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 March 31, 2007
Or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number 0-28402
Aradigm Corporation
(Exact name of registrant as specified in its charter)
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California
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94-3133088 |
(State or other jurisdiction of
incorporation or organization)
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(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)
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(Outstanding at April 30, 2007) |
Common
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53,999,817 |
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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March 31, |
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December 31, |
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2007 |
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2006 |
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(Unaudited) |
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(Note 1) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
53,378 |
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$ |
27,013 |
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Short-term investments |
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2,973 |
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501 |
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Receivables |
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128 |
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643 |
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Prepaid expenses and other current assets |
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598 |
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1,002 |
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Total current assets |
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57,077 |
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29,159 |
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Property and equipment, net |
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2,703 |
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2,592 |
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Non-current portion of notes receivable from officers and employees |
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31 |
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31 |
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Other assets |
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288 |
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444 |
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Total assets |
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$ |
60,099 |
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$ |
32,226 |
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LIABILITIES, CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS EQUITY
(DEFCIT) |
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Current liabilities: |
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Accounts payable |
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$ |
575 |
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$ |
1,151 |
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Accrued cost of clinical and other studies |
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163 |
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278 |
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Accrued compensation |
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1,650 |
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1,814 |
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Deferred revenue |
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5 |
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Other accrued liabilities |
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203 |
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511 |
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Total current liabilities |
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2,596 |
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3,754 |
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Non-current portion of deferred rent |
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993 |
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1,035 |
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Non-current portion of capital lease |
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27 |
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29 |
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Note payable and accrued interest to related party |
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7,780 |
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7,686 |
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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: none outstanding at
March 31, 2007 and 1,544,626 at December 31, 2006; liquidation
preference of $0 at March 31, 2007 and $41,866 at December 31, 2006 |
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23,669 |
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Shareholders equity (deficit): |
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Preferred stock, 2,950,000 shares authorized but none outstanding
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Common stock, no par value, 100,000,000 shares authorized;
issued and outstanding shares: 53,999,817 at March 31, 2007 and
14,765,474 at December 31, 2006 |
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341,127 |
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283,914 |
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Accumulated other comprehensive income |
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7 |
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4 |
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Accumulated deficit |
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(292,431 |
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(287,865 |
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Total shareholders equity (deficit) |
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48,703 |
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(3,947 |
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Total liabilities, convertible preferred stock and
shareholders equity (deficit) |
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$ |
60,099 |
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$ |
32,226 |
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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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March 31, |
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2007 |
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2006 |
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Revenues (including amounts from related parties $15 - 2007; $33 - 2006) |
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$ |
416 |
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$ |
1,073 |
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Operating expenses: |
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Research and development |
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3,407 |
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6,740 |
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General and administrative |
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2,085 |
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2,853 |
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Total operating expenses |
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5,492 |
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9,593 |
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Loss from operations |
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(5,076 |
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(8,520 |
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Interest income |
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637 |
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245 |
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Interest expense |
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(96 |
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(3 |
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Other expense |
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(31 |
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(7 |
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Net loss |
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$ |
(4,566 |
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$ |
(8,285 |
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Basic and diluted net loss per common share |
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$ |
(0.11 |
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$ |
(0.57 |
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Shares used in computing basic and diluted net loss per common share |
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40,820 |
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14,563 |
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See accompanying Notes to Condensed Financial Statements
- 4 -
ARADIGM CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Three months ended |
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March 31, |
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2007 |
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2006 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(4,566 |
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$ |
(8,285 |
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Adjustments to reconcile net loss to cash used in operating activities: |
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Amortization and accretion of investments |
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(3 |
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Depreciation and amortization |
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195 |
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283 |
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Stock-based compensation |
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310 |
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470 |
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Loss on retirement and sale of property and equipment |
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11 |
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6 |
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Cost of warrants and stock options for services |
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1 |
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Changes in operating assets and liabilities: |
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Receivables |
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515 |
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(429 |
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Prepaid and other current assets |
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404 |
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(532 |
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Other assets |
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156 |
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1 |
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Accounts payable |
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(576 |
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(1,695 |
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Accrued compensation |
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(164 |
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(1,831 |
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Other accrued liabilities |
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(330 |
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17 |
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Deferred rent |
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(42 |
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55 |
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Deferred revenue |
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5 |
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77 |
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Net cash used in operating activities |
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(4,085 |
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(11,862 |
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Cash flows from investing activities: |
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Capital expenditures |
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(317 |
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(600 |
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Purchases of available-for-sale investments |
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(2,969 |
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(515 |
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Proceeds from sales and maturities of available-for-sale investments |
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503 |
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Net cash used in investing activities |
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(2,783 |
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(1,115 |
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Cash flows from financing activities: |
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Proceeds from public offering, net |
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33,178 |
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Proceeds from issuance of common stock, net |
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55 |
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249 |
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Payments received on notes receivable from officers and employees |
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13 |
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Net cash provided by financing activities |
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33,233 |
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262 |
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Net increase (decrease) in cash and cash equivalents |
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26,365 |
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(12,715 |
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Cash and cash equivalents at beginning of period |
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27,013 |
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27,694 |
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Cash and cash equivalents at end of period |
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$ |
53,378 |
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$ |
14,979 |
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Supplemental
disclosure of non-cash financing activities: |
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Conversion of mandatorily redeemable convertible preferred stock to
common stock |
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$ |
23,669 |
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See accompanying Notes to Condensed Financial Statements
- 5 -
STATEMENT OF CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS EQUITY (DEFICIT)
(In thousands, except per share data)
(Unaudited)
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Accumulated |
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Total |
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Convertible |
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Other |
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Shareholders |
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Preferred Stock |
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Common Stock |
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Comprehensive |
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Accumulated |
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Equity |
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Shares |
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Amount |
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Shares |
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Amount |
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Income |
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Deficit |
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(Deficit) |
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Balances at December 31, 2006 |
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1,544,626 |
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$ |
23,669 |
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14,765,474 |
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$ |
283,914 |
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$ |
4 |
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$ |
(287,865 |
) |
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$ |
(3,947 |
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Issuance of common stock in public offering |
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37,950,000 |
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33,178 |
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33,178 |
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Issuance of common stock upon
conversion of preferred stock
related to public
offering |
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(1,544,626 |
) |
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(23,669 |
) |
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1,235,699 |
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23,669 |
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23,669 |
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Issuance of common stock under
the employee stock purchase plan |
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53,519 |
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56 |
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56 |
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Reversal of restricted stock
award due to forfeiture |
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(4,875 |
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Stock-based compensation related
to issuance of stock option
grants |
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310 |
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|
310 |
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Comprehensive loss: |
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Net loss |
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(4,566 |
) |
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(4,566 |
) |
Net change in unrealized gain
(loss) on available-for-sale
investments |
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3 |
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3 |
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Total comprehensive loss |
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(4,563 |
) |
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Balances at March 31, 2007 |
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$ |
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53,999,817 |
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$ |
341,127 |
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$ |
7 |
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|
$ |
(292,431 |
) |
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$ |
48,703 |
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See accompanying Notes to Condensed Financial Statements
- 6 -
ARADIGM CORPORATION
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
March 31, 2007
1. Organization and Basis of Presentation
Organization
Aradigm
Corporation (the Company, we, and/or our) 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. Management believes that
cash, cash equivalents and short-term investments at March 31, 2007 are sufficient to enable the
Company to meet its obligations through 2008. Management plans to continue to obtain funds through
collaborative arrangements, equity issuances and/or debt arrangements. 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, 2006, 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, 2006 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, warrants and other stock based
compensation. Actual results could differ from these estimates.
Revenue Recognition
Contract revenues consist of revenues from grants, collaboration agreements and feasibility
studies. The Company recognizes revenue under the provisions of the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 104, Revenue Recognition. Under the agreements,
revenue is recognized once costs are incurred and collectibility is reasonably assured. Under some
agreements the Companys collaborators have the right to withhold reimbursement of costs incurred
until the work performed under the agreement is mutually agreed upon. For these agreements revenue
is recognized upon confirmation from the collaborator of acceptance of work performed and payment
amount. Deferred revenue represents the portion of all refundable and nonrefundable research
payments received that have not been earned. In
- 7 -
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 revenues 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 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.
Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (FIN
48), which provides clarification related to the process associated with accounting for uncertain
tax positions recognized in financial statements. FIN 48 prescribes a
more-likely-than-not threshold for financial statement recognition and measurement of a tax
position taken, or expected to be taken, in a tax return. FIN 48 also provides guidance related to,
among other things, classification, accounting for interest and penalties associated with tax
positions, and disclosure requirements. We adopted FIN 48 on January 1, 2007 and there was no impact to our
financial statements.
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.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS No. 159). SFAS No. 159 expands opportunities to use fair value
measurement in financial reporting and permits entities to choose to measure many financial
instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. We have not decided if we will choose to measure any eligible
financial assets and liabilities at fair value.
- 8 -
3. Stock-Based Compensation
The following table shows the stock-based employee compensation expense included in the
statement of operations for the three-month periods ended March 31, 2007 and 2006 (in thousands
except per share amount):
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|
|
|
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
Research and development |
|
$ |
94 |
|
|
$ |
263 |
|
General and administrative |
|
|
216 |
|
|
|
207 |
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
$ |
310 |
|
|
$ |
470 |
|
|
|
|
|
|
|
|
Impact on basic and diluted net loss per common share |
|
$ |
(0.01 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
There was no capitalized stock-based employee compensation cost as of March 31, 2007. Since
the Company incurred net losses as of March 31, 2007, there was no recognized tax benefit
associated with stock-based compensation expense.
Total compensation expense for restricted stock awards recognized by the Company under SFAS
No. 123R was $19,000 and $14,000 for the three months ended March 31, 2007 and 2006, respectively,
and at March 31, 2007, 59,625 shares subject to restricted share awards are outstanding. As of
March 31, 2007, $235,000 of total unrecognized compensation costs, net of forfeitures, related to
non-vested stock awards is expected to be recognized over a weighted average period of 2.88 years.
Total compensation expense for stock options
and stock purchases under the employee stock purchase plan recognized by the Company under SFAS No.
123R, was $235,000 and $455,000 for the three months ended March 31, 2007 and 2006. As of March 31,
2007, $2.5 million of total unrecognized compensation costs, net of forfeitures, related to
non-vested stock options and stock purchases is expected to be recognized over a weighted average
period of 2.61 years.
Total compensation expense for stock options issued to consultants recognized by the Company
was $56,000 and $1,000 for the three months ended March 31, 2007 and 2006, respectively.
As of March 31, 2007, 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, officers, scientific advisory board members and
consultants of the Company are eligible to participate in the 2005 Plan. As of March 31, 2007, the
Company had 1,174,582 shares of common stock available for future issuance under the 2005 Plan
(including 4,875 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, 2006 or the three months ended March 31, 2007.
As of March 31, 2007, 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
- 9 -
payroll deductions, are limited to the lesser of
fifteen percent of earnings or $25,000. As of March 31, 2007 a total of 762,672 shares have been
issued under the Purchase Plan, leaving a balance of 287,328 shares available for future issuance.
Valuation Assumptions
The fair value of options was estimated at the date of grant using the Black-Scholes option
pricing model. The assumptions used for the three months ended March 31, 2007 and 2006 and the
resulting estimates of weighted-average fair value per share of options granted and shares
purchased during these periods are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
2007 |
|
2006 |
Employee Stock Options |
|
|
|
|
|
|
|
|
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
Volatility factor |
|
|
85.2 |
% |
|
|
85.9 |
% |
Risk-free interest rate |
|
|
5.1 |
% |
|
|
4.8 |
% |
Expected life (years) |
|
|
4.0 |
|
|
|
4.2 |
|
Weighted-average fair value
of options granted during
the periods |
|
$ |
0.79 |
|
|
$ |
2.47 |
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan |
|
|
|
|
|
|
|
|
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
Volatility factor |
|
|
86.4 |
% |
|
|
87.1 |
% |
Risk-free interest rate |
|
|
4.9 |
% |
|
|
3.6 |
% |
Expected life (years) |
|
|
0.5 |
|
|
|
1.2 |
|
Weighted-average fair value
of employee stock purchases
during the periods |
|
$ |
0.59 |
|
|
$ |
2.62 |
|
Stock Option Activity
A summary of the status of the Companys stock option plans at March 31, 2007 and changes
during the three months then ended is presented in the table below (share numbers and aggregate
intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Weighted- |
|
average |
|
|
|
|
Number |
|
average |
|
remaining |
|
Aggregate |
|
|
of |
|
exercise |
|
contractual |
|
intrinsic |
|
|
shares |
|
price |
|
life in years |
|
value |
Options outstanding at January 1, 2007 |
|
|
3,064 |
|
|
$ |
8.90 |
|
|
|
8.28 |
|
|
$ |
|
|
Options granted |
|
|
356 |
|
|
|
1.23 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options cancelled |
|
|
(131 |
) |
|
|
8.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at March 31, 2007 |
|
|
3,288 |
|
|
|
8.10 |
|
|
|
7.77 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at March 31, 2007 |
|
|
1,352 |
|
|
$ |
16.87 |
|
|
|
5.56 |
|
|
$ |
2 |
|
During
the three months ended March 31, 2007, the Company granted
options to employees and consultants to purchase
approximately 261,950 and 93,600 shares of common stock, respectively. There were no options exercised during the three months ended
March 31, 2007.
- 10 -
The following table summarizes information about stock options outstanding and exercisable at
March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
$1.02-$1.15 |
|
|
47 |
|
|
|
9.61 |
|
|
$ |
1.07 |
|
|
|
8 |
|
|
$ |
1.02 |
|
$1.23-$1.23 |
|
|
350 |
|
|
|
9.89 |
|
|
$ |
1.23 |
|
|
|
49 |
|
|
$ |
1.23 |
|
$1.29-$1.64 |
|
|
395 |
|
|
|
9.29 |
|
|
$ |
1.37 |
|
|
|
86 |
|
|
$ |
1.39 |
|
$1.70-$1.70 |
|
|
300 |
|
|
|
9.19 |
|
|
$ |
1.70 |
|
|
|
56 |
|
|
$ |
1.70 |
|
$1.80-$1.80 |
|
|
556 |
|
|
|
9.20 |
|
|
$ |
1.80 |
|
|
|
217 |
|
|
$ |
1.80 |
|
$1.87-$1.87 |
|
|
500 |
|
|
|
9.36 |
|
|
$ |
1.87 |
|
|
|
0 |
|
|
$ |
0 |
|
$3.14-$5.30 |
|
|
343 |
|
|
|
6.86 |
|
|
$ |
4.46 |
|
|
|
206 |
|
|
$ |
4.78 |
|
$5.35-$12.00 |
|
|
336 |
|
|
|
5.61 |
|
|
$ |
8.40 |
|
|
|
269 |
|
|
$ |
8.64 |
|
$13.00-$53.13 |
|
|
329 |
|
|
|
2.93 |
|
|
$ |
24.16 |
|
|
|
329 |
|
|
$ |
24.16 |
|
$56.88-$120.63 |
|
|
132 |
|
|
|
1.66 |
|
|
$ |
82.53 |
|
|
|
132 |
|
|
$ |
82.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,288 |
|
|
|
|
|
|
|
|
|
|
|
1,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2007, $2.5 million of total unrecognized compensation costs, net of
forfeitures, related to non-vested stock options is expected to be recognized over 2.61 years.
4. Net Income (Loss) Per Share
Basic net loss is computed using the weighted-average
number of shares of common stock outstanding less the weighted-average number of shares subject to
repurchase. There were no shares subject to repurchase in the three
months ended March 31, 2007. The
effects of including the incremental shares associated with options,
warrants and unvested restricted stock are antidilutive,
and are not included in diluted weighted average common shares outstanding for the three months
ended March 31, 2007.
The following securities were excluded from the calculation of diluted loss per share for the
three months ended March 31, 2007 and 2006, as their effect would be anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
March 31, |
|
|
2007 |
|
2006 |
Outstanding stock options |
|
|
3,288 |
|
|
|
2,166 |
|
Convertible
preferred stock |
|
|
|
|
|
|
1,236 |
|
Unvested restricted stock |
|
|
60 |
|
|
|
140 |
|
Warrants to
purchase common stock |
|
|
836 |
|
|
|
2,120 |
|
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 |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
Net loss |
|
$ |
(4,566 |
) |
|
$ |
(8,285 |
) |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) on available-for-sale securities |
|
|
3 |
|
|
|
(4 |
) |
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(4,563 |
) |
|
$ |
(8,289 |
) |
|
|
|
|
|
|
|
- 11 -
6. Cash, Cash Equivalents and Short-Term Investments
The following summarizes the fair value of the Companys cash, cash equivalents and short-term
investments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March |
|
|
December |
|
|
|
31, 2007 |
|
|
31, 2006 |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Cash and money market fund |
|
$ |
140 |
|
|
$ |
1,248 |
|
Commercial paper |
|
|
53,238 |
|
|
|
25,765 |
|
|
|
|
|
|
|
|
|
|
$ |
53,378 |
|
|
$ |
27,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments: |
|
|
|
|
|
|
|
|
Corporate and government notes |
|
$ |
2,973 |
|
|
$ |
501 |
|
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 March 31, 2007 mature in less than
one year. The Company places its cash, cash equivalents and short term investments in money market
funds, commercial paper and corporate and government notes.
7. Income Taxes
We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes an Interpretation of FASB Statement No. 109, or FIN 48, on January 1, 2007. We did not have
any unrecognized tax benefits and there was no effect on our financial condition or results of
operations as a result of implementing FIN 48.
We file income tax returns in the U.S. federal jurisdiction and various state and foreign
jurisdictions. We are subject to U.S. federal or state income tax examinations by tax authorities
for all years in which we reported net operating losses that are
being carried forward for tax purposes. We do not believe there will be any
material changes in our unrecognized tax positions over the next 12 months.
We recognize interest and penalties accrued on any unrecognized tax benefits as a component of
income tax expense. As of the date of adoption of FIN 48, we did not have any accrued interest or
penalties associated with any unrecognized tax benefits, nor was any interest expense recognized
for the period ended March 31, 2007.
8. Public Offering of Common Shares
On January 30, 2007, the Company received $33.9 million from the closing of its public
offering of 37,950,000 shares of common stock in an underwritten public offering with net proceeds,
after underwriting discount and expenses, of approximately $33.2 million. This public offering
triggered the automatic conversion of all outstanding shares of Series A convertible preferred
stock to common stock and eliminated the Series A liquidation preference of $41.9 million, equal to
the original issue price plus all accrued and unpaid dividends (as adjusted for any stock
dividends, combinations, splits, recapitalizations and other similar events). Following the
offering, the 1,544,626 shares of Series A convertible preferred stock has been converted to
1,235,699 shares of common stock, and no liquidation preference or other preferential rights
remain. As of March 31, 2007 the Company had 53,999,817 common shares outstanding.
- 12 -
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion below contains forward-looking statements that are based on the beliefs of
management, as well as assumptions made by, and information currently available to, management. Our
future results, performance or achievements could differ materially from those expressed in, or
implied by, any such forward-looking statements as a result of certain factors, including, but not
limited to, those discussed in this section as well as in the section entitled Risk Factors and
elsewhere in our filings with the Securities and Exchange Commission.
Our business is subject to significant risks including, but not limited to, 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 March 31, 2007, we had an
accumulated deficit of $292.4 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 investments. On January 30,
2007, we closed the sale of 37,950,000 shares of common stock in an underwritten public offering
with net proceeds, after underwriting discount and expenses, of
approximately $33.2 million. (See Note 8 to our condensed
financial statements.)
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, 2006, we have received from
Novo
- 13 -
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
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 we 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. |
- 14 -
|
|
|
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 with
interest at 5% per year that will be payable to Novo
Nordisk in three equal annual payments commencing in July
2012. 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 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
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 selected 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 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 recorded a non-cash
impairment charge of $4.0 million in the third quarter of 2006
to write down our Intraject-related assets, based solely on their net
realizable valve without giving effect to any future milestone or
royalty payments. We sold these assets for 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 |
|
Phase 3 |
ARD-1300 (Hydroxychloroquine) |
|
Asthma |
|
Phase 2 (1) |
ARD-1500 (Liposomal treprostinil) |
|
Pulmonary Arterial Hypertension |
|
Preclinical |
|
|
|
(1) |
|
A Phase 2a clinical study did not meet pre-specified clinical
endpoints. The program is currently under review by APT and is in
our view, unlikely to continue. |
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.
- 15 -
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 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 Pseudomonas aeruginosa, a lung infection to which CF patients are vulnerable.
Currently, there is only one inhalation antibiotic approved for the treatment of this infection. 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 designations from the FDA for this product for the management of
CF, and for the treatment of respiratory infections associated with non-CF bronchiectasis a
chronic pulmonary disease with symptoms similar to cystic fibrosis affecting over 100,000 patients
in USA. 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.
- 16 -
We initiated preclinical studies for liposomal ciprofloxacin in 2006 and we also continued to
work on new innovative formulations for this product with the view to maximize the safety, efficacy
and convenience to patients. We are currently conducting additional preclinical development and
expect to initiate human clinical studies in the second half of 2007, with results expected by the
end of the first quarter of 2008. We expect to incur expenses of approximately $20 million in 2007
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 liposomal ciprofloxacin for the treatment of other serious
respiratory infections.
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.
- 17 -
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 six Phase 3 clinical trials, and our licensee, Novo Nordisk, is responsible
for all remaining development, manufacturing and commercialization. We will receive royalties under
our license agreement that will rise to an average of five percent or higher by the fifth year
after commercialization, 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 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.
- 18 -
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. |
The Phase 3 clinical trials are expected to include a total of approximately 3,000 Type 1 and
Type 2 diabetes patients. The trials include treatment comparisons with other medicaments for the
treatment of diabetes. 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.
ARD-1300 Hydroxychloroquine for the Treatment of Asthma
The ARD-1300 program 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 hyperresponsiveness 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. Data from studies in which HCQ was orally administered to
humans suggested that HCQ could be effective in the treatment of asthma. APT and Aradigm
hypothesized that targeted delivery of HCQ to the airways may enhance the effectiveness of the
treatment of asthma relative to systemic delivery of HCQ while reducing side effects by decreasing
exposure of the drug to other parts of the body.
- 19 -
Development
APT has funded all activities in the development of this program to date. The ARD-1300 program
advanced into Phase 2 clinical trials following positive preclinical testing and Phase 1 clinical
results. The Phase 2a clinical trial, begun in March 2006, was 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 the results of the study were announced in November.
The results of the Phase 2a clinical study of inhaled HCQ as a treatment for patients with
moderate-persistent asthma did not meet the pre-specified clinical efficacy endpoints. No serious
adverse effects were noted or associated with the aerosolized HCQ or with the AERx system. While
APT and Aradigm are currently analyzing the data from this study in order to determine whether
additional studies of inhaled HCQ are warranted, it is unlikely that the current development path
for HCQ for the treatment of asthma can be advanced without further research. This will delay
development of this product candidate. Moreover, APT may choose not to conduct such research, in
which case this collaborative program would be terminated. While APT has not yet indicated its
intention, the Company believes it is unlikely that this program will continue.
ARD-1500 Treprostinil for the Treatment of Pulmonary Arterial Hypertension
As part of our collaboration with United Therapeutics, we investigatied 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, (acquired in 2007 by Actelion
Pharmaceuticals Ltd.), markets in the United States another prostacyclin analogue, iloprost, under
the name Ventavis that is administered six to nine times per day using a nebulizer, with each
treatment lasting four to 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 (in vitro) testing of selected formulations. We are currently in negotiations
with United
Therapeutics on further development of inhaled treprostinil using our pulmonary drug delivery
technologies.
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
- 20 -
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 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 revenues from collaboration agreements and feasibility studies.
We recognize 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 approximate
to or are greater than such revenues and 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 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
- 21 -
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.
Stock-Based Compensation Expense
We measure stock-based compensation at the grant date based on the awards fair value and we
recognize the expense ratably over the requisite vesting period, net of estimated forfeitures, for
all stock-based awards granted after January 1, 2006 and all stock based awards granted prior to,
but not vested as of, January 1, 2006.
We have elected to calculate an awards fair value based on the Black-Scholes option-pricing
model. The Black-Scholes model requires various assumptions, including expected option life and
volatility. If any of the assumptions used in the Black-Scholes model or the estimated forfeiture
rate change significantly, stock-based compensation expense may differ materially in the future
from that recorded in the current period.
We recognized expense for stock-based compensation of $310,000 and $470,000 for the three
months ended March 31, 2007 and 2006, respectively.
Results of Operations
Three months ended March 31, 2007 and 2006
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
|
2007 |
|
|
2006 |
|
|
Percent |
|
|
|
(in thousands) |
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Related parties |
|
$ |
15 |
|
|
$ |
33 |
|
|
|
(55 |
%) |
Percentage of total revenues |
|
|
4 |
% |
|
|
3 |
% |
|
|
|
|
Unrelated parties |
|
|
401 |
|
|
|
1,040 |
|
|
|
(61 |
%) |
Percentage of total revenues |
|
|
96 |
% |
|
|
97 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
416 |
|
|
$ |
1,073 |
|
|
|
(61 |
%) |
|
|
|
|
|
|
|
|
|
|
|
Total revenue consists of related party and unrelated party revenues. Total revenues decreased
$657,000 for the three months ended March 31, 2007, over the comparable period in fiscal 2006. In
the three months ended March 31, 2007 we recorded revenues from NNDT of $15,000. The primary reason
for the decreases in related party revenues was due to the conclusion of the restructuring
agreement with Novo Nordisk. Similarly, the primary reason for the decrease in unrelated party
revenues was the conclusion of most of our collaboration agreements in 2006. For the three months
ended March 31, 2007, we recorded collaborative revenues of $312,000 related to ARD-1500, $84,000
from our transition agreement with Zogenix and $5,000 from our nozzle manufacture contract.
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
|
2007 |
|
|
2006 |
|
|
Percent |
|
|
|
(in thousands) |
|
|
|
|
|
Research and development expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Collaborative |
|
$ |
419 |
|
|
$ |
1,119 |
|
|
|
(63 |
)% |
Self-initiated |
|
|
2,988 |
|
|
|
5,621 |
|
|
|
(47 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Total research and development expense |
|
$ |
3,407 |
|
|
$ |
6,740 |
|
|
|
(49 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses represent proprietary research expenses and costs related to
contract research revenue which 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. The decrease in collaborative
program expenses in the three months ended March 31, 2007 was due primarily to the transition from
contract research agreements
- 22 -
towards a greater focus on the development of our lead candidate
ARD-3100. Similarly, the decrease in research and development expense for self-initiated projects
was due primarily to a strategic restructuring of our business to focus resources on advancing our
current product candidates. In addition, our Intraject clinical batch registration lot activities
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. Stock-based compensation expense charged to
research and development for the three months ended March 31, 2007 and 2006 was $94,000 and
$263,000, respectively. We expect that our research and development expenses will increase over the
next few quarters as we continue the development of our lead candidate, ARD-3100.
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
March 31, |
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
2007 |
|
2006 |
|
Percent |
|
|
(in thousands) |
|
|
|
|
General and administrative expenses |
|
$ |
2,085 |
|
|
$ |
2,853 |
|
|
|
(27 |
)% |
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. General and administrative expenses for the three months
ended March 31, 2007 decreased over the comparable period in 2006 primarily as a result of the
reduction in force announced in May 2006 and sale of
Intraject-related assets to Zogenix in July 2006. Stock-based compensation expense charged to general and
administrative expenses for the three months ended March 31, 2007 and 2006 were $216,000 and
$207,000, respectively. We expect that our general and administrative expenses will remain
relatively constant or perhaps decrease slightly over the next few quarters.
Interest income, interest expense and other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
|
2007 |
|
|
2006 |
|
|
Percent |
|
|
|
(in thousands) |
|
|
|
|
|
Interest income, interest expense and other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
637 |
|
|
$ |
245 |
|
|
|
160 |
% |
Interest expense |
|
|
(96 |
) |
|
|
(3 |
) |
|
|
(3,100 |
)% |
Other expense |
|
|
(31 |
) |
|
|
(7 |
) |
|
|
(343 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Total interest income, interest and other expense |
|
$ |
510 |
|
|
$ |
235 |
|
|
|
117 |
% |
|
|
|
|
|
|
|
|
|
|
|
Interest income for the three months ended March 31, 2007 increased $392,000 over the
comparable period in 2006 due to a higher 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 in July 2006. 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 March 31, 2007, we had cash, cash equivalents and short-term investments of $56.4
million and total working capital of $54.5 million. On January 30, 2007 we closed the sale of
37,950,000 shares of common stock in an underwritten public offering that resulted in net proceeds
of approximately $33.2
- 23 -
million, after underwriting discounts and expenses. This public offering
triggered the automatic conversion of all outstanding shares of our Series A convertible preferred
stock to common stock and eliminated the Series A liquidation preference of $41.9 million. Our
principal requirements for cash are to fund working capital needs and, to a lesser extent, capital
expenditures for equipment purchases.
For the three months ended March 31, 2007, our operating activities used net cash of $4.1
million and reflect our net loss of $4.6 million, offset by non-cash charges including stock-based
compensation expense and depreciation and amortization expense. Cash was used to pay for invoices outstanding and
severance-related expenses accrued for the additional reduction in workforce. The change in other
accrued liabilities was due primarily to legal expenses related to our public offering and clinical
trial expenses related to our ARD-3100 program. We recognized less deferred revenue due to the wind
down of our ARD-1500 program with United Therapeutics in 2006. The change in accounts receivable is
primarily related to our partnered program for ARD-1100 with Defence Research and Development
Canada. The change in prepaid expenses is primarily due to advances
on future program costs, the reclassification of capitalized public
offering expense to equity and recognition of insurance expense. This compares to the net cash used in our
operating activities for the three-month period ended March 31, 2006, of $11.9 million, which
reflects the net loss of $8.3 million offset by non-cash charges including stock-based compensation
and depreciation amortization expense. Cash was used to fund an increase in accounts receivable, primarily
related to the partnered programs, to fund an increase in prepaid expenses for advances on future
program costs, to pay for accrued bonuses and to pay for invoices related to our Intraject program.
For the three-month period ended March 31, 2007, net cash used in financing activities was
$2.8 million. We used $317,000 for purchases of equipment primarily for our ARD-3100 program, $3.0
million for the purchase of short term investments and $503,000 in proceeds from sales and
maturities of available for-sale securities. This compares to $600,000 for the purchases of
equipment primarily for the Intraject program and $515,000 to purchase short term investments for
the same three month period in the prior year.
Net cash provided by financing activities of $33.2 million for the three months ended March
31, 2007 was primarily due to net proceeds from our public offering concluded in January
30, 2007 and $56,000 in purchases under our employee stock plan. This compares to net cash provided
by financing activities of $262,000 for the three months ended March 31, 2006, attributable
primarily to purchases under our employee stock plans.
As of March 31, 2007, we had an accumulated deficit of $292.4 million, working capital of
$54.5 million and shareholders equity of $48.7 million. Management believes that cash and cash
equivalents on hand at March 31, 2007, will be sufficient to enable us meet our obligations through
at least 2008.
Contractual Obligations
Our contractual obligations and future minimum lease payments that are non-cancelable at March
31, 2007 are disclosed in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period |
|
|
|
|
|
|
|
(amounts in thousands) |
|
|
|
Total |
|
|
2007(1) |
|
|
1 - 2 years |
|
|
3-5 years |
|
|
+5 years |
|
Contractual obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations |
|
$ |
20,742 |
|
|
$ |
1,774 |
|
|
$ |
2,421 |
|
|
$ |
6,607 |
|
|
$ |
9,940 |
|
Unconditional capital purchase obligations |
|
|
730 |
|
|
|
730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconditional purchase obligations |
|
|
1,422 |
|
|
|
1,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual commitments |
|
$ |
22,894 |
|
|
$ |
3,926 |
|
|
$ |
2,421 |
|
|
$ |
6,607 |
|
|
$ |
9,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For nine months ending December 31, 2007. |
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
- 24 -
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 March 31, 2007, we had cash, cash equivalents and short-term investments of $56.4
million. Our short-term investments will likely decline by an immaterial amount if market interest
rates increase, and therefore, we believe our exposure to interest rate changes is 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
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
In addition to the other information contained in this Form 10-Q, and risk factors set
forth in our most recent SEC filings, the following risk factors should be considered carefully in
evaluating our business. Our business, financial condition, or results of operations could be
materially adversely affected by any of these risks. Additional risks not presently known to us or
that we currently deem immaterial may also impair our business and operations.
The risk factors included herein include any material changes to and supersede the risk
factors associated with our business previously disclosed in Item 1A to Part I of our Annual Report
on Form 10-K for the fiscal year ended December 31, 2006. We have marked with an asterisk (*) those
risk factors that reflect substantive changes from the risk factors included in our Annual Report
Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended December 31,
2006.
Risks Related to Our Business
We are an early-stage company.
You must evaluate us in light of the uncertainties and complexities present in an
early-stage company. All of our potential products are in an early stage of research or
development. Our potential drug delivery products require extensive research, development and
pre-clinical and clinical testing. Our potential products also may involve lengthy regulatory
reviews before they can be sold. Because none of our product candidates has yet received approval
by the FDA, we cannot assure you that our research and development
- 25 -
efforts will be successful, any
of our potential products will be proven safe and effective or regulatory clearance or approval to
sell any of our potential products will be obtained. We cannot assure you that any of our potential
products can be manufactured in commercial quantities or at an acceptable cost or marketed
successfully. We may abandon the development of some or all of our product candidates at any time
and without prior notice. We must incur substantial up-front expenses to develop and commercialize
products and failure to achieve commercial feasibility, demonstrate safety, achieve clinical
efficacy, obtain regulatory approval or successfully manufacture and market products will
negatively impact our business.
* We 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. In
May 2006, we began transitioning 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 are 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; |
|
|
|
|
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, cash equivalents and short-term investments balances at March 31, 2007, which include net proceeds from our public offering that closed on
January 30, 2007 and interest earned on our investments, should be sufficient to meet our needs for
at least the next 24 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
- 26 -
scope
of, or eliminate one or more of our product development programs and reduce personnel-related
costs, or to obtain funds through arrangements with collaborators or other sources that may require
us to relinquish rights to certain of our technologies or products that we would not otherwise
relinquish. If we are able to obtain funds through the issuance of debt securities or borrowing,
the terms may restrict our operations. 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. As of March 31, 2007, we have an accumulated deficit of $292.4 million. We have not had
any product sales and do not anticipate receiving any revenues from product sales for at least the
next few years, if ever. While our recent shift in development strategy may result in reduced
capital expenditures, we expect to continue to incur substantial losses over at least the next
several years as we:
|
|
|
expand drug product development efforts; |
|
|
|
|
conduct preclinical testing and clinical trials; |
|
|
|
|
pursue additional applications for our existing delivery technologies; |
|
|
|
|
outsource the commercial-scale production of our products; and |
|
|
|
|
establish a sales and marketing force to commercialize certain of our
proprietary products if these products obtain regulatory approval. |
To achieve and sustain profitability, we must, alone or with others, successfully
develop, obtain regulatory approval for, manufacture, market and sell our products. We expect to
incur substantial expenses in our efforts to develop and commercialize products and we may never
generate sufficient product or contract research revenues to become profitable or to sustain
profitability.
Our dependence on collaborators may delay or prevent the progress of certain of our programs.
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.
- 27 -
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 costs and postpone the potential receipt of revenues.
Before we or our collaborators can file for regulatory approval for the commercial sale
of our potential products, the FDA will require extensive preclinical safety testing and clinical
trials to demonstrate their safety and efficacy. Completing clinical trials in a timely manner
depends on, among other factors, the timely enrollment of patients. Our collaborators and our
ability to recruit patients depends on a number of factors, including the size of the patient
population, the proximity of patients to clinical sites, the eligibility criteria for the study and
the existence of competing clinical trials. Delays in planned patient enrollment in our current or
future clinical trials may result in increased costs, program delays or both, and the loss of
potential revenues.
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.
- 28 -
Regulatory authorities may not approve our product candidates even if the product candidates
meet safety and efficacy endpoints in clinical trials or the approvals may be too limited for us to
earn sufficient revenues.
The FDA and other foreign regulatory agencies can delay approval of or refuse to approve
our product candidates for a variety of reasons, including failure to meet safety and efficacy
endpoints in our clinical trials. Our product candidates may not be approved even if they achieve
their endpoints in clinical trials. Regulatory agencies, including the FDA, may disagree with our
trial design and our interpretations of data from preclinical studies and clinical trials. Even if
a product candidate is approved, it may be approved for fewer or more limited indications than
requested or the approval may be subject to the performance of significant post-marketing studies.
In addition, regulatory agencies may not approve the labeling claims that are necessary or
desirable for the successful commercialization of our product candidates. Any limitation, condition
or denial of approval would have an adverse affect on our business, reputation and results of
operations.
Even if we are granted initial FDA approval for any of our product candidates, we may not be
able to maintain such approval, which would reduce our revenues.
Even if we are granted initial regulatory approval for a product candidate, the FDA and
similar foreign regulatory agencies can limit or withdraw product approvals for a variety of
reasons, including failure to comply with regulatory requirements, changes in regulatory
requirements, problems with manufacturing facilities or processes or the occurrence of unforeseen
problems, such as the discovery of previously undiscovered side effects. If we are able to obtain
any product approvals, they may be limited or withdrawn or we may be unable to remain in compliance
with regulatory requirements. Both before and after approval we, our collaborators and our products
are subject to a number of additional requirements. For example, certain changes to the approved
product, such as adding new indications, certain manufacturing changes and additional labeling
claims are subject to additional FDA review and approval. Advertising and other promotional
material must comply with FDA requirements and established requirements applicable to drug samples.
We, our collaborators and our manufacturers will be subject to continuing review and periodic
inspections by the FDA and other authorities where applicable and must comply with ongoing
requirements, including the FDAs Good Manufacturing Practices, or GMP, requirements. Once the FDA
approves a product, a manufacturer must provide certain updated safety and efficacy information,
submit
copies of promotional materials to the FDA and make certain other required reports. Product
approvals may be withdrawn if regulatory requirements are not complied with or if problems
concerning safety or efficacy of the product occur following approval. Any limitation or withdrawal
of approval of any of our products could delay or prevent sales of our products, which would
adversely affect our revenues. Further continuing regulatory requirements involve expensive ongoing
monitoring and testing requirements.
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.
- 29 -
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.
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.
- 30 -
Even if we or our collaborators successfully develop one or more products, such products
may not be commercially acceptable to healthcare professionals and patients, who will have to
choose our products over alternative products for the same disease indications, and many of these
alternative products will be more established than ours. For our products to be commercially
viable, we will need to demonstrate to healthcare professionals and patients that our products
afford benefits to the patient that are cost-effective as compared to the benefits of alternative
therapies. Our ability to demonstrate this depends on a variety of factors, including:
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the demonstration of efficacy and safety in clinical trials; |
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the existence, prevalence and severity of any side effects; |
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the potential or perceived advantages or disadvantages compared to alternative treatments; |
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the timing of market entry relative to competitive treatments; |
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the relative cost, convenience, product dependability and ease of administration; |
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the strength of marketing and distribution support; |
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the sufficiency of coverage and reimbursement of our product candidates by governmental
and other third-party payors; and |
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the product labeling or product insert required by the FDA or regulatory authorities in
other countries. |
Our product revenues will be adversely affected if, due to these or other factors, the
products we or our collaborators are able to commercialize do not gain significant market
acceptance.
We depend upon our proprietary technologies, and we may not be able to protect our potential
competitive proprietary advantage.
Our business and competitive position is dependent upon our and our collaborators
ability to protect our proprietary technologies related to various aspects of pulmonary drug
delivery and drug formulation. While our intellectual property rights may not provide a significant
commercial advantage for us, our patents and know-how are intended to provide protection for
important aspects of our technology, including methods for aerosol generation, devices used to
generate aerosols, breath control, compliance monitoring, certain pharmaceutical formulations,
design of dosage forms and their manufacturing and testing methods. In addition, we are maintaining
as non-patented trade secrets some of the key elements of our manufacturing technologies, for
example, those associated with production of disposable unit-dose packets for our AERx delivery
system.
Our ability to compete effectively will also depend to a significant extent on our and
our collaborators ability to obtain and enforce patents and maintain trade secret protection over
our proprietary technologies. The coverage claimed in a patent application typically is
significantly reduced before a patent is issued, either in the United States or abroad.
Consequently, any of our pending or future patent applications may not result in the issuance of
patents and any patents issued may be subjected to further proceedings limiting their scope and may
in any event not contain claims broad enough to provide meaningful protection. Any patents that are
issued to us or our collaborators may not provide significant proprietary protection or competitive
advantage, and may be circumvented or invalidated. In addition, unpatented proprietary rights,
including trade secrets and know-how, can be difficult to protect and may lose their value if they
are independently developed by a third party or if their secrecy is lost. Further, because
development and commercialization of pharmaceutical products can be subject to substantial delays,
patents may expire early and provide only a short period of protection, if any, following
commercialization of products.
In July 2006, we assigned 23 issued United States patents to Novo Nordisk along with
corresponding non-United States counterparts and certain related pending applications. In August
2006, Novo Nordisk brought suit against Pfizer, Inc. claiming infringement of certain claims in one
of the assigned United States patents. In December 2006, Novo Nordisks motion for a preliminary
injunction in this case was denied. That patent is placed at risk in connection with this
infringement lawsuit. Other patents assigned to
- 31 -
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 royalties
or other compensation which we might potentially otherwise receive based directly on such patents.
Further, the patents assigned to Novo Nordisk encompass, in some instances, technology beyond
inhaled insulin and, if all or any of these patents are invalidated, it could harm our ability to
obtain market exclusivity with respect to other product candidates.
We 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 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
- 32 -
candidates that
are on the market or in a more advanced stage of development than our product candidates. Our
ability to earn product revenues and our market share would be substantially harmed if any existing
or potential competitors brought a product to market before we or our collaborators were able to,
or if a competitor introduced at any time a product superior to or more cost-effective than ours.
If we do not continue to attract and retain key employees, our product development efforts
will be delayed and impaired.
We depend on a small number of key management and technical personnel. Our success also
depends on our ability to attract and retain additional highly qualified marketing, management,
manufacturing, engineering and development personnel. There is a shortage of skilled personnel in
our industry, we face intense competition in our recruiting activities, and we may not be able to
attract or retain qualified personnel. Losing any of our key employees, particularly our 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 acquire products, businesses
or technologies that we believe are complementary to our business strategy. The process of
investigating, acquiring and integrating any business or technology into our business and
operations is risky and we may not be able to accurately predict or derive the benefits of any such
acquisition. The process of acquiring and integrating any business or technology may create
operating difficulties and unexpected expenditures, such as:
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diversion of our management from the development and commercialization of our
pipeline product candidates; |
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difficulty in assimilating and efficiently using the acquired assets or personnel; and |
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inability to retain key personnel. |
In addition to the factors set forth above, we may encounter other unforeseen problems
with acquisitions that we may not be able to overcome. Any future acquisitions may require us to
issue shares of our stock or other securities that dilute the ownership interests of our other
shareholders, expend cash, incur debt, assume liabilities, including contingent or unknown
liabilities, or incur additional expenses related to write-offs or amortization of intangible
assets, any of which could materially adversely affect our operating results.
If we market our products in other countries, we will be subject to different laws and we may
not be able to adapt to those laws, which could increase our costs while reducing our revenues.
If we market any approved products in foreign countries, we will be subject to different
laws, particularly with respect to intellectual property rights and regulatory approval. To
maintain a proprietary market position in foreign countries, we may seek to protect some of our
proprietary inventions through foreign counterpart patent applications. Statutory differences in
patentable subject matter may limit the protection we can obtain on some of our inventions outside
of the United States. The diversity of patent laws may make our expenses associated with the
development and maintenance of intellectual property in foreign jurisdictions more expensive than
we anticipate. We probably will not obtain the same patent protection in every market in which we
may otherwise be able to potentially generate revenues. In addition, in order to market our
products in foreign jurisdictions, we and our collaborators must obtain required regulatory
approvals from foreign regulatory agencies and comply with extensive regulations regarding safety
and quality. We may not be able to obtain regulatory approvals in such jurisdictions and we may
have to incur significant costs in obtaining or maintaining any foreign regulatory approvals. If
approvals to market our products are delayed, if we fail to receive these approvals, or if we lose
previously received approvals, our business would be impaired as we could not earn revenues from
sales in those countries.
- 33 -
We may be exposed to product liability claims, which would hurt our reputation, market
position and operating results.
We face an inherent risk of product liability as a result of the clinical testing of our
product candidates in humans and will face an even greater risk upon commercialization of any
products. These claims may be made directly by consumers or by pharmaceutical companies or others
selling such products. We may be held liable if any product we develop causes injury or is found
otherwise unsuitable during product testing, manufacturing or sale. Regardless of merit or eventual
outcome, liability claims would likely result in negative publicity, decreased demand for any
products that we may develop, injury to our reputation and suspension or withdrawal of clinical
trials. Any such claim will be very costly to defend and also may result in substantial monetary
awards to clinical trial participants or customers, loss of revenues and the inability to
commercialize products that we develop. Although we currently have product liability insurance, we
may not be able to maintain such insurance or obtain additional insurance on acceptable terms, in
amounts sufficient to protect our business, or at all. A successful claim brought against us in
excess of our insurance coverage would have a material adverse effect on our results of operations.
If we cannot arrange for adequate third-party reimbursement for our products, our revenues
will suffer.
In both domestic and foreign markets, sales of our potential products will depend in
substantial part on the availability of adequate reimbursement from third-party payors such as
government health administration authorities, private health insurers and other organizations.
Third-party payors often challenge the price and cost-effectiveness of medical products and
services. Significant uncertainty exists as to the adequate reimbursement status of newly approved
health care products. Any products we are able to successfully develop may not be reimbursable by
third-party payors. In addition, our products may not be considered cost-effective and adequate
third-party reimbursement may not be available to enable us to maintain price levels sufficient to
realize a profit. Legislation and regulations affecting the pricing of pharmaceuticals may change
before our products are approved for marketing and any such changes could further limit
reimbursement. If any products we develop do not receive adequate reimbursement, our revenues will
be severely limited.
Our use of hazardous materials could subject us to liabilities, fines and sanctions.
Our laboratory and clinical testing sometimes involve use of hazardous and toxic
materials. We are subject to federal, state and local laws and regulations governing how we use,
manufacture, handle, store and dispose of these materials. Although we believe that our safety
procedures for handling and disposing of such materials comply in all material respects with all
federal, state and local regulations and standards, there is always the risk of accidental
contamination or injury from these materials. In the event of an accident, we could be held liable
for any damages that result and such liability could exceed our financial resources. Compliance
with environmental and other laws may be expensive and current or future regulations may impair our
development or commercialization efforts.
If we are unable to effectively implement or maintain a system of internal 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, 2008, to
attest to, and report on, managements assessment of our internal controls over financial
reporting. Additionally, if our market capitalization increases significantly and we become an
accelerated filer, our auditors may need to issue such a report for calendar year 2007. 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
- 34 -
results and cause us to fail to meet our financial reporting obligations, which
could adversely affect our business and reduce our stock price.
Risks Related to Our Common Stock
Our stock price is likely to remain volatile.
The market prices for securities of many companies in the drug delivery and
pharmaceutical industries, including ours, have historically been highly volatile, and the market
from time to time has experienced significant price and volume fluctuations unrelated to the
operating performance of particular companies. Prices for our common stock may be influenced by
many factors, including:
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investor perception of us; |
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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.
Our common stock was delisted from the Nasdaq Capital Market; this delisting may reduce the
liquidity of our common stock and the price may decline.
On November 10, 2006, our common stock was delisted from the Nasdaq Capital Market due to
non-compliance with Nasdaqs continued listing standards. Our common stock is currently quoted on
the OTC Bulletin Board. This delisting may reduce the liquidity of our common stock, may cause
investors not to trade in our stock and may result in a lower stock price. In addition, investors
may find it more difficult to obtain accurate quotations of the share price of our common stock.
We have implemented certain anti-takeover provisions, which make it less likely that we would
be acquired and 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
- 35 -
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 of our articles of incorporation, our poison pill, our severance plan and our change
of control agreements, and provisions of the California Corporations Code may discourage, delay or
prevent another party from acquiring us or reduce the price that a buyer is willing to pay for our
common stock.
We have never paid dividends on our capital stock, and we do not anticipate paying cash
dividends for at least the foreseeable future.
We have never declared or paid cash dividends on our capital stock. We do not anticipate
paying any cash dividends on our common stock for at least the foreseeable future. We currently
intend to retain all available funds and future earnings, if any, to fund the development and
growth of our business. As a result, capital appreciation, if any, of our common stock will be your
sole source of potential gain for at least the foreseeable future
- 36 -
Item 6. EXHIBITS
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Exhibit |
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Number |
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Description |
10.10c(10)
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Amendment No. 3 to Rights Agreement, dated as of January
24, 2007, by and between the Company and Computershare
Trust Company, N.A. |
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10.16(7)+
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Form of Change of Control Agreement entered into between
the Company and certain of the Companys senior officers. |
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31.1
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Certification by the Companys Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2
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Certification by the Companys Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1
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Certification by the Companys Chief Executive Officer and
Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
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+ |
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Represents a management contract or compensatory plan or arrangement. |
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(10) |
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Incorporated by reference to the Companys Form 8-K filed on January 30, 2007. |
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(7) |
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Incorporated by reference to the Companys Form S-1 (No. 333-138169) filed on
October 24, 2006, as amended. |
- 37 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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ARADIGM CORPORATION |
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(Registrant) |
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/s/ Igor Gonda |
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Dr. Igor Gonda |
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President and Chief Executive Officer |
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/s/ Thomas C. Chesterman |
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Thomas C. Chesterman |
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Senior Vice President and Chief Financial Officer |
Dated: May 15, 2007
- 38 -
INDEX TO EXHIBITS
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Exhibit |
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Number |
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Description |
10.10c(10)
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Amendment No. 3 to Rights Agreement, dated as of January
24, 2007, by and between the Company and Computershare
Trust Company, N.A. |
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10.16(7)+
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Form of Change of Control Agreement entered into between
the Company and certain of the Companys senior officers. |
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31.1
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Certification by the Companys Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2
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Certification by the Companys Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1
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Certification by the Companys Chief Executive Officer and
Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
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+ |
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Represents a management contract or compensatory plan or arrangement. |
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(10) |
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Incorporated by reference to the Companys Form 8-K filed on January 30, 2007. |
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(7) |
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Incorporated by reference to the Companys Form S-1 (No. 333-138169) filed on
October 24, 2006, as amended. |
- 39 -