of our patents, insurance, marketing research,
contractor and consultant fees, stock based compensation expense, and other support costs including
facilities, depreciation and travel costs. Stock based compensation expense charged to general and
administrative expenses for the three months ended September 30, 2006 was $229,000 due to the
adoption of SFAS No.123R effective January 1, 2006.
General and administrative expenses for the three months ended September 30, 2006 increased
$1.3 million over the comparable period in 2005 due primarily to an increase in associated legal
expenses resulting from our restructuring activity and an increase in employee stock
based compensation. The increase was offset by a reduction in associated costs for building and
maintenance costs, labor benefits, insurance expense and marketing
expense. We expect
that general and administrative expenses will decrease over the next few quarters, however, it
may be offset by increased legal and other expenses associated with additional financings.
Restructuring and Asset Impairment:
Restructuring and asset impairment expenses are comprised of severance related expenses
including payroll, health insurance expenses, outplacement expenses and Intraject related asset
impairment expenses. Severance related expense for the three months ended September 30, 2006 was
$333,000. On August 25, 2006, we recorded a restructuring charge of $566,000 in severance
expense related to the resignation of V. Bryan Lawlis, our former President and Chief
Executive Officer, and Bobba Venkatadri, the Companys former Senior Vice President of Operations,
which was offset by a reduction of $233,000 related to previously recorded expense due to the
departure of employees in connection with the sale of
Intraject-related assets to Zogenix. We expect to pay the severance-related balance in full by the end of 2007.
Gain on sale of patents and royalty interest:
The gain on sale of patents and royalty interest reflects two transactions entered into by the
Company with Novo Nordisk, a related party; (i) the transfer by the Company of certain intellectual
property, including all right, title and interest to its patents that contain claims that pertain
generally to breath control or specifically to the pulmonary delivery of monomeric insulin and
monomeric insulin analogs, together with interrelated patents, which are linked via terminal
disclaimers, as well as certain pending patent applications and continuations thereof by the
Company for a cash payment to the Company of $12.0 million, with the Company retaining exclusive,
royalty-free control of these patents outside the field of glucose control; and (ii) a reduction by
100 basis points of each royalty rate payable by Novo Nordisk to the Company for a cash payment to
the Company of $8.0 million.
27
Interest income, interest expense and other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
Change in |
|
|
|
2006 |
|
|
2005 |
|
|
Dollars |
|
|
Percent |
|
Interest income, interest expense and other
income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
459 |
|
|
$ |
342 |
|
|
$ |
117 |
|
|
|
34 |
% |
Interest expense |
|
|
(95 |
) |
|
|
|
|
|
|
(95 |
) |
|
|
(100) |
% |
Other income (expense) |
|
|
(7 |
) |
|
|
8 |
|
|
|
(15 |
) |
|
|
(188) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income, interest and other expense |
|
$ |
357 |
|
|
$ |
350 |
|
|
$ |
7 |
|
|
|
2 |
% |
Interest income for the three months ended September 30, 2006 increased over the comparable
period in 2005 due to higher average invested balance. Interest expense for the three months ended
September 30, 2006 consists primarily of interest expense related to the $7.5 million note payable
issued to Novo Nordisk. Other income and expense reflects loss on asset disposals.
Nine months ended September 30, 2006 and 2005
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
Change in |
|
|
2006 |
|
2005 |
|
Dollars |
|
Percent |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenues |
|
$ |
3,715 |
|
|
$ |
4,378 |
|
|
$ |
(663 |
) |
|
|
(15% |
) |
Percentage of total revenues |
|
|
93 |
% |
|
|
45 |
% |
|
|
|
|
|
|
|
|
Milestone revenues |
|
|
291 |
|
|
|
5,267 |
|
|
|
(4,976 |
) |
|
|
(94% |
) |
Percentage of total revenues |
|
|
7 |
% |
|
|
55 |
% |
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
4,006 |
|
|
$ |
9,645 |
|
|
$ |
(5,639 |
) |
|
|
(58% |
) |
Total revenues consist of contract and milestone revenues. Total revenues decreased $5.7
million for the nine months ended September 30, 2006 over the comparable period in fiscal 2005 due
to decreases in both contract and milestone revenues. The primary reason for the decreases in both
milestone and contract revenues were the result of concluding the
restructuring agreement with Novo Nordisk on January 26, 2005.
In the nine months ended September 30, 2006, we
recorded revenues from the transition agreement with Zogenix of $360,000 and increased contract
revenues of $1.8 million from our AERx programs including the
ARD-3100, ARD-1500, ARD-1300 and AERx Smoking Cessation programs for $545,000, $378,000, $679,000 and $166,000 respectively. This increase was primarily
offset by a net decrease in contract revenues of $2.1 million due to the restructuring
agreement with Novo Nordisk and $566,000 from a transition service
agreement with Novo Nordisk that ended on January
27, 2006 and a decrease of $170,000 in our AERx Pulmoshield program. Milestone revenues for the nine
month period ended September 30, 2006 decreased by approximately $5.0 million due primarily to the
conclusion of Novo Nordisk restructuring agreement on January 26, 2005 which resulted in a decrease
of $5.2 million, offset by an increase of $210,000 for our
ARD-1300 development program.
Research and Development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
Change in |
|
|
|
2006 |
|
|
2005 |
|
|
Dollars |
|
|
Percent |
|
Research and development expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaborative |
|
$ |
4,107 |
|
|
$ |
4,372 |
|
|
$ |
(265 |
) |
|
|
(6) |
% |
Self-initiated |
|
|
13,538 |
|
|
|
16,486 |
|
|
|
(2,948 |
) |
|
|
(18) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expense |
|
$ |
17,645 |
|
|
$ |
20,858 |
|
|
$ |
(3,213 |
) |
|
|
(15) |
% |
Research and development expenses include salaries, payments to contract manufacturers, and
contract research organizations, contractor and consultant fees, stock-based compensation expense,
and other support costs including facilities, depreciation and travel costs. Stock based
compensation expense charged to research and development for the nine months ended September 30,
2006 was $665,000 due to the adoption of SFAS No.123R effective January 1, 2006.
28
The decrease in collaborative program expenses in the nine months ended September 30, 2006 was
due primarily to the conclusion of the restructuring agreement with
Novo Nordisk in January
2005. Similarly, the decrease in research and development expense for self-initiated projects was
due primarily to a decrease in our Intraject clinical batch registration lot activities substantially
completed at year-end 2005 and finalized in early 2006. In
August 2006, we sold all of
our assets related to the Intraject technology platform to Zogenix, a newly created private company
that is responsible for further development and commercialization
efforts of Intraject.
We expect that our research and development expenses will remain
relatively constant over the next few quarters as we redirect our
focus from Intraject programs to our AERx programs.
General and Administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
Change in |
|
|
2006 |
|
2005 |
|
Dollars |
|
Percent |
General and administrative expenses
|
|
$ |
9,051 |
|
|
$ |
8,274 |
|
|
$ |
777 |
|
|
|
9 |
% |
General and administrative expenses are comprised of salaries, legal fees including those
associated with the establishment and protection of our patents, insurance, marketing research,
contractor and consultant fees, stock-based compensation expense and other support costs including
facilities, depreciation and travel costs. Stock-based compensation expense charged to general and
administrative expenses for the nine months ended September 30, 2006 was $614,000 due to the
adoption of SFAS 123R effective January 1, 2006.
General and administrative expenses for the nine months ended September 30, 2006 increased
over the comparable period in 2005 primarily as a result of legal expenses incurred related to the
restructuring transaction entered into with Novo Nordisk in
July 2006 and an increase in stock-based compensation.
We expect that our general and administrative expenses will remain
relatively constant over the next few quarters, however, there may be
increased legal expenses associated with additional financings.
Restructuring and Asset Impairment:
Restructuring
and asset impairment expenses are comprised of severance-related expenses
including payroll, health insurance payments, outplacement expenses
and Intraject-related asset
impairment expenses. Severance-related expense for the nine months ended September 30, 2006 was
$1.7 million and is primarily related to the reduction in workforce announced on May 15, 2006. In
addition, we recorded $566,000 in severance expense related to the resignation of V. Bryan Lawlis,
our former President and Chief Executive Officer, and Bobba
Venkatadri, our
former Senior Vice President of Operations, in August 2006, which was offset by a reduction in
previously recorded severance expense of $233,000 related to the departure of employees in
connection with the sale of Intraject-related assets to Zogenix. We expect to pay the
severance related balance in full by the end of 2007. The asset impairment
charge of $4.0 million during the nine months ended September 30, 2006 is related to our estimate
of the net realizable value of the Intraject-related assets, based on the expected sale of those
assets.
Gain on sale of patents and royalty interest:
The gain on sale of patents and royalty interest reflects two transactions entered into by the
Company with Novo Nordisk, a related party; (i) the transfer by the Company of certain intellectual
property, including all right, title and interest to its patents that contain claims that pertain
generally to breath control or specifically to the pulmonary delivery of monomeric insulin and
monomeric insulin analogs, together with interrelated patents, which are linked via terminal
disclaimers, as well as certain pending patent applications and continuations thereof by the
Company for a cash payment to the Company of $12.0 million, with the Company retaining exclusive,
royalty-free control of these patents outside the field of glucose control; and (ii) a reduction by
100 basis points of each royalty rate payable by Novo Nordisk to the Company for a cash payment to
the Company of $8.0 million.
29
Interest income, interest expense and other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
Change in |
|
|
|
2006 |
|
|
2005 |
|
|
Dollars |
|
|
Percent |
|
Interest income, interest expense and other
income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income |
|
$ |
839 |
|
|
$ |
980 |
|
|
$ |
(141 |
) |
|
|
(14 |
)% |
Interest expense |
|
|
(101 |
) |
|
|
|
|
|
|
(101 |
) |
|
|
(100 |
)% |
Other Income (Expense) |
|
|
26 |
|
|
|
(37 |
) |
|
|
63 |
|
|
|
170 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income, interest and other expense |
|
$ |
764 |
|
|
$ |
943 |
|
|
$ |
(179 |
) |
|
|
(19 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income for the nine months ended September 30, 2006 decreased $141,000 over the
comparable period in 2005 due to a lower average invested balance. Interest expense, primarily
reflects the interest expense on the $7.5 million note payable with an interest rate of 5%, issued
to Novo Nordisk. The increase in other income and expenses primarily represents realized gains from
exchange rate transactions offset by the loss on the disposition of assets.
Liquidity and Capital Resources
As of September 30, 2006, we had cash, cash equivalents and short-term investments of $32.8
million and total working capital of $30.2 million. During the quarter ended September 30, 2006 we
received proceeds of $20.0 million from the sale of patents and royalty rights to Novo Nordisk,
proceeds from a $7.5 million promissory note we issued to Novo Nordisk and proceeds of $4.0 million
from the sale of assets to
Zogenix. Our principal requirements for cash are to fund working capital needs and, to a
lesser extent, capital expenditures for equipment purchases.
For the nine months ended September 30, 2006, our operating activities used net cash of $25.4
million and reflect our net loss of $7.6 million offset by non-cash charges including stock-based
compensation expense under SFAS No. 123R an asset impairment charge on property and equipment and
depreciation expense and our use of operating cash to fund changes in operating assets and
liabilities. Cash was used to pay for an increase in invoices outstanding for the Intraject
program, to pay for severance related expenses accrued for the reduction in workforce and to fund
accounts receivable, primarily related to the partnered programs. This compares to the net cash
used in our operating activities for the nine months ended September 30, 2005 of $26.8 million
reflecting our net loss of $18.5 million offset by non-cash charges including depreciation expense
and our use of cash to fund changes in operating assets and liabilities. The primary changes in
operating assets and liabilities is the recognition of the deferred revenues of $7.2 million, and
reduction of deferred rent of $1.3 million, recognized in the statement of operations in the nine
month period ended September 30, 2005 in conjunction with the Novo Nordisk restructuring agreement.
For the nine month period ended September 30, 2006, net cash provided by investing activities
was $22.2 million, which consisted primarily of $20.0 million in proceeds from the sale of patents
and royalty interest and $4.0 million in proceeds from the sale
of Intraject-related assets. This
was partly offset by $1.3 million for purchases of equipment primarily for the Intraject
commercialization program and $507,000 was used to purchase short term investments. This compares
to net cash provided by investing activities for the nine months ended September 30, 2005 of
$45.4 million which consisted primarily of $50.3 million in net proceeds from NNDT in connection
with the restructuring agreement and $4.5 million in proceeds from sale of investments, offset by
our purchase of $4.0 million of fixed assets relating to our Intraject platform and our purchases
of $5.3 million in securities classified as short-term investments with funds received in
connection with the restructuring agreement.
Net cash provided by financing activities was $7.8 million primarily representing proceeds
from the $7.5 million promissory note issued to Novo Nordisk and net cash provided by purchases
under our employee stock plans for the nine months ended September 30, 2006, compared to $557,000
for the comparable period in the prior year.
30
As of September 30, 2006, we had an accumulated deficit of $282.6 million, working capital of
$30.1 million and shareholders equity of $1.0 million. Management believes that cash and cash
equivalents on hand at September 30, 2006, together with expected funding to be received under
additional collaborative arrangements, will be sufficient to enable us to meet our obligations
through at least the next 18 months.
Contractual Obligations
Our contractual obligations and future minimum lease payments that are non-cancelable at
September 30, 2006 are disclosed in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period |
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands) |
|
|
|
|
|
|
|
|
|
Total |
|
|
2006(1) |
|
|
1 - 2 years |
|
|
3-5 years |
|
|
+5 years |
|
Contractual obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations |
|
$ |
21,766 |
|
|
$ |
404 |
|
|
$ |
4,798 |
|
|
$ |
4,631 |
|
|
$ |
11,933 |
|
Unconditional purchase obligations |
|
|
2,352 |
|
|
|
2,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual commitments |
|
$ |
24,118 |
|
|
$ |
2,756 |
|
|
$ |
4,798 |
|
|
$ |
4,631 |
|
|
$ |
11,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For three months ending December 31, 2006 |
Off-Balance Sheet Financings and Liabilities
Other than contractual obligations incurred in the normal course of business, we do not have
any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or
contingent interests in
transferred assets or any obligation arising out of a material variable interest in an
unconsolidated entity. We do not have any majority-owned subsidiaries.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosures
In the normal course of business, our financial position is routinely subject to a variety of
risks, including market risk associated with interest rate movement. We regularly assess these
risks and have established policies and business practices to protect against these and other
exposures. As a result, we do not anticipate material potential losses in these areas.
As of September 30, 2006, we had cash, cash equivalents and short-term investments of $32.8
million, consisting of cash, cash equivalents and highly liquid short-term investments. Our
short-term investments will likely decline by an immaterial amount if market interest rates
decrease, and therefore, we believe our exposure to interest rate changes has been immaterial.
Declines of interest rates over time will, however, reduce our interest income from short-term
investments
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Based on their evaluation of our disclosure
controls and procedures (as defined in the rules promulgated under the Securities Exchange Act of
1934), our chief executive officer and our chief financial officer concluded that our disclosure
controls and procedures were effective as of the end of the period covered by this report to ensure
that information required to be disclosed in this report was recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions rules and
forms.
Changes in internal control. There were no significant changes in our internal control over
financial reporting during the period covered by this report that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the effectiveness of controls. We believe that a controls system, no matter how
well designed and operated, cannot provide absolute assurance that the objectives of the controls
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. Our disclosure controls
and procedures are designed to
31
provide reasonable assurance of achieving their objectives, and our
chief executive officer and our chief financial officer have concluded that these controls and
procedures are effective at the reasonable assurance level.
PART II. OTHER INFORMATION
Item 1A. RISK FACTORS
The
risk factors included herein include any material changes to and supersede the risk factors associated with our business previously disclosed in Item A to
Part I of our 2005 Annual Report on Form 10-K. In addition to the other information contained in
this Form 10-Q, and risk factors set forth in our most recent SEC filings, the following risk
factors should be considered carefully in evaluating our business. Our business, financial
condition, or results of operations could be materially adversely affected by any of these risks.
Additional risks not presently known to us or that we currently deem immaterial may also impair our
business and operations.
Risks Related to Our Business
None of our product candidates has been approved or commercialized, and we may never successfully
develop any products.
Most of our product candidates are in an early stage of development. Development of our
products will require extensive additional time, effort and cost in preclinical testing and
clinical trials. Our products also
require lengthy regulatory reviews before they can be marketed. None of our products has yet
received FDA approval, and our development efforts may never result in a commercialized product. We
have spent more than 10 years developing AERx iDMS for the treatment of diabetes and it is still
not on the market. 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
significantly hurt our results of operations.
We recently changed our product development strategy, and if we do not successfully implement this
new strategy our business and reputation will be damaged.
Since our inception in 1991 we have focused on developing drug delivery technologies. We have
recently transitioned our business focus from the development of delivery technologies to the
application of our pulmonary drug delivery technologies and expertise to the development of novel
drug products to treat respiratory diseases. As part of this transition we have implemented
workforce reductions in an effort to reduce our expenses and improve our cash flows. We have not
yet implemented or are only in the early stages of implementing various aspects of our new
strategy, and we may not be successful in implementing our new strategy. Even if we are able to
implement the various aspects of our new strategy, it may not be successful.
We will need additional capital and we may not be able to obtain it.
Our operations to date have consumed substantial amounts of cash and have generated no product
revenues. While our refocused development strategy will reduce capital expenditures, we expect
negative operating cash flows to continue for at least the foreseeable future. Even though we do
not plan to engage in drug discovery, we will nevertheless need to commit substantial funds to
develop our product candidates and we may not be able to obtain sufficient funds on acceptable
terms or at all. Our future capital requirements will depend on many factors, including:
|
|
|
our progress in the application of our delivery and formulation technologies, which may
require further refinement of these technologies; |
|
|
|
|
the number of product development programs we pursue and the pace of each program; |
|
|
|
|
our progress with formulation development; |
32
|
|
|
the scope, rate of progress, results and costs of preclinical testing and clinical trials; |
|
|
|
|
the time and costs associated with seeking regulatory approvals; |
|
|
|
|
our ability to outsource the manufacture of our product candidates and the costs of doing so; |
|
|
|
|
the time and costs associated with establishing in-house resources to market and sell
certain of our products; |
|
|
|
|
our ability to establish and maintain collaborative arrangements with others and the terms
of those arrangements; |
|
|
|
|
the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims; and |
|
|
|
|
our need to acquire licenses or other rights for our product candidates. |
Since inception, we have financed our operations primarily through private placements and
public offerings of our capital stock, proceeds from equipment lease financings, contract research
funding and interest earned on investments. We believe that our existing cash and cash equivalent
balances at September 30, 2006, together with funding commitments from collaborators and interest
earned on our investments should be sufficient to meet our needs for at least the next 18 months.
We will need to obtain
substantial additional funds before we would be able to bring any of our product candidates to
market. Our estimates of future capital use are uncertain, and changing circumstances, including
those related to implementation of our new development strategy or further changes to our
development strategy, could cause us to consume capital significantly faster than currently
expected, and our expected sources of funding may not be sufficient. If adequate funds are not
available, we will be required to delay, reduce the scope of, or eliminate one or more of our
product development programs, or to obtain funds through arrangements with collaborators or other
sources that may require us to relinquish rights to certain of our technologies or products that we
would not otherwise relinquish, and to reduce personnel-related costs. If we are able to obtain
funds through the issuance of debt securities or borrowing, the terms may restrict our operations,
including a prohibition on paying dividends on our common stock. If we are able to obtain funds
through the issuance of equity securities, your interest will be diluted and our stock price may
drop as a result.
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. Through September 30, 2006, we have incurred a cumulative deficit of $282.6 million. We
have not had any product sales and do not anticipate receiving any revenues from product sales for
at least the next few years, if ever. While our recent shift in development strategy may result in
reduced capital expenditures, we expect to continue to incur substantial losses over at least the
next several years as we:
|
|
|
expand drug product development efforts; |
|
|
|
|
conduct preclinical testing and clinical trials; |
|
|
|
|
pursue additional applications for our existing delivery technologies; |
|
|
|
|
outsource the commercial-scale production of our products; and |
|
|
|
|
establish a sales and marketing force to commercialize certain of our
proprietary products if these products obtain regulatory approval. |
To achieve and sustain profitability, we must, alone or with others, successfully develop,
obtain regulatory approval for, manufacture, market and sell our products. We will 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.
Our dependence on collaborators may delay or prevent the progress of certain of our programs.
33
Our commercialization strategy for certain of our product candidates depends on our ability to
enter into agreements with collaborators to obtain assistance and funding for the development and
potential commercialization of our product candidates. Collaborations may involve greater
uncertainty for us, as we have less control over certain aspects of our collaborative programs than
we do over our proprietary development and commercialization programs. We may determine that
continuing a collaboration under the terms provided is not in our best interest, and we may
terminate the collaboration. Our existing collaborators could delay or terminate their agreements,
and our products subject to collaborative arrangements may never be successfully commercialized.
For example, Novo Nordisk has control over and responsibility for development and commercialization
of AERx iDMS. The development and commercialization of AERx iDMS could be delayed further or
terminated if Novo Nordisk fails to conduct these activities in a timely manner or at all. In 2004,
Novo Nordisk amended the protocols of a Phase 3 clinical program, which resulted in a significant
delay of the development of the product. If, due to delays or otherwise, we do not receive
development funds or achieve milestones set forth in the agreements governing our collaborations,
or if any of our collaborators breach or terminate their collaborative agreements or do not devote
sufficient resources or priority to our programs, our business prospects and potential to receive
revenues would be hurt.
Further, our existing or future collaborators may pursue alternative technologies or develop
alternative products either on their own or in collaboration with others, including our
competitors, and the priorities or
focus of our collaborators may shift such that our programs receive less attention or
resources than we would like. Any such actions by our collaborators may adversely affect our
business prospects and ability to earn revenues. In addition, we could have disputes with our
existing or future collaborators regarding, for example, the interpretation of terms in our
agreements. Any such disagreements could lead to delays in the development or commercialization of
any potential products or could result in time-consuming and expensive litigation or arbitration,
which may not be resolved in our favor.
Even with respect to certain other programs that we intend to commercialize ourselves, we may
enter into agreements with collaborators to share in the burden of conducting clinical trials,
manufacturing and marketing our product candidates or products. In addition, our ability to apply
our proprietary technologies to develop proprietary drugs will depend on our ability to establish
and maintain licensing arrangements or other collaborative arrangements with the holders of
proprietary rights to such drugs. We may not be able to establish such arrangements on favorable
terms or at all, and our existing or future collaborative arrangements may not be successful.
The results of later stage clinical trials of our product candidates may not be as favorable as
earlier trials and that could result in additional costs and delay or prevent commercialization of
our products.
Although we believe the limited and preliminary data we have regarding our potential products
is encouraging, the results of initial preclinical testing and clinical trials do not necessarily
predict the results that we will get from subsequent or more extensive preclinical testing and
clinical trials. Clinical trials of our product candidates may not demonstrate that they are safe
and effective to the extent necessary to obtain regulatory approvals. Many companies in the
biopharmaceutical industry have suffered significant setbacks in advanced clinical trials, even
after receiving promising results in earlier trials. If we cannot adequately demonstrate through
the clinical trial process that a therapeutic product we are developing is safe and effective,
regulatory approval of that product would be delayed or prevented, which would impair our
reputation, increase our costs and prevent us from earning revenues.
If our clinical trials are delayed because of patient enrollment or other problems, we would incur
additional cost and postpone the potential receipt of revenues.
Before we or our collaborators can file for regulatory approval for the commercial sale of our
potential products, the FDA will require extensive preclinical safety testing and clinical trials
to demonstrate their safety and efficacy. Completing clinical trials in a timely manner depends on,
among other factors, the timely enrollment of patients. Our collaborators and our ability to
recruit patients depends on a number of factors, including the size of the patient population, the
proximity of patients to clinical sites, the eligibility criteria for the study and the existence
of competing clinical trials. Delays in planned patient enrollment in our current or future
clinical trials may result in increased costs, program delays or both, and the loss of potential
revenues.
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We are subject to extensive regulation, including the requirement of approval before any of our
product candidates can be marketed. We may not obtain regulatory approval for our product
candidates on a timely basis, or at all.
We, our collaborators and our products are subject to extensive and rigorous regulation by the
federal government, principally the FDA, and by state and local government agencies. Both before
and after regulatory approval, the development, testing, manufacture, quality control, labeling,
storage, approval, advertising, promotion, sale, distribution and export of our potential products
are subject to regulation. Pharmaceutical products that are marketed abroad are also subject to
regulation by foreign governments. Our products cannot be marketed in the United States without FDA
approval. The process for obtaining FDA approval for drug products is generally lengthy, expensive
and uncertain. To date, we have not sought or received approval from the FDA or any corresponding
foreign authority for any of our product candidates.
Even though we intend to apply for approval of most of our products in the United States under
Section 505(b)(2) of the United States Food, Drug and Cosmetic Act, which applies to reformulations
of approved drugs and that may require smaller and shorter safety and efficacy testing than that
for entirely new drugs, the approval process will still be costly, time-consuming and uncertain. We
or our collaborators may not be able to obtain necessary regulatory approvals on a timely basis, if
at all, for any of our potential products. Even if granted, regulatory approvals may include
significant limitations on the uses for which products may be marketed. Failure to comply with
applicable regulatory requirements can, among other things,
result in warning letters, imposition of civil penalties or other monetary payments, delay in
approving or refusal to approve a product candidate, suspension or withdrawal of regulatory
approval, product recall or seizure, operating restrictions, interruption of clinical trials or
manufacturing, injunctions and criminal prosecution.
Regulatory authorities may not approve our product candidates even if the product candidates meet
safety and efficacy endpoints in clinical trials or the approvals may be too limited for us to earn
sufficient revenues.
The FDA and other foreign regulatory agencies can delay approval of or refuse to approve our
product candidates for a variety of reasons, including failure to meet safety and efficacy
endpoints in our clinical
trials. Our product candidates may not be approved even if they achieve their endpoints in clinical
trials. Regulatory agencies, including the FDA, may disagree with our trial design and our
interpretations of data from preclinical studies and clinical trials. Even if a product candidate
is approved, it may be approved for fewer or more limited indications than requested or the
approval may be subject to the performance of significant post-marketing studies. In addition,
regulatory agencies may not approve the labeling claims that are necessary or desirable for the
successful commercialization of our product candidates. Any limitation, condition or denial of
approval would have an adverse affect on our business reputation and results of operations.
Even if we are granted initial FDA approval for any of our product candidates, we may not be able
to maintain such approval, which would reduce our revenues.
Even if we are granted initial regulatory approval for a product candidate, the FDA and
similar foreign regulatory agencies can limit or withdraw product approvals for a variety of
reasons, including failure to comply with regulatory requirements, changes in regulatory
requirements, problems with manufacturing facilities or processes or the occurrence of unforeseen
problems, such as the discovery of previously undiscovered side effects. If we are able to obtain
any product approvals, they may be limited or withdrawn or we may be unable to remain in compliance
with regulatory requirements. Both before and after approval we, our collaborators and our products
are subject to a number of additional requirements. For example, certain changes to the approved
product, such as adding new indications, certain manufacturing changes and additional labeling
claims are subject to additional FDA review and approval. Advertising and other promotional
material must comply with FDA requirements and established requirements applicable to drug samples.
We, our collaborators and our manufacturers will be subject to continuing review and periodic
inspections by the FDA and other authorities where applicable and must comply with ongoing
requirements, including the FDAs Good Manufacturing Practices, or GMP, requirements. Once the FDA
approves a product, a manufacturer must provide certain updated safety and efficacy information,
submit copies of promotional materials to the FDA and make certain other required reports. Product
approvals may be withdrawn if regulatory requirements are not complied with or if problems
concerning safety or efficacy
35
of the product occur following approval. Any limitation or withdrawal
of approval of any of our products could delay or prevent sales of our products, which would
adversely affect our revenues. Further continuing regulatory requirements involve expensive ongoing
monitoring and testing requirements.
Since one of our key proprietary programs, the ARD-3100 liposomal ciprofloxacin program, relies on
the FDAs granting of orphan drug designation for potential market exclusivity, the product may not
be able to obtain market exclusivity and could be barred from the market for up to seven years.
The FDA has granted orphan drug designation for our proprietary liposomal ciprofloxacin for
the management of cystic fibrosis. Orphan drug designation is intended to encourage research and
development of new therapies for diseases that affect fewer than 200,000 patients in the United
States. The designation provides the opportunity to obtain market exclusivity for seven years from
the date of the FDAs approval of a new drug application, or NDA. However, the market exclusivity
is granted only to the first chemical entity to be approved by the FDA for a given indication.
Therefore, if another inhaled ciprofloxacin product were to be approved by the FDA for a cystic
fibrosis 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. We may seek to develop additional products that
incorporate drugs that have received orphan drug designations for specific indications. In each
case, if our product is not the first to be approved by the FDA for a given indication, we will be
unable to access the target market in the United States, which would adversely affect our ability
to earn revenues.
We have limited manufacturing capacity and will have to depend on contract manufacturers and
collaborators; if they do not perform as expected, our revenues and customer relations will suffer.
We have limited capacity to manufacture our requirements for the development and
commercialization of our product candidates. We intend to use contract manufacturers to produce key
components, assemblies and subassemblies in the clinical and commercial manufacturing of our
products. We may not be able to enter into or maintain satisfactory contract manufacturing
arrangements. Specifically, an affiliate of Novo Nordisk has agreed to supply devices and dosage
forms to us for use in the development of our products that incorporate our proprietary AERx
technology through January 27, 2008. We may not be able to extend this agreement at satisfactory
terms, if at all, and we may not be able to find a replacement contract manufacturer at
satisfactory terms.
We may decide to invest in additional clinical manufacturing facilities in order to internally
produce critical components of our product candidates and to handle critical aspects of the
production process, such as assembly of the disposable unit-dose packets and filling of the
unit-dose packets. If we decide to produce components of any of our product candidates in-house,
rather than use contract manufacturers, it will be costly and we may not be able to do so in a
timely or cost-effective manner or in compliance with regulatory requirements.
With respect to some of our product development programs targeted at large markets, either our
collaborators or we will have to invest significant amounts to attempt to provide for the
high-volume manufacturing required to take advantage of these product markets, and much of this
spending may occur before a product is approved by the FDA for commercialization. Any such effort
will entail many significant risks. For example, the design requirements of our products may make
it too costly or otherwise infeasible for us to develop them at a commercial scale, or
manufacturing and quality control problems may arise as we attempt to expand production. Failure to
address these issues could delay or prevent late-stage clinical testing and commercialization of
any products that may receive FDA approval.
Further, we, our contract manufacturers and our collaborators are required to comply with the
FDAs GMP requirements that relate to product testing, quality assurance, manufacturing and
maintaining records and documentation. We, our contract manufacturers or our collaborators may not
be able to comply with the applicable GMP and other FDA regulatory requirements for manufacturing,
which could result in an enforcement or other action, prevent commercialization of our product
candidates and impair our reputation and results of operations.
36
We rely on a small number of vendors and contract manufacturers to supply us with specialized
equipment, tools and components; if they do not perform as we need them to, we will not be able to
develop or commercialize products.
We rely on a small number of vendors and contract manufacturers to supply us and our
collaborators with specialized equipment, tools and components for use in development and
manufacturing processes. These vendors may not continue to supply such specialized equipment, tools
and components, and we may not be able to find alternative sources for such specialized equipment
and tools. Any inability to acquire or any delay in our ability to acquire necessary equipment,
tools and components would increase our expenses and could delay or prevent our development of
products.
In order to market our proprietary products, we are likely to establish our own sales, marketing
and distribution capabilities. We have no experience in these areas, and if we have problems
establishing these capabilities, the commercialization of our products would be impaired.
We intend to establish our own sales, marketing and distribution capabilities to market
products to concentrated, easily addressable prescriber markets. We have no experience in these
areas, and developing these capabilities will require significant expenditures on personnel and
infrastructure. While we intend to market products that are aimed at a small patient population, we
may not be able to create an effective sales force around even a niche market. In addition, some of
our product development programs will require a large sales force to call on, educate and support
physicians and patients. While we intend to enter into collaborations with one or more
pharmaceutical companies to sell, market and distribute such products, we may not be able to enter
into any such arrangement on acceptable terms, if at all. Any collaborations we do enter into may
not be effective in generating meaningful product royalties or other revenues for us.
If any products that we or our collaborators may develop do not attain adequate market acceptance
by healthcare professionals and patients, our business prospects and results of operations will
suffer.
Even if we or our collaborators successfully develop one or more products, such products may
not be commercially acceptable to healthcare professionals and patients, who will have to choose
our products over alternative products for the same disease indications, and many of these
alternative products will be more established than ours. For our products to be commercially
viable, we will need to demonstrate to healthcare professionals and patients that our products
afford benefits to the patient that are cost-effective as compared to the benefits of alternative
therapies. Our ability to demonstrate this depends on a variety of factors, including:
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the 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
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the product labeling or product insert required by the FDA or regulatory authorities in
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Our product revenues will be adversely affected if, due to these or other factors, the
products we or our collaborators are able to commercialize do not gain significant market
acceptance.
We depend upon our proprietary technologies, and we may not be able to protect our potential
competitive proprietary advantage.
Our business and competitive position is dependent upon our and our collaborators ability to
protect our proprietary technologies related to various aspects of pulmonary drug delivery and drug
formulation. While our intellectual property rights may not provide a significant commercial
advantage for us, our patents and know-how are intended to provide protection for important aspects
of our technology, including methods for aerosol generation, devices used to generate aerosols,
breath control, compliance monitoring,
37
certain pharmaceutical formulations, design of dosage forms
and their manufacturing and testing methods. In addition, we are maintaining as non-patented trade
secrets some of the key elements of our manufacturing technologies, for example, those associated
with production of disposable unit-dose packets for our AERx delivery system.
Our ability to compete effectively will also depend to a significant extent on our and our
collaborators ability to obtain and enforce patents and maintain trade secret protection over our
proprietary technologies. The coverage claimed in a patent application typically is significantly
reduced before a patent is issued, either in the United States or abroad. Consequently, any of our
pending or future patent applications may not result in the issuance of patents and any patents
issued may be subjected to further proceedings limiting their scope and may in any event not
contain claims broad enough to provide meaningful protection. Any patents that are issued to us or
our collaborators may not provide significant proprietary protection or competitive advantage, and
may be circumvented or invalidated. In addition, unpatented proprietary rights, including trade
secrets and know-how, can be difficult to protect and may lose their value if they are
independently developed by a third party or if their secrecy is lost. Further, because development
and commercialization of pharmaceutical products can be subject to substantial delays, patents may
expire early and provide only a short period of protection, if any, following commercialization of
products.
In July 2006, we assigned 23 issued United States patents to Novo Nordisk along with
corresponding non-United States counterparts and certain related pending applications. In August
2006, Novo Nordisk brought suit against Pfizer, Inc. claiming infringement of certain claims in one
of the assigned United
States patents. That patent is placed at risk in connection with this infringement lawsuit.
Other patents assigned to Novo Nordisk may become the subject of future litigation. If all or any
of the patents assigned to Novo Nordisk are invalidated, it may reduce Novo Nordisks commitment to
move forward with AERx iDMS and would adversely affect any royalty which we might potentially
receive based on all or any of those patents. Further, the patents assigned to Novo Nordisk
encompass, in some instances, technology beyond inhaled insulin and, if the patents are
invalidated, it could harm our ability to obtain market exclusivity with respect to other product
candidates.
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 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 management 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, and patent applications in certain other countries generally
are not published until more than 18 months after they are first filed, and because publication of
discoveries in scientific or patent literature often lags behind actual
38
discoveries, we cannot be
certain that we were the first creator of inventions covered by our pending patent applications or
that we were the first to file patent applications on such inventions.
We are in a highly competitive market and our competitors have developed or may develop alternative
therapies for our target indications, which would limit the revenue potential of any product we may
develop.
We are in competition with pharmaceutical, biotechnology and drug delivery companies,
hospitals, research organizations, individual scientists and nonprofit organizations engaged in the
development of drugs and therapies for the disease indications we are targeting. Our competitors
may succeed before we can, and many already have succeeded, in developing competing technologies
for the same disease indications, obtaining FDA approval for products or gaining acceptance for the
same markets that we are targeting. If we are not first to market, it may be more difficult for
us and our collaborators to enter markets as second or subsequent competitors and become
commercially successful. We are aware of a number of companies that are developing or have
developed therapies to address indications we are targeting, including major pharmaceutical
companies such as Bayer, Eli Lilly, Genentech, Gilead Sciences, Merck & Co., Novartis and Pfizer.
Certain of these companies are addressing these target markets with pulmonary products that are
similar to ours. These companies and many other potential competitors have greater research and
development, manufacturing, marketing, sales, distribution, financial and managerial resources and
experience than we have and many of these companies may have products and product candidates that
are on the market or in a more advanced stage of development than our product candidates.
Our ability to earn product revenues and our market share would be substantially harmed if any
existing or potential competitors brought a product to market before we or our collaborators were
able to, or if a competitor introduced at any time a product superior or more cost-effective than
ours.
If we do not continue to attract and retain key employees, our product development efforts will be
delayed and impaired.
We depend on a small number of key management and technical personnel. Our success also
depends on our ability to attract and retain additional highly qualified marketing, management,
manufacturing, engineering and development personnel. There is a shortage of skilled personnel in
our industry, we face intense competition in our recruiting activities, and we may not be able to
attract or retain qualified personnel. Losing any of our key employees, particularly our new
President and Chief Executive Officer, Dr. Igor Gonda, who plays a central role in our strategy
shift to a specialty pharmaceutical company, could impair our product development efforts and
otherwise harm our business. Any of our employees may terminate their employment with us at will.
Acquisition of complementary businesses or technologies could result in operating difficulties and
harm our results of operations.
While we have not identified any definitive targets, we may use a portion of the proceeds from
this offering to 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.
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If we market our products in other countries, we will be subject to different laws and we may not
be able to adapt to those laws, which could increase our costs while reducing our revenues.
If we market any approved products in foreign countries, we will be subject to different laws,
particularly with respect to intellectual property rights and regulatory approval. To maintain a
proprietary market position in foreign countries, we may seek to protect some of our proprietary
inventions through foreign counterpart patent applications. Statutory differences in patentable
subject matter may limit the protection we can obtain on some of our inventions outside of the
United States. The diversity of patent laws may make our expenses associated with the development
and maintenance of intellectual property in foreign jurisdictions more expensive than we
anticipate. We probably will not obtain the same patent protection in every market in which we may
otherwise be able to potentially generate revenues. In addition, in order to market our products in
foreign jurisdictions, we and our collaborators must obtain required regulatory approvals from
foreign regulatory agencies and comply with extensive regulations regarding safety and quality. We
may not be able to obtain regulatory approvals in such jurisdictions and we may have to incur
significant costs in obtaining or maintaining any foreign regulatory approvals. If approvals to
market our products are delayed, if we fail to receive these approvals, or if we lose previously
received approvals, our business would be impaired as we could not earn revenues from sales in
those countries.
We may be exposed to product liability claims, which would hurt our reputation, market position and
operating results.
We face an inherent risk of product liability as a result of the clinical testing of our
product candidates in humans and will face an even greater risk upon commercialization of any
products. These claims may be made directly by consumers or by pharmaceutical companies or others
selling such products. We may be held liable if any product we develop causes injury or is found
otherwise unsuitable during product testing, manufacturing or sale. Regardless of merit or eventual
outcome, liability claims would likely result in negative publicity, decreased demand for any
products that we may develop, injury to our reputation and suspension or withdrawal of clinical
trials. Any such claim will be very costly to defend and also may result in substantial monetary
awards to clinical trial participants or customers, loss of revenues and the inability to
commercialize products that we develop. Although we currently have product liability insurance, we
may not be able to maintain such insurance or obtain additional insurance on acceptable terms, in
amounts sufficient to protect our business, or at all. A successful claim brought against us in
excess of our insurance coverage would have a material adverse effect on our results of operations.
If we cannot arrange for adequate third-party reimbursement for our products, our revenues will
suffer.
In both domestic and foreign markets, sales of our potential products will depend in
substantial part on the availability of adequate reimbursement from third-party payors such as
government health administration authorities, private health insurers and other organizations.
Third-party payors often challenge the price and cost-effectiveness of medical products and
services. Significant uncertainty exists as to the adequate reimbursement status of newly approved
health care products. Any products we are able to successfully develop may not be reimbursable by
third-party payors. In addition, our products may not be considered cost-effective and adequate
third-party reimbursement may not be available to enable us to maintain price levels sufficient to
realize a profit. Legislation and regulations affecting the pricing of pharmaceuticals may change
before our products are approved for marketing and any such changes could further limit
reimbursement. If any products we develop do not receive adequate reimbursement, our revenues will
be severely limited.
Our use of hazardous materials could subject us to liabilities, fines and sanctions.
Our laboratory and clinical testing sometimes involve use of hazardous and toxic materials. We
are subject to federal, state and local laws and regulations governing how we use, manufacture,
handle, store and dispose of these materials. Although we believe that our safety procedures for
handling and disposing of such materials comply in all material respects with all federal, state
and local regulations and standards, there is always the risk of accidental contamination or injury
from these materials. In the event of an accident, we could be held liable for any damages that
result and such liability could exceed our financial resources. Compliance with environmental and
other laws may be expensive and current or future regulations may impair our development or
commercialization efforts.
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If we are unable to effectively implement or maintain a system of internal controls 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 controls over financial reporting as of the end of each fiscal year, and to include a
management report
assessing the effectiveness of our internal controls over financial reporting in our annual report
on Form 10-K for that fiscal year. Section 404 also requires our independent registered public
accounting firm, beginning with our fiscal year ending December 31, 2007, to attest to, and report
on, managements assessment of our internal controls 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 jeopardize our listing on the Nasdaq Capital Market, either
of which could reduce our stock price.
Risks Related to Our Common Stock
Our common stock is no longer listed on the Nasdaq Capital Market; our stock may have less market
liquidity and the price may decline.
On November 8, 2006 the Company was informed by the Nasdaq Listing Qualifications Panel, that
the Companys shares were to be delisted from the Nasdaq capital market, due to non-compliance with
the continued listing standards. The Company intends to request a review of his decision, but
neither said request nor a granting of such a review will stay the delisting. The company expects
to be immediately eligible for quotation on the Pink Sheets, and will investigate other quotation
and trading alternatives.
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:
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investor perception of us; |
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our ability to maintain the listing of our common stock on the Nasdaq Capital Market; |
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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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fluctuations in our operating results; |
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market conditions relating to our segment of the industry or the securities markets in general; |
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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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failure to maintain existing or establish new collaborative relationships; |
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developments or disputes concerning patents or proprietary rights; |
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delays in the development or approval of our product candidates; |
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regulatory developments in both the United States and foreign countries; |
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concern of the public or the medical community as to the safety or efficacy of our products,
or products deemed to have similar safety risk factors or other similar characteristics to our
products; |
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period-to-period fluctuations in financial results; |
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future sales or expected sales of substantial amounts of common stock by shareholders; |
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our ability to raise financing; and |
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economic and other external factors. |
In the past, class action securities litigation has often been instituted against companies
promptly following volatility in the market price of their securities. Any such litigation
instigated against us would, regardless of its merit, result in substantial costs and a diversion
of managements attention and resources.
We have implemented certain anti-takeover provisions, which make it less likely that we would be
acquired and you would receive a premium price for your shares.
Certain provisions of our articles of incorporation and the California Corporations Code could
discourage a party from acquiring, or make it more difficult for a party to acquire, control of our
company without approval of our board of directors. These provisions could also limit the price
that certain investors might be willing to pay in the future for shares of our common stock.
Certain provisions allow our board of directors to authorize the issuance, without shareholder
approval, of preferred stock with rights superior to those of the common stock. We are also subject
to the provisions of Section 1203 of the California Corporations Code, which requires us to provide
a fairness opinion to our shareholders in connection with their consideration of any proposed
interested party reorganization transaction.
We have adopted a shareholder rights plan, commonly known as a poison pill. We have also
adopted an Executive Officer Severance Plan and a Form of Change of Control Agreement, both of
which may provide for the payment of benefits to our officers in connection with an acquisition.
The provisions described above, our poison pill, our severance plan and our change of control
agreements, and provisions of the California Corporations Code may discourage, delay or prevent
another party from acquiring us or reduce the price that a buyer is willing to pay for our common
stock.
We have never paid dividends on our capital stock, and we do not anticipate paying cash dividends
for at least the foreseeable future.
We have never declared or paid cash dividends on our capital stock. We do not anticipate
paying any cash dividends on our common stock for at least the foreseeable future. We currently
intend to retain all available funds and future earnings, if any, to fund the development and
growth of our business. As a result, capital appreciation, if any, of our common stock will be your
sole source of potential gain for at least the foreseeable future.
Item 6. EXHIBITS
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|
|
Exhibit |
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|
Number |
|
Description |
10.2(1)+
|
|
2005 Equity Incentive Plan, as amended. |
|
|
|
10.7(1)+
|
|
Employee Stock Purchase Plan, as amended. |
|
|
|
10.20(1)
|
|
Promissory Note and Security Agreement, dated July 3, 2006, by and between the Company and Novo Nordisk A/ S. |
|
|
|
10.21(1)@
|
|
Asset Purchase Agreement, dated as of August 25, 2006, by and between the Company and Zogenix, Inc. |
|
|
|
10.22(1)+
|
|
Employment Agreement, dated as of August 10, 2006, with Dr. Igor Gonda. |
|
|
|
31.1
|
|
Certification by the Companys Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification by the Companys Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification by the Companys Chief Executive Officer and
Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
@ The Company has sought confidential treatment for portions of the referenced exhibit.
+ Represents a management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the Companys Form S-1 (No. 333-138169) filed on October 24, 2006.
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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|
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|
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|
|
ARADIGM CORPORATION |
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(Registrant) |
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|
|
|
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|
|
|
|
/s/ Igor Gonda |
|
|
|
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Dr. Igor Gonda
|
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
|
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/s/ Thomas C. Chesterman |
|
|
|
|
Thomas C. Chesterman
|
|
|
|
|
Senior Vice President and Chief Financial Officer |
|
|
Dated: November 14, 2006
43
INDEX TO EXHIBITS
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.2(1)+
|
|
2005 Equity Incentive Plan, as amended. |
|
|
|
10.7(1)+
|
|
Employee Stock Purchase Plan, as amended. |
|
|
|
10.20(1)
|
|
Promissory Note and Security Agreement, dated July 3, 2006, by and between the Company and Novo Nordisk A/ S. |
|
|
|
10.21(1)@
|
|
Asset Purchase Agreement, dated as of August 25, 2006, by and between the Company and Zogenix, Inc. |
|
|
|
10.22(1)+
|
|
Employment Agreement, dated as of August 10, 2006, with Dr. Igor Gonda. |
|
|
|
31.1
|
|
Certification by the Companys Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification by the Companys Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification by the Companys Chief Executive Officer and
Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
@ The Company has sought confidential treatment for portions of the referenced exhibit.
+ Represents a management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the Companys Form S-1 (No. 333-138169) filed on October 24, 2006.