sv1za
As filed
with the Securities and Exchange Commission on October 25,
2010
Registration
No. 333-168770
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Pre-Effective Amendment No. 2
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Aradigm Corporation
(Exact name of registrant as
specified in its charter)
|
|
|
|
|
California
|
|
2834
|
|
94-3133088
|
(State or other jurisdiction of
incorporation or organization)
|
|
(Primary Standard Industrial
Classification Code Number)
|
|
(I.R.S. Employer
Identification Number)
|
3929 Point Eden Way
Hayward, California
94545
(510) 265-9000
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
Igor Gonda
President and Chief Executive
Officer
Aradigm Corporation
3929 Point Eden Way
Hayward, California
94545
(510) 265-9000
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
With a copy to:
John W.
Campbell, Esq.
Raymond T.
Hum, Esq.
Morrison & Foerster
LLP
425 Market Street
San Francisco, CA
94105
Tel:
(415) 268-7000
Fax:
(415) 268-7522
Approximate date of commencement of proposed sale to the
public: From time to time after the effective
date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933 check the
following
box: þ
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
|
|
|
|
Large
accelerated
filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller reporting
company þ
|
(Do not check if a smaller
reporting company)
CALCULATION
OF REGISTRATION FEE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of
|
|
|
Proposed Maximum
|
|
|
Proposed Maximum
|
|
|
Amount of
|
Title of Each Class of
|
|
|
Shares to be
|
|
|
Offering
|
|
|
Aggregate
|
|
|
Registration
|
Securities to be Registered
|
|
|
Registered
|
|
|
Price per Share
|
|
|
Offering Price
|
|
|
Fee
|
Common Stock, no par value per share(1)
|
|
|
|
68,229,726
|
(2)
|
|
|
$
|
0.135
|
(3)
|
|
|
$
|
9,211,013.01
|
|
|
|
$
|
656.75
|
|
Total
|
|
|
|
68,229,726
|
|
|
|
|
|
|
|
|
$
|
9,211,013.01
|
|
|
|
$
|
656.75
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes associated rights (the
Preferred Share Purchase Rights) to purchase shares
of Series A Junior Participating Preferred Stock, no par
value per share, of Aradigm Corporation (the
Registrant). The Preferred Share Purchase Rights are
attached to shares of common stock, no par value per share (the
Common Stock), of the Registrant in accordance with
the Amended and Restated Rights Agreement, dated as of
September 5, 2008 (the Rights Agreement), as
amended from time to time, by and between the Registrant and
Computershare Trust Company, N.A., as Rights Agent. The
Preferred Share Purchase Rights are not exercisable until the
occurrence of certain events specified in the Rights Agreement,
are evidenced by the stock certificates representing the Common
Stock and are transferable solely with the Common Stock. The
value attributable to the Preferred Share Purchase Rights, if
any, is reflected in the value of the Common Stock.
|
|
(2)
|
|
Consists of shares to be offered by
selling shareholders. Consists of (a) 34,702,512
outstanding shares of common stock issued in a private placement
that closed on June 21, 2010 (the June 2010 private
placement), (b) 7,527,214 outstanding shares of
common stock that were issued upon exercise of warrants issued
in the June 2010 private placement and (c) 26,000,000
outstanding shares of common stock that were issued under a
stock purchase agreement, dated as of July 30, 2010, by and
among the Registrant and Novo Nordisk A/S. Pursuant to
Rule 416 under the Securities Act of 1933, as amended (the
Securities Act), there is also being registered
hereby such indeterminate number of additional shares of common
stock as may be issued or issuable because of stock splits,
stock dividends, stock distributions, and similar transactions.
|
|
(3)
|
|
Estimated solely for the purpose of
calculating the registration fee in accordance with
Rule 457(c) under the Securities Act based on the average
of the high and low prices of the Registrants common stock
reported on the OTC Bulletin Board on August 9, 2010.
|
|
(4)
|
|
Previously paid.
|
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission
acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. The selling shareholders may not sell these securities
publicly until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where
the offer or sale is not permitted.
|
SUBJECT TO COMPLETION DATED
OCTOBER 25, 2010
Aradigm Corporation
Up to 68,229,726 Shares of
Common Stock
This prospectus relates to the resale of up to
68,229,726 shares of our common stock, no par value per
share, being offered by the selling shareholders identified in
this prospectus, including their respective transferees, donees,
pledgees or other successors in interest. These shares consist
of (i) 34,702,512 outstanding shares of common stock issued
in a private placement that closed on June 21, 2010, which
we refer to in this prospectus as the June 2010 private
placement, (ii) 7,527,214 outstanding shares of common
stock that were issued upon exercise of warrants issued in the
June 2010 private placement and (iii) 26,000,000
outstanding shares of common stock that were issued under a
stock purchase agreement, dated as of July 30, 2010, by and
among us and Novo Nordisk A/S, which we refer to in this
prospectus as the Novo Nordisk stock purchase agreement. We will
not receive any of the proceeds from the sale of common stock by
the selling shareholders under this prospectus. We have agreed
to bear the expenses (other than any underwriting discounts or
commissions or agents commissions) in connection with the
registration of the common stock being offered under this
prospectus by the selling shareholders.
The selling shareholders may sell all or a portion of the shares
of common stock held by them and offered hereby from time to
time directly or through one or more underwriters,
broker-dealers or agents. If the shares of common stock are sold
through underwriters or broker-dealers, the selling shareholders
will be responsible for underwriting discounts or commissions or
agents commissions.
The shares of common stock may be sold in one or more
transactions at fixed prices, at prevailing market prices at the
time of the sale, at varying prices determined at the time of
sale or at negotiated prices. See Plan of
Distribution beginning on page 56 of this prospectus.
Our common stock is quoted on the OTC Bulletin Board under
the symbol ARDM. The closing price for our common
stock on October 22, 2010 was $0.215 per share.
Investing in our common stock involves risk. You should
carefully consider the risk factors beginning on page 5 of
this prospectus before making a decision to invest in our common
stock.
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus or
any prospectus supplement. This prospectus is not an offer of
these securities in any jurisdiction where an offer and sale is
not permitted.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE
SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this prospectus
is ,
2010
Table of
Contents
|
|
|
|
|
|
|
Page
|
|
|
|
|
1
|
|
|
|
|
4
|
|
|
|
|
5
|
|
|
|
|
14
|
|
|
|
|
15
|
|
|
|
|
22
|
|
|
|
|
39
|
|
|
|
|
41
|
|
|
|
|
51
|
|
|
|
|
53
|
|
|
|
|
54
|
|
|
|
|
57
|
|
|
|
|
57
|
|
|
|
|
59
|
|
|
|
|
60
|
|
|
|
|
60
|
|
|
|
|
61
|
|
|
|
|
61
|
|
|
|
|
F-1
|
|
Exhibit 23.1 |
PROSPECTUS
SUMMARY
This summary highlights material information about us that is
described more fully elsewhere in this prospectus. It may not
contain all of the information that you find important. You
should carefully read this entire document, including the
Risk Factors section beginning on page 5 of
this prospectus and the financial statements and related notes
to those statements appearing elsewhere in this prospectus
before making a decision to invest in our common stock.
Overview
We are an emerging specialty pharmaceutical company focused on
the development and commercialization of drugs delivered by
inhalation for the treatment of severe respiratory diseases by
pulmonologists. Over the last decade, we invested a large amount
of capital to develop drug delivery technologies, particularly
the development of a significant amount of expertise in
pulmonary drug delivery. We also invested considerable effort
into the generation of a large volume of laboratory and clinical
data demonstrating the performance of our
AERx®
pulmonary drug delivery platform and other proprietary
technology, including our liposomal ciprofloxacin formulation
for inhalation. We have not been profitable since inception and
expect to incur additional operating losses over at least the
next several years as we continue product development efforts,
clinical trial activities, and possible sales, marketing and
contract manufacturing efforts. To date, we have not had any
significant product sales and do not anticipate receiving
revenues from the sale of any of our products in the near term.
As of June 30, 2010, we had an accumulated deficit of
$352.8 million. Historically, we have funded our operations
primarily through public offerings and private placements of our
capital stock, license fees and milestone payments from
collaborators, proceeds from the January 2005 restructuring
transaction with Novo Nordisk, borrowings from Novo Nordisk, the
sale of Intraject-related assets to Zogenix, the milestone
payment received from Zogenix during the three months ended
March 31, 2010 and interest earned on cash equivalents and
short-term investments.
Over the last four years, our business has focused on
opportunities in the development of drugs for the treatment of
severe respiratory disease that could be developed by the
Company and commercialized in the United States, or another
significant territory such as the European Union
(EU). It is our longer term strategy to
commercialize our respiratory product candidates with our own
focused sales and marketing force addressing pulmonary specialty
doctors in the United States or in the EU, where we believe that
a proprietary sales force will enhance the return to our
shareholders. Where our products can benefit a broader
population of patients in the United States or in other
countries, we may enter into co-development, co-promotion or
other marketing arrangements with collaborators, thereby
reducing costs and increasing revenues through license fees,
milestone payments and royalties. In selecting our proprietary
development programs, we primarily seek drugs approved by the
United States Food and Drug Administration that can be
reformulated for both existing and new indications in
respiratory disease. Our intent is to use our pulmonary delivery
methods and formulations to improve their safety, efficacy and
convenience of administration to patients. We believe that this
strategy will allow us to reduce cost, development time and risk
of failure, when compared to the discovery and development of
new chemical entities. Our lead development candidate is a
proprietary liposomal formulation of the antibiotic
ciprofloxacin that is delivered by inhalation for the treatment
of infections associated with the severe respiratory diseases
cystic fibrosis and non-cystic fibrosis bronchiectasis. We
received orphan drug designations for both of these indications
in the U.S. and for cystic fibrosis in the European Union.
We have reported the results of two successful Phase 2a trials
with this product candidate in cystic fibrosis and non-cystic
fibrosis bronchiectasis, respectively and recently reported
results from one successful Phase 2b trial in non-cystic
fibrosis bronchiectasis.
Pulmonary delivery by inhalation is already a widely used and
well accepted method of administration of a variety of drugs for
the treatment of respiratory diseases. Compared to other routes
of administration, inhalation provides local delivery of the
drug to the respiratory tract which offers a number of potential
advantages, including rapid onset of action, less drug required
to achieve the desired therapeutic effect, and reduced side
effects because the rest of the body has lower exposure to the
drug. We believe that there still are significant unmet medical
needs in the respiratory disease market, both to replace
existing therapies that over prolonged use in patients
demonstrate reduced efficacy or increased side effects, as well
as to provide novel treatments to patient populations and for
disease conditions that are inadequately treated.
1
We believe that our proprietary formulation and delivery
technologies and our experience in the development and
management of pulmonary clinical programs uniquely position us
to benefit from opportunities in the respiratory disease market
as well as other pharmaceutical markets that would benefit from
the efficient, non-invasive inhalation delivery of drugs.
Recent
Developments
June
2010 Private Placement
On June 21, 2010, we closed a private placement, which we
refer to in this prospectus as the June 2010 private placement,
in which we sold 34,702,512 shares of our common stock and
warrants to purchase an aggregate of 7,527,214 shares of
our common stock to accredited investors (which included a few
then-existing significant shareholders) under the terms of a
securities purchase agreement that we entered into with the
selling shareholders on June 18, 2010. At the closing of
the June 2010 private placement, we received approximately
$4.1 million in aggregate gross proceeds from the sale of
the common stock and the warrants. After deducting for fees and
expenses, the aggregate net proceeds from the sale of the common
stock and the warrants were approximately $3.7 million.
After we held our special meeting of shareholders on
September 14, 2010 and obtained the requisite shareholder
approval on a proposal to amend our amended and restated
articles of incorporation to increase the total number of
authorized shares of our common stock to cover the shares
issuable upon exercise of the warrants, the warrants were
exercised and we received approximately $891,000 in additional
aggregate net proceeds from the exercise of the warrants.
The common stock and the warrants were offered and sold to the
selling shareholders without registration under the Securities
Act of 1933, as amended (the Securities Act), or any
state securities laws in reliance on the exemption from the
registration requirements of the Securities Act pursuant to
Section 4(2) thereof and Rule 506 of Regulation D
promulgated thereunder.
Novo
Nordisk Stock Purchase Agreement
On September 15, 2010, we closed the issuance to Novo
Nordisk A/S of 26,000,000 shares of our common stock under
a stock purchase agreement, dated as of July 30, 2010, by
and among us and Novo Nordisk A/S, which we refer to in this
prospectus as the Novo Nordisk stock purchase agreement, in
consideration for the termination of all of our obligations
under a promissory note and security agreement dated
July 3, 2006 in favor of Novo Nordisk A/S. The closing
occurred after we held our special meeting of shareholders on
September 14, 2010 and obtained the requisite shareholder
approval on a proposal to amend our amended and restated
articles of incorporation to increase the total number of
authorized shares of our common stock to cover the
26,000,000 shares issuable under the Novo Nordisk stock
purchase agreement. An amended and restated stock purchase
agreement, dated as of January 26, 2005, previously entered
into by us, Novo Nordisk A/S and Novo Nordisk Pharmaceuticals,
Inc. in connection with our January 2005 restructuring
transaction with Novo Nordisk was also terminated at the
closing. The July 3, 2006 promissory note and security
agreement had evidenced, among other things, a loan that had
been previously made by Novo Nordisk A/S to us in the principal
amount of $7.5 million, which had bore interest accruing at
5% per annum and the principal, along with the accrued interest,
had been payable in three equal payments of approximately
$3.5 million on July 2, 2012, July 1, 2013 and
June 30, 2014.
The shares were offered and issued to Novo Nordisk without
registration under the Securities Act, or any state securities
laws in reliance on the exemption from the registration
requirements of the Securities Act afforded by Section 4(2)
thereof.
Corporate
Information
We were incorporated in California in 1991. Our principal
executive offices and mailing address is
3929 Point Eden Way, Hayward, California 94545, and
the main telephone number of our principal executive offices is
(510) 265-9000.
Our website address is www.aradigm.com.
2
THE
OFFERING
This prospectus relates to the resale of up to
68,229,726 shares of our common stock, no par value per
share, being offered by the selling shareholders identified in
this prospectus, including their respective transferees, donees,
pledgees or other successors in interest. These shares consist
of (i) 34,702,512 outstanding shares of common stock issued
in the June 2010 private placement, (ii) 7,527,214
outstanding shares of common stock that were issued upon
exercise of warrants issued in the June 2010 private placement
and (iii) 26,000,000 outstanding shares of common stock
that were issued under the Novo Nordisk stock purchase agreement.
|
|
|
Common stock being offered by selling shareholders |
|
68,229,726 shares(1) |
|
|
|
Common stock outstanding prior to and after the offering |
|
172,462,378 shares(2) |
|
|
|
Use of proceeds |
|
We will not receive any of the proceeds from the sale of common
stock by the selling shareholders under this prospectus. |
|
OTC Bulletin Board Symbol |
|
ARDM |
|
Risk Factors |
|
The shares offered by this prospectus are speculative and
involve a high degree of risk and investors purchasing these
shares should not purchase these shares unless they can afford
the loss of their entire investment. See Risk
Factors beginning on page 5. |
|
|
|
(1) |
|
Consists of (i) 34,702,512 outstanding shares of common
stock issued in the June 2010 private placement,
(ii) 7,527,214 outstanding shares of common stock that were
issued upon exercise of warrants issued in the June 2010 private
placement and (iii) 26,000,000 outstanding shares of common
stock that were issued under the Novo Nordisk stock purchase
agreement. |
|
|
|
(2) |
|
As of October 21, 2010. Includes the shares of common stock
being offered under this prospectus. |
3
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are
based on the current beliefs of management, as well as current
assumptions made by, and information currently available to,
management. All statements contained in this prospectus, other
than statements that are purely historical, are forward-looking
statements. Words such as anticipate,
expect, intend, plan,
believe, may, will,
could, continue, seek,
estimate, or the negative thereof and similar
expressions also identify forward-looking statements. These
forward-looking statements are subject to risks and
uncertainties that could cause our future actual results,
performance or achievements to differ materially from those
expressed in, or implied by, any such forward-looking statements
as a result of certain factors, including, but not limited to,
those risks and uncertainties discussed in this section, as well
as in the section entitled Risk Factors, and
elsewhere in this prospectus and our other filings with the
United States Securities and Exchange Commission (the
SEC). Forward-looking statements include, but are
not limited to: our belief that our cash, cash equivalents and
short-term investments as of June 30, 2010, the Zogenix
quarterly royalty payments and the proceeds from the exercise of
warrants from the June 2010 private placement will be sufficient
to enable us to meet our obligations through at least through
the fourth quarter of 2010; and our anticipation that we will
not receive revenues from the sale of any of our products in the
near term or for at least the next few years, if ever.
These forward-looking statements and our business are subject to
significant risks including, but not limited to: our ability to
obtain additional financing; our ability to implement our
product development strategy; the success of product development
efforts; obtaining and enforcing patents important to our
business; clearing the lengthy and expensive regulatory approval
process; and possible competition from other products. Even if
product candidates appear promising at various stages of
development, they may not reach the market or may not be
commercially successful for a number of reasons. Such reasons
include, but are not limited to, the possibilities that the
potential products may be found to be ineffective during
clinical trials, may fail to receive necessary regulatory
approvals, may be difficult to manufacture on a large scale, are
uneconomical to market, may be precluded from commercialization
by proprietary rights of third parties or may not gain
acceptance from health care professionals and patients.
You are cautioned not to place undue reliance on the
forward-looking statements contained herein, which speak only as
of the date of this prospectus. We undertake no obligation to
update these forward-looking statements in light of events or
circumstances occurring after the date of this prospectus or to
reflect the occurrence of unanticipated events.
4
RISK
FACTORS
In addition to the other information contained in this
prospectus, and risk factors set forth in this prospectus and
our other filings with the SEC, the following risk factors
should be considered carefully before you decide whether to buy,
hold or sell our common stock. Our business, financial
condition, results of operations and stock price could be
materially adversely affected by any of these risks. Additional
risks not presently known to us or that we currently deem
immaterial may also impair our business, financial conditions,
results of operations and stock price.
Risks
Related to Our Business
We are
an early-stage company.
You must evaluate us in light of the uncertainties and
complexities present in an early-stage company. All of our
potential products are in an early stage of research or
development. Our potential products require extensive research,
development and pre-clinical and clinical testing. Our potential
products also may involve lengthy regulatory reviews before they
can be sold. Because none of our product candidates has yet
received approval by the FDA, we cannot assure you that our
research and development efforts will be successful, any of our
potential products will be proven safe and effective or
regulatory clearance or approval to sell any of our potential
products will be obtained. We cannot assure you that any of our
potential products can be manufactured in commercial quantities
or at an acceptable cost or marketed successfully. We may
abandon the development of some or all of our product candidates
at any time and without prior notice. We must incur substantial
up-front expenses to develop and commercialize products and
failure to achieve commercial feasibility, demonstrate safety,
achieve clinical efficacy, obtain regulatory approval or
successfully manufacture and market products will negatively
impact our business.
We
will need additional capital, and we may not be able to obtain
it on a timely basis, or at all.
We will need to commit substantial funds to develop our product
candidates and we may not be able to obtain sufficient funds on
acceptable terms or at all, especially in light of the current
difficult financing environment. Our operations to date have
consumed substantial amounts of cash and have generated no
significant direct product revenues. We expect negative
operating cash flows to continue for at least the foreseeable
future. Our future capital requirements will depend on many
factors, including:
|
|
|
|
|
our progress in the application of our delivery and formulation
technologies, which may require further refinement of these
technologies;
|
|
|
|
the number of product development programs we pursue and the
pace of each program;
|
|
|
|
our progress with formulation development;
|
|
|
|
the scope, rate of progress, results and costs of preclinical
testing and clinical trials;
|
|
|
|
the time and costs associated with seeking regulatory approvals;
|
|
|
|
our ability to outsource the manufacture of our product
candidates and the costs of doing so;
|
|
|
|
the time and costs associated with establishing in-house
resources to market and sell certain of our products;
|
|
|
|
our ability to establish collaborative arrangements with others
and the terms of those arrangements;
|
|
|
|
the costs of preparing, filing, prosecuting, maintaining and
enforcing patent claims, and
|
|
|
|
our need to acquire licenses, or other rights for our product
candidates.
|
Since inception, we have financed our operations primarily
through private placements and public offerings of our capital
stock, contract research funding and interest earned on
investments. We believe that our cash and cash equivalents at
June 30, 2010, the proceeds from the exercise of warrants
from the June 2010 private placement and anticipated future
recurring royalty payments will be sufficient to fund operations
at least through the fourth quarter of 2010. We will need to
obtain substantial additional funds before we would be able to
bring any of our product candidates to market. Our estimates of
future capital use are uncertain, and changing circumstances,
including those related to implementation of, or further changes
to, our development strategy, could cause us to consume capital
significantly faster than currently expected, and our expected
sources of funding may not be sufficient. If adequate funds are
not available, we will be required to delay, reduce the scope
of, or eliminate one or more of our product development programs
and reduce personnel-related costs, or to obtain funds through
arrangements with
5
collaborators or other sources that may require us to relinquish
rights to or sell certain of our technologies or products that
we would not otherwise relinquish or sell. If we are able to
obtain funds through the issuance of debt securities or
borrowing, the terms may significantly restrict our operations.
If we are able to obtain funds through the issuance of equity
securities, our shareholders may suffer significant dilution and
our stock price may drop.
We
have a history of losses, we expect to incur losses for at least
the foreseeable future, and we may never attain or maintain
profitability.
We have never been profitable and have incurred significant
losses in each year since our inception. As of June 30,
2010, we have an accumulated deficit of $352.8 million. We
have not had any significant direct product sales and do not
anticipate receiving revenues from the sale of any of our
products for at least the next few years, if ever. While our
shift in development strategy has resulted in reduced operating
and capital expenditures, we expect to continue to incur
substantial losses over at least the next several years as we:
|
|
|
|
|
continue drug product development efforts;
|
|
|
|
conduct preclinical testing and clinical trials;
|
|
|
|
pursue additional applications for our existing delivery
technologies;
|
|
|
|
outsource the commercial-scale production of our
products; and
|
|
|
|
establish a sales and marketing force to commercialize certain
of our proprietary products if these products obtain regulatory
approval.
|
To achieve and sustain profitability, we must, alone or with
others, successfully develop, obtain regulatory approval for,
manufacture, market and sell our products. We expect to incur
substantial expenses in our efforts to develop and commercialize
products and we may never generate sufficient product or
contract research revenues to become profitable or to sustain
profitability.
We are
dependent upon Zogenix and its partners to successfully market
and sell the SUMAVEL DosePro needle-free delivery system in
order to realize value from this asset.
We have no control over decisions made by Zogenix
and/or its
partners and collaborators on the marketing, sale or continued
development of the SUMAVEL DosePro product and any subsequent
products utilizing the DosePro technology. Any delay in, or
failure to receive royalties could adversely affect our
financial position and we may not be able to find another source
of cash to continue our operations.
The
results of later stage clinical trials of our product candidates
may not be as favorable as earlier trials and that could result
in additional costs and delay or prevent commercialization of
our products.
Although we believe the limited and preliminary data we have
regarding our potential products are encouraging, the results of
initial preclinical testing and clinical trials do not
necessarily predict the results that we will get from subsequent
or more extensive preclinical testing and clinical trials.
Clinical trials of our product candidates may not demonstrate
that they are safe and effective to the extent necessary to
obtain regulatory approvals
and/or
collaborative partnerships. Many companies in the
biopharmaceutical industry have suffered significant setbacks in
advanced clinical trials, even after receiving promising results
in earlier trials. If we cannot adequately demonstrate through
the clinical trial process that a therapeutic product we are
developing is safe and effective, regulatory approval of that
product would be delayed or prevented, which would impair our
reputation, increase our costs and prevent us from earning
revenues. For example, while our Phase 2a clinical trials with
inhaled liposomal ciprofloxacin showed promising initial
efficacy and safety results both in patients with cystic
fibrosis and non-cystic fibrosis bronchiectasis, there is no
guarantee that longer term studies in larger patient populations
will confirm these results or that we will satisfy all efficacy
and safety endpoints required by the regulatory authorities.
If our
clinical trials are delayed because of patient enrollment or
other problems, we would incur additional costs and delay the
potential receipt of revenues.
Before we or any future collaborators can file for regulatory
approval for the commercial sale of our potential products, the
FDA will require extensive preclinical safety testing and
clinical trials to demonstrate their safety and efficacy.
Completing clinical trials in a timely manner depends on, among
other factors, the timely enrollment of patients. Our ability to
recruit patients depends on a number of factors, including the
size of the patient population,
6
the proximity of patients to clinical sites, the eligibility
criteria for the study and the existence of competing clinical
trials. Delays in planned patient enrollment in our current or
future clinical trials may result in increased costs, program
delays, or both, and the loss of potential revenues.
We are
subject to extensive regulation, including the requirement of
approval before any of our product candidates can be marketed.
We may not obtain regulatory approval for our product candidates
on a timely basis, or at all.
We and our products are subject to extensive and rigorous
regulation by the federal government, principally the FDA, and
by state and local government agencies. Both before and after
regulatory approval, the development, testing, manufacture,
quality control, labeling, storage, approval, advertising,
promotion, sale, distribution and export of our potential
products are subject to regulation. Pharmaceutical products that
are marketed abroad are also subject to regulation by foreign
governments. Our products cannot be marketed in the United
States without FDA approval. The process for obtaining FDA
approval for drug products is generally lengthy, expensive and
uncertain. To date, we have not sought or received approval from
the FDA or any corresponding foreign authority for any of our
product candidates.
Even though we intend to apply for approval of most of our
products in the United States under Section 505(b)(2) of
the United States Food, Drug and Cosmetic Act, which applies to
reformulations of approved drugs and which may require smaller
and shorter safety and efficacy testing than that for entirely
new drugs, the approval process will still be costly,
time-consuming and uncertain. We, or our collaborators, may not
be able to obtain necessary regulatory approvals on a timely
basis, if at all, for any of our potential products. Even if
granted, regulatory approvals may include significant
limitations on the uses for which products may be marketed.
Failure to comply with applicable regulatory requirements can,
among other things, result in warning letters, imposition of
civil penalties or other monetary payments, delay in approving
or refusal to approve a product candidate, suspension or
withdrawal of regulatory approval, product recall or seizure,
operating restrictions, interruption of clinical trials or
manufacturing, injunctions and criminal prosecution.
Regulatory
authorities may delay or not approve our product candidates even
if the product candidates meet safety and efficacy endpoints in
clinical trials or the approvals may be too limited for us to
earn sufficient revenues.
The FDA and other foreign regulatory agencies can delay approval
of, or refuse to approve, our product candidates for a variety
of reasons, including failure to meet safety and efficacy
endpoints in our clinical trials. Our product candidates may not
be approved even if they achieve their endpoints in clinical
trials. Regulatory agencies, including the FDA, may disagree
with our trial design and our interpretations of data from
preclinical studies and clinical trials. Even if a product
candidate is approved, it may be approved for fewer or more
limited indications than requested or the approval may be
subject to the performance of significant post-marketing
studies. In addition, regulatory agencies may not approve the
labeling claims that are necessary or desirable for the
successful commercialization of our product candidates. Any
limitation, condition or denial of approval would have an
adverse affect on our business, reputation and results of
operations.
Even
if we are granted initial FDA approval for any of our product
candidates, we may not be able to maintain such approval, which
would reduce our revenues.
Even if we are granted initial regulatory approval for a product
candidate, the FDA and similar foreign regulatory agencies can
limit or withdraw product approvals for a variety of reasons,
including failure to comply with regulatory requirements,
changes in regulatory requirements, problems with manufacturing
facilities or processes or the occurrence of unforeseen
problems, such as the discovery of previously undiscovered side
effects. If we are able to obtain any product approvals, they
may be limited or withdrawn or we may be unable to remain in
compliance with regulatory requirements. Both before and after
approval we, our future collaborators and our products are
subject to a number of additional requirements. For example,
certain changes to the approved product, such as adding new
indications, certain manufacturing changes and additional
labeling claims are subject to additional FDA review and
approval. Advertising and other promotional material must comply
with FDA requirements and established requirements applicable to
drug samples. We, our future collaborators and our manufacturers
will be subject to continuing review and periodic inspections by
the FDA and other authorities, where applicable, and must comply
with ongoing requirements, including the FDAs Good
Manufacturing
7
Practices, or GMP, requirements. Once the FDA approves a
product, a manufacturer must provide certain updated safety and
efficacy information, submit copies of promotional materials to
the FDA and make certain other required reports. Product
approvals may be withdrawn if regulatory requirements are not
complied with or if problems concerning safety or efficacy of
the product occur following approval. Any limitation or
withdrawal of approval of any of our products could delay or
prevent sales of our products, which would adversely affect our
revenues. Further continuing regulatory requirements involve
expensive ongoing monitoring and testing requirements.
Because
our proprietary liposomal ciprofloxacin programs rely on the
FDAs and European Medicines Agencys grant of orphan
drug designation for potential market exclusivity, the product
may not be able to obtain market exclusivity and could be barred
from the market in the US for up to seven years or European
Union for up to ten years.
The FDA has granted orphan drug designation for our proprietary
liposomal ciprofloxacin drug product candidate for the
management of cystic fibrosis and bronchiectasis. Orphan drug
designation is intended to encourage research and development of
new therapies for diseases that affect fewer than
200,000 patients in the United States. The designation
provides the opportunity to obtain market exclusivity for seven
years from the date of the FDAs approval of a new drug
application, or NDA. However, the market exclusivity is granted
only to the first chemical entity to be approved by the FDA for
a given indication. Therefore, if another inhaled ciprofloxacin
product were to be approved by the FDA for a cystic fibrosis or
bronchiectasis indication before our product, then we may be
blocked from launching our product in the United States for
seven years, unless we are able to demonstrate to the FDA
clinical superiority of our product on the basis of safety or
efficacy. For example, Bayer HealthCare is developing an inhaled
powder formulation of ciprofloxacin for the treatment of
respiratory infections in cystic fibrosis and bronchiectasis.
Bayer has obtained orphan drug status for their inhaled powder
formulation of ciprofloxacin in the United States and European
Union for the treatment of cystic fibrosis.
In August 2009, the European Medicines Agency (EMEA)
granted orphan drug designation to our inhaled liposomal
ciprofloxacin drug product candidate for the treatment of lung
infections associated with cystic fibrosis. Under European
guidelines, Orphan Medicinal Product Designation provides
10 years of potential market exclusivity if the product
candidate is the first product candidate for the indication
approved for marketing in the European Union. We may seek to
develop additional products that incorporate drugs that have
received orphan drug designations for specific indications. In
each case, if our product is not the first to be approved by the
FDA or EMEA for a given indication, we may not be able to access
the target market in the United States
and/or the
European Union, which would adversely affect our ability to earn
revenues.
We
have limited manufacturing capacity and will have to depend on
contract manufacturers and collaborators; if they do not perform
as expected, our revenues and customer relations will
suffer.
We have limited capacity to manufacture our requirements for the
development and commercialization of our product candidates. We
intend to use contract manufacturers to produce our products. We
may not be able to enter into or maintain satisfactory contract
manufacturing arrangements. For example, our agreement with
sigma-tau Group to manufacture liposomal ciprofloxacin may be
terminated for unforeseen reasons, or we may not be able to
reach mutually satisfactory agreements with sigma-tau Group to
manufacture these at a commercial scale. There may be a
significant delay before we find an alternative contract
manufacturer or we may not find an alternative contract
manufacturer at all.
Further, we, our contract manufacturers and our future
collaborators are required to comply with the FDAs GMP
requirements that relate to product testing, quality assurance,
manufacturing and maintaining records and documentation. We, our
contract manufacturers or our future collaborators may not be
able to comply with the applicable GMP and other FDA regulatory
requirements for manufacturing, which could result in an
enforcement or other action, prevent commercialization of our
product candidates and impair our reputation and results of
operations.
Our
dependence on future collaborators and other contracting parties
may delay or terminate certain of our programs, and any such
delay or termination would harm our business prospects and stock
price.
Our commercialization strategy for certain of our product
candidates depends on our ability to enter into agreements with
collaborators to obtain assistance and funding for the
development and potential commercialization of our product
candidates. Collaborations may involve greater uncertainty for
us, as we have less control
8
over certain aspects of our collaborative programs than we do
over our proprietary development and commercialization programs.
We may determine that continuing a collaboration under the terms
provided is not in our best interest, and we may terminate the
collaboration. Our collaborators could delay or terminate their
agreements, and our products subject to collaborative
arrangements may never be successfully commercialized.
Further, our future collaborators may pursue alternative
technologies or develop alternative products either on their own
or in collaboration with others, including our competitors, and
the priorities or focus of our collaborators may shift such that
our programs receive less attention or resources than we would
like, or they may be terminated altogether. Any such actions by
our collaborators may adversely affect our business prospects
and ability to earn revenues. In addition, we could have
disputes with our future collaborators, such as the
interpretation of terms in our agreements. Any such
disagreements could lead to delays in the development or
commercialization of any potential products or could result in
time-consuming and expensive litigation or arbitration, which
may not be resolved in our favor.
Even with respect to certain other programs that we intend to
commercialize ourselves, we may enter into agreements with
collaborators to share in the burden of conducting clinical
trials, manufacturing and marketing our product candidates or
products. In addition, our ability to apply our proprietary
technologies to develop proprietary drugs will depend on our
ability to establish and maintain licensing arrangements or
other collaborative arrangements with the holders of proprietary
rights to such drugs. We may not be able to establish such
arrangements on favorable terms or at all, and our future
collaborative arrangements may not be successful.
In
order to market our proprietary products, we are likely to
establish our own sales, marketing and distribution
capabilities. We have no experience in these areas, and if we
have problems establishing these capabilities, the
commercialization of our products would be
impaired.
We intend to establish our own sales, marketing and distribution
capabilities to market products to concentrated, easily
addressable prescriber markets. We have no experience in these
areas, and developing these capabilities will require
significant expenditures on personnel and infrastructure. While
we intend to market products that are aimed at a small patient
population, we may not be able to create an effective sales
force around even a niche market. In addition, some of our
product candidates will require a large sales force to call on,
educate and support physicians and patients. While we intend to
enter into collaborations with one or more pharmaceutical
companies to sell, market and distribute such products, we may
not be able to enter into any such arrangement on acceptable
terms, if at all. Any collaboration we do enter into may not be
effective in generating meaningful product royalties or other
revenues for us.
If any
products that we or our future collaborators may develop do not
attain adequate market acceptance by healthcare professionals
and patients, our business prospects and results of operations
will suffer.
Even if we or our future collaborators successfully develop one
or more products, such products may not be commercially
acceptable to healthcare professionals and patients, who will
have to choose our products over alternative products for the
same 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:
|
|
|
|
|
the demonstration of efficacy and safety in clinical trials;
|
|
|
|
the existence, prevalence and severity of any side effects;
|
|
|
|
the potential or perceived advantages or disadvantages compared
to alternative treatments;
|
|
|
|
the timing of market entry relative to competitive treatments;
|
|
|
|
the relative cost, convenience, product dependability and ease
of administration;
|
|
|
|
the strength of marketing and distribution support;
|
|
|
|
the sufficiency of coverage and reimbursement of our product
candidates by governmental and other third-party payors; and
|
|
|
|
the product labeling or product insert required by the FDA or
regulatory authorities in other countries.
|
9
Our product revenues will be adversely affected if, due to these
or other factors, the products we or our future collaborators
are able to commercialize do not gain significant market
acceptance.
We
depend upon our proprietary technologies, and we may not be able
to protect our potential competitive proprietary
advantage.
Our business and competitive position is dependent upon our and
our future collaborators ability to protect our
proprietary technologies related to various aspects of pulmonary
drug delivery and drug formulation. While our intellectual
property rights may not provide a significant commercial
advantage for us, our patents and know-how are intended to
provide protection for important aspects of our technology,
including methods for aerosol generation, devices used to
generate aerosols, breath control, compliance monitoring,
certain pharmaceutical formulations, design of dosage forms and
their manufacturing and testing methods. In addition, we are
maintaining as non-patented trade secrets some of the key
elements of our manufacturing technologies, for example, those
associated with production of liposomal ciprofloxacin.
Our ability to compete effectively will also depend to a
significant extent on our and our future collaborators
ability to obtain and enforce patents and maintain trade secret
protection over our proprietary technologies. The coverage
claimed in a patent application typically is significantly
reduced before a patent is issued, either in the United States
or abroad. Consequently, any of our pending or future patent
applications may not result in the issuance of patents and any
patents issued may be subjected to further proceedings limiting
their scope and may in any event not contain claims broad enough
to provide meaningful protection. Any patents that are issued to
us or our future collaborators may not provide significant
proprietary protection or competitive advantage, and may be
circumvented or invalidated. In addition, unpatented proprietary
rights, including trade secrets and know-how, can be difficult
to protect and may lose their value if they are independently
developed by a third party or if their secrecy is lost. Further,
because development and commercialization of pharmaceutical
products can be subject to substantial delays, patents may
expire and provide only a short period of protection, if any,
following commercialization of products.
We may
infringe on the intellectual property rights of others, and any
litigation could force us to stop developing or selling
potential products and could be costly, divert management
attention and harm our business.
We must be able to develop products without infringing the
proprietary rights of other parties. Because the markets in
which we operate involve established competitors with
significant patent portfolios, including patents relating to
compositions of matter, methods of use and methods of drug
delivery, it could be difficult for us to use our technologies
or develop products without infringing the proprietary rights of
others. We may not be able to design around the patented
technologies or inventions of others and we may not be able to
obtain licenses to use patented technologies on acceptable
terms, or at all. If we cannot operate without infringing on the
proprietary rights of others, we will not earn product revenues.
If we are required to defend ourselves in a lawsuit, we could
incur substantial costs and the lawsuit could divert
managements attention, regardless of the lawsuits
merit or outcome. These legal actions could seek damages and
seek to enjoin testing, manufacturing and marketing of the
accused product or process. In addition to potential liability
for significant damages, we could be required to obtain a
license to continue to manufacture or market the accused product
or process and any license required under any such patent may
not be made available to us on acceptable terms, if at all.
Periodically, we review publicly available information regarding
the development efforts of others in order to determine whether
these efforts may violate our proprietary rights. We may
determine that litigation is necessary to enforce our
proprietary rights against others. Such litigation could result
in substantial expense, regardless of its outcome, and may not
be resolved in our favor.
Furthermore, patents already issued to us or our pending patent
applications may become subject to dispute, and any disputes
could be resolved against us. For example, Eli Lilly and Company
brought an action against us seeking to have one or more
employees of Eli Lilly named as co-inventors on one of our
patents. This case was determined in our favor in 2004, but we
may face other similar claims in the future and we may lose or
settle cases at significant loss to us. In addition, because
patent applications in the United States are currently
maintained in secrecy for a period of time prior to issuance,
patent applications in certain other countries generally are not
10
published until more than 18 months after they are first
filed, and publication of discoveries in scientific or patent
literature often lags behind actual discoveries, we cannot be
certain that we were the first creator of inventions covered by
our pending patent applications or that we were the first to
file patent applications on such inventions.
We are
in a highly competitive market, and our competitors have
developed or may develop alternative therapies for our target
indications, which would limit the revenue potential of any
product we may develop.
We are in competition with pharmaceutical, biotechnology and
drug delivery companies, hospitals, research organizations,
individual scientists and nonprofit organizations engaged in the
development of drugs and therapies for the disease indications
we are targeting. Our competitors may succeed before we can, and
many already have succeeded, in developing competing
technologies for the same disease indications, obtaining FDA
approval for products or gaining acceptance for the same markets
that we are targeting. If we are not first to
market, it may be more difficult for us and our future
collaborators to enter markets as second or subsequent
competitors and become commercially successful. We are aware of
a number of companies that are developing or have developed
therapies to address indications we are targeting, including
major pharmaceutical companies such as Bayer, Genentech (now a
part of Roche), Gilead Sciences, GlaxoSmith Kline, Novartis,
Johnson & Johnson and Pfizer. Certain of these companies
are addressing these target markets with pulmonary products that
are similar to ours. These companies and many other potential
competitors have greater research and development,
manufacturing, marketing, sales, distribution, financial and
managerial resources and experience than we have and many of
these companies may have products and product candidates that
are on the market or in a more advanced stage of development
than our product candidates. Our ability to earn product
revenues and our market share would be substantially harmed if
any existing or potential competitors brought a product to
market before we or our future collaborators were able to, or if
a competitor introduced at any time a product superior to or
more cost-effective than ours.
If we
do not continue to attract and retain key employees, our product
development efforts will be delayed and impaired.
We depend on a small number of key management and technical
personnel. Our success also depends on our ability to attract
and retain additional highly qualified management and
development personnel. There is a shortage of skilled personnel
in our industry, we face competition in our recruiting
activities, and we may not be able to attract or retain
qualified personnel. Losing any of our key employees,
particularly our President and Chief Executive Officer,
Dr. Igor Gonda, who plays a central role in our strategy
shift to a specialty pharmaceutical company, could impair our
product development efforts and otherwise harm our business. Any
of our employees may terminate their employment with us at will.
If we
market our products in other countries, we will be subject to
different laws and we may not be able to adapt to those laws,
which could increase our costs while reducing our
revenues.
If we market any approved products in foreign countries, we will
be subject to different laws, particularly with respect to
intellectual property rights and regulatory approval. To
maintain a proprietary market position in foreign countries, we
may seek to protect some of our proprietary inventions through
foreign counterpart patent applications. Statutory differences
in patentable subject matter may limit the protection we can
obtain on some of our inventions outside of the United States.
The diversity of patent laws may make our expenses associated
with the development and maintenance of intellectual property in
foreign jurisdictions more expensive than we anticipate. We
probably will not obtain the same patent protection in every
market in which we may otherwise be able to potentially generate
revenues. In addition, in order to market our products in
foreign jurisdictions, we and our future collaborators must
obtain required regulatory approvals from foreign regulatory
agencies and comply with extensive regulations regarding safety
and quality. We may not be able to obtain regulatory approvals
in such jurisdictions and we may have to incur significant costs
in obtaining or maintaining any foreign regulatory approvals. If
approvals to market our products are delayed, if we fail to
receive these approvals, or if we lose previously received
approvals, our business would be impaired as we could not earn
revenues from sales in those countries.
11
We may
be exposed to product liability claims, which would hurt our
reputation, market position and operating results.
We face an inherent risk of product liability as a result of the
clinical testing of our product candidates in humans and will
face an even greater risk upon commercialization of any
products. These claims may be made directly by consumers or by
pharmaceutical companies or others selling such products. We may
be held liable if any product we develop causes injury or is
found otherwise unsuitable during product testing, manufacturing
or sale. Regardless of merit or eventual outcome, liability
claims would likely result in negative publicity, decreased
demand for any products that we may develop, injury to our
reputation and suspension or withdrawal of clinical trials. Any
such claim will be very costly to defend and also may result in
substantial monetary awards to clinical trial participants or
customers, loss of revenues and the inability to commercialize
products that we develop. Although we currently have product
liability insurance, we may not be able to maintain such
insurance or obtain additional insurance on acceptable terms, in
amounts sufficient to protect our business, or at all. A
successful claim brought against us in excess of our insurance
coverage would have a material adverse effect on our results of
operations.
If we
cannot arrange for adequate third-party reimbursement for our
products, our revenues will suffer.
In both domestic and foreign markets, sales of our potential
products will depend in substantial part on the availability of
adequate reimbursement from third-party payors such as
government health administration authorities, private health
insurers and other organizations. Third-party payors often
challenge the price and cost-effectiveness of medical products
and services. Significant uncertainty exists as to the adequate
reimbursement status of newly approved health care products. Any
products we are able to successfully develop may not be
reimbursable by third-party payors. In addition, our products
may not be considered cost-effective and adequate third-party
reimbursement may not be available to enable us to maintain
price levels sufficient to realize a profit. Legislation and
regulations affecting the pricing of pharmaceuticals may change
before our products are approved for marketing and any such
changes could further limit reimbursement. If any products we
develop do not receive adequate reimbursement, our revenues will
be severely limited.
Our
use of hazardous materials could subject us to liabilities,
fines and sanctions.
Our laboratory and clinical testing sometimes involves the use
of hazardous and toxic materials. We are subject to federal,
state and local laws and regulations governing how we use,
manufacture, handle, store and dispose of these materials.
Although we believe that our safety procedures for handling and
disposing of such materials comply in all material respects with
all federal, state and local regulations and standards, there is
always the risk of accidental contamination or injury from these
materials. In the event of an accident, we could be held liable
for any damages that result and such liability could exceed our
financial resources. Compliance with environmental and other
laws may be expensive and current or future regulations may
impair our development or commercialization efforts.
If we
are unable to effectively implement or maintain a system of
internal control over financial reporting, we may not be able to
accurately or timely report our financial results and our stock
price could be adversely affected.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us
to evaluate the effectiveness of our internal control over
financial reporting as of the end of each fiscal year, and to
include a management report assessing the effectiveness of our
internal control over financial reporting in our Annual Report
on
Form 10-K
for that fiscal year. Our ability to comply with the annual
internal control report requirements will depend on the
effectiveness of our financial reporting and data systems and
controls across our company. We expect these systems and
controls to involve significant expenditures and to become
increasingly complex as our business grows and to the extent
that we make and integrate acquisitions. To effectively manage
this complexity, we will need to continue to improve our
operational, financial and management controls and our reporting
systems and procedures. Any failure to implement required new or
improved controls, or difficulties encountered in the
implementation or operation of these controls, could harm our
operating results and cause us to fail to meet our financial
reporting obligations, which could adversely affect our business
and reduce our stock price.
12
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:
|
|
|
|
|
investor perception of us;
|
|
|
|
market conditions relating to our segment of the industry or the
securities markets in general;
|
|
|
|
investor perception of the value of the royalty stream from
Zogenix;
|
|
|
|
sales of our stock by certain large institutional shareholders
to meet liquidity concerns during the current economic climate;
|
|
|
|
research analyst recommendations and our ability to meet or
exceed quarterly performance expectations of analysts or
investors;
|
|
|
|
failure to establish new collaborative relationships;
|
|
|
|
fluctuations in our operating results;
|
|
|
|
announcements of technological innovations or new commercial
products by us or our competitors;
|
|
|
|
publicity regarding actual or potential developments relating to
products under development by us or our competitors;
|
|
|
|
developments or disputes concerning patents or proprietary
rights;
|
|
|
|
delays in the development or approval of our product candidates;
|
|
|
|
regulatory developments in both the United States and foreign
countries;
|
|
|
|
concern of the public or the medical community as to the safety
or efficacy of our products, or products deemed to have similar
safety risk factors or other similar characteristics to our
products;
|
|
|
|
future sales or expected sales of substantial amounts of common
stock by shareholders;
|
|
|
|
our ability to raise financing; and
|
|
|
|
economic and other external factors.
|
In the past, class action securities litigation has often been
instituted against companies promptly following volatility in
the market price of their securities. Any such litigation
instigated against us would, regardless of its merit, result in
substantial costs and a diversion of managements attention
and resources.
Our
common stock is quoted on the OTC Bulletin Board, which may
provide less liquidity for our shareholders than the national
exchanges.
On November 10, 2006, our common stock was delisted from
the Nasdaq Capital Market due to non-compliance with
Nasdaqs continued listing standards. Our common stock is
currently quoted on the OTC Bulletin Board. As compared to
being listed on a national exchange, being quoted on the OTC
Bulletin Board may result in reduced liquidity for our
shareholders, may cause investors not to trade in our stock and
may result in a lower stock price. In addition, investors may
find it more difficult to obtain accurate quotations of the
share price of our common stock.
We
have implemented certain anti-takeover provisions, which may
make an acquisition less likely or might result in costly
litigation or proxy battles.
Certain provisions of our articles of incorporation and the
California Corporations Code could discourage a party from
acquiring, or make it more difficult for a party to acquire,
control of our company without approval of our board of
directors. These provisions could also limit the price that
certain investors might be willing to pay in the future for
shares of our common stock. Certain provisions allow our board
of directors to authorize the issuance, without shareholder
approval, of preferred stock with rights superior to those of
the common stock. We are also subject to the provisions of
Section 1203 of the California Corporations Code, which
requires us to provide a
13
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.
One of our shareholders may choose to pursue a lawsuit or engage
in a proxy battle with management to limit our use of one or
more of these anti-takeover protections. Any such lawsuit or
proxy battle would, regardless of its merit or outcome, result
in substantial costs and a diversion of managements
attention and resources.
We
have never paid dividends on our capital stock, and we do not
anticipate paying cash dividends for at least the foreseeable
future.
We have never declared or paid cash dividends on our capital
stock. We do not anticipate paying any cash dividends on our
common stock for at least the foreseeable future. We currently
intend to retain all available funds and future earnings, if
any, to fund the development and growth of our business.
Therefore, our shareholders will not receive any funds absent a
sale of their shares. We cannot assure shareholders of a
positive return on their investment if they sell their shares,
nor can we assure that shareholders will not lose the entire
amount of their investment.
A
small number of shareholders own a large percentage of our
common stock and can influence the outcome of matters submitted
to our shareholders for approval.
A small number of our shareholders own a large percentage of our
common stock and can, therefore, influence the outcome of
matters submitted to our shareholders for approval. Based on
information known to us as of September 28, 2010, our four
largest investors, collectively, control in excess of a majority
of our outstanding common stock. As a result, these shareholders
have the ability to influence the outcome of matters submitted
to our shareholders for approval, including certain proposed
amendments to our amended and restated articles of incorporation
(for example, amendments to increase the number of our
authorized shares) and any proposed merger, consolidation or
sale of all or substantially all of our assets. These
shareholders may support proposals and actions with which you
may disagree. The concentration of ownership could delay or
prevent a change in control of our company or otherwise
discourage a potential acquirer from attempting to obtain
control of our company, which in turn could reduce the price of
our common stock.
USE OF
PROCEEDS
We will not receive any of the proceeds from the sale of common
stock by the selling shareholders under this prospectus. All
proceeds from the sale of common stock under this prospectus
will be paid directly to the selling shareholders. We have
agreed to bear the expenses (other than any underwriting
discounts or commissions or agents commissions) in
connection with the registration of the common stock being
offered hereby by the selling shareholders.
14
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion below contains forward-looking statements that
are based on the current beliefs of management, as well as
current assumptions made by, and information currently available
to, management. All statements contained in the discussion
below, other than statements that are purely historical, are
forward-looking statements. These forward-looking statements are
subject to risks and uncertainties that could cause our future
actual results, performance or achievements to differ materially
from those expressed in, or implied by, any such forward-looking
statements as a result of certain factors, including, but not
limited to, those risks and uncertainties discussed in this
section, as well as in the section entitled Risk
Factors, and elsewhere in our other filings with the SEC.
See Cautionary Note Regarding Forward-Looking
Statements elsewhere in this prospectus.
Our business is subject to significant risks including, but
not limited to, our ability to obtain additional financing, our
ability to implement our product development strategy, the
success of product development efforts, obtaining and enforcing
patents important to our business, clearing the lengthy and
expensive regulatory approval process and possible competition
from other products. Even if product candidates appear promising
at various stages of development, they may not reach the market
or may not be commercially successful for a number of reasons.
Such reasons include, but are not limited to, the possibilities
that the potential products may be found to be ineffective
during clinical trials, may fail to receive necessary regulatory
approvals, may be difficult to manufacture on a large scale, are
uneconomical to market, may be precluded from commercialization
by proprietary rights of third parties or may not gain
acceptance from health care professionals and patients. Further,
even if our product candidates appear promising at various
stages of development, our share price may decrease such that we
are unable to raise additional capital without dilution that may
be unacceptable to our shareholders.
Investors are cautioned not to place undue reliance on the
forward-looking statements contained herein. We undertake no
obligation to update these forward-looking statements in light
of events or circumstances occurring after the date hereof or to
reflect the occurrence of unanticipated events.
Overview
We are an emerging specialty pharmaceutical company focused on
the development and commercialization of drugs delivered by
inhalation for the treatment of severe respiratory diseases by
pulmonologists. Over the last decade, we invested a large amount
of capital to develop drug delivery technologies, particularly
the development of a significant amount of expertise in
pulmonary drug delivery. We also invested considerable effort
into the generation of a large volume of laboratory and clinical
data demonstrating the performance of our
AERx®
pulmonary drug delivery platform and other proprietary
technology, including our liposomal ciprofloxacin formulation
for inhalation. We have not been profitable since inception and
expect to incur additional operating losses over at least the
next several years as we continue product development efforts,
clinical trial activities, and possible sales, marketing and
contract manufacturing efforts. To date, we have not had any
significant product sales and do not anticipate receiving
revenues from the sale of any of our products in the near term.
As of June 30, 2010, we had an accumulated deficit of
$352.8 million. Historically, we have funded our operations
primarily through public offerings and private placements of our
capital stock, license fees and milestone payments from
collaborators, proceeds from the January 2005 restructuring
transaction with Novo Nordisk, borrowings from Novo Nordisk, the
sale of Intraject-related assets to Zogenix, the milestone
payment received from Zogenix during the three months ended
March 31, 2010 and interest earned on cash equivalents and
short-term investments.
Over the last four years, our business has focused on
opportunities in the development of drugs for the treatment of
severe respiratory disease that could be developed by the
Company and commercialized in the United States, or another
significant territory such as the European Union
(EU). It is our longer term strategy to
commercialize our respiratory product candidates with our own
focused sales and marketing force addressing pulmonary specialty
doctors in the United States or in the EU, where we believe that
a proprietary sales force will enhance the return to our
shareholders. Where our products can benefit a broader
population of patients in the United States or in other
countries, we may enter into co-development, co-promotion or
other marketing arrangements with collaborators, thereby
reducing costs and increasing revenues through license fees,
milestone payments and royalties. In selecting our proprietary
development programs, we primarily seek drugs approved by
15
the United States Food and Drug Administration (FDA)
that can be reformulated for both existing and new indications
in respiratory disease. Our intent is to use our pulmonary
delivery methods and formulations to improve their safety,
efficacy and convenience of administration to patients. We
believe that this strategy will allow us to reduce cost,
development time and risk of failure, when compared to the
discovery and development of new chemical entities. Our lead
development candidate is a proprietary liposomal formulation of
the antibiotic ciprofloxacin that is delivered by inhalation for
the treatment of infections associated with the severe
respiratory diseases cystic fibrosis and non-cystic fibrosis
bronchiectasis. We received orphan drug designations for both of
these indications in the U.S. and for cystic fibrosis in
the European Union. We have reported the results of two
successful Phase 2a trials with this product candidate in cystic
fibrosis (CF) and non-cystic fibrosis bronchiectasis
(BE), respectively, as described below.
In June 2008, we completed a multi-center
14-day
treatment Phase 2a trial in Australia and New Zealand in 21 CF
patients with once daily dosing of 6 mL of inhaled liposomal
ciprofloxacin (ARD-3100). The primary efficacy endpoint in this
Phase 2a study was the change from baseline in the sputum
Pseudomonas aeruginosa colony forming units (CFU), an
objective measure of the reduction in pulmonary bacterial load.
Data analysis in 21 patients who completed the study
demonstrated that the CFUs decreased by a mean 1.43 log over the
14-day
treatment period (p<0.0001). Evaluation one week after
study treatment was discontinued showed that the Pseudomonas
bacterial density in the lung was still reduced from the
baseline without additional antibiotic use. Pulmonary function
testing as measured by the forced expiratory volume in one
second (FEV1) showed a significant mean increase of 6.86% from
baseline after 14 days of treatment (p=0.04). The study
drug was well tolerated and there were no serious adverse events
reported during the trial.
In December 2008, we completed an open-label, four week
treatment study with once daily inhaled liposomal ciprofloxacin
(ARD-3100) in patients with non-CF bronchiectasis. The study was
conducted at eight leading centers in the United Kingdom and
enrolled a total of 36 patients. The patients were
randomized into two equal size groups, one receiving 3 mL of
inhaled liposomal ciprofloxacin and the other receiving 6 mL of
inhaled liposomal ciprofloxacin,
once-a-day
for the four-week treatment period. The primary efficacy
endpoint was the change from baseline in the sputum
Pseudomonas aeruginosa CFU, the standard objective
measure of the reduction in pulmonary bacterial load. The 3 mL
and 6 mL doses of inhaled liposomal ciprofloxacin in the
evaluable patient population demonstrated significant mean
decreases against baseline in the CFUs over the
28-day
treatment period of 3.5 log (p<0.001) and 4.0 log
(p<0.001) units, respectively.
In July 2009, we announced that clearance was received from the
U.S. Food and Drug Administration for the inhaled liposomal
ciprofloxacin (ARD-3100) Investigational New Drug (IND)
application for the management of non-cystic fibrosis
bronchiectasis.
In November 2009, the first patient was dosed in the ORBIT-2
(Once-daily Respiratory Bronchiectasis Inhalation Treatment)
trial, a
6-month,
multicenter, international Phase 2b clinical trial of inhaled
ciprofloxacin with the ARD-3150 formulation in 40 adult patients
with non-cystic fibrosis bronchiectasis. The randomized,
double-blind, placebo-controlled trial was conducted in
Australia and New Zealand. Following a 14 day screening
period, the patients were treated
once-a-day
for 28 days with either the active drug, or placebo,
followed by a 28 day off-treatment period. This on-off
sequence was repeated three times. The primary endpoint was
defined as the mean change in Pseudomonas aeruginosa
density in sputum (colony forming units CFU
per gram) from baseline to day 28 of the active
treatment group versus placebo. Safety and tolerability
assessments of the treatment versus placebo group were performed
and secondary efficacy endpoints being assessed include long
term microbiological responses, time to an exacerbation,
severity of exacerbations, length of time to resolve
exacerbations and changes in lung function and in quality of
life measurements.
ORBIT-2 explored whether the novel formulation ARD-3150, which
has a different drug release profile than ARD-3100, may have
additional therapeutic benefits. In October 2010, we announced
positive top line data from the ORBIT-2 study. Statistical
significance was achieved in the primary endpoint and one of the
secondary endpoints. The primary endpoint the mean
change in Pseudomonas aeruginosa density in sputum from
baseline to day 28 was met. In the full analysis
population (full analysis set includes all patients who were
randomized, received at least one dose and provided samples for
at least two time points), there was a significant mean
reduction of 4.2
log10
units in the ARD-3150 group, reflecting an almost
sixteen-thousand fold decrease in bacterial load,
16
versus a very small mean decrease of 0.1
log10
units in the placebo group (p=0.004). Secondary endpoint
analysis showed that 17 subjects in the placebo group required
supplemental antibiotics for respiratory-related infections
versus 8 subjects in the ARD-3150 group (p=0.05). Positive
trends were observed in the key area of pulmonary exacerbations.
The median time to first exacerbation was 58 days in the
placebo group versus 134 days in the
ARD-3150
group and there were fewer exacerbations in the treatment group
compared to the placebo group.
ARD-3150 was
well tolerated and there were no significant decreases in lung
function, as measured by FEV1 (forced expiratory volume in
one second), at 28 days in either group. Overall, the
incidence and severity of adverse events were similar in both
the placebo and treatment groups. Data from additional analyses
of the secondary endpoints will be reported in future
conferences and press releases.
In February 2010, the first patient was dosed in the
U.S. as part of the ORBIT-1 trial, an international,
randomized, double-blind, placebo-controlled Phase 2b study
designed to evaluate inhaled liposomal ciprofloxacin with the
ARD-3100 formulation in patients with BE under the
aforementioned U.S. IND. The ORBIT-1 trial will randomize
96 patients, who will receive for four weeks, either one of
two different once-daily inhaled doses (100 or 150 mg
ciprofloxacin delivered by inhalation as 2 or 3 mL of liposomal
dispersion, respectively) or once-daily inhaled placebo. The
primary efficacy endpoint will be the change from baseline in
sputum Pseudomonas aeruginosa colony forming units
(CFUs). Secondary endpoints will include quality of life
measurements and improvement of outcomes with respect to
exacerbations. Lung function changes will be monitored for
safety. The ORBIT-1 trial is currently enrolling patients and is
expected to be complete by the end of 2010.
The results from each of these trials, will produce an extensive
data base of information from which we hope to select the
optimum product and the most appropriate endpoints to test in
Phase 3. In order to expedite anticipated time to market and
increase market acceptance, we have elected to deliver our
formulations via an approved, widely-accepted nebulizer system
for each of these Phase 2b trials.
In May 2010, we announced that clearance was received from the
U.S. Food and Drug Administration for the inhaled liposomal
ciprofloxacin (ARD-3100) Investigational New Drug (IND)
application for the management of cystic fibrosis (CF). The
first trial planned under this IND is a Phase 1/2a study in
pediatric CF patients.
In August 2009, the European Medicines Agency (EMEA)
granted Orphan Drug Designation to our inhaled liposomal
ciprofloxacin drug product candidate for the treatment of lung
infections associated with cystic fibrosis. Under European
guidelines, Orphan Medicinal Product Designation provides
10 years of potential market exclusivity if the product
candidate is the first product candidate for the indication
approved for marketing in the European Union. Orphan drug
designation also allows the candidates sponsor to seek
assistance from the EMEA in optimizing the candidates
clinical development through participation in designing the
clinical protocol and preparing the marketing application.
Additionally, a drug candidate designated by the Commission as
an Orphan Medicinal Product may qualify for a reduction in
regulatory fees as well as a European Union-funded research
grant. We had previously been granted orphan drug designations
by the U.S. Food and Drug Administration for inhaled
liposomal ciprofloxacin for the management of CF and for
non-cystic fibrosis bronchiectasis.
On June 1, 2009, we received a written notice from United
Therapeutics Corporation, on behalf of its wholly-owned
subsidiary Lung Rx, Inc., seeking to terminate our collaboration
agreement (the Lung Rx Agreement) effective
July 1, 2009. Lung Rx did not assert the existence of any
technical problems with our AERx technology or any safety or
efficacy concerns. We believed that Lung Rx was not entitled to
terminate the Lung Rx Agreement and, per the terms of the Lung
Rx Agreement, we requested formal non-binding arbitration of
this dispute. We discontinued all business activities that we
were undertaking to support the collaboration and eliminated the
positions of personnel who were devoting all or substantially
all of their time to supporting the collaboration. In addition,
we reviewed all AERx technology production assets for
impairment. During the quarter ended September 30, 2009, we
recorded an impairment charge of $1.6 million. The charge
represented managements estimate of the excess of the net
book value of the assets less the expected future cash flows.
Our Research and Development depreciation expense was
immediately reduced by $0.5 million (on an annualized
basis) as a result of the impairment. In addition, we recognized
all of the previously deferred revenue from the Lung Rx
Agreement. In June 2010, a panel of arbitrators dismissed
the proceedings on procedural grounds. We continue to review our
options and may elect to pursue litigation in this matter in the
future.
17
On July 16, 2009, Zogenix, Inc. announced that it was
granted approval by the FDA of the SUMAVEL DosePro (sumatriptan
injection) needle-free delivery system for the treatment of
acute migraine and cluster headache. On August 3, 2009,
Zogenix and Astellas Pharma US, Inc. (Astellas)
announced that they had entered into an exclusive co-promotion
agreement in the U.S. for the SUMAVEL DosePro needle-free
delivery system. SUMAVEL DosePro became commercially available
in January 2010. Under the announced terms of the agreement,
Zogenix and Astellas will collaborate on the promotion and
marketing of SUMAVEL DosePro with Zogenix focusing their sales
activities primarily on the neurology market while Astellas will
focus mostly on primary care physicians. Zogenix will have
responsibility for manufacturing and distribution of the product.
On January 13, 2010, Zogenix announced the
U.S. commercial launch of its SUMAVEL DosePro product. The
U.S. launch entitled the Company to the $4.0 million
milestone payment payable upon the initial commercialization of
SUMAVEL DosePro, which we received and recorded as royalty
revenue during the three months ended March 31, 2010. We
will earn quarterly royalty payments on all SUMAVEL DosePro
sales. We anticipate recording this recurring royalty revenue
beginning with the three months ending September 30, 2010
since the terms of the asset sale agreement provide for royalty
payments to be based on cash received by Zogenix on their
product sales and there is a sixty day lag following the end of
the quarter in royalty reporting. We have been informed by
Zogenix that wholesalers distributing the SUMAVEL DosePro
product were given net 90 day payment terms for the first
quarter sales, resulting in the effective delay of first quarter
2010 royalties until the second quarter 2010 royalty payment due
in late August 2010. After first quarter 2010, the payment terms
for wholesalers reverted to net 30 days.
On June 21, 2010, we closed a private placement, which we
refer to in this prospectus as the June 2010 private placement,
in which we sold 34,702,512 shares of our common stock and
warrants to purchase an aggregate of 7,527,214 shares of
our common stock to accredited investors (which included a few
then-existing significant shareholders) under the terms of a
securities purchase agreement that we entered into with the
selling shareholders on June 18, 2010. At the closing of
the June 2010 private placement, we received approximately
$4.1 million in aggregate gross proceeds from the sale of
the common stock and the warrants. After deducting for fees and
expenses, the aggregate net proceeds from the sale of the common
stock and the warrants were approximately $3.7 million.
After we held our special meeting of shareholders on
September 14, 2010 and obtained the requisite shareholder
approval on a proposal to amend our amended and restated
articles of incorporation to increase the total number of
authorized shares of our common stock to cover the shares
issuable upon exercise of the warrants, the warrants were
exercised and we received approximately $891,000 in additional
aggregate net proceeds from the exercise of the warrants.
On September 15, 2010, we closed the issuance to Novo
Nordisk A/S of 26,000,000 shares of our common stock under
a stock purchase agreement, dated as of July 30, 2010, by
and among us and Novo Nordisk A/S, which we refer to in this
prospectus as the Novo Nordisk stock purchase agreement, in
consideration for the termination of all of our obligations
under a promissory note and security agreement dated
July 3, 2006 in favor of Novo Nordisk A/S. The closing
occurred after we held our special meeting of shareholders on
September 14, 2010 and obtained the requisite shareholder
approval on a proposal to amend our amended and restated
articles of incorporation to increase the total number of
authorized shares of our common stock to cover the
26,000,000 shares issuable under the Novo Nordisk stock
purchase agreement. An amended and restated stock purchase
agreement, dated as of January 26, 2005, previously entered
into by us, Novo Nordisk A/S and Novo Nordisk Pharmaceuticals,
Inc. in connection with our January 2005 restructuring
transaction with Novo Nordisk was also terminated at the
closing. The July 3, 2006 promissory note and security
agreement had evidenced, among other things, a loan that had
been previously made by Novo Nordisk A/S to us in the principal
amount of $7.5 million, which had bore interest accruing at
5% per annum and the principal, along with the accrued interest,
had been payable in three equal payments of approximately
$3.5 million on July 2, 2012, July 1, 2013 and
June 30, 2014.
Critical
Accounting Policies and Estimates
We consider certain accounting policies related to revenue
recognition, impairment of long-lived assets, exit/disposal
activities, research and development, income taxes and
stock-based compensation to be critical accounting policies that
require the use of significant judgments and estimates relating
to matters that are inherently uncertain and may result in
materially different results under different assumptions and
conditions. The preparation of
18
financial statements in conformity with United States generally
accepted accounting principles requires us to make estimates and
assumptions that affect the amounts reported in the financial
statements and accompanying notes to the financial statements.
These estimates include useful lives for property and equipment
and related depreciation calculations, estimated amortization
periods for payments received from product development and
license agreements as they relate to revenue recognition, and
assumptions for valuing options, warrants and other stock-based
compensation. Our actual results could differ from these
estimates.
Revenue
Recognition
The Company recognizes revenue under the provisions of the
SECs Staff Accounting Bulletin (SAB) 104,
Topic 13, Revenue Recognition Revised and Updated and
ASC 605, Revenue Recognition. In addition, contract
revenue from our collaboration arrangements typically contain
multiple elements and are accounted for under the guidance of
ASC
605-25,
Revenue Recognition-Multiple Element Arrangements.
Contract Revenue. Contract revenues consist of
revenues from grants, collaboration agreements and feasibility
studies. We record license fees, milestone fees, reimbursement
of research and development expenses as contract revenue. We
review all of these arrangements for the existence of multiple
elements. The Company reviews elements that have been delivered
and determines whether such items have value to the
Companys collaborators on a stand-alone basis and whether
objective reliable evidence of fair value of the undelivered
items exists. Deliverables that meet these criteria are
considered a separate unit of accounting and are recognized as
revenue when delivered and collection is reasonably assured.
Deliverables that do not meet these criteria are combined and
accounted for as a single unit of accounting. Revenue
recognition criteria are identified and applied to each separate
unit of accounting. The Company typically has not had reliable
evidence of separate units and has treated the entire
arrangement as a single unit of accounting.
Royalty Revenue. We earn royalty revenue under
the terms of the asset sale agreement with Zogenix. We recognize
revenue when the amounts under this agreement can be determined
and when collectability is probable. We have no performance
obligations under this agreement. We recognize revenue from our
quarterly royalty payments one quarter in arrears due to the
contractual terms in the asset sale agreement that allow Zogenix
sixty days to complete their royalty report following the end of
the quarter. In the first quarter of 2010, we received the
$4 million milestone payment that was due upon the first
commercial sale by Zogenix of a product using the DosePro
technology. This one time payment was recorded as royalty
revenue for the three months ended March 31, 2010. The
Company anticipates recording the recurring royalty revenue
beginning with the three months ending September 30, 2010
since the terms of the asset sale agreement provides for royalty
payments to be based on cash received by Zogenix on their
product sales and there is a sixty day period following the end
of the quarter for Zogenix to complete their royalty reporting.
The Company has been informed by Zogenix that wholesalers
distributing the SUMAVEL DosePro product were given net
90 day payments terms for the first quarter sales,
resulting in the effective delay of first quarter 2010 royalties
until the second quarter 2010 royalty payment due in late August
2010. After first quarter 2010, the payment terms for
wholesalers reverted to net 30 days.
Impairment
of Long-Lived Assets
In accordance with
ASC 360-10,
Property Plant and Equipment Overall, we
review for impairment whenever events or changes in
circumstances indicate that the carrying amount of property and
equipment may not be recoverable. Determination of
recoverability is based on an estimate of undiscounted future
cash flows resulting from the use of the asset and its eventual
disposition. In the event that such cash flows are not expected
to be sufficient to recover the carrying amount of the assets,
we write down the assets to their estimated fair values and
recognize the loss in the statements of operations.
Accounting
for Costs Associated with Exit or Disposal
Activities
In accordance with ASC 420, Exit or Disposal Cost
Obligations (ASC 420), we recognize a liability
for the cost associated with an exit or disposal activity that
is measured initially at its fair value in the period in which
the liability is incurred, except for a liability for one-time
termination benefits that is incurred over time. According to
this guidance, costs to terminate an operating lease or other
contracts are (a) costs to terminate the contract before
19
the end of its term or (b) costs that will continue to be
incurred under the contract for its remaining term without
economic benefit to the entity. In periods subsequent to initial
measurement, changes to the liability are measured using the
credit-adjusted risk-free rate that was used to measure the
liability initially.
Research
and Development
Research and development expenses consist of costs incurred for
company-sponsored, collaborative and contracted research and
development activities. These costs include direct and
research-related overhead expenses. Research and development
expenses under collaborative and government grants approximate
the revenue recognized under such agreements. We expense
research and development costs as such costs are incurred.
Income
Taxes
We make certain estimates and judgments in determining income
tax expense for financial statement purposes. These estimates
and judgments occur in the calculation of certain tax assets and
liabilities, which arise from differences in the timing of
recognition of revenue and expense for tax and financial
statement purposes. As part of the process of preparing our
financial statements, we are required to estimate our income
taxes in each of the jurisdictions in which we operate. This
process involves us estimating our current tax exposure under
the most recent tax laws and assessing temporary differences
resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax
assets and liabilities, which are included in our balance sheets.
We assess the likelihood that we will be able to recover our
deferred tax assets. We consider all available evidence, both
positive and negative, including our historical levels of income
and losses, expectations and risks associated with estimates of
future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for a valuation
allowance. If we do not consider it more likely than not that we
will recover our deferred tax assets, we will record a valuation
allowance against the deferred tax assets that we estimate will
not ultimately be recoverable. At June 30, 2010 and
December 31, 2009, we believed that the amount of our
deferred income taxes would not be ultimately recovered.
Accordingly, we recorded a full valuation allowance for deferred
tax assets. However, should there be a change in our ability to
recover our deferred tax assets, we would recognize a benefit to
our tax provision in the period in which we determine that it is
more likely than not that we will recover our deferred tax
assets.
Employee
Stock-Based Compensation
We follow the fair value method of accounting for employee
stock-based compensation arrangements in accordance with
ASC 718, Compensation Stock
Compensation. We record expense for stock-based
compensation, which includes stock options, restricted stock
awards and purchases of common stock under the Employee Stock
Purchase Plan. The expense amount that is recorded is based on
the fair value of the award and is recognized as compensation
expense. Expense is recognized over the vesting period of the
award.
We used the Black-Scholes option-pricing model to estimate the
fair value of stock-based awards as of the grant date. The
Black-Scholes model, by its design, is complex, and dependent
upon key data inputs estimated by management. We determine
expected volatility using the historical method, which is based
on the daily historical daily trading data of our common stock
over the expected term of the option. Effective during the three
months ended March 31, 2010, we began using the safe harbor
method to calculate the expected term, as allowed by
SAB 110. We believe that use of this method is most
appropriate for us considering the very limited, relevant
historical experience of stock option exercises.
Recent
Accounting Pronouncements
See Note 2 to the accompanying unaudited condensed
financial statements included elsewhere in this prospectus for
information on recent accounting pronouncements.
20
Results
of Operations
Three
and six months ended June 30, 2010 and 2009
We reduced our net loss by approximately $0.5 million for
the three months ended June 30, 2010 as compared with the
three months ended June 30, 2009. These favorable results
occurred because of lower research and development costs, lower
restructuring and asset impairment costs and the receipt of a
refund of escrow funds related to VAT payments that was received
in the three months ended June 30, 2010. We significantly
reduced our net loss by $5.5 million for the six months
ended June 30, 2010 as compared with the six months ended
June 30, 2009. These favorable results were due to the
royalty revenue from Zogenix and lower operating expenses as
compared with the prior year period. Operating expenses were
lower despite our continued investment in our liposomal
ciprofloxacin program, including the expenses related to our two
ongoing clinical trials.
We recorded no revenue in each of the three months ended
June 30, 2010 and 2009. Total revenue was $4.0 million
for the six months ended June 30, 2010 as compared with no
revenue for the six months ended June 30, 2009. For the six
months ended June 30, 2010, we recorded $4.0 million
in royalty revenue related to the milestone payment that was due
upon the initial commercialization of Zogenixs DosePro
product. We are also entitled to recurring quarterly royalty
payments based on sales of the DosePro product. We anticipate
recording this recurring royalty revenue beginning with the
three months ending September 30, 2010 since the terms of
the asset sale agreement provides for royalty payments to be
based on cash received by Zogenix on their product sales and
there is a sixty day period following the end of the quarter for
Zogenix to complete their royalty reporting. We have been
informed by Zogenix that wholesalers distributing the SUMAVEL
DosePro product were given net 90 day payments terms for
the first quarter sales, resulting in the effective delay of
first quarter 2010 royalties until the second quarter 2010
royalty payment due in late August 2010. After first quarter
2010, the payment terms for wholesalers reverted to net
30 days. Consequently, we recorded no royalty revenue in
the three months ended June 30, 2010.
For the six months ended June 30, 2009, the Company did not
record any revenue since all amounts invoiced under the Lung Rx
collaboration agreement were deferred and not recognized as
revenue until a subsequent period.
Operating expenses were $4.1 million for the three months
ended June 30, 2010 which represented a $0.4 million
decrease from the three months ended June 30, 2009.
Research and development expenses decreased $0.2 million
and restructuring and impairment expenses also decreased by
$0.2 million as compared with the three months ended
June 30, 2009. Operating expenses were $8.2 million
for the six months ended June 30, 2010, which represented a
$1.4 million decrease as compared with the six months ended
June 30, 2009. Research and development expenses decreased
$1.1 million, general and administrative expenses decreased
$0.1 million and restructuring and impairment expenses
decreased $0.2 million as compared with the six months
ended June 30, 2009.
The decrease in research and development expenses was due to
lower AERx-related expenses for headcount, contract
manufacturing and depreciation expenses. AERx-related expenses
decreased due to the termination of the Lung Rx collaboration in
June 2009 and the subsequent suspension of AERx-related
development activity. These decreases were partially offset by
higher direct clinical expenses related to our liposomal
ciprofloxacin Phase 2b trials.
Liquidity
and Capital Resources
As of June 30, 2010, we had cash and cash equivalents of
$9.6 million and total working capital of
$7.8 million. We believe that cash and cash equivalents on
hand at June 30, 2010, as well as anticipated recurring
royalty payments from Zogenix, will be sufficient to enable us
to fund our operations at least through the fourth quarter of
2010.
On June 21, 2010, we closed the June 2010 private placement
in which we sold 34,702,512 shares of our common stock and
warrants to purchase an aggregate of 7,527,214 shares of
our common stock to accredited investors (which included a few
then-existing significant shareholders) under the terms of a
securities purchase agreement that we entered into with the
selling shareholders on June 18, 2010. At the closing of
the June 2010 private placement, we received approximately
$4.1 million in aggregate gross proceeds from the sale of
the
21
common stock and the warrants. After deducting for fees and
expenses, the aggregate net proceeds from the sale of the common
stock and the warrants were approximately $3.7 million.
After we held our special meeting of shareholders on
September 14, 2010 and obtained the requisite shareholder
approval on a proposal to amend our amended and restated
articles of incorporation to increase the total number of
authorized shares of our common stock to cover the shares
issuable upon exercise of the warrants, the warrants were
exercised and we received approximately $891,000 in additional
aggregate net proceeds from the exercise of the warrants.
We are currently exploring means to fund the further development
of the cystic fibrosis indication for
ARD-3100, as
well as the anticipated costs of our Phase 3 liposomal
ciprofloxacin bronchiectasis trials, focusing primarily on
establishing funded partnering agreements and through sale or
out-licensing of non-strategic assets.
Six
months ended June 30, 2010
Total cash and cash equivalents increased by $5.7 million
for the six months ended June 30, 2010. The increase in
cash was primarily due to the net proceeds of $3.7 million
from the sale of common stock in the June 2010 private placement
and the net proceeds from the sale of short-term investments of
$5.2 million. This increase was partially offset by cash
used in operations of $3.3 million. Cash used for
operations was favorably impacted by the receipt of the
$4.0 million milestone payment from Zogenix.
Six
months ended June 30, 2009
As of June 30, 2009 we had cash, cash equivalents and
short-term investments of $15.8 million, down from
$19.1 million at December 31, 2008. The
$3.3 million decrease consisted of a decrease of
$9.6 million in cash and cash equivalents offset by an
increase of $6.3 million in short-term investments. The
overall decrease primarily resulted from the use of cash to fund
operations, partially offset by the $3.9 million in
proceeds from the registered direct offering of our common stock.
Net cash used in operating activities for the six months ended
June 30, 2009 was $7.3 million and primarily resulted
from our net loss of $9.8 million, partially offset by
non-cash expenses for depreciation, stock based compensation and
facility lease exit expenses. Net cash used by investing
activities was $6.3 million for the six months ended
June 30, 2009 and represented the net purchase of
short-term investments. Net cash provided by financing
activities for the six months ended June 30, 2009 was
$4.0 million which was primarily due to the registered
direct offering of our common stock.
Off-Balance
Sheet Financings and Liabilities
Other than contractual obligations incurred in the normal course
of business, we do not have any off-balance sheet financing
arrangements or liabilities, guarantee contracts, retained or
contingent interests in transferred assets or any obligation
arising out of a material variable interest in an unconsolidated
entity. We have one inactive, wholly-owned subsidiary domiciled
in the United Kingdom.
DESCRIPTION
OF THE BUSINESS
Overview
We are an emerging specialty pharmaceutical company focused on
the development and commercialization of drugs delivered by
inhalation for the treatment of severe respiratory diseases by
pulmonologists. Over the last decade, we invested a large amount
of capital to develop drug delivery technologies, particularly
the development of a significant amount of expertise in
pulmonary drug delivery. We also invested considerable effort
into the generation of a large volume of laboratory and clinical
data demonstrating the performance of our
AERx®
pulmonary drug delivery platform and other proprietary
technologies, including our liposomal formulations for
inhalation. We have not been profitable since inception and
expect to incur additional operating losses over at least the
next several years as we expand product development efforts,
preclinical testing, clinical trial activities, and possible
sales and marketing efforts, and as we secure production
capabilities from outside contract manufacturers. To date, we
have not had any significant product sales and do not anticipate
generating any revenues from the sale of
22
our products in the near term. However, we do expect to generate
royalty revenue in 2010 from the Intraject technology platform
that we sold to Zogenix in 2006. As of June 30, 2010, we
had an accumulated deficit of $352.8 million. Historically,
we have funded our operations primarily through public offerings
and private placements of our capital stock, license fees and
milestone payments from collaborators, proceeds from the January
2005 restructuring transaction with Novo Nordisk related to our
inhaled insulin program, borrowings from Novo Nordisk, the sale
of Intraject-related assets and interest earned on investments.
Over the last four years, our business has focused on
opportunities for product development for the treatment of
severe respiratory diseases that we could develop and
commercialize in the United States or European Union without a
partner, or be able to retain co-marketing rights in the United
States or European Union for such products. In selecting our
proprietary development programs, we primarily seek drugs
approved by the United States Food and Drug Administration
(FDA) that can be reformulated for both existing and
new indications in respiratory disease. Our intent is to use our
pulmonary delivery methods and formulations to improve their
safety, efficacy and convenience of administration to patients.
When compared to the discovery and development of new chemical
entities, we believe that our strategy will allow us to reduce
cost, development time and risk of failure. It is our longer
term strategy to commercialize our respiratory product
candidates with our own focused sales and marketing force
addressing pulmonary specialty doctors in the United States or
European Union, where we believe that a proprietary sales force
will enhance the return to our shareholders. Where our products
can benefit a broader population of patients in the United
States or in other countries, we may enter into co-development,
co-promotion or other marketing arrangements with collaborators,
thereby reducing costs and increasing revenues through license
fees, milestone payments and royalties. Our lead development
candidate in Phase 2 clinical trials is a proprietary liposomal
formulation of the antibiotic ciprofloxacin that is delivered by
inhalation for the treatment of infections associated with the
severe respiratory diseases cystic fibrosis and bronchiectasis.
The same formulation could also potentially be used for the
prevention and treatment of bioterrorism agents such as inhaled
anthrax, tularemia and plague. In the near term given our
current financial resources, our focus will be on completing
Phase 2b clinical trials of liposomal ciprofloxacin in
bronchiectasis.
Pulmonary delivery by inhalation is already a widely used and
well accepted method of administration of a variety of drugs for
the treatment of respiratory diseases. Compared to other routes
of administration, inhalation provides local delivery of the
drug to the respiratory tract which offers a number of potential
advantages, including rapid onset of action, less drug required
to achieve the desired therapeutic effect, and reduced side
effects because the rest of the body has lower exposure to the
drug. We believe that there still are significant unmet medical
needs in the respiratory disease market, both to replace
existing therapies that over prolonged use in patients
demonstrate reduced efficacy or increased side effects, as well
as to provide novel treatments to patient populations and for
disease conditions that are inadequately treated.
In addition to its use in the treatment of respiratory diseases,
there is also an increasing awareness of the value of the
inhalation route of delivery to administer drugs via the lung
for the systemic treatment of disease elsewhere in the body. For
many drugs, the large and highly absorptive area of the lung
enables bioavailability and fast absorption as a result of
pulmonary delivery that could otherwise only be obtained by
injection. We believe that the features of our AERx delivery
system make it more attractive for many systemic drug
applications than alternative methods. We believe particular
opportunities exist for the use of our pulmonary delivery
technology for the delivery of biologics, including proteins,
antibodies and peptides that today must be delivered by
injection, as well as small molecule drugs, where rapid
absorption is desirable. We intend to pursue selected
opportunities for systemic delivery via inhalation by seeking
collaborations and government grants that will fund development
and commercialization.
We believe that our proprietary formulation and delivery
technologies and our experience in the development and
management of pulmonary clinical programs uniquely position us
to benefit from opportunities in the respiratory disease market
as well as other pharmaceutical markets that would benefit from
the efficient, non-invasive inhalation delivery of drugs.
23
Recent
Developments
June
2010 Private Placement
On June 21, 2010, we closed a private placement, which we
refer to in this prospectus as the June 2010 private placement,
in which we sold 34,702,512 shares of our common stock and
warrants to purchase an aggregate of 7,527,214 shares of
our common stock to accredited investors (which included a few
then-existing significant shareholders) under the terms of a
securities purchase agreement that we entered into with the
selling shareholders on June 18, 2010. At the closing of
the June 2010 private placement, we received approximately
$4.1 million in aggregate gross proceeds from the sale of
the common stock and the warrants. After deducting for fees and
expenses, the aggregate net proceeds from the sale of the common
stock and the warrants were approximately $3.7 million.
After we held our special meeting of shareholders on
September 14, 2010 and obtained the requisite shareholder
approval on a proposal to amend our amended and restated
articles of incorporation to increase the total number of
authorized shares of our common stock to cover the shares
issuable upon exercise of the warrants, the warrants were
exercised and we received approximately $891,000 in additional
aggregate net proceeds from the exercise of the warrants.
Novo
Nordisk Stock Purchase Agreement
On September 15, 2010, we closed the issuance to Novo
Nordisk A/S of 26,000,000 shares of our common stock under
a stock purchase agreement, dated as of July 30, 2010, by
and among us and Novo Nordisk A/S, which we refer to in this
prospectus as the Novo Nordisk stock purchase agreement, in
consideration for the termination of all of our obligations
under a promissory note and security agreement dated
July 3, 2006 in favor of Novo Nordisk A/S. The closing
occurred after we held our special meeting of shareholders on
September 14, 2010 and obtained the requisite shareholder
approval on a proposal to amend our amended and restated
articles of incorporation to increase the total number of
authorized shares of our common stock to cover the
26,000,000 shares issuable under the Novo Nordisk stock
purchase agreement. An amended and restated stock purchase
agreement, dated as of January 26, 2005, previously entered
into by us, Novo Nordisk A/S and Novo Nordisk Pharmaceuticals,
Inc. in connection with our January 2005 restructuring
transaction with Novo Nordisk was also terminated at the
closing. The July 3, 2006 promissory note and security
agreement had evidenced, among other things, a loan that had
been previously made by Novo Nordisk A/S to us in the principal
amount of $7.5 million, which had bore interest accruing at
5% per annum and the principal, along with the accrued interest,
had been payable in three equal payments of approximately
$3.5 million on July 2, 2012, July 1, 2013 and
June 30, 2014.
Our
Strategy
We have transitioned our business model to a specialty
pharmaceutical company focused on development and
commercialization of a portfolio of drugs delivered by
inhalation for the treatment and prevention of respiratory
diseases. We have chosen to focus on respiratory diseases based
on the expertise of our management team and the history of our
company. We have significant experience in the treatment of
respiratory diseases and specifically in the development of
inhalation products that are uniquely suited for their
treatment. We have a portfolio of proprietary technologies that
may potentially address significant unmet medical needs for
better products in the global respiratory market. There are five
key elements of our strategy:
|
|
|
|
|
Develop a proprietary portfolio of products for the treatment
of respiratory diseases. We believe our expertise
in the development of pulmonary pharmaceutical products should
enable us to advance and commercialize respiratory products for
a variety of indications. We select for development those
product candidates that can benefit from our experience in
pulmonary delivery and that we believe are likely to provide a
superior therapeutic profile or other valuable benefits to
patients when compared to existing products.
|
|
|
|
Accelerate the regulatory approval process. We
believe our management teams expertise in pharmaceutical
inhalation products, new indications and reformulations of
existing drugs will enable us to pursue the most appropriate
regulatory pathway for our product candidates. Because our
current product candidates incorporate FDA-approved drugs, we
believe that the most expedient review and approval pathway for
these product candidates in the United States will be under
Section 505(b)(2) of the Food, Drug and Cosmetic Act,
|
24
|
|
|
|
|
or the FDCA. Section 505(b)(2) permits the FDA to rely on
scientific literature or on the FDAs prior findings of
safety
and/or
effectiveness for approved drug products. By choosing to develop
new applications or reformulations of FDA-approved drugs, we
believe that we can substantially reduce or potentially
eliminate the significant time, expenditure and risks associated
with preclinical testing of new chemical entities and biologics,
as well as utilize knowledge of these approved drugs to reduce
the risk, time and cost of the clinical trials needed to obtain
drug approval. In addressing niche market opportunities, we have
already been granted or intend to pursue orphan drug designation
for our products when appropriate. Orphan drug designation may
be granted to drugs and biologics that treat rare
life-threatening diseases that affect fewer than
200,000 persons in the United States. Such designation
provides a company with the possibility of market exclusivity
for seven years as well as regulatory assistance, reduced filing
fees and possible tax credits. We may also decide alternatively,
or in addition, to explore the use of our own sales force to
serve pulmonary speciality physicians in another significant
pharmaceutical market, such as the EU.
|
|
|
|
|
|
Develop our own sales and marketing capacity for products in
niche markets. It is our longer term strategy to
develop our own targeted sales and marketing force for those of
our products prescribed primarily by the approximately 11,000
pulmonologists, or their subspecialty associates, in the United
States. We expect to begin establishing a sales force as we
approach commercialization of the first of such products. We
believe that by developing a small sales group dedicated to
interacting with disease-specific physicians in the respiratory
field, we can create greater value from our products for our
shareholders. For markets where maximizing sales of the product
would depend on marketing to primary healthcare providers that
are only addressable with a large sales force, we plan to enter
into co-marketing arrangements. We also intend to establish
collaborative relationships to commercialize our products in
cases where we cannot meet these goals with a small sales force
or when we need collaborators with relevant expertise and
capabilities, such as the ability to address international
markets. Through such collaborations, we may also utilize our
collaborators resources and expertise to conduct large
late-stage clinical development.
|
|
|
|
Exploit the broad applicability of our delivery technology
through product development collaborations. We
continue to believe that companies can benefit by collaborating
with us when our proprietary delivery technologies create new
pharmaceutical and biologics products. We intend to continue to
exploit the broad applicability of our delivery technologies for
systemic applications of our validated technologies in
collaborations with companies and organizations that will fund
development and commercialization. We intend to continue to
out-license technologies and product opportunities that we have
already developed to a certain stage and that are outside of our
core strategic focus. Collaborations and out-licensing may
generate additional revenues while we progress towards the
development and potential launch of our own proprietary products.
|
|
|
|
Outsource manufacturing activities. We intend
to outsource the late stage clinical and commercial scale
manufacturing of our products to conserve our capital for
product development. We believe that the required late stage
clinical and commercial manufacturing capacity can be obtained
from contract manufacturers. With this approach, we seek
manufacturers whose expertise should allow us to reduce risk and
the costs normally incurred if we were to build, operate and
maintain large-scale production facilities ourselves.
|
Proprietary
Programs Under Development
Liposomal
Ciprofloxacin
Ciprofloxacin has been approved by the FDA as an anti-infective
agent and is widely used for the treatment of a variety of
bacterial infections. Today ciprofloxacin is delivered by oral
or intravenous administration. We believe that delivering this
potent antibiotic directly to the lung may improve its safety
and efficacy in the treatment of pulmonary infections. Our novel
sustained release formulation of ciprofloxacin provides high and
prolonged concentrations of the antibiotic within the infected
sputum from the lung while reducing systemic exposure. We
believe the latter may reduce the frequency and severity of the
side effects seen with currently marketed ciprofloxacin
products. To achieve this sustained release, we employ
liposomes, which are lipid-based nanoparticles dispersed in
water that encapsulate the drug during storage and release the
drug gradually upon contact with fluid covering the airways and
the lung. In an animal experiment, ciprofloxacin delivered to
the lungs of mice
25
appeared to be rapidly absorbed into the bloodstream, with no
drug detectable four hours after administration. In contrast,
the liposomal formulation of ciprofloxacin produced
significantly higher levels of ciprofloxacin in the lung at all
time points and was still detectable at 12 hours post
dosing. We also believe that for certain respiratory disease
indications it may be possible that a liposomal formulation
enables better interaction of the drug with the disease target,
leading to improved effectiveness over other therapies. We have
at present under development three disease indications for this
formulation that share much of the laboratory and production
development efforts, as well as a common safety data base.
ARD-3100
Liposomal Ciprofloxacin for the Treatment of Infections in
Cystic Fibrosis (CF) Patients
One of our programs uses our proprietary liposomal formulation
of ciprofloxacin for the treatment and control of respiratory
infections common to patients with cystic fibrosis, or CF. CF is
a genetic disease that causes thick, sticky mucus to form in the
lungs, pancreas and other organs. In the lungs, the mucus tends
to block the airways, causing lung damage and making these
patients highly susceptible to lung infections. According to the
Cystic Fibrosis Foundation, CF affects roughly 30,000 children
and adults in the United States and roughly 70,000 children and
adults worldwide. According to the American Lung Association,
the direct medical care costs for an individual with CF are
currently estimated to be in excess of $40,000 per year.
The inhalation route affords direct administration of the drug
to the infected part of the lung, maximizing the dose to the
affected site and minimizing the wasteful exposure to the rest
of the body where it could cause side effects. Therefore,
treatment of CF-related lung infections by direct administration
of antibiotics to the lung may improve both the safety and
efficacy of treatment compared to systemic administration by
other routes, as well as improving patient convenience as
compared to injections. Oral and injectable forms of
ciprofloxacin are approved for the treatment of Pseudomonas
aeruginosa, a lung infection to which CF patients are
vulnerable. Currently, there are two inhaled antibiotics
approved for the treatment of this infection, one of them is
given twice a day and the other one three times a day. Both of
these antibiotics are administered by nebulization. We believe
that local lung delivery via inhalation of ciprofloxacin in a
sustained release formulation could provide a convenient,
effective and safe treatment of the debilitating and often
life-threatening lung infections that afflict patients with CF.
We think that once a day dosing of inhaled liposomal
ciprofloxacin could also be a welcome reduction in the burden of
therapy for this patient population. We have received orphan
drug designation from the FDA for this product for the
management of CF.
We believe we have the preclinical development, clinical and
regulatory expertise to advance this product through
development. We intend to retain marketing or co-marketing
rights for the inhaled liposomal ciprofloxacin formulations in
at least one of the major markets such as United States or the
European Union.
Development
We initiated preclinical studies for liposomal ciprofloxacin in
2006 and we also continued to work on new innovative
formulations for this product with the view to maximize the
safety, efficacy and convenience to patients. In October 2007,
we completed a Phase 1 clinical trial in 20 healthy volunteers
in Australia. This was a safety, tolerability and
pharmacokinetic study that included single dose escalation
followed by dosing for one week. Administration of the liposomal
formulation by inhalation was well tolerated and no serious
adverse reactions were reported. The pharmacokinetic profile
obtained by measurement of blood levels of ciprofloxacin
following the inhalation of the liposomal formulation was
consistent with the profile from sustained release of
ciprofloxacin from liposomes, supporting once daily dosing; the
blood levels of ciprofloxacin were much lower than those that
would be observed following administration of therapeutic doses
of ciprofloxacin by injection or via the gastrointestinal tract.
We believe that this is a desirable pharmacokinetic profile
likely to result in a reduction of the incidence and severity of
systemic side effects of ciprofloxacin and to be less likely to
lead to systemic emergence of resistant micro-organisms.
Further, we believe that once a day dosing of this product could
provide a significant reduction in the burden of therapy for CF
patients and their healthcare providers.
In June 2008, we completed a multi-center
14-day
treatment Phase 2a trial in Australia and New Zealand in
21 CF patients to investigate safety, efficacy and
pharmacokinetics of once daily inhaled liposomal ciprofloxacin.
The primary efficacy endpoint in this Phase 2a study was the
change from baseline in the sputum Pseudomonas
26
aeruginosa colony forming units (CFU), an objective
measure of the reduction in pulmonary bacterial load. Data
analysis in 21 patients who completed the study
demonstrated that the CFUs decreased by a mean 1.43 log over the
14-day
treatment period (p<0.0001). Evaluation one week after
study treatment was discontinued showed that the Pseudomonas
bacterial density in the lung was still reduced from the
baseline without additional antibiotic use. Pulmonary function
testing as measured by the forced expiratory volume in one
second (FEV1) showed a significant mean increase of 6.86% from
baseline after 14 days of treatment (p=0.04). The study
drug was well tolerated, and there were no serious adverse
events reported during the trial.
In order to expedite anticipated time to market and increase
market acceptance, we have elected to deliver our formulation
via nebulizer, as most CF patients already own a nebulizer and
are familiar with this method of drug delivery.
ARD-3100
and ARD-3150 Liposomal Ciprofloxacin for the
Treatment of Infections in Non-Cystic Fibrosis Bronchiectasis
(BE) Patients
Bronchiectasis is a chronic condition characterized by abnormal
dilatation of the bronchi and bronchioles associated with
chronic infection. It is frequently observed in patients with
CF. However, it is a condition that affects over
110,000 people without CF in the United States and many
more in other countries, and results from a cycle of
inflammation, recurrent infection, and bronchial wall damage.
There is currently no drug specifically approved for the
treatment of non-CF bronchiectasis in the US. We were granted
orphan drug designation in the US for the management of this
condition with inhaled liposomal ciprofloxacin. We believe we
have the preclinical development, clinical and regulatory
expertise to advance this product through development. We intend
to retain marketing or co-marketing rights for the inhaled
liposomal ciprofloxacin formulations in the United States or
another major market such as the European Union. We have been
testing two formulations of inhaled liposomal ciprofloxacin
(ARD-3100 and ARD-3150) that differ in the proportion of rapidly
available and slow release ciprofloxacin.
Development
Pre-clinical activities described above for ARD-3100 are also
utilized by the ARD-3150 program.
In December 2008, we completed an open-label, four week
treatment study of efficacy, safety and tolerability of once
daily inhaled liposomal ciprofloxacin formulation ARD-3100 in
patients with non-CF bronchiectasis. The study was conducted at
eight leading centers in the United Kingdom and enrolled a total
of 36 patients. The patients were randomized into two equal
size groups, one receiving 3 mL of inhaled liposomal
ciprofloxacin and the other receiving 6 mL of inhaled liposomal
ciprofloxacin,
once-a-day
for the four-week treatment period. The primary efficacy
endpoint was the change from baseline in the sputum
Pseudomonas aeruginosa CFU, the standard objective
measure of the reduction in pulmonary bacterial load. The 3 mL
and 6 mL doses of inhaled liposomal ciprofloxacin in the
evaluable patient population demonstrated significant mean
decreases against baseline in the Pseudomonas aeruginosa
CFUs over the
28-day
treatment period of 3.5 log (p<0.001) and 4.0 log
(p<0.001) units, respectively.
With regard to safety, there were no statistically significant
changes in lung function for the evaluable patient population at
the end of treatment as measured by the normalized forced
expiratory volume in one second (FEV1% predicted). Inhaled
liposomal ciprofloxacin was well tolerated: no bronchodilator
use was mandated or needed before administration of the study
drug. In the 3 mL group, respiratory drug-related adverse
reactions were only mild. Three serious adverse events were
observed in each dose group, with only one of the six classified
as possibly drug-related in the 6 mL group. This particular
patient suffered from a recurrent episode of a viral infection
(shingles) early in the treatment period that might have been a
confounding factor leading ultimately to a respiratory
exacerbation requiring hospitalization.
In November 2009, the first patient was dosed in the ORBIT-2
(Once-daily Respiratory Bronchiectasis Inhalation Treatment)
trial, a
6-month,
multicenter, international Phase 2b clinical trial of inhaled
ciprofloxacin with the ARD-3150 formulation in 40 adult patients
with non-cystic fibrosis bronchiectasis. The randomized,
double-blind, placebo-controlled trial was conducted in
Australia and New Zealand. Following a 14 day screening
period, the patients were treated
once-a-day
for 28 days with either the active drug, or placebo,
followed by a 28 day
27
off-treatment period. This on-off sequence was repeated three
times. The primary endpoint was defined as the mean change in
Pseudomonas aeruginosa density in sputum (colony forming
units CFU per gram) from baseline to day
28 of the active treatment group versus placebo. Safety and
tolerability assessments of the treatment versus placebo group
were performed and secondary efficacy endpoints being assessed
include long term microbiological responses, time to an
exacerbation, severity of exacerbations, length of time to
resolve exacerbations, and changes in spirometry and in quality
of life measurements.
ORBIT-2 explored whether the novel formulation ARD-3150, which
has a different drug release profile than ARD-3100, may have
additional therapeutic benefits. In October 2010, we announced
positive top line data from the ORBIT-2 study. Statistical
significance was achieved in the primary endpoint and one of the
secondary endpoints. The primary endpoint the mean
change in Pseudomonas aeruginosa density in sputum from
baseline to day 28 was met. In the full analysis
population (full analysis set includes all patients who were
randomized, received at least one dose and provided samples for
at least two time points), there was a significant mean
reduction of 4.2
log10
units in the ARD-3150 group, reflecting an almost
sixteen-thousand fold decrease in bacterial load, versus a very
small mean decrease of 0.1
log10
units in the placebo group (p=0.004). Secondary endpoint
analysis showed that 17 subjects in the placebo group required
supplemental antibiotics for respiratory-related infections
versus 8 subjects in the ARD-3150 group (p=0.05). Positive
trends were observed in the key area of pulmonary exacerbations.
The median time to first exacerbation was 58 days in the
placebo group versus 134 days in the
ARD-3150
group and there were fewer exacerbations in the treatment group
compared to the placebo group.
ARD-3150 was
well tolerated and there were no significant decreases in lung
function, as measured by FEV1 (forced expiratory volume in
one second), at 28 days in either group. Overall, the
incidence and severity of adverse events were similar in both
the placebo and treatment groups. Data from additional analyses
of the secondary endpoints will be reported in future
conferences and press releases.
In February 2010, the first patient was dosed in the
U.S. as part of the ORBIT-1 trial, an international,
randomized, double-blind, placebo-controlled Phase 2b study
designed to evaluate inhaled liposomal ciprofloxacin with the
ARD-3100 formulation in patients with BE under a U.S. IND.
The ORBIT-1 trial will randomize 96 patients, who will
receive for four weeks, either one of two different once-daily
inhaled doses (100 or 150 mg ciprofloxacin delivered by
inhalation as 2 or 3 mL of liposomal dispersion, respectively)
or once-daily inhaled placebo. The primary efficacy endpoint
will be the change from baseline in sputum Pseudomonas
aeruginosa colony forming units (CFUs). Secondary endpoints
will include quality of life measurements and improvement of
outcomes with respect to exacerbations. Lung function changes
will be monitored for safety. The ORBIT-1 trial is currently
enrolling patients and is expected to be complete by the end of
2010.
The results from each of these trials, will produce an extensive
data base of information from which we hope to select the
optimum product and the most appropriate endpoints to test in
Phase 3. In order to expedite anticipated time to market
and increase market acceptance, we have elected to deliver our
formulations via an approved, widely-accepted nebulizer system
for each of these Phase 2b trials.
We believe our inhaled liposomal ciprofloxacin could also be
explored for the treatment of other serious respiratory
infections, such as those occurring in severe asthma and COPD
patients.
We intend to finalize development plans and budgets for the CF
and BE programs in conjunction with discussions with the FDA. We
are seeking partnerships for these programs in order to reduce
the overall cost to us of development and to bring additional
expertise for the global development and commercialization of
inhaled liposomal ciprofloxacin for multiple indications.
ARD-1100
Liposomal Ciprofloxacin for the Treatment of Inhalation
Anthrax
The third of our liposomal ciprofloxacin programs is for the
prevention and treatment of pulmonary anthrax infections.
Anthrax spores are naturally occurring in soil throughout the
world. Anthrax infections are most commonly acquired through
skin contact with infected animals and animal products or, less
frequently, by inhalation or ingestion of spores. With
inhalation anthrax, once symptoms appear, fatality rates are
high even with the initiation of antibiotic and supportive
therapy. Further, a portion of the anthrax spores, once inhaled,
may remain dormant in the lung for several months and then
germinate. Anthrax has been identified by the Centers for
Disease Control as a likely potential agent of bioterrorism. In
the fall of 2001, when anthrax-contaminated mail was
28
deliberately sent through the United States Postal Service to
government officials and members of the media, five people died
and many more became sick. These attacks highlighted the concern
that inhalation anthrax and other types of inhaled bacterial
(e.g. tularemia and plague) bioterror agents represents a real
and current threat.
Ciprofloxacin has been approved by the FDA for use orally and
via injection for the treatment of inhalation anthrax
(post-exposure) since 2000. Our ARD-1100 research and
development program received funding from the Defence Research
and Development Canada, or DRDC, a division of the Canadian
Department of National Defence. We believe that our product
candidate may be able to deliver a long-acting formulation of
ciprofloxacin directly into the lung and could potentially have
fewer side effects and be more effective to prevent and treat
inhalation anthrax and other inhaled bacterial bioterrorism
agents than currently available therapies.
Development
We began our research into liposomal ciprofloxacin for the
treatment of inhalation anthrax under a technology demonstration
program funded by the DRDC as part of their interest in
developing products to counter bioterrorism. The DRDC had
already demonstrated the feasibility of inhaled liposomal
ciprofloxacin for post-exposure prophylaxis of Francisella
tularensis, a potential bioterrorism agent similar to
anthrax. Mice were exposed to a lethal dose of Francisella
tularensis and then 24 hours later were exposed via
inhalation to a single dose of free ciprofloxacin, liposomal
ciprofloxacin or saline. All the mice in the control group and
the free ciprofloxacin group were dead within 11 days
post-infection; in contrast, all the mice in the liposomal
ciprofloxacin group were alive 14 days post-infection. The
same results were obtained when the mice received the single
inhaled treatment as late as 48 or 72 hours post-infection.
The DRDC has provided funding for our development efforts to
date and additional development of this program is dependent on
negotiating for and obtaining additional funding from DRDC or
other collaborators or sources of funding. We plan to use our
preclinical and clinical safety data from our BE and CF programs
to supplement the data needed to have this product candidate
considered for approval for use in treating inhalation anthrax
and possibly tularemia and plague.
If we can obtain sufficient additional funding, we would
anticipate developing this drug for approval under FDA
regulations relating to the approval of new drugs or biologics
for potentially fatal diseases where human studies cannot be
conducted ethically or practically. Unlike most drugs, which
require large, well controlled Phase 3 clinical trials in
patients with the disease or condition being targeted, these
regulations allow for a drug to be evaluated and approved by the
FDA on the basis of demonstrated safety in humans combined with
studies in animal models to show effectiveness.
Smoking
Cessation Therapy
ARD-1600
(Nicotine) Tobacco Smoking Cessation Therapy
According to the National Center for Health Statistics
(NCHS), 21% of the U.S. population age 18
and above currently smoke cigarettes. The World Health
Organizations (WHO) recent report states that
tobacco smoking is the single most preventable cause of death in
the world today. Already tobacco kills more than five million
people per year more than tuberculosis, HIV/AIDS and
malaria combined. The WHO warns that by 2030, the death toll
could exceed eight million a year. Unless urgent action is
taken, tobacco could kill one billion people during this
century. According to the National Institute on Drug Abuse, more
than $75 billion of total U.S. healthcare costs each
year is attributable directly to smoking. However, this cost is
well below the total cost to society because it does not include
burn care from smoking-related fires, perinatal care for low
birth-weight infants of mothers who smoke, and medical care
costs associated with disease caused by secondhand smoke. In
addition to healthcare costs, the costs of lost productivity due
to smoking effects are estimated at $82 billion per year,
bringing a conservative estimate of the economic burden of
smoking to more than $150 billion per year.
NCHS indicates that nicotine dependence is the most common form
of chemical dependence in this country. Quitting tobacco use is
difficult and often requires multiple attempts, as users often
relapse because of withdrawal symptoms. Our goal is to develop
an inhaled nicotine product that would address effectively the
acute craving for cigarettes and, through gradual reduction of
the peak nicotine levels, wean-off the patients from cigarette
smoking and from the nicotine addiction.
29
Development
The initial laboratory work on this program was partly funded
under grants from the National Institutes of Health.
We have encouraging data from our first human clinical trial
delivering aqueous solutions of nicotine using the palm-size
AERx Essence system. Our randomized, open-label, single-site
Phase 1 trial evaluated arterial plasma pharmacokinetics and
subjective acute cigarette craving when one of three nicotine
doses was administered to 18 adult male smokers. Blood
levels of nicotine rose much more rapidly following a
single-breath inhalation compared to published data on other
approved nicotine delivery systems. Cravings for cigarettes were
measured on a scale from 0-10 before and after dosing for up to
four hours. Prior to dosing, mean craving scores were 5.5, 5.5
and 5.0, respectively, for the three doses. At five minutes
following inhalation of the nicotine solution through the AERx
Essence device, craving scores were reduced to 1.3, 1.7 and 1.3,
respectively, and did not return to pre-dose baseline during the
four hours of monitoring. Nearly all subjects reported an acute
reduction in craving or an absence of craving immediately
following dosing. No serious adverse reactions were reported in
the study.
We believe these results provide the foundation for further
research with the AERx Essence device as a means toward smoking
cessation. We are seeking collaborations with government and
non-government organizations to further develop this product.
Other
Potential Applications
We have demonstrated in human clinical trials to date effective
deposition and, where required, systemic absorption of a wide
variety of drugs, including small molecules, peptides and
proteins, using our AERx delivery system. In particular, Aradigm
and its former collaboration partner Novo Nordisk generated a
substantial amount of preclinical and clinical data on the
delivery of insulin using the AERx inhaler for the treatment of
Type I and Type II diabetes. In October 2008, Novo Nordisk
transferred to us, at no charge, a portfolio of inhaled insulin
related patents pursuant to a license agreement between us and
Novo that was terminated in May 2008. The portfolio includes
both U.S. and foreign patents. In addition to the patent
portfolio, Novo transferred to us a significant preclinical
safety database that was developed during the Aradigm/Novo
Nordisk collaboration, the rights to a miniaturized
second-generation AERx electronic insulin inhaler and data from
Novos inhaled insulin clinical program, which included
nine Phase 3 trials in Type 1 and Type 2 diabetes patients. We
continue to maintain the intellectual property portfolio related
to inhaled insulin and seek to license or sell this asset.
We are regularly examining our previously conducted preclinical
and clinical programs to identify product candidates that may be
suitable for further development consistent with our current
business strategy. We previously demonstrated the feasibility of
delivering a variety of small molecules, peptides,
oligonucleotides, proteins and gene therapies via our
proprietary AERx delivery system but we have not been able to
continue their development due to a variety of reasons, most
notably the lack of funding provided from collaborators. We seek
to identify partners who may wish to license or buy these
assets, in order to raise non-dilutive capital from these
non-core assets.
Zogenix
DosePro Technology
In August 2006, we sold all of our assets related to the
Intraject needle-free injector technology platform and products,
including 12 United States patents along with foreign
counterparts, to Zogenix, Inc., a private company. Zogenix is
responsible for further development and commercialization
efforts of Intraject (now rebranded under the name DosePro*). In
conjunction with the sale, we received a $4 million initial
payment from Zogenix, with an additional milestone payment of
$4 million and royalty payments payable upon any
commercialization of products in the U.S. and other
countries, including the European Union, developed and sold
using the DosePro technology.
In December 2007, Zogenix submitted a New Drug Application, or
NDA, with the U.S. FDA for the migraine drug sumatriptan
using the needle-free injector DosePro, branded as SUMAVEL*
DosePro. The NDA was accepted for filing by the FDA in March
2008. Also in March 2008, Zogenix entered into a license
agreement to grant exclusive rights in the European Union to
Desitin Pharmaceuticals, GmbH to develop and commercialize
SUMAVEL DosePro in the European Union.
30
In July 2009, Zogenix was granted approval by the FDA of the
SUMAVEL DosePro (sumatriptan injection) needle-free delivery
system for the treatment of acute migraine and cluster headache.
In August 2009, Zogenix and Astellas Pharma US, Inc. entered
into an exclusive co-promotion agreement in the U.S. for
the SUMAVEL DosePro needle-free delivery system. Under the
announced terms of the agreement, Zogenix and Astellas will
collaborate on the promotion and marketing of SUMAVEL DosePro
with Zogenix focusing their sales activities primarily on the
neurology market while Astellas will focus mostly on primary
care physicians. Zogenix will have responsibility for
manufacturing and distribution of the product.
In October 2009, Zogenix and Desitin announced that Desitin has
filed for European regulatory approval of SUMAVEL DosePro
needle-free delivery system following the successful completion
of a European pivotal bioequivalence trial. We will be entitled
to receive royalty payments upon the commercialization of
SUMAVEL DosePro in the European Union.
On January 13, 2010, Zogenix and Astellas announced the
U.S. commercial launch of SUMAVEL DosePro. In February
2010, we received from Zogenix the $4 million milestone
payable upon the initial commercialization of SUMAVEL DosePro
and we will earn quarterly royalty payments on all SUMAVEL
DosePro sales beginning with the quarter ended March 31,
2010.
Pulmonary
Drug Delivery Background
Pulmonary delivery describes the delivery of drugs by inhalation
and is a common method of treatment of many respiratory
diseases, including asthma, chronic bronchitis, cystic fibrosis
and bronchiectasis. The current global market for inhalation
products includes delivery through metered-dose inhalers, dry
powder inhalers and nebulizers. The advantage of inhalation
delivery for the diagnosis, prevention and treatment of lung
disease is that the active agent is delivered in high
concentration directly to the desired targets in the respiratory
tract while keeping the bodys exposure to the rest of the
drug, and resulting side effects, at a minimum. Over the last
two decades, there has also been increased interest in the use
of the inhalation route for systemic delivery of drugs
throughout the body, either for the purpose of rapid onset of
action or to enable noninvasive delivery of drugs that are not
orally bioavailable.
The AERx
Delivery Technology
The AERx delivery technology provides an efficient and
reproducible means of targeting drugs to the diseased parts of
the lung, or to the lung for systemic absorption, through a
combination of fine mist generation technology and breath
control mechanisms. Similar to nebulizers, the AERx delivery
technology is capable of generating aerosols from simple liquid
drug formulations, avoiding the need to develop complex dry
powder or other formulations. However, in contrast to
nebulizers, AERx is a hand-held unit that can deliver the
required dosage typically in one or two breaths in a matter of
seconds due to its enhanced efficiency compared to nebulization
treatments, which commonly last about 15 minutes. We believe the
ability to make small micron-size droplets from a hand-held
device that incorporates breath control will be the preferred
method of delivery for many medications.
We have demonstrated in the laboratory and in many human
clinical trials that our AERx delivery system enables pulmonary
delivery of a wide range of pharmaceuticals in liquid
formulations for local or systemic effects. Our proprietary
technologies focus principally on delivering liquid medications
through small particle aerosol generation and controlling
patient inhalation technique for efficient and reproducible
delivery of the aerosol drug to the deep lung. We have developed
these proprietary technologies through an integrated approach
that combines expertise in physics, engineering and
pharmaceutical sciences.
The various forms of our AERx technology have been extensively
tested in the laboratory and in over 50 human clinical
trials with 19 different small molecules, peptides and proteins.
We also conducted two human clinical trials (with treprostinil
and with nicotine) with the latest version of our inhalation
technology, the AERx
Essence®
system. This system retains the key features of breath control
and aerosol quality of the previous generations of the AERx
technology, but the patient is provided with a much smaller,
palm-sized device. The device is easy to use and maintain and it
does not require any batteries or external electrical power.
31
In June 2009, we received a notice from United Therapeutics
Corporation, on behalf of their wholly-owned subsidiary Lung Rx,
Inc., seeking to terminate the Exclusive License, Development
and Commercialization Agreement (the Lung Rx
Agreement), which was a collaboration agreement to develop
and commercialize inhaled treprostinil using our AERx Essence
technology for the treatment of pulmonary arterial hypertension
and other potential therapeutic indications. Shortly thereafter,
we suspended all development of the AERx delivery system and
terminated all employees solely dedicated to working on this
technology. In addition, we reviewed AERx production fixed
assets for impairment and recorded a $1.6 million
impairment charge during the quarter ended September 30,
2009. While the development of our AERx product candidate is
currently dormant, we believe that we could restart the
development effort if sufficient funding or a collaboration is
secured. We seek to identify partners who may wish to license or
buy this asset in order to raise non-dilutive capital.
Formulation
Technologies
We have a number of formulation technologies for drugs delivered
by inhalation. We have proprietary knowledge and trade secrets
relating to the formulation of drugs to achieve products with
adequate stability and safety, and for the manufacture and
testing of inhaled drug formulations. We have been exploring the
use of liposomal formulations of drugs that may be used for the
prevention and treatment of respiratory diseases. Liposomes are
lipid-based nanoparticles dispersed in water that encapsulate
the drug during storage, and release the drug slowly upon
contact with fluid covering the airways and the lung. We have
experience in the development of liposomal formulations
specifically for those drugs or biologics that currently need to
be dosed several times a day, or when the slow release of the
drug is likely to improve the efficacy and safety profile. We
believe a liposomal formulation will provide extended duration
of protection and treatment against lung infection, greater
convenience for the patient and reduced systemic levels of the
drug. The formulation may also enable better interaction of the
drug with the disease target, potentially leading to greater
efficacy. We have applied this technology to ciprofloxacin.
Intellectual
Property and Other Proprietary Rights
Our success will depend, to a significant extent, on our ability
to obtain, expand and protect our intellectual property estate,
enforce patents, maintain trade secret protection and operate
without infringing the proprietary rights of other parties. As
of February 28, 2010, we had 97 issued United States
patents, with 36 additional United States patent
applications pending. In addition, we had 102 issued foreign
patents and additional 78 foreign patent applications pending.
The bulk of our patents and patent applications contain claims
directed toward our proprietary delivery technologies, including
methods for aerosol generation, devices used to generate
aerosols, breath control, compliance monitoring, certain
pharmaceutical formulations, design of dosage forms and their
manufacturing and testing methods. In addition, we have
purchased three United States patents containing claims that are
relevant to our inhalation technologies. The bulk of our
patents, including fundamental patents directed toward our
proprietary AERx delivery technology, expire between 2013 and
2023. For certain of our formulation technologies we have
in-licensed some technology and will seek to supplement such
intellectual property rights with complementary proprietary
processes, methods and formulation technologies, including
through patent applications and trade secret protection. Because
patent positions can be highly uncertain and frequently involve
complex legal and factual questions, the breadth of claims
obtained in any application or the enforceability of our patents
cannot be predicted.
In December 2004, as part of our research and development
efforts funded by the DRDC for the development of liposomal
ciprofloxacin for the treatment of biological terrorism-related
inhalation anthrax, we obtained worldwide exclusive rights to a
patented liposomal formulation technology for the pulmonary
delivery of ciprofloxacin from Tekmira Pharmaceuticals
Corporation, formerly known as Inex Pharmaceuticals Corporation,
and may have the ability to expand the exclusive license to
other fields. We do not use Tekmiras liposomal formulation
technology and developed our own proprietary technology for our
liposomal ciprofloxacin program.
We seek to protect our proprietary position by protecting
inventions that we determine are or may be important to our
business. We do this, when we are able, through the filing of
patent applications with claims directed toward the devices,
methods and technologies we develop. Our ability to compete
effectively will depend to a significant extent on our ability
and the ability of our collaborators to obtain and enforce
patents and maintain trade secret
32
protection over our proprietary technologies. The coverage
claimed in a patent application typically is significantly
reduced before a patent is issued, either in the United States
or abroad. Consequently, any of our pending or future patent
applications may not result in the issuance of patents or, to
the extent patents have been issued or will be issued, these
patents may be subjected to further proceedings limiting their
scope and may in any event not contain claims broad enough to
provide meaningful protection. Patents that are issued to us or
our collaborators may not provide significant proprietary
protection or competitive advantage, and may be circumvented or
invalidated.
We also rely on our trade secrets and the know-how of our
officers, employees, consultants and other service providers.
Our policy is to require our officers, employees, consultants
and advisors to execute proprietary information and invention
assignment agreements upon commencement of their relationships
with us. These agreements provide that all confidential
information developed or made known to the individual during the
course of the relationship shall be kept confidential except in
specified circumstances. These agreements also provide that all
inventions developed by the individual on behalf of us shall be
assigned to us and that the individual will cooperate with us in
connection with securing patent protection for the invention if
we wish to pursue such protection. These agreements may not
provide meaningful protection for our inventions, trade secrets
or other proprietary information in the event of unauthorized
use or disclosure of such information.
We also execute confidentiality agreements with outside
collaborators and consultants. However, disputes may arise as to
the ownership of proprietary rights to the extent that outside
collaborators or consultants apply technological information
developed independently by them or others to our projects, or
apply our technology or proprietary information to other
projects, and any such disputes may not be resolved in our
favor. Even if resolved in our favor, such disputes could result
in substantial expense and diversion of management attention.
In addition to protecting our own intellectual property rights,
we must be able to develop products without infringing the
proprietary rights of other parties. Because the markets in
which we operate involve established competitors with
significant patent portfolios, including patents relating to
compositions of matter, methods of use, methods of delivery and
products in those markets, it may be difficult for us to develop
products without infringing the proprietary rights of others.
We would incur substantial costs if we are required to defend
ourselves in suits, regardless of their merit. These legal
actions could seek damages and seek to enjoin development,
testing, manufacturing and marketing of the allegedly infringing
product. In addition to potential liability for significant
damages, we could be required to obtain a license to continue to
manufacture or market the allegedly infringing product and any
license required under any such patent may not be available to
us on acceptable terms, if at all.
We may determine that litigation is necessary to enforce our
proprietary rights against others. Such litigation could result
in substantial expense and diversion of management attention,
regardless of its outcome and any litigation may not be resolved
in our favor.
Competition
We are in a highly competitive industry. We are in competition
with pharmaceutical and biotechnology companies, hospitals,
research organizations, individual scientists and nonprofit
organizations engaged in the development of drugs and other
therapies for the respiratory disease indications we are
targeting. Our competitors may succeed, and many have already
succeeded, in developing competing products, obtaining FDA
approval for products or gaining patient and physician
acceptance of products before us for the same markets and
indications that we are targeting. Many of these companies, and
large pharmaceutical companies in particular, have greater
research and development, regulatory, manufacturing, marketing,
financial and managerial resources and experience than we have
and many of these companies may have products and product
candidates that are in a more advanced stage of development than
our product candidates. If we are not first to
market for a particular indication, it may be more
difficult for us or our collaborators to enter markets unless we
can demonstrate our products are clearly superior to existing
therapies.
Examples of competitive therapies include:
|
|
|
|
|
ARD-3100 and ARD-3150. There is no product
approved in the United States specifically for the treatment of
bronchiectasis. Currently marketed inhaled antibiotics for the
management of infections associated with
|
33
|
|
|
|
|
cystic fibrosis are TOBI* marketed by Novartis and Cayston*
marketed by Gilead Sciences. Inhaled products under development
to treat respiratory infections in CF and non-CF BE include dry
powder tobramycin under development by Novartis, dry powder
ciprofloxacin by Bayer, liposomal amikacin by Transave,
levofloxacin by Mpex Pharmaceuticals and liposomal tobramycin by
Axentis. Bayer was granted orphan drug designation in the
U.S. and in the European Union for their inhaled
ciprofloxacin product in development for the treatment of
infections associated with cystic fibrosis.
|
Several of these products have substantial current sales and
long histories of effective and safe use. In addition, we
believe there are a number of additional drug candidates in
various stages of development that, if approved, could compete
with any future products we may develop. Moreover, one or more
of our competitors that have developed or are developing
pulmonary drug delivery technologies, such as Alkermes, MAP,
Mannkind or Alexza Pharmaceuticals, or other competitors with
alternative drug delivery methods, may negatively impact our
potential competitive position.
We believe that our respiratory expertise and pulmonary delivery
and formulation technologies provide us with an important
competitive advantage for our potential products. We intend to
compete by developing products that are safer, more efficacious,
more convenient, less costly, earlier to market, marketed with
smaller sales forces or cheaper to develop than existing
products, or any combination of the foregoing.
Government
Regulation
United
States
The research, development, testing, manufacturing, labeling,
advertising, promotion, distribution, marketing and export,
among other things, of any products we develop are subject to
extensive regulation by governmental authorities in the United
States and other countries. The FDA regulates drugs in the
United States under the FDCA and implementing regulations
thereunder.
If we fail to comply with the FDCA or FDA regulations, we and
our products could be subject to regulatory actions. These may
include delay in approval or refusal by the FDA to approve
pending applications, injunctions ordering us to stop sale of
any products we develop, seizure of our products, warning
letters, imposition of civil penalties or other monetary
payments, criminal prosecution, and recall of our products. Any
such events would harm our reputation and our results of
operations.
Before one of our drugs may be marketed in the United States, it
must be approved by the FDA. None of our product candidates has
received such approval. We believe that our products currently
in development will be regulated by the FDA as drugs.
The steps required before a drug may be approved for marketing
in the United States generally include:
|
|
|
|
|
preclinical laboratory and animal tests, and formulation studies;
|
|
|
|
the submission to the FDA of an Investigational New Drug
application, or IND, for human clinical testing that must become
effective before human clinical trials may begin;
|
|
|
|
adequate and well controlled human clinical trials to establish
the safety and efficacy of the product candidate for each
indication for which approval is sought;
|
|
|
|
the submission to the FDA of a New Drug Application, or NDA, and
FDAs acceptance of the NDA for filing;
|
|
|
|
satisfactory completion of an FDA inspection of the
manufacturing facilities at which the product is to be produced
to assess compliance with the FDAs Good Manufacturing
Practices, or GMP; and
|
|
|
|
FDA review and approval of the NDA.
|
Preclinical
Testing
The testing and approval process requires substantial time,
effort, and financial resources, and the receipt and timing of
approval, if any, is highly uncertain. Preclinical tests include
laboratory evaluations of product chemistry, toxicity, and
formulation, as well as animal studies. The results of the
preclinical studies, together with
34
manufacturing information and analytical data, are submitted to
the FDA as part of the IND. The IND automatically becomes
effective 30 days after receipt by the FDA, unless the FDA
raises concerns or questions about the conduct of the proposed
clinical trials as outlined in the IND prior to that time. In
such a case, the IND sponsor and the FDA must resolve any
outstanding FDA concerns or questions before clinical trials can
proceed. Submission of an IND may not result in FDA
authorization to commence clinical trials. Once an IND is in
effect, the protocol for each clinical trial to be conducted
under the IND must be submitted to the FDA, which may or may not
allow the trial to proceed.
In July 2009, we received clearance from the FDA for our IND for
inhaled liposomal ciprofloxacin for the treatment of non-cystic
fibrosis bronchiectasis. In May 2010, we received clearance
from the FDA for our IND for inhaled liposomal ciprofloxacin for
the treatment of cystic fibrosis.
Clinical
Trials
Clinical trials involve the administration of the
investigational drug to human subjects under the supervision of
qualified investigators and healthcare personnel. Clinical
trials are conducted under protocols detailing, for example, the
parameters to be used in monitoring patient safety and the
safety and effectiveness criteria, or end points, to be
evaluated. Clinical trials are typically conducted in three
defined phases, but the phases may overlap or be combined. Each
trial must be reviewed and approved by an independent
institutional review board overseeing the institution conducting
the trial before it can begin.
These phases generally include the following:
|
|
|
|
|
Phase 1. Phase 1 clinical trials usually
involve the initial introduction of the drug into human
subjects, frequently healthy volunteers. In Phase 1, the drug is
usually evaluated for safety, including adverse effects, dosage
tolerance, absorption, distribution, metabolism, excretion and
pharmacodynamics.
|
|
|
|
Phase 2. Phase 2 usually involves studies in a
limited patient population with the disease or condition for
which the drug is being developed to (1) preliminarily
evaluate the efficacy of the drug for specific, targeted
indications; (2) determine dosage tolerance and appropriate
dosage; and (3) identify possible adverse effects and
safety risks.
|
|
|
|
Phase 3. If a drug is found to be potentially
effective and to have an acceptable safety profile in Phase 2
studies, the clinical trial program will be expanded, usually to
further evaluate clinical efficacy and safety by administering
the drug in its final form to an expanded patient population at
geographically dispersed clinical trial sites. Phase 3 studies
usually include several hundred to several thousand patients.
|
In November 2009, the first patient was dosed in the ORBIT-2
(Once-daily Respiratory Bronchiectasis Inhalation Treatment)
trial, a
6-month,
multicenter, international Phase 2b clinical trial of inhaled
ciprofloxacin (ARD-3150) in 40 adult patients with non-cystic
fibrosis bronchiectasis.
In February 2010, the first patient was dosed in the
U.S. as part of the ORBIT-1 trial, an international,
randomized, double-blind, placebo-controlled Phase 2b study
designed to evaluate inhaled liposomal ciprofloxacin (ARD-3100)
in 96 patients with non-cystic fibrosis bronchiectasis
under a U.S. IND.
Phase 1, Phase 2, or Phase 3 clinical trials may not be
completed successfully within any specified period of time, if
at all. Further, we or the FDA may suspend clinical trials at
any time on various grounds, including a finding that the
patients are being exposed to an unacceptable health risk.
Assuming successful completion of the required clinical testing,
the results of preclinical studies and clinical trials, together
with detailed information on the manufacture and composition of
the product, are submitted to the FDA in the form of an NDA
requesting approval to market the product for one or more
indications. Before approving an application, the FDA usually
will inspect the facility or facilities at which the product is
manufactured, and will not approve the product unless continuing
GMP compliance is satisfactory. If the FDA determines the NDA is
not acceptable, the FDA may outline the deficiencies in the NDA
and often will request additional information or additional
clinical trials. Notwithstanding the submission of any requested
additional testing or information, the FDA ultimately may decide
that the application does not satisfy the regulatory criteria
for approval.
35
If regulatory approval of a product is granted, such approval
will usually entail limitations on the indicated uses for which
the product may be marketed. Once approved, the FDA may withdraw
the product approval if compliance with pre- and post-marketing
regulatory requirements and conditions of approvals are not
maintained, if GMP compliance is not maintained or if problems
occur after the product reaches the marketplace. In addition,
the FDA may require post-marketing studies, referred to as Phase
4 studies, to monitor the effect of approved products and may
limit further marketing of the product based on the results of
these post-marketing studies.
After approval, certain changes to the approved product, such as
adding new indications, certain manufacturing changes, or
additional labeling claims are subject to further FDA review and
approval. Post-approval marketing of products can lead to new
findings about the safety or efficacy of the products. This
information can lead to a product sponsor making, or the FDA
requiring, changes in the labeling of the product or even the
withdrawal of the product from the market.
Section 505(b)(2)
Applications
Some of our product candidates may be eligible for submission of
applications for approval under the FDAs
Section 505(b)(2) approval process, which requires less
information than the NDAs described above.
Section 505(b)(2) applications may be submitted for drug
products that represent a modification (e.g., a new
indication or new dosage form) of an eligible approved drug and
for which investigations other than bioavailability or
bioequivalence studies are essential to the drugs
approval. Section 505(b)(2) applications may rely on the
FDAs previous findings for the safety and effectiveness of
the listed drug, scientific literature, and information obtained
by the 505(b)(2) applicant needed to support the modification of
the listed drug. For this reason, preparing
Section 505(b)(2) applications is generally less costly and
time-consuming than preparing an NDA based entirely on new data
and information from a full set of clinical trials. The law
governing Section 505(b)(2) or FDAs current policies
may change in such a way as to adversely affect our applications
for approval that seek to utilize the Section 505(b)(2)
approach. Such changes could result in additional costs
associated with additional studies or clinical trials and delays.
The FDCA provides that reviews
and/or
approvals of applications submitted under Section 505(b)(2)
may be delayed in various circumstances. For example, the holder
of the NDA for the listed drug may be entitled to a period of
market exclusivity, during which the FDA will not approve, and
may not even review a Section 505(b)(2) application from
other sponsors. If the listed drug is claimed by a patent that
the NDA holder has listed with the FDA, the
Section 505(b)(2) applicant must submit a patent
certification. If the 505(b)(2) applicant certifies that the
patent is invalid, unenforceable, or not infringed by the
product that is the subject of the Section 505(b)(2), and
the 505(b)(2) applicant is sued within 45 days of its
notice to the entity that holds the approval for the listed drug
and the patent holder, the FDA will not approve the
Section 505(b)(2) application until the earlier of a court
decision favorable to the Section 505(b)(2) applicant or
the expiration of 30 months. The regulations governing
marketing exclusivity and patent protection are complex, and it
is often unclear how they will be applied in particular
circumstances.
In addition, both before and after approval is sought, we are
required to comply with a number of FDA requirements. For
example, we are required to report certain adverse reactions and
production problems, if any, to the FDA, and to comply with
certain limitations and other requirements concerning
advertising and promotion for our products. Also, quality
control and manufacturing procedures must continue to conform to
continuing GMP after approval, and the FDA periodically inspects
manufacturing facilities to assess compliance with continuing
GMP. In addition, discovery of problems, such as safety
problems, may result in changes in labeling or restrictions on a
product manufacturer or NDA holder, including removal of the
product from the market.
Orphan
Drug Designation
The FDA may grant orphan drug designation to drugs intended to
treat a rare disease or condition which generally is
a disease or condition that affects fewer than 200,000
individuals in the United States. A sponsor may request orphan
drug designation of a previously unapproved drug, or of a new
indication for an already marketed drug. Orphan drug designation
must be requested before an NDA is submitted. If the FDA grants
orphan drug designation, which it may not, the identity of the
therapeutic agent and its potential orphan status are publicly
36
disclosed by the FDA. Orphan drug designation does not convey an
advantage in, or shorten the duration of, the review and
approval process. If a drug which has orphan drug designation
subsequently receives the first FDA approval for the indication
for which it has such designation, the drug is entitled to
orphan drug exclusivity, meaning that the FDA may not approve
any other applications to market the same drug for the same
indication for a period of seven years, unless the subsequent
application is able to demonstrate clinical superiority in
efficacy or safety. Orphan drug designation does not prevent
competitors from developing or marketing different drugs for
that indication, or the same drug for other indications.
We have obtained orphan drug designation from the FDA for
inhaled liposomal ciprofloxacin for the management of cystic
fibrosis and non-cystic fibrosis bronchiectasis. We may seek
orphan drug designation for other eligible product candidates we
develop. However, our liposomal ciprofloxacin may not receive
orphan drug marketing exclusivity. Also, it is possible that our
competitors could obtain approval, and attendant orphan drug
designation or exclusivity, for products that would preclude us
from marketing our liposomal ciprofloxacin for this indication
for some time.
Foreign regulatory authorities may also provide for orphan drug
designations in countries outside the United States. For
example, under European guidelines, Orphan Medicinal Product
Designation provides 10 years of potential market
exclusivity if the product candidate is the first product
candidate for the indication approved for marketing in the
European Union. Orphan drug designation also allows the
candidates sponsor to seek assistance from the European
Medicines Agency (EMEA) in optimizing the candidates
clinical development through participation in designing the
clinical protocol and preparing the marketing application.
Additionally, a drug candidate designated by the Commission as
an Orphan Medicinal Product may qualify for a reduction in
regulatory fees as well as a European Union-funded research
grant.
In August 2009, the EMEA granted Orphan Drug Designation to our
inhaled liposomal ciprofloxacin drug product candidate for the
treatment of lung infections associated with cystic fibrosis.
International
Regulation
We are also subject to foreign regulatory requirements governing
clinical trials, product manufacturing, marketing and product
sales. Our ability to market and sell our products in countries
outside the United States will depend upon receiving marketing
authorization(s) from appropriate regulatory authorities. We
will only be permitted to commercialize our products in a
foreign country if the appropriate regulatory authority is
satisfied that we have presented adequate evidence of safety,
quality and efficacy. Whether or not FDA approval has been
obtained, approval of a product by the comparable regulatory
authorities of foreign countries must be obtained prior to the
commencement of marketing of the product in those countries.
Approval of a product by the FDA does not assure approval by
foreign regulators. Regulatory requirements, and the approval
process, vary widely from country to country, and the time, cost
and data needed to secure approval may be longer or shorter than
that required for FDA approval. The regulatory approval and
oversight process in other countries includes all of the risks
associated with the FDA process described above.
Scientific
Advisory Board
We have assembled a scientific advisory board comprised of
scientific and product development advisors who provide
expertise, on a consulting basis from time to time, in the areas
of respiratory diseases, allergy and immunology, pharmaceutical
development and drug delivery, including pulmonary delivery, but
are employed elsewhere on a full-time basis. As a result, they
can only spend a limited amount of time on our affairs. We
access scientific and medical experts in academia, as needed, to
support our scientific advisory board. The scientific
37
advisory board assists us on issues related to potential product
applications, product development and clinical testing. Its
members, and their affiliations and areas of expertise, include:
|
|
|
|
|
Name
|
|
Affiliation
|
|
Area of Expertise
|
|
Peter R. Byron, Ph.D.
|
|
Medical College of Virginia, Virginia Commonwealth University
|
|
Aerosol Science/Pharmaceutics
|
Peter S. Creticos, M.D.
|
|
The Johns Hopkins University School of Medicine
|
|
Allergy/Immunology/Asthma
|
Stephen J. Farr, Ph.D.
|
|
Zogenix, Inc.
|
|
Pulmonary Delivery/Pharmaceutics
|
Michael Konstan, M.D.
|
|
Rainbow Babies and Childrens Hospital
|
|
Pulmonary Diseases/Cystic Fibrosis
|
Babatunde Otulana, M.D.
|
|
Aerovance, Inc.
|
|
Pulmonary Diseases/Cystic Fibrosis/Regulatory
|
Adam Wanner, M.D.
|
|
University of Miami
|
|
Chronic Obstructive Pulmonary Diseases (COPD)
|
Martin Wasserman, Ph.D.
|
|
Roche, AtheroGenics (retired)
|
|
Asthma
|
In addition to our scientific advisory board, for certain
indications and programs we assemble groups of experts to assist
us on issues specific to such indications and programs.
Employees
As of December 31, 2009, we had fifteen employees. Ten
employees are involved in research and development and product
development and five employees are involved in finance and
administration. Five employees have advanced scientific degrees.
Our employees are not represented by any collective bargaining
agreement.
We also utilize an international network of consultants and
contractors, such as clinical research organizations (CROs),
clinical manufacturing organizations (CMOs) and various
specialists in areas, such as regulatory affairs and business
and corporate development.
Corporate
History and Website Information
We were incorporated in California in 1991. Our principal
executive offices are located at 3929 Point Eden Way, Hayward,
California 94545, and our main telephone number is
(510) 265-9000.
Investors can obtain access to our Annual Reports on
Form 10-K,
our Quarterly Reports on
Form 10-Q,
our Current Reports on
Form 8-K
and all amendments to these reports, free of charge, on our
website at
http://www.aradigm.com
as soon as reasonably practicable after such filings are
electronically filed with the Securities and Exchange Commission
or SEC. Information contained on our website is not part of this
prospectus or of our other filings with the SEC. The public may
read and copy any material we file with the SEC at the
SECs Public Reference Room at 100 F Street,
N.W., Washington, D.C., 20549. The public may obtain
information on the operations of the Public Reference Room by
calling the SEC at
1-800-SEC-0330.
The SEC maintains an Internet site,
http://www.sec.gov
that contains reports, proxy and information statements and
other information regarding issuers that file electronically
with the SEC.
We have adopted a code of ethics, which is part of our Code of
Business Conduct and Ethics that applies to all of our
employees, including our principal executive officer, our
principal financial officer and our principal accounting
officer. This code of ethics is posted on our website. If we
amend or waive a provision of our Code of Business Conduct and
Ethics, we would post such amendment or waiver on our website,
as required by applicable rules.
38
Legal
Proceedings
Arbitration
Proceedings against Lung Rx, Inc.
On June 1, 2009, we received a written notice from United
Therapeutics Corporation (United) terminating the
Exclusive License, Development and Commercialization Agreement,
dated August 30, 2007 (the Lung Rx Agreement),
between us and Lung Rx, Inc., a wholly-owned subsidiary of
United (Lung Rx), effective July 1, 2009. Lung
Rx did not assert the existence of any technical problems with
our AERx technology or any safety or efficacy concerns.
We believe that Lung Rx was not entitled to terminate the Lung
Rx Agreement. Accordingly, on September 14, 2009, we had
commenced non-binding arbitration proceedings against Lung Rx
before the American Arbitration Association, alleging breach by
Lung Rx of the Lung Rx Agreement and seeking a license fee,
milestone payments, royalties, development costs and expenses,
and attorneys fees from Lung Rx.
In June 2010, a panel of arbitrators dismissed the arbitration
proceedings on procedural grounds. We continue to review our
options and may elect to pursue litigation in this matter in the
future.
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive
Officers and Directors
Our directors and executive officers and their ages as of the
date of this prospectus are as follows:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Igor Gonda, Ph.D.
|
|
|
62
|
|
|
President, Chief Executive Officer and Director
|
Nancy E. Pecota
|
|
|
50
|
|
|
Vice President, Finance and Chief Financial Officer
|
Frank H. Barker(1)(2)(3)
|
|
|
79
|
|
|
Director
|
John M. Siebert, Ph.D.(1)(2)(3)
|
|
|
70
|
|
|
Director
|
Virgil D. Thompson(1)(2)(3)
|
|
|
70
|
|
|
Chairman of the Board and Director
|
|
|
|
(1) |
|
Member of the Audit Committee. |
|
(2) |
|
Member of the Compensation Committee. |
|
(3) |
|
Member of the Nominating and Corporate Governance Committee. |
Igor Gonda, Ph.D. has served as our President and
Chief Executive Officer since August 2006 and as a director
since September 2001. From December 2001 to August 2006,
Dr. Gonda was the Chief Executive Officer and Managing
Director of Acrux Limited, a publicly traded specialty
pharmaceutical company located in Melbourne, Australia. From
July 2001 to December 2001, Dr. Gonda was our Chief
Scientific Officer and, from October 1995 to July 2001, was our
Vice President, Research and Development. From February 1992 to
September 1995, Dr. Gonda was a Senior Scientist and Group
Leader at Genentech, Inc. His key responsibilities at Genentech
were the development of the inhalation delivery of rhDNase
(Pulmozyme) for the treatment of cystic fibrosis and
non-parenteral methods of delivery of biologics. Prior to that,
Dr. Gonda held academic positions at the University of
Aston in Birmingham, United Kingdom, and the University of
Sydney, Australia. Dr. Gonda holds a B.Sc. in Chemistry and
a Ph.D. in Physical Chemistry from Leeds University, United
Kingdom. Dr. Gonda was the Chairman of our Scientific
Advisory Board until August 2006.
Nancy E. Pecota has served as our Vice President, Finance
and Chief Financial Officer since September 2008. From October
2005 to July 2008, Ms. Pecota was the Chief Financial
Officer for NuGEN Technologies, Inc., a privately held life
sciences tools company. From August 2003 to September 2005,
Ms. Pecota was a consultant for early to mid-stage
biopharmaceutical companies assisting them in developing
fundable business models and assessing and improving internal
financial preparation and reporting processes. From March 2001
to April 2003, she was Vice President, Finance and
Administration at Signature BioScience, Inc., a privately held
biopharmaceutical company. Prior to that, she was Director,
Finance and Accounting for ACLARA BioSciences, Inc., a publicly
traded biotechnology company. Ms. Pecota holds a B.S. in
Economics from San Jose State University.
39
Frank H. Barker has been a director since May 1999. From
January 1980 to January 1994, Mr. Barker served as a
company group chairman of Johnson & Johnson, Inc., a
diversified health care company, and was Corporate Vice
President from January 1989 to January 1996. Mr. Barker
retired from Johnson & Johnson, Inc. in January 1996.
Mr. Barker holds a B.A. in Business Administration from
Rollins College, Winter Park, Florida.
John M. Siebert, Ph.D. has been a director since
November 2006. From May 2003 to October 2008, Dr. Siebert
was the Chairman and Chief Executive Officer of CyDex, Inc., a
privately held specialty pharmaceutical company. From September
1995 to April 2003, he was President and Chief Executive Officer
of CIMA Labs Inc., a publicly traded drug delivery company, and
from July 1995 to September 1995 he was President and Chief
Operating Officer of CIMA Labs. From 1992 to 1995,
Dr. Siebert was Vice President, Technical Affairs at Dey
Laboratories, Inc., a privately held pharmaceutical company.
From 1988 to 1992, he worked at Bayer Corporation. Prior to
that, Dr. Siebert was employed by E.R. Squibb &
Sons, Inc., G.D. Searle & Co. and The
Procter & Gamble Company. Dr Siebert holds a B.S.
in Chemistry from Illinois Benedictine University, an M.S. in
Organic Chemistry from Wichita State University and a Ph.D. in
Organic Chemistry from the University of Missouri.
Dr. Siebert is the Chairman of our audit committee and the
designated audit committee financial expert.
Virgil D. Thompson has been a director since June 1995
and has been Chairman of the Board since January 2005. Since
July 2009, Mr. Thompson has been Chief Executive Officer
and a director of Spinnaker Biosciences, Inc., a privately held
ophthalmic drug delivery company. From November 2002 until June
2007, Mr. Thompson served as President and Chief Executive
Officer of Angstrom Pharmaceuticals, Inc., a privately held
pharmaceutical company. From September 2000 to November 2002,
Mr. Thompson was President, Chief Executive Officer and a
director of Chimeric Therapies, Inc., a privately held
biotechnology company. From May 1999 until September 2000,
Mr. Thompson was the President, Chief Operating Officer and
a director of Savient Pharmaceuticals, a publicly traded
specialty pharmaceutical company. From January 1996 to April
1999, Mr. Thompson was the President and Chief Executive
Officer and a director of Cytel Corporation, a publicly traded
biopharmaceutical company that was subsequently acquired by IDM
Pharma, Inc. From 1994 to 1996, Mr. Thompson was President
and Chief Executive Officer of Cibus Pharmaceuticals, Inc., a
privately held drug delivery device company. From 1991 to 1993,
Mr. Thompson was President of Syntex Laboratories, Inc., a
U.S. subsidiary of Syntex Corporation, a publicly traded
pharmaceutical company. Mr. Thompson holds a B.S. in
Pharmacy from Kansas University and a J.D. from The George
Washington University Law School. Mr. Thompson is a
director and chairman of the board of Questcor Pharmaceuticals,
Inc., a publicly traded pharmaceutical company, and a director
of Savient Pharmaceuticals.
Independence
of the Board of Directors
We have chosen to apply the listing standards of the Nasdaq in
determining the independence of our directors. The Board
consults with counsel to ensure that the Boards
determinations are consistent with all relevant securities and
other laws and regulations regarding the definition of
independent, including those set forth in pertinent
listing standards of the Nasdaq, as in effect from time to time.
Consistent with these considerations, after review of all
relevant transactions or relationships between each director and
nominee for director, or any of his family members, and us, our
senior management and our independent registered public
accounting firm, the Board affirmatively has determined that the
following three directors and nominees for directors are
independent within the meaning of the applicable Nasdaq listing
standards: Mr. Barker, Dr. Siebert, and
Mr. Thompson. In making this determination, the Board found
that none of these directors or nominees for director had a
material or disqualifying relationship with the Company.
Dr. Gonda, our President and Chief Executive Officer, is
not an independent director within the meaning of the applicable
Nasdaq standards by virtue of his employment with Aradigm. In
addition, each person who served as a director for any portion
of 2009 was independent within the meaning of the applicable
Nasdaq listing standards, except for Dr. Gonda.
Code of
Ethics
We have adopted the Aradigm Corporation Code of Business Conduct
and Ethics that applies to all of our officers, directors and
employees. The Code of Business Conduct and Ethics is available
on our website at
40
www.aradigm.com. If we make any substantive amendments to the
Code of Business Conduct and Ethics or grant any waiver from a
provision of the Code to any executive officer or director, we
will promptly disclose the nature of the amendment or waiver on
our website.
COMPENSATION
The policies of the Compensation Committee, or the Committee,
with respect to the compensation of executive officers,
including the Chief Executive Officer, or CEO, are designed to
provide compensation sufficient to attract, motivate and retain
executives of outstanding ability and potential and to establish
an appropriate relationship between executive compensation and
the creation of shareholder value. To meet these goals, the
Committee recommends executive compensation packages to our
Board of Directors that are based on a mix of salary, bonus and
equity awards.
Overall, the Board and the Committee seek to provide total
compensation packages that are competitive in terms of total
potential value to our executives, and that are tailored to the
unique characteristics of our Company in order to create an
executive compensation program that will adequately reward our
executives for their roles in creating value for our
shareholders. The Board and the Committee intend to provide
executive compensation packages that are competitive with other
similarly situated companies in our industry. Historically, the
Board and the Committee generally weighted executives
compensation packages more heavily in favor of equity-based
compensation versus salary, as they believe performance and
equity-based compensation is important to maintain a strong link
between executive incentives and the creation of shareholder
value. The Board and the Committee believe that performance and
equity-based compensation are the most important component of
the total executive compensation package for maximizing
shareholder value while, at the same time, attracting,
motivating and retaining high-quality executives. For 2009, the
Board and the Committee continued their emphasis on equity-based
compensation. Given the Companys current financial
situation and market capitalization, the state of the equity
markets and the Companys proposed business plan, the Board
and the Committee viewed the Company as somewhat analogous to a
start-up
company and believed that a focus on equity-based compensation
was even more important as a tool to motivate the Companys
executive officers.
The Board and the Committee have reviewed this Compensation
Discussion and Analysis with the Companys management.
Benchmarking
of Compensation Practices
The Board and the Committee believe it is important when making
compensation-related decisions to be informed as to current
practices of similarly situated publicly held companies in the
life sciences industry. In late 2008, given the Board and
Committees focus on equity-based compensation, the Board
and the Committee retained a consultant to review equity-based
compensation of executives in the biotechnology industry. The
consultant prepared a study reviewing the equity-based
compensation practices of 120 publicly held small-to-medium size
biotechnology companies. In addition to this benchmarking study,
the Board and the Committee take into account input from other
sources, including past benchmarking studies, and publicly
available data relating to the compensation practices and
policies of other companies within and outside of our industry.
Benchmarking studies were used primarily in making compensation
decisions for Dr. Igor Gonda, our President and Chief
Executive Officer, Ms. Nancy Pecota, our Vice President,
Finance and Chief Financial Officer, and Mr. D. Jeffery
Grimes, our former Vice President, Legal Affairs, General
Counsel & Corporate Secretary, whose employment was
terminated effective June 18, 2010. Given the
Companys operating performance and continued need for
capital, in 2010 the Board and the Committee retained total cash
compensation for these three executive officers at the same
level as paid in 2009. Based on the Board and Committees
last annual review of total cash compensation, the Board and
Committee believe these salaries are substantially equivalent to
the median cash compensation paid by comparable companies in the
life sciences industry. Consistent with the Boards and the
Committees greater emphasis on equity-based compensation,
in 2009 they sought to establish equity compensation for these
three executive officers at a level approximately equal to the
equity-based compensation paid at the
75th percentile
of comparable companies in the life sciences industry, based on
the survey conducted in late 2008.
41
While benchmarking may not always be appropriate as a
stand-alone tool for setting compensation due to the aspects of
our business and objectives that may be unique to us, the Board
and the Committee generally believe that gathering this
information is an important part of their compensation-related
decision-making process.
The Committee has in the past retained and may in the future
retain the services of third-party executive compensation
specialists, as the Committee sees fit, in connection with the
establishment of compensation and related policies. The
Committee did not retain the services of third-party executive
compensation specialists for establishing 2010 compensation and
related policies as these services are costly and the Company is
focused on conserving cash.
Compensation
Components
Base Salary. Generally, the Board and the
Committee believe that executive base salaries should be set
near the median of the range of salaries for executives in
similar positions and with similar responsibilities at
comparable companies. The Board and the Committee believe that
maintaining base salary amounts at or near the industry median
minimizes competitive disadvantage while conserving the
Companys cash resources and avoiding paying amounts in
excess of what they believe to be necessary to motivate
executives to meet corporate goals. Base salaries are typically
reviewed annually. In the past, management has presented the
Committee with its initial recommendations for executive salary
levels and the Committee and Board have determined whether to
adjust these base salary recommendations to realign such
salaries with median market levels after taking into account
individual responsibilities, performance, experience as well as
the benchmarking data reviewed by the Committee.
For 2009, the Board, upon recommendation of the Committee,
established base salaries for Dr. Gonda, Ms. Pecota
and Mr. Grimes of $380,000, $238,000 and $230,000,
respectively. For 2010, management recommended to the Board and
Committee that base salaries for Dr. Gonda, Ms. Pecota
and Mr. Grimes be retained at their 2009 levels. Given the
Companys financial position, management felt, and the
Board agreed, that an increase in base salary for 2010 was not
appropriate.
Annual
Executive Bonus Plan.
In addition to base salaries, the Board and the Committee
believe that performance-based cash bonuses can play an
important role in providing incentives to our executives to
achieve defined annual corporate goals. Prior to or near the
beginning of each year, the Board, upon the recommendation of
the Committee, reviews the target bonus amount (defined as a set
percentage of base salary) for each executive. The target bonus
amount is set at a level that, upon achievement of 100% of the
target goals, will result in bonus payments that the Board and
the Committee believe to be at or near the median level for
target bonus amounts for comparable companies included in the
benchmark studies and that, upon achievement beyond the target
goals, can result in bonuses of up to 150% of the target bonus
amount.
The Committee also reviews a detailed set of overall corporate
performance goals (target goals) prepared by management that are
intended to apply to the executives bonus awards and, with
some distinctions, to the bonus awards for all of our other
employees. The Committee then works with management to develop
final corporate performance goals that are set at a level the
Committee believes management can achieve over the next year.
For each individual corporate goal, the Committee establishes
relative weights and then sets target performance for
Level 1 satisfaction (50% of target payout for that goal),
Level 2 satisfaction (100% of target payout for that goal)
and Level 3 satisfaction (150% of target payout for that
goal) of the corporate goal, with the attainment of each
specified level of performance tied to a specific percentage
payout of the target bonus amount for that goal. The relative
weights for each individual corporate goal may be changed by the
Board during the year as a result of external and internal
events and their impact upon the Company.
The goals are designed to lead to results that will maximize
shareholder value. For example, at the start of 2008, the Board
and Committee determined that the ARD-3100/3150 program (i.e.,
the Companys liposomal ciprofloxacin programs for the
treatment of infections in patients with cystic fibrosis and
bronchiectasis) and would likely drive the Companys value
in 2008 and 2009, and so in those years they weighted the goal
related to development of the ARD-3100/3150 program higher than
the other operational performance goals.
42
At the end of each year, the Board, upon the recommendation of
the Committee, determines the level of achievement for each
corporate goal, on a goal by goal basis, and awards credit for
the achievement of goals as a percentage of the target bonus.
Final determinations as to bonus levels are then based on the
achievement of these corporate goals, which are the same for all
executives, as well as the Boards and the Committees
assessment as to the overall success of the Company and the
development of the business.
Actual bonuses are targeted to be paid to the executives at the
end of each fiscal year and may be above or below target bonus
levels, at the discretion of the Board. While the Board and
Committee retain full discretion as to the amount, if any, of
bonus compensation paid to executives, the Committee strives to
develop corporate goals that are objective and reliably
measurable to deemphasize the need for subjective discretion.
The Board and Committee strive to limit their discretionary
authority to unusual circumstances.
Bonus payments under the annual bonus plan are contingent on
continued employment with the Company at the end of the year.
In January 2009, the Board and Committee determined the
executive team had satisfied corporate goals to a level that
would have entitled them to a payout of 60% of their target
bonus amounts. Management recommended to the Board and Committee
not to pay the executives a bonus for 2008. Management felt, and
the Board agreed, that given the Companys cash position,
the recent reduction in force and the current economic climate,
a bonus was not appropriate.
In January 2009, the Board, upon recommendation of the
Committee, established 2009 target bonus awards (as a percentage
of base salary) of 50% for Dr. Gonda and 40% for
Ms. Pecota and Mr. Grimes. For 2009, the Committee
determined the specific corporate performance goals to be
achieved for the executives bonus awards to be earned,
with a continued emphasis on the development of the
ARD-3100/3150 program.
In January 2010, the Board and Committee determined the
executive team had satisfied corporate goals to a level that
would have entitled them to a payout of 30% of their target
bonus amounts. Management recommended to the Board and Committee
not to pay the executives a bonus for 2009. Management felt, and
the Board agreed, that given the Companys cash position
and the current economic climate, a bonus was not appropriate.
In January 2010, the Board, upon recommendation of the
Committee, revised the Executive Bonus Plan to convert it from
an annual performance evaluation period to a multi-year
performance evaluation period. The Board established, upon
recommendation of the Committee, performance objectives that are
not dependent upon the objective being achieved within a fixed
time period, in order to incentivize the executives to focus on
the achievement of longer term goals that could be significant
value creation events for our shareholders. The objectives focus
on raising non-dilutive capital for the Company, partnering the
Companys programs and advancing the ARD-3100/3150 program.
The bonus will be paid upon achievement of the objective and
will be in the form of cash
and/or
restricted stock. In general, if the achievement of the
objective results in the receipt of cash by the Company then the
bonus will be paid in cash; if the achievement of the objective
is of strategic importance to the Company but does not generate
cash then the bonus will be paid in the form of restricted stock.
Actual bonus awards for 2010 will be determined as the
objectives are achieved and may be above or below the target
bonus levels, at the discretion of the Board and the Committee.
Equity Awards. The Board and the Committee
believe that providing a significant portion of our
executives total compensation package in stock options and
restricted stock awards aligns the incentives of our executives
with the interests of our shareholders and with our long-term
success. The Board and the Committee develop their equity award
determinations based on their judgments as to whether the
complete compensation packages provided to our executives,
including prior equity awards, are sufficient to retain,
motivate and adequately award the executives. As discussed
above, the primary component of this judgment is based on
information provided by benchmarking studies. The Board and the
Committee seek to establish equity compensation for our three
executive officers at a level approximately equal to the
equity-based compensation paid at the 75th percentile of
the companies in the surveys. Initial equity award grants are
proposed to the Committee by management and the Board and the
Committee then work with management to ensure the award grants
are at a level the Board and the Committee feel are appropriate.
43
We grant equity awards through our 2005 Equity Incentive Plan,
which was adopted by our Board and shareholders to permit the
grant of stock options, stock appreciation rights, restricted
shares, restricted stock units, performance shares and other
stock-based awards to our officers, directors, scientific
advisory board members, employees and consultants. All of our
employees, directors, scientific advisory board members and
consultants are eligible to participate in the 2005 Equity
Incentive Plan. The material terms of the 2005 Equity Incentive
Plan are further described in Proposal 2 of these proxy
materials. All options we grant have an exercise price equal to
the fair market value of our common stock on the date of grant.
For 2009, the Board and Committee decided to grant equity awards
as a combination of stock options and restricted stock awards.
The stock options vest quarterly over four years and the
restricted stock awards vest annually over two years. The awards
were allocated with roughly two-thirds of the target grant
amount as stock options and one-third of the target grant amount
as restricted stock. However, the Board and Committee determined
that the restricted stock awards have a higher value to the
executives, and as a rough approximation of the difference in
value the Board and Committee valued a restricted stock award
for one share as three times the value of a stock option for one
share. Accordingly, if the Board and Committee had determined to
grant an executive an award with a value equivalent to an option
of 100,000 shares of our stock, the actual allocation of
the award between stock options and restricted stock would have
resulted in the grant of a stock option of about
67,000 shares and a restricted stock award of about
11,000 shares.
In July 2009, the Committee granted Dr. Gonda,
Ms. Pecota and Mr. Grimes restricted stock awards for
600,000, 200,000 and 200,000 shares of our common stock,
respectively. These grants vest 100% on August 1, 2010. In
addition, Dr. Gonda was granted two awards of
200,000 shares each, which will vest upon achievement of
certain objectives related to the ARD-3100 program. The
Committee felt that the 2009 equity awards were necessary to
bring our executives equity compensation levels to a level
the Committee believes is necessary to retain a talented and
capable management team during a critical time period for the
ARD-3100 program.
The Committee anticipates making future equity award grants to
executives annually, subject to its discretion. The Committee
believes this award structure is consistent with our executive
compensation policies.
Severance Benefits. The Board, upon
recommendation of the Committee, previously adopted an Amended
and Restated Executive Officer Severance Plan, dated as of
December 31, 2008, and approved change of control
agreements with each of our executive officers, the terms of
which are more fully described below in the section entitled
Potential Payments Upon Termination or Change in
Control. The Board and the Committee believe these
severance and change in control benefits are an essential
element of our executive compensation package and assist us in
recruiting and retaining talented individuals. Our business is
inherently risky and the Board and the Committee believe the
severance benefits encourage our executives to take necessary
but reasonable business risks to increase shareholder value. The
Board and the Committee believe the change of control benefits
align our executives interests more greatly in favor of
corporate liquidity events that can be potentially valuable to
our shareholders. They have established these severance and
change of control benefits at levels that they feel are
comparable to benefits offered to executives in similar
positions and with similar responsibilities at comparable
companies.
Other Compensation. All of our executives are
eligible to participate in our employee benefit plans, including
medical, dental, life insurance and 401(k) plans. These plans
are available to all employees and do not discriminate in favor
of executive officers. It is generally our policy to not extend
significant perquisites to our executives that are not available
to our employees generally. We have no current plans to make
changes to levels of benefits and perquisites provided to
executives.
Summary
Compensation Table
The following table sets forth information regarding
compensation earned in 2009 and 2008 by the individual serving
as our principal executive officer during 2009 and our two most
highly compensated executive officers
44
(other than our principal executive officer) who were serving as
executive officers at the end of 2009 (these individuals are
collectively referred to as our named executive
officers):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
Option
|
|
Incentive Plan
|
|
All Other
|
|
|
|
|
|
|
Salary
|
|
Bonus
|
|
Awards(1)
|
|
Awards(1)
|
|
Compensation
|
|
Compensation
|
|
Total
|
|
|
Year
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
Igor Gonda, PhD
|
|
|
2009
|
|
|
|
380,000
|
|
|
|
|
|
|
|
172,000
|
|
|
|
52,675
|
|
|
|
|
|
|
|
30,578
|
|
|
|
635,253
|
|
President and Chief
|
|
|
2008
|
|
|
|
380,000
|
|
|
|
|
|
|
|
53,002
|
|
|
|
266,197
|
|
|
|
|
|
|
|
25,101
|
|
|
|
724,300
|
|
Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nancy Pecota(2)
|
|
|
2009
|
|
|
|
238,000
|
|
|
|
|
|
|
|
46,750
|
|
|
|
30,100
|
|
|
|
|
|
|
|
4,750
|
|
|
|
319,600
|
|
Vice President, Finance
|
|
|
2008
|
|
|
|
66,823
|
|
|
|
|
|
|
|
|
|
|
|
2,472
|
|
|
|
|
|
|
|
1,760
|
|
|
|
71,055
|
|
and Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D. Jeffery Grimes(3)
|
|
|
2009
|
|
|
|
230,000
|
|
|
|
|
|
|
|
46,750
|
|
|
|
30,100
|
|
|
|
|
|
|
|
14,741
|
|
|
|
321,591
|
|
Vice President, Legal
|
|
|
2008
|
|
|
|
226,716
|
|
|
|
|
|
|
|
15,464
|
|
|
|
18,358
|
|
|
|
|
|
|
|
15,233
|
|
|
|
275,771
|
|
Affairs, General Counsel and Corporate Secretary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For 2009, amounts represent the grant date fair value of awards
and options that were issued in 2009. For 2008, the amounts
represent the expense recorded for financial reporting purposes.
See Note 7 of the financial statements included in our
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2008 for methods and
assumptions that were used to calculate expense amounts. |
|
(2) |
|
Ms. Pecota was appointed as an officer on
September 22, 2008. |
|
(3) |
|
Mr. Grimes was appointed as an officer on July 1, 2008
and his employment was terminated effective June 18, 2010. |
All Other Compensation in the summary compensation table above
includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
|
|
|
|
|
|
|
|
|
Life
|
|
401(k)
|
|
Stock
|
|
|
|
|
|
|
|
|
Health Care
|
|
Insurance
|
|
Matching
|
|
Equity
|
|
|
|
|
|
|
|
|
Contribution
|
|
Premiums
|
|
Contributions
|
|
Incentive
|
|
All Other
|
|
Total
|
Name
|
|
Year
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
Igor Gonda, Ph.D.
|
|
|
2009
|
|
|
|
18,428
|
|
|
|
2,100
|
|
|
|
8,250
|
|
|
|
1,250
|
|
|
|
|
|
|
|
30,578
|
|
|
|
|
2008
|
|
|
|
11,933
|
|
|
|
2,100
|
|
|
|
7,750
|
|
|
|
2,968
|
|
|
|
350
|
|
|
|
25,101
|
|
Nancy Pecota
|
|
|
2009
|
|
|
|
573
|
|
|
|
1,499
|
|
|
|
2,678
|
|
|
|
|
|
|
|
|
|
|
|
4,750
|
|
|
|
|
2008
|
|
|
|
287
|
|
|
|
375
|
|
|
|
1,098
|
|
|
|
|
|
|
|
|
|
|
|
1,760
|
|
D. Jeffery Grimes
|
|
|
2009
|
|
|
|
5,433
|
|
|
|
1,449
|
|
|
|
6,209
|
|
|
|
1,250
|
|
|
|
|
|
|
|
14,741
|
|
|
|
|
2008
|
|
|
|
3,048
|
|
|
|
1,281
|
|
|
|
6,567
|
|
|
|
3,987
|
|
|
|
350
|
|
|
|
15,233
|
|
45
2009
Grants of Plan-Based Award
The following table sets forth information regarding plan-based
awards to our named executive officers in 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
|
|
|
|
Grant
|
|
|
|
|
|
|
|
|
|
Estimated Future
|
|
|
Estimated Future
|
|
|
Awards:
|
|
|
Exercise
|
|
|
Date Fair
|
|
|
|
|
|
|
|
|
|
Payouts Under Non-
|
|
|
Payouts Under
|
|
|
Number of
|
|
|
or Base
|
|
|
Value of
|
|
|
|
|
|
|
|
|
|
Equity Incentive
|
|
|
Equity Incentive
|
|
|
Securities
|
|
|
Price of
|
|
|
Stock and
|
|
|
|
|
|
|
|
|
|
Plan Awards(1)
|
|
|
Plan Awards
|
|
|
Underlying
|
|
|
Option
|
|
|
Option
|
|
|
|
Grant
|
|
|
Approval
|
|
|
Target
|
|
|
Maximum
|
|
|
Target
|
|
|
Maximum
|
|
|
Options
|
|
|
Awards
|
|
|
Awards(2)
|
|
Name
|
|
Date
|
|
|
Date
|
|
|
($)
|
|
|
($)
|
|
|
(#)
|
|
|
(#)
|
|
|
(#)
|
|
|
($/sh)
|
|
|
($)
|
|
|
Igor Gonda, Ph.D.
|
|
|
7/30/2009
|
|
|
|
7/30/2009
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400,000
|
|
|
|
0.00
|
|
|
|
38,000
|
|
|
|
|
7/30/2009
|
|
|
|
7/30/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
600,000
|
|
|
|
0.00
|
|
|
|
114,000
|
|
|
|
|
1/21/2009
|
|
|
|
1/21/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,000
|
|
|
|
0.00
|
|
|
|
20,000
|
|
|
|
|
1/21/2009
|
|
|
|
1/21/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
350,000
|
|
|
|
0.25
|
|
|
|
52,675
|
|
|
|
|
1/1/2009
|
|
|
|
1/1/2009
|
|
|
|
190,000
|
|
|
|
285,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nancy Pecota
|
|
|
7/30/2009
|
|
|
|
7/30/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
|
|
0.00
|
|
|
|
38,000
|
|
|
|
|
1/21/2009
|
|
|
|
1/21/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,000
|
|
|
|
0.00
|
|
|
|
8,750
|
|
|
|
|
1/21/2009
|
|
|
|
1/21/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
|
|
0.25
|
|
|
|
30,100
|
|
|
|
|
1/1/2009
|
|
|
|
1/1/2009
|
|
|
|
95,200
|
|
|
|
142,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D. Jeffery Grimes
|
|
|
7/30/2009
|
|
|
|
7/30/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
|
|
0.00
|
|
|
|
38,000
|
|
|
|
|
1/21/2009
|
|
|
|
1/21/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,000
|
|
|
|
0.00
|
|
|
|
8,750
|
|
|
|
|
1/21/2009
|
|
|
|
1/21/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
|
|
0.25
|
|
|
|
30,100
|
|
|
|
|
1/1/2009
|
|
|
|
1/1/2009
|
|
|
|
92,000
|
|
|
|
138,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects each executive officers participation in our 2009
Executive Bonus Plan. The amount of bonus actually earned by
each executive officer was zero, as indicated in the summary
compensation table above. |
|
(2) |
|
The method of and assumptions used to calculate the value of
stock and option awards granted to our named executive officers
is discussed in Note 10 to our audited financial statements
included elsewhere in this prospectus. |
|
(3) |
|
Represents performance based stock awards that vest only if
certain milestones are achieved by a specified date. |
46
Outstanding
Equity Awards at December 31, 2009
The following table provides information regarding each
unexercised stock equity award held by each of our named
executive officers as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned
|
|
|
Market or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares, Units
|
|
|
Payout Value of
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
or Other
|
|
|
Unearned Shares,
|
|
|
|
|
|
|
Underlying Unexercised
|
|
|
Option
|
|
|
|
|
|
Rights That
|
|
|
Units or Other
|
|
|
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Option
|
|
|
Have Not
|
|
|
Rights That
|
|
|
|
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price(1)
|
|
|
Expiration
|
|
|
Vested
|
|
|
Have Not Vested
|
|
Name
|
|
|
|
|
(#)
|
|
|
(#)
|
|
|
($)
|
|
|
Date
|
|
|
(#)
|
|
|
($)
|
|
|
Igor Gonda, Ph.D.
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400,000
|
|
|
|
56,000
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
600,000
|
|
|
|
84,000
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,000
|
|
|
|
11,200
|
|
|
|
|
(2
|
)
|
|
|
65,625
|
|
|
|
284,375
|
|
|
|
0.25
|
|
|
|
1/21/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
1.60
|
|
|
|
12/04/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300,000
|
|
|
|
42,000
|
|
|
|
|
(4
|
)
|
|
|
416,666
|
|
|
|
83,334
|
|
|
|
1.87
|
|
|
|
08/10/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
1.52
|
|
|
|
05/18/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
5.30
|
|
|
|
05/19/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
5.30
|
|
|
|
05/20/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000
|
|
|
|
|
|
|
|
5.30
|
|
|
|
05/13/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
6.50
|
|
|
|
05/15/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
4.75
|
|
|
|
02/19/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000
|
|
|
|
|
|
|
|
17.25
|
|
|
|
05/21/2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
17.15
|
|
|
|
05/17/2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
|
|
|
|
|
|
24.10
|
|
|
|
02/11/2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500
|
|
|
|
|
|
|
|
17.20
|
|
|
|
09/20/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,312
|
|
|
|
|
|
|
|
30.00
|
|
|
|
03/15/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,875
|
|
|
|
|
|
|
|
107.81
|
|
|
|
09/22/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,624
|
|
|
|
|
|
|
|
112.50
|
|
|
|
02/15/2010
|
|
|
|
|
|
|
|
|
|
Nancy Pecota
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
|
|
28,000
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,000
|
|
|
|
4,900
|
|
|
|
|
(2
|
)
|
|
|
37,500
|
|
|
|
162,500
|
|
|
|
0.25
|
|
|
|
1/21/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
70,312
|
|
|
|
154,688
|
|
|
|
0.39
|
|
|
|
09/30/2018
|
|
|
|
|
|
|
|
|
|
D. Jeffery Grimes
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
|
|
28,000
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,000
|
|
|
|
4,900
|
|
|
|
|
(2
|
)
|
|
|
37,500
|
|
|
|
162,500
|
|
|
|
0.25
|
|
|
|
1/21/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
70,312
|
|
|
|
154,688
|
|
|
|
0.80
|
|
|
|
07/01/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
18,750
|
|
|
|
11,250
|
|
|
|
1.37
|
|
|
|
06/20/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the fair market value of a share of our common stock
on the grant date of the option. |
|
(2) |
|
The option vests over four years with 1/16 of the shares of
underlying common stock vesting every three months from the
grant date. |
|
(3) |
|
The restricted stock award vests in full if within four years
following the grant of the award the company achieves certain
product and product-pipeline development milestones. |
|
(4) |
|
The option vests over four years with 1/4 of the shares of
underlying common stock vesting on the first anniversary of the
grant date and 1/48 of the shares of underlying common stock
vesting each month thereafter. |
47
|
|
|
(5) |
|
The option vests over four years with 1/4 of the shares of
underlying common stock vesting on the first anniversary of the
grant date and 1/16 of the shares of underlying common stock
vesting every three months thereafter. |
|
(6) |
|
Each restricted stock award will vest 1/2 of the shares on the
first anniversary of the grant date and 1/2 of the shares on the
second anniversary of the grant date. |
|
(7) |
|
Each restricted stock award will vest on August 1, 2010. |
|
(8) |
|
These restricted stock awards vest in full if within one year
following the grant of the award the company achieves certain
product development milestones. |
2009
Option Exercises and Stock Vested
None of our named executive officers exercised options.
Mr. Grimes had 30,000 shares of restricted stock
awards vest in 2009.
Pension
Benefits
None of our named executive officers participate in or have
account balances in qualified or non-qualified defined benefit
plans sponsored by us. The Committee may elect to adopt
qualified or non-qualified defined benefit plans in the future
if the Committee determines that doing so is in our best
interests.
Nonqualified
Deferred Compensation
None of our named executive officers participate in or have
account balances in nonqualified defined contribution plans or
other nonqualified deferred compensation plans maintained by us.
The Committee may elect to provide our officers and other
employees with non-qualified defined contribution or other
nonqualified deferred compensation benefits in the future if the
Committee determines that doing so is in our best interests.
48
Potential
Payments Upon Termination or Change in Control
The following table sets forth potential payments payable to our
named executive officers upon termination of employment or a
change in control. The Committee may in its discretion revise,
amend or add to the benefits if it deems advisable. The table
below reflects amounts payable to our named executive officers
assuming their employment was terminated on December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
|
|
|
|
|
|
Without
|
|
|
|
|
|
|
|
|
Cause or
|
|
|
|
|
|
|
|
|
Constructive
|
|
|
|
|
|
|
|
|
Termination
|
|
|
|
|
Termination Without
|
|
|
|
Following a
|
|
|
|
|
Cause Prior to a
|
|
Change in
|
|
Change
|
|
|
|
|
Change in Control
|
|
Control
|
|
in Control
|
Name
|
|
Benefit
|
|
($)
|
|
($)
|
|
($)
|
|
Igor Gonda, Ph.D.
|
|
Salary
|
|
|
380,000
|
|
|
|
|
|
|
|
760,000
|
|
|
|
Bonus
|
|
|
125,020
|
|
|
|
|
|
|
|
250,040
|
|
|
|
Option acceleration(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock award acceleration(1)
|
|
|
|
|
|
|
42,000
|
|
|
|
193,200
|
|
|
|
Benefits continuation
|
|
|
20,563
|
|
|
|
|
|
|
|
41,126
|
|
|
|
Career transition assistance
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total value:
|
|
|
525,583
|
|
|
|
42,000
|
|
|
|
1,264,366
|
|
Nancy Pecota
|
|
Salary
|
|
|
238,000
|
|
|
|
|
|
|
|
238,000
|
|
|
|
Bonus
|
|
|
62,642
|
|
|
|
|
|
|
|
62,642
|
|
|
|
Option acceleration(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock award acceleration(1)
|
|
|
|
|
|
|
|
|
|
|
32,900
|
|
|
|
Benefits continuation
|
|
|
716
|
|
|
|
|
|
|
|
716
|
|
|
|
Career transition assistance
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total value:
|
|
|
301,358
|
|
|
|
|
|
|
|
344,258
|
|
D. Jeffery Grimes
|
|
Salary
|
|
|
230,000
|
|
|
|
|
|
|
|
230,000
|
|
|
|
Bonus
|
|
|
60,536
|
|
|
|
|
|
|
|
60,536
|
|
|
|
Option acceleration(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock award acceleration(1)
|
|
|
|
|
|
|
|
|
|
|
32,900
|
|
|
|
Benefits continuation
|
|
|
6,416
|
|
|
|
|
|
|
|
6,416
|
|
|
|
Career transition assistance
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total value:
|
|
|
296,952
|
|
|
|
|
|
|
|
339,852
|
|
|
|
|
(1) |
|
The value of the stock and option award acceleration was
calculated using a value of $0.14 per share of common stock,
which was the last reported closing sale price of our common
stock on December 31, 2009. |
Termination without cause prior to a change in
control. If any of our named executive officers
is terminated by us without cause prior to a change in control,
upon executing a general release and waiver, such executive is
entitled to receive (less applicable withholding taxes) in a
lump sum payment or in installments, at our discretion:
|
|
|
|
|
an amount equal to such executives annual base salary;
|
|
|
|
an amount equal to such executives current target bonus
multiplied by the average annual percentage achievement of
corporate goals for the three complete fiscal years preceding
the termination date; and
|
|
|
|
continuation of such executives health insurance benefits
for 12 months.
|
Acceleration upon a change in control. If we
undergo a change in control on or prior to December 4,
2010, the 300,000 share restricted stock award granted to
Dr. Gonda will vest in full.
49
Termination without cause or constructive termination
following a change in control. If any of our
executives is terminated by us without cause or constructively
terminated (which includes a material reduction in title or
duties, a material reduction in salary or benefits or a
relocation of 50 miles or more) during the
18-month
period following a change in control, upon executing a general
release and waiver, such executive is entitled to receive (less
applicable withholding taxes):
|
|
|
|
|
a lump sum payment equal to twice such executives annual
base salary, in the case of Dr. Gonda, and such
executives annual base salary, in the case of
Ms. Pecota and Mr. Grimes;
|
|
|
|
a lump sum payment equal to such executives current target
bonus multiplied by (i) twice the average annual percentage
achievement of corporate goals for the three complete fiscal
years preceding the termination date, in the case of
Dr. Gonda, and (ii) the average annual percentage
achievement of corporate goals for the three complete fiscal
years preceding the termination date, in the case of
Ms. Pecota and Mr. Grimes;
|
|
|
|
continuation of such executives health insurance benefits
for 24 months, in the case of Dr. Gonda, and
12 months, in the case of Ms. Pecota and
Mr. Grimes;
|
|
|
|
reimbursement of actual career transition assistance
(outplacement services) incurred by such executive within six
months of termination in an amount up to $20,000, in the case of
Dr. Gonda, and $10,000, in the case of Ms. Pecota and
Mr. Grimes; and
|
|
|
|
acceleration of vesting of any stock options or restricted stock
awards that remain unvested as of the date of such
executives termination.
|
Compensation
Committee Interlocks and Insider Participation
No interlocking relationship exists between our Board or the
Committee and the board of directors or the compensation
committee of any other company, nor has any such interlocking
relationship existed in the past.
Non-Employee
Director Compensation
The following table sets forth a summary of the compensation we
paid to our non-employee directors in 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned or
|
|
Option
|
|
Restricted Stock
|
|
|
|
|
Paid in Cash
|
|
Awards(1)
|
|
Awards(1)
|
|
Total
|
Name
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
Frank H. Barker(2)
|
|
|
49,941
|
|
|
|
19,940
|
|
|
|
15,000
|
|
|
|
84,881
|
|
Timothy P. Lynch(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John M. Siebert(4)
|
|
|
54,072
|
|
|
|
19,940
|
|
|
|
15,000
|
|
|
|
89,012
|
|
Virgil D. Thompson(5)
|
|
|
68,875
|
|
|
|
19,940
|
|
|
|
25,000
|
|
|
|
113,815
|
|
|
|
|
(1) |
|
Amount represents the grant date fair value of options and
restricted stock awards granted in 2009. |
|
(2) |
|
Mr. Barker owns stock options for 292,136 shares of
our common stock as of December 31, 2009, of which
192,136 shares are vested as of December 31, 2009. In
addition, Mr. Barker owns 46,876 restricted stock awards at
December 31, 2009, none of which has vested. |
|
(3) |
|
Mr. Lynch resigned from the Board on February 17,
2009. He did not receive any compensation from Aradigm in 2009. |
|
(4) |
|
Dr. Siebert owns stock options for 270,000 shares of
our common stock as of December 31, 2009, of which
170,000 shares are vested as of December 31, 2009. In
addition, Dr. Siebert owns 46,876 restricted stock awards
at December 31, 2009, none of which has vested. |
|
(5) |
|
Mr. Thompson owns stock options for 354,600 shares of
our common stock as of December 31, 2009, of which
254,600 shares are vested as of December 31, 2009. In
addition, Mr. Thompson owns 78,126 restricted stock awards
at December 31, 2009, none of which has vested. |
In 2010, the Chairman of the Board will receive an annual
retainer in the value of $50,000 and all other non-employee
directors will receive an annual retainer in the value of
$30,000. The retainers may be paid in cash or an equivalent
value of restricted stock at the option of the director. Board
members also receive additional annual retainers
50
for serving on Board committees. The additional annual retainer
for the Chairman of the Audit Committee will be $15,000 and the
additional annual retainer for all other members of the Audit
Committee will be $5,000. The additional annual retainer for the
Chairman of the Compensation Committee and the Chairman of the
Nominating and Corporate Governance Committee will be $10,000
and the additional annual retainer for all other members will be
$5,000. The Board retainer covers six meetings in a year and, if
exceeded, the Chairman of the Board will receive $1,500 for each
additional meeting and the other Board members will receive
$1,000 for each additional meeting. If the number of meetings in
a year for any given committee exceeds four, the chairman of the
committee will receive $1,500 for each additional meeting and
the other committee members will receive $1,000 for each
additional meeting. Our directors are also entitled to receive
reimbursement of reasonable
out-of-pocket
expenses incurred by them to attend Board meetings.
In addition to the cash and restricted stock compensation, each
non-employee director will be granted an annual stock option
grant.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
ownership of our common stock as of October 21, 2010 by:
(i) each director; (ii) each of our named executive
officers; (iii) all of our executive officers and directors
as a group; and (iv) all those known by us to be beneficial
owners of more than five percent of our common stock.
|
|
|
|
|
|
|
|
|
|
|
Beneficial Ownership Common(1)
|
|
|
Number of Shares
|
|
Percent of Total (%)
|
|
First Eagle Investment Management, LLC.(2)
|
|
|
61,712,652
|
|
|
|
35.78
|
|
1345 Avenue of the Americas
New York, NY 10105
|
|
|
|
|
|
|
|
|
Novo Nordisk A/S(3)
|
|
|
27,573,672
|
|
|
|
15.99
|
|
Conus Partners, Inc.(4)
|
|
|
9,991,988
|
|
|
|
5.79
|
|
49 West 38th Street, 11th Floor
New York, NY 10018
|
|
|
|
|
|
|
|
|
Igor Gonda, Ph.D.(5)
|
|
|
3,178,871
|
|
|
|
1.84
|
|
Nancy Pecota(6)
|
|
|
772,500
|
|
|
|
*
|
|
D. Jeffery Grimes(7)
|
|
|
168,768
|
|
|
|
*
|
|
Virgil D. Thompson(8)
|
|
|
767,983
|
|
|
|
*
|
|
Frank H. Barker(9)
|
|
|
721,250
|
|
|
|
*
|
|
John M. Siebert, Ph.D.(10)
|
|
|
542,750
|
|
|
|
*
|
|
All executive officers and directors as a group
(6 persons)(11)
|
|
|
6,152,122
|
|
|
|
3.57
|
|
|
|
|
(1) |
|
This table is based upon information supplied by officers,
directors and principal shareholders and Forms 4 and
Schedules 13D and 13G filed with the Securities and Exchange
Commission (SEC). Unless otherwise indicated in the
footnotes to this table and subject to community property laws
where applicable, we believe that each of the shareholders named
in this table has sole voting and investment power with respect
to the shares indicated as beneficially owned. Applicable
percentages are based on 172,462,378 shares of common stock
outstanding on October 21, 2010. Unless otherwise
indicated, the address of each person on this table is
c/o Aradigm
Corporation, 3929 Point Eden Way, Hayward, California, 94545. |
|
|
|
(2) |
|
Based upon information contained in a Schedule 13G filed
with the SEC on September 22, 2010 and other information
known to us, First Eagle Investment Management
(FEIM) (formerly Arnhold and S. Bleichroeder
Advisors, LLC), an investment adviser registered under
Section 203 of the Investment Advisers Act of 1940, may be
deemed to beneficially own 61,712,652 shares of our common
stock, as a result of acting as investment advisor to various
clients. Clients of FEIM have the right to receive and the
ultimate power to direct the receipt of dividends from, or the
proceeds of the sale of, such securities. First Eagle Value in
Biotechnology |
51
|
|
|
|
|
Master Fund, Ltd., a Cayman Islands company for which FEIM acts
as investment adviser, may be deemed to beneficially own
31,276,465 of these 61,712,652 shares. 21 April Fund,
Ltd., a Cayman Islands company for which FEIM acts as investment
adviser, may be deemed to beneficially own 16,458,279 of these
61,712,652 shares. DEF Associates N.V., a Netherlands
Antilles company for which FEIM acts as investment adviser, may
be deemed to beneficially own 8,378,378 of these
61,712,652 shares. 21 April Fund, L.P., a Delaware
limited partnership for which FEIM acts as investment adviser,
may be deemed to beneficially own 4,619,787 of these
61,712,652 shares. |
|
(3) |
|
Based upon information contained in a Schedule 13D/A filed
with the SEC on September 16, 2010 and other information
known to us, Novo Nordisk A/S may be deemed to beneficially own
27,573,672 shares of our common stock. Novo Nordisk A/S
holds 26,204,122 of these 27,573,672 shares directly,
1,133,144 of these 27,573,672 shares indirectly through
Novo Nordisk Inc., a Delaware corporation (previously named Novo
Nordisk Pharmaceuticals, Inc.) and 236,406 of these
27,573,672 shares indirectly through Novo Nordisk Delivery
Technologies, Inc., a Delaware corporation. |
|
|
|
(4) |
|
Based upon information furnished to us by Conus Partners, Inc.
on October 22, 2010, Conus Partners, Inc. may be deemed to
beneficially own 9,991,988 shares of our common stock. The
Conus Fund, L.P. may be deemed to own 4,216,920 of these
9,991,988 shares. The Conus Fund Offshore Master
Fund Limited may be deemed to beneficially own 843,700 of
these 9,991,988 shares. The Conus Fund (QP), L.P. may be
deemed to beneficially own 4,931,368 of these
9,991,988 shares. |
|
|
|
(5) |
|
Includes 1,153,437 stock options shares which are exercisable
within 60 days of October 21, 2010. The number of
shares also includes 840,000 shares pursuant to restricted
stock awards that have not vested. Additionally, the number of
shares does not include a total of 200,000 shares that vest
only upon the occurrence of certain future events pursuant to a
restricted stock bonus agreement between Dr. Gonda and
Aradigm. |
|
|
|
(6) |
|
Includes 237,500 stock options which are exercisable within
60 days of October 21, 2010. The number of shares also
includes 317,500 shares pursuant to restricted stock awards
that have not vested. |
|
|
|
(7) |
|
Mr. Grimes employment was terminated effective
June 18, 2010. |
|
|
|
(8) |
|
Includes 399,500 stock options which are exercisable within
60 days of October 21, 2010. The number of shares also
includes 208,333 shares pursuant to restricted stock units
that have not vested. |
|
|
|
(9) |
|
Includes 400,000 stock options which are exercisable within
60 days of October 21, 2010. The number of shares also
includes 125,000 shares pursuant to restricted stock awards
that have not vested. |
|
|
|
(10) |
|
Includes 320,000 stock options which are exercisable within
60 days of October 21, 2010. The number of shares also
includes 125,000 shares pursuant to restricted stock units
that have not vested. |
|
|
|
(11) |
|
See footnotes (5) through (10) above. |
52
Equity
Compensation Plan Information
The following table summarizes our equity compensation plan
information as of December 31, 2009. Information is
included for the equity compensation plans approved by our
shareholders. There are no equity compensation plans not
approved by our shareholders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
Available for
|
|
|
|
|
|
|
Future Issuance
|
|
|
Common Stock to
|
|
|
|
Under Equity
|
|
|
be Issued Upon
|
|
Weighted-Average
|
|
Compensation
|
|
|
Exercise of
|
|
Exercise Price of
|
|
Plans (Excluding
|
|
|
Outstanding Options
|
|
Outstanding Options
|
|
Securities Reflected
|
|
|
and Rights
|
|
and Rights
|
|
in Column (a))
|
Plan Category
|
|
(a)
|
|
(b)
|
|
(c)
|
|
Equity compensation plans approved by Aradigm shareholders
|
|
|
5,088,443
|
(1)
|
|
$
|
2.49
|
|
|
|
3,832,065
|
(2)
|
Equity compensation plans not approved by Aradigm shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Issuable pursuant to our 1996 Equity Incentive Plan, the 1996
Non-Employee Directors Plan and the 2005 Equity Incentive
Plan. |
|
(2) |
|
Includes 3,068,880 shares reserved under our Employee Stock
Purchase Plan (See Note 10 to our audited financial
statements included elsewhere in this prospectus). |
Change in
Control
There were no arrangements, known to us, including any pledge by
any person of our securities the operation of which may at a
subsequent date result in a change in control of our company.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Review,
Approval or Ratification of Transactions with Related
Persons
The Board has adopted, in writing, a policy and procedures for
the review of related person transactions. Any related person
transaction we propose to enter into must be reported to our
Chief Financial Officer or our Vice President of Legal Affairs
and, unless otherwise reviewed and approved by the Board, shall
be reviewed and approved by the Audit Committee in accordance
with the terms of the policy, prior to effectiveness or
consummation of any related person transaction, whenever
practicable. The policy defines a related person
transaction as any financial transaction, arrangement or
relationship (including any indebtedness or guarantee of
indebtedness), or any series of similar transactions,
arrangements or relationships in which Aradigm (i) was or
is to be a participant, (ii) the amount involved exceeds
$120,000 and (iii) a Related Person (as defined therein)
had or will have a direct or indirect material interest. In
addition, any related person transaction previously approved by
the Audit Committee or otherwise already existing that is
ongoing in nature shall be reviewed by the Audit Committee
annually to ensure that such related person transaction has been
conducted in accordance with the previous approval granted by
the Audit Committee, if any, and that all required disclosures
regarding the related person transaction are made. Transactions
involving compensation of executive officers shall be reviewed
and approved by the Compensation Committee in the manner
specified in the charter of the Compensation Committee. As
appropriate for the circumstances, the Audit Committee shall
review and consider the Related Persons interest in the
related person transaction, the approximate dollar value of the
amount involved in the related person transaction, the
approximate dollar value of the amount of the Related
Persons interest in the transaction without regard to the
amount of any profit or loss, whether the transaction was
undertaken in the ordinary course of business, whether the
transaction with the Related Person is proposed to be, or was,
entered into on terms no less favorable to the Company than
terms that could have been reached with an unrelated third
party, the purpose of, and the potential benefits to us of the
transaction and any other information regarding the related
person transaction or the Related Person in the context of the
proposed transaction that would be material to investors in
light of the circumstances of the particular transaction.
53
June 2010
Private Placement
On June 21, 2010, we closed a private placement, which we
refer to in this prospectus as the June 2010 private placement,
in which we sold 34,702,512 shares of our common stock and
warrants to purchase an aggregate of 7,527,214 shares of
our common stock to accredited investors under the terms of a
securities purchase agreement that we entered into with the
investors on June 18, 2010. For more information regarding
the June 2010 private placement, see Description of the
Business Recent Developments June 2010
Private Placement.
The investors who purchased common stock and warrants at the
closing of the June 2010 private placement included the
following investors for which First Eagle Investment Management,
LLC (who, immediately prior to the June 2010 private placement,
was then deemed to be the beneficial owner of more than five
percent of our common stock) serves as investment adviser:
(i) 21 April Fund, L.P., (ii) 21 April Fund,
Ltd., (iii) DEF Associates N.V. and (iv) First Eagle
Value in Biotechnology Master Fund, Ltd. At the closing of the
June 2010 private placement, these investors for which First
Eagle Investment Management, LLC serves as investment adviser
collectively purchased 19,433,408 shares of our common
stock and warrants to purchase an aggregate of
4,215,239 shares of our common stock for an aggregate
purchase price of approximately $2.3 million. After we held
our special meeting of shareholders on September 14, 2010
and obtained the requisite shareholder approval on a proposal to
amend our amended and restated articles of incorporation to
increase the total number of authorized shares of our common
stock to cover the shares issuable upon exercise of the
warrants, these four investors fully exercised their warrants at
an exercise price of $0.1184 per share and we received an
aggregate of approximately $0.5 million in additional
proceeds from the exercise of their warrants. Consistent with
our policy and procedures for the review of related person
transactions, the June 2010 private placement was approved by
our board of directors.
SELLING
SHAREHOLDERS
This prospectus generally covers the resale of up to
68,229,726 shares of our common stock being offered by the
selling shareholders identified in the table below. These shares
consist of (i) 34,702,512 outstanding shares of common
stock issued in the June 2010 private placement,
(ii) 7,527,214 outstanding shares of common stock that were
issued upon exercise of warrants issued in the June 2010 private
placement and (iii) 26,000,000 outstanding shares of common
stock that were issued under the Novo Nordisk stock purchase
agreement.
We have entered into registration rights agreements with the
selling shareholders pursuant to which we have agreed to file a
registration statement, of which this prospectus is a part,
under the Securities Act of 1933, as amended (the
Securities Act), registering the resale by the
selling shareholders of the shares of common stock covered by
this prospectus. We have also agreed to cause such registration
statement to become effective, and to keep such registration
statement effective. Our failure to satisfy the deadlines set
forth in the registration rights agreements may subject us to
payment of certain monetary penalties pursuant to the terms of
the registration rights agreements.
We are registering the shares of common stock covered by this
prospectus in order to permit the selling shareholders to offer
the shares for resale from time to time.
The table below lists the selling shareholders and other
information regarding the beneficial ownership (as determined
under Section 13(d) of the Securities Exchange Act of 1934,
as amended, and the rules and regulations thereunder) of the
shares of common stock held by each of the selling shareholders.
The table below has been prepared based on information supplied
to us by the selling shareholders. Except as indicated in the
footnotes to the table below, the selling shareholders have not
had any material relationship with us within the past three
years, except for their ownership of our common stock.
The second column lists the number of shares of common stock
beneficially owned by the selling shareholders, based on their
respective ownership of shares of common stock, as of
September 28, 2010. This column includes the shares of
common stock being offered under this prospectus.
The third column lists the maximum number of shares of common
stock being offered by the selling shareholders under this
prospectus.
The fourth and fifth columns assume the sale of all of the
shares offered by the selling shareholders pursuant to this
prospectus.
54
The selling shareholders may sell all, some or none of their
shares in this offering. See Plan of Distribution.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
Number of
|
|
Number of
|
|
Number of
|
|
|
|
|
Shares of
|
|
Shares of
|
|
Shares of
|
|
Percentage of
|
|
|
Common
|
|
Common
|
|
Common
|
|
Common Stock
|
|
|
Stock Owned
|
|
Stock to be
|
|
Stock Owned
|
|
Outstanding
|
|
|
Prior to
|
|
Sold Pursuant to
|
|
After
|
|
After
|
Name of Selling Shareholder
|
|
Offering(a)
|
|
this Prospectus
|
|
Offering(b)
|
|
Offering(c)
|
|
21 April Fund, L.P. (1)
|
|
|
4,619,787
|
|
|
|
1,858,108
|
(2)
|
|
|
2,761,679
|
|
|
|
1.60
|
%
|
21 April Fund, Ltd. (3)
|
|
|
16,458,279
|
|
|
|
6,587,837
|
(4)
|
|
|
9,870,442
|
|
|
|
5.72
|
%
|
Bison Trading, LLC(5)
|
|
|
1,689,189
|
|
|
|
1,689,189
|
(6)
|
|
|
0
|
|
|
|
*
|
|
DEF Associates N.V. (7)
|
|
|
8,378,378
|
|
|
|
3,378,378
|
(8)
|
|
|
5,000,000
|
|
|
|
2.90
|
%
|
First Eagle Value in Biotechnology Master Fund, Ltd. (9)
|
|
|
31,276,465
|
|
|
|
11,824,324
|
(10)
|
|
|
19,452,141
|
|
|
|
11.28
|
%
|
Laurence Lytton
|
|
|
8,472,037
|
|
|
|
8,445,945
|
(11)
|
|
|
26,092
|
|
|
|
*
|
|
Novo Nordisk A/S(12)
|
|
|
27,573,672
|
|
|
|
26,000,000
|
(13)
|
|
|
1,573,672
|
|
|
|
*
|
|
The Conus Fund, L.P.(14)
|
|
|
4,216,920
|
|
|
|
3,130,500
|
(15)
|
|
|
1,086,420
|
|
|
|
*
|
|
The Conus Fund Offshore Master Fund Limited(16)
|
|
|
843,700
|
|
|
|
624,700
|
(17)
|
|
|
219,000
|
|
|
|
*
|
|
The Conus Fund (QP), L.P.(18)
|
|
|
4,931,368
|
|
|
|
4,690,745
|
(19)
|
|
|
240,623
|
|
|
|
*
|
|
|
|
|
|
|
The selling shareholder is an affiliate of a broker-dealer.
Based on information provided to us by such selling shareholder,
such selling shareholder purchased the shares being offered for
resale in the ordinary course of business and, at the time of
purchase, such selling shareholder had no agreements or
understandings, directly or indirectly, with any person to
distribute the shares. |
|
|
|
* |
|
Less than 1% |
|
(a) |
|
Includes the shares of common stock being offered under this
prospectus. Unless otherwise indicated in the footnotes to this
table and subject to community property laws where applicable,
we believe that each of the selling shareholders named in this
table has sole voting and investment power with respect to the
shares indicated as beneficially owned. |
|
(b) |
|
Assumes all of the shares of common stock being offered under
this prospectus are sold in the offering. |
|
|
|
(c) |
|
Applicable percentage ownership is based on
172,462,378 shares of common stock outstanding as of
October 21, 2010. |
|
|
|
(1) |
|
First Eagle Investment Management, LLC, a Delaware limited
liability company and a U.S. registered investment adviser
serves as investment adviser to the selling shareholder. First
Eagle Investment Management, LLC is a subsidiary of Arnhold and
S. Bleichroeder Holdings, Inc., a Delaware corporation. Michael
M. Kellen may be deemed to have voting and investment control
over the shares held by the selling shareholder. |
|
(2) |
|
Consists of 1,526,911 outstanding shares of common stock that
were issued to the selling shareholder in the June 2010 private
placement and 331,197 outstanding shares of common stock that
were issued upon exercise of warrants issued to the selling
shareholder in the June 2010 private placement. |
|
(3) |
|
First Eagle Investment Management, LLC, a Delaware limited
liability company and a U.S. registered investment adviser
serves as investment adviser to the selling shareholder. First
Eagle Investment Management, LLC is a subsidiary of Arnhold and
S. Bleichroeder Holdings, Inc., a Delaware corporation. Michael
M. Kellen may be deemed to have voting and investment control
over the shares held by the selling shareholder. |
|
(4) |
|
Consists of 5,413,592 outstanding shares of common stock that
were issued to the selling shareholder in the June 2010 private
placement and 1,174,245 outstanding shares of common stock that
were issued upon exercise of warrants issued to the selling
shareholder in the June 2010 private placement. |
|
(5) |
|
Chad C. Hellmann is the managing member of the selling
shareholder and may be deemed to have voting and investment
control over the shares held by the selling shareholder. |
55
|
|
|
(6) |
|
Consists of 1,388,100 outstanding shares of common stock that
were issued to the selling shareholder in the June 2010 private
placement and 301,089 outstanding shares of common stock that
were issued upon exercise of warrants issued to the selling
shareholder in the June 2010 private placement. |
|
(7) |
|
First Eagle Investment Management, LLC, a Delaware limited
liability company and a U.S. registered investment adviser
serves as investment adviser to the selling shareholder. First
Eagle Investment Management, LLC is a subsidiary of Arnhold and
S. Bleichroeder Holdings, Inc., a Delaware corporation. Michael
M. Kellen may be deemed to have voting and investment control
over the shares held by the selling shareholder. |
|
(8) |
|
Consists of 2,776,201 outstanding shares of common stock that
were issued to the selling shareholder in the June 2010 private
placement and 602,177 outstanding shares of common stock that
were issued upon exercise of warrants issued to the selling
shareholder in the June 2010 private placement. |
|
(9) |
|
First Eagle Investment Management, LLC, a Delaware limited
liability company and a U.S. registered investment adviser
serves as investment adviser to the selling shareholder. First
Eagle Investment Management, LLC is a subsidiary of Arnhold and
S. Bleichroeder Holdings, Inc., a Delaware corporation.
Dan DeClue may be deemed to have voting and investment
control over the shares held by the selling shareholder. |
|
(10) |
|
Consists of 9,716,704 outstanding shares of common stock that
were issued to the selling shareholder in the June 2010 private
placement and 2,107,620 outstanding shares of common stock that
were issued upon exercise of warrants issued to the selling
shareholder in the June 2010 private placement. |
|
(11) |
|
Consists of 6,940,502 outstanding shares of common stock that
were issued to the selling shareholder in the June 2010 private
placement and 1,505,443 outstanding shares of common stock that
were issued upon exercise of warrants issued to the selling
shareholder in the June 2010 private placement. |
|
(12) |
|
Novo Nordisk A/S, a company organized under the laws of Denmark,
is the selling shareholder. Novo Nordisk is a former
collaboration partner of ours, and the former lender under the
promissory note and security agreement dated July 3, 2006
that was terminated at the closing of the transactions
contemplated by the Novo Nordisk stock purchase agreement. The
board of directors of Novo Nordisk A/S exercises the sole voting
and/or dispositive powers with respect to the shares being
offered by Novo Nordisk A/S under this prospectus. The members
of the board of directors of Novo Nordisk A/S are Sten Scheibye,
Göran A. Ando, Henrik Gürtler, Ulrik Hjulmand-Lassen,
Pamela J. Kirby, Anne Marie Handrup Kverneland, Kurt Anker
Nielsen, Søren Thuesen Pedersen, Stig Strøbaek, Hannu
Ryöppönen and Jørgen Wedel. Of the shares of
common stock owned prior to the offering, Novo Nordisk A/S held
204,122 shares of common stock, Novo Nordisk Delivery
Technologies Inc. held 236,406 shares of common stock and
Novo Nordisk, Inc. held 1,133,144 shares of common stock. |
|
(13) |
|
Consists of 26,000,000 shares that were issued to Novo
Nordisk A/S under the Novo Nordisk stock purchase agreement. |
|
(14) |
|
Conus Capital, LLC, a New York limited liability company, serves
as the selling shareholders general partner (the
General Partner). Andrew Zacks is the managing
member of the General Partner. Conus Partners Inc., a New York
corporation (the Investment Adviser), provides
infrastructure and overhead support services to the selling
shareholder and is responsible for managing the investment
portfolio of the selling shareholder and may be deemed to have
voting and investment control over the shares held by the
selling shareholder. Andrew Zacks is the principal and managing
director of the Investment Adviser. |
|
(15) |
|
Consists of 2,572,506 outstanding shares of common stock that
were issued to the selling shareholder in the June 2010 private
placement and 557,994 outstanding shares of common stock that
were issued upon exercise of warrants issued to the selling
shareholder in the June 2010 private placement. |
|
(16) |
|
The investment adviser of the selling shareholder is Conus
Partners, Inc. (the Investment Adviser), a
corporation organized under the laws of the State of New York,
U.S.A., which may be deemed to have voting and investment
control over the shares held by the selling shareholder. Andrew
Zacks is the principal and managing director of the Investment
Adviser. |
|
(17) |
|
Consists of 513,351 outstanding shares of common stock that were
issued to the selling shareholder in the June 2010 private
placement and 111,349 outstanding shares of common stock that
were issued upon exercise of warrants issued to the selling
shareholder in the June 2010 private placement. |
|
(18) |
|
Conus Capital, LLC, a New York limited liability company, serves
as the selling shareholders general partner (the
General Partner). Andrew Zacks is the managing
member of the General Partner. Conus Partners Inc., a |
56
|
|
|
|
|
New York corporation (the Investment Adviser),
provides infrastructure and overhead support services to the
selling shareholder and is responsible for managing the
investment portfolio of the selling shareholder and may be
deemed to have voting and investment control over the shares
held by the selling shareholder. Andrew Zacks is the principal
and managing director of the Investment Adviser. |
|
(19) |
|
Consists of 3,854,645 outstanding shares of common stock that
were issued to the selling shareholder in the June 2010 private
placement and 836,100 outstanding shares of common stock that
were issued upon exercise of warrants issued to the selling
shareholder in the June 2010 private placement. |
DETERMINATION
OF OFFERING PRICE
The selling shareholders will determine at what price they may
sell the shares of common stock offered by this prospectus, and
such sales may be made at prevailing market prices, or at
privately negotiated prices.
PLAN OF
DISTRIBUTION
We are registering 68,229,726 shares of our common stock
being offered by the selling shareholders. These shares consist
of (i) 34,702,512 outstanding shares of common stock issued
in the June 2010 private placement, (ii) 7,527,214
outstanding shares of common stock that were issued upon
exercise of warrants issued in the June 2010 private placement
and (iii) 26,000,000 outstanding shares of common stock
that were issued under the Novo Nordisk stock purchase
agreement. We are registering these shares to permit the resale
of these shares of common stock by the selling shareholders from
time to time after the date of this prospectus. We will not
receive any of the proceeds from the sale by the selling
shareholders of the shares of common stock. We will bear all
fees and expenses incident to our obligation to register the
shares of common stock.
The selling shareholders may sell all or a portion of the shares
of common stock held by them and offered hereby from time to
time directly or through one or more underwriters,
broker-dealers or agents. If the shares of common stock are sold
through underwriters or broker-dealers, the selling shareholders
will be responsible for underwriting discounts or commissions or
agents commissions. The shares of common stock may be sold
in one or more transactions at fixed prices, at prevailing
market prices at the time of the sale, at varying prices
determined at the time of sale or at negotiated prices. These
sales may be effected in transactions, which may involve crosses
or block transactions, pursuant to one or more of the following
methods:
|
|
|
|
|
on any national securities exchange or quotation service on
which the securities may be listed or quoted at the time of sale;
|
|
|
|
in the
over-the-counter
market;
|
|
|
|
in transactions otherwise than on these exchanges or systems or
in the
over-the-counter
market;
|
|
|
|
through the writing or settlement of options, whether such
options are listed on an options exchange or otherwise;
|
|
|
|
ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
|
|
|
|
block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
|
|
|
|
purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
|
|
|
|
an exchange distribution in accordance with the rules of the
applicable exchange;
|
|
|
|
privately negotiated transactions;
|
|
|
|
short sales made after the date the Registration Statement is
declared effective by the SEC;
|
|
|
|
agreements between broker-dealers and the selling
securityholders to sell a specified number of such shares at a
stipulated price per share;
|
57
|
|
|
|
|
a combination of any such methods of sale; and
|
|
|
|
any other method permitted pursuant to applicable law.
|
The selling shareholders may also sell shares of common stock
under Rule 144 promulgated under the Securities Act of
1933, as amended, if available, rather than under this
prospectus. In addition, the selling shareholders may transfer
the shares of common stock by other means not described in this
prospectus If the selling shareholders effect such transactions
by selling shares of common stock to or through underwriters,
broker-dealers or agents, such underwriters, broker-dealers or
agents may receive commissions in the form of discounts,
concessions or commissions from the selling shareholders or
commissions from purchasers of the shares of common stock for
whom they may act as agent or to whom they may sell as principal
(which discounts, concessions or commissions as to particular
underwriters, broker-dealers or agents may be in excess of those
customary in the types of transactions involved). In connection
with sales of the shares of common stock or otherwise, the
selling shareholders may enter into hedging transactions with
broker-dealers, which may in turn engage in short sales of the
shares of common stock in the course of hedging in positions
they assume. The selling shareholders may also sell shares of
common stock short and deliver shares of common stock covered by
this prospectus to close out short positions and to return
borrowed shares in connection with such short sales. The selling
shareholders may also loan or pledge shares of common stock to
broker-dealers that in turn may sell such shares.
The selling shareholders may pledge or grant a security interest
in some or all of the shares of common stock owned by them and,
if they default in the performance of their secured obligations,
the pledgees or secured parties may offer and sell the shares of
common stock from time to time pursuant to this prospectus or
any amendment to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act amending, if
necessary, the list of selling shareholders to include the
pledgee, transferee or other successors in interest as selling
shareholders under this prospectus. The selling shareholders
also may transfer and donate the shares of common stock in other
circumstances in which case the transferees, donees, pledgees or
other successors in interest will be the selling beneficial
owners for purposes of this prospectus.
To the extent required by the Securities Act and the rules and
regulations thereunder, the selling shareholders and any
broker-dealer participating in the distribution of the shares of
common stock may be deemed to be underwriters within
the meaning of the Securities Act, and any commission paid, or
any discounts or concessions allowed to, any such broker-dealer
may be deemed to be underwriting commissions or discounts under
the Securities Act. At the time a particular offering of the
shares of common stock is made, a prospectus supplement, if
required, will be distributed, which will set forth the
aggregate amount of shares of common stock being offered and the
terms of the offering, including the name or names of any
broker-dealers or agents, any discounts, commissions and other
terms constituting compensation from the selling shareholders
and any discounts, commissions or concessions allowed or
re-allowed or paid to broker-dealers.
Under the securities laws of some states, the shares of common
stock may be sold in such states only through registered or
licensed brokers or dealers. In addition, in some states, the
shares of common stock may not be sold unless such shares have
been registered or qualified for sale in such state or an
exemption from registration or qualification is available and is
complied with.
There can be no assurance that any selling shareholder will sell
any or all of the shares of common stock registered pursuant to
the registration statement, of which this prospectus forms a
part.
The selling shareholders and any other person participating in
such distribution will be subject to applicable provisions of
the Securities Exchange Act of 1934, as amended (the
Exchange Act), and the rules and regulations
thereunder, including, without limitation, to the extent
applicable, Regulation M of the Exchange Act, which may
limit the timing of purchases and sales of any of the shares of
common stock by the selling shareholders and any other
participating person. To the extent applicable,
Regulation M may also restrict the ability of any person
engaged in the distribution of the shares of common stock to
engage in market-making activities with respect to the shares of
common stock. All of the foregoing may affect the marketability
of the shares of common stock and the ability of any person or
entity to engage in market-making activities with respect to the
shares of common stock.
We will pay all expenses of the registration of the shares of
common stock pursuant to the related registration rights
agreements, estimated to be $48,586.75 in total, including,
without limitation, SEC filing fees and expenses
58
of compliance with state securities or blue sky
laws; provided, however, a selling shareholder will pay all
underwriting discounts and selling commissions, if any. We will
indemnify the selling shareholders against liabilities,
including some liabilities under the Securities Act in
accordance with the registration rights agreements or the
selling shareholders will be entitled to contribution. We may be
indemnified by the selling shareholders against civil
liabilities, including liabilities under the Securities Act that
may arise from any written information furnished to us by the
selling shareholder specifically for use in this prospectus, in
accordance with the related registration rights agreements or we
may be entitled to contribution.
Once sold under the registration statement, of which this
prospectus forms a part, the shares of common stock will be
freely tradable in the hands of persons other than our
affiliates.
DESCRIPTION
OF SECURITIES
The following description summarizes some of the terms of our
capital stock. Because it is only a summary, it does not contain
all of the information that may be important to you and is
qualified in its entirety by reference to the relevant
provisions of our Amended and Restated Articles of
Incorporation, our Amended and Restated Bylaws and our amended
and restated shareholder rights plan.
For a complete description you should refer to our Amended and
Restated Articles of Incorporation, our Amended and Restated
Bylaws and our amended and restated shareholder rights plan,
which are incorporated by reference as exhibits to the
registration statement of which the prospectus is a part.
General
As of the date of this prospectus, we are authorized by our
amended and restated articles of incorporation to issue an
aggregate of 213,527,214 shares of common stock. In
addition, as of the date of this prospectus, we are authorized
by our amended and restated articles of incorporation to issue
an aggregate of 5,000,000 shares of preferred stock.
As of October 21, 2010, there were:
|
|
|
|
|
172,462,378 shares of common stock issued and outstanding,
which includes the shares of common stock being offered under
this prospectus; and
|
|
|
|
|
|
there were no shares of preferred stock issued and outstanding.
|
Common
Stock
All outstanding shares of common stock are of the same class and
have equal rights and attributes. The holders of common stock
are entitled to one vote per share on all matters submitted to a
vote of shareholders of the Company. All shareholders are
entitled to share equally in dividends, if any, as may be
declared from time to time by the board of directors out of
funds legally available. In the event of liquidation, the
holders of common stock are entitled to share ratably in all
assets remaining after payment of all liabilities. The
shareholders do not have cumulative or preemptive rights.
The transfer agent and registrar for our common stock is
Computershare (formerly Equiserve Trust Company).
Preferred
Stock
Our board of directors is empowered, without shareholder
approval, to issue preferred stock with dividend, liquidation,
conversion, voting or other rights which could adversely affect
the voting power or other rights of the holders of common stock.
We may issue some or all of the preferred stock to effect a
business combination. In addition, the preferred stock could be
utilized as a method of discouraging, delaying or preventing a
change in control of us. Although we do not currently intend to
issue any shares of preferred stock, we cannot assure you that
we will not do so in the future.
59
Shareholder
Rights Plan
In September 2008, we adopted an amended and restated
shareholder rights plan, which replaced the rights plan
originally adopted in August 1998. Pursuant to the rights plan,
as amended and restated, we distribute rights to purchase shares
of Series A Junior Participating Preferred Stock as a
dividend at the rate of one right for each share of common stock
outstanding. Until the rights are distributed, the rights trade
with, and are not separable from our common stock and are not
exercisable. The rights are designed to guard against partial
tender offers and other abusive and coercive tactics that might
be used in an attempt to gain control of our company or to
deprive our shareholders of their interest in our companys
long-term value. The shareholder rights plan seeks to achieve
these goals by encouraging a potential acquirer to negotiate
with our board of directors. The rights will expire at the close
of business on September 8, 2018.
MARKET
FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Since December 21, 2006, our common stock has been quoted
on the OTC Bulletin Board, an electronic quotation service
for securities traded
over-the-counter,
under the symbol ARDM. Between June 20, 1996
and May 1, 2006 our common stock was listed on the Nasdaq
Global Market (formerly the Nasdaq National Market). Between
May 2, 2006 and November 9, 2006, our common stock was
listed on the Nasdaq Capital Market (formerly the Nasdaq Small
Cap Market). As of November 9, 2006, we were delisted from
the Nasdaq Capital Market. Between November 10, 2006 and
December 20, 2006, our common stock was quoted on the Pink
Sheets.
The following table sets forth the high and low closing sale
prices of our common stock for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
Low
|
|
2008
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
1.58
|
|
|
$
|
1.11
|
|
Second Quarter
|
|
|
1.09
|
|
|
|
0.62
|
|
Third Quarter
|
|
|
0.80
|
|
|
|
0.39
|
|
Fourth Quarter
|
|
|
0.40
|
|
|
|
0.20
|
|
2009
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
0.29
|
|
|
$
|
0.07
|
|
Second Quarter
|
|
|
0.34
|
|
|
|
0.10
|
|
Third Quarter
|
|
|
0.28
|
|
|
|
0.17
|
|
Fourth Quarter
|
|
|
0.20
|
|
|
|
0.14
|
|
As of February 28, 2010, there were approximately 112
holders of record of our common stock.
Dividend
Policy
We have never declared or paid any cash dividends on our capital
stock and we do not currently intend to pay any cash dividends
on our capital stock for at least the foreseeable future. We
expect to retain future earnings, if any, to fund the
development and growth of our business. Any future determination
to pay dividends on our capital stock will be, subject to
applicable law, at the discretion of our board of directors and
will depend upon, among other factors, our results of
operations, financial condition, capital requirements and
contractual restrictions in loan agreements or other agreements.
LEGAL
MATTERS
The validity of the shares of our common stock offered hereby
has been passed upon for us by Morrison & Foerster
LLP, San Francisco, California.
60
EXPERTS
The audited financial statements for the years ended
December 31, 2009 and 2008 have been included in this
prospectus in reliance upon the report of Odenberg Ullakko
Muranishi & Co LLP, an independent registered public
accounting firm, and their authority as experts in accounting
and auditing.
WHERE YOU
CAN FIND MORE INFORMATION
We are a public company and file annual, quarterly and special
reports, proxy statements and other information with the SEC.
You may read and copy any document we file at the SECs
public reference room at 100 F Street, NE,
Washington, D.C. 20549. You can request copies of these
documents by writing to the SEC and paying a fee for the copying
cost. Please call the SEC at
1-800-SEC-0330
for more information about the operation of the public reference
room. Our SEC filings are also available, at no charge, to the
public at the SECs website at
http://www.sec.gov.
61
ARADIGM
CORPORATION
|
|
|
|
|
Page
|
|
Unaudited Condensed Financial Statements:
|
|
|
|
|
F-2
|
|
|
F-3
|
|
|
F-4
|
|
|
F-5
|
Audited Financial Statements:
|
|
|
|
|
F-16
|
|
|
F-17
|
|
|
F-18
|
|
|
F-19
|
|
|
F-20
|
|
|
F-21
|
F-1
ARADIGM
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
June 30,
|
|
|
2009
|
|
|
|
2010
|
|
|
(Note 1)
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,608
|
|
|
$
|
3,903
|
|
Short-term investments
|
|
|
|
|
|
|
5,228
|
|
Receivables
|
|
|
394
|
|
|
|
155
|
|
Prepaid and other current assets
|
|
|
499
|
|
|
|
328
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
10,501
|
|
|
|
9,614
|
|
Property and equipment, net
|
|
|
1,849
|
|
|
|
2,166
|
|
Notes receivable
|
|
|
53
|
|
|
|
52
|
|
Other assets
|
|
|
129
|
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
12,532
|
|
|
$
|
11,965
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS DEFICIT
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
948
|
|
|
$
|
572
|
|
Accrued clinical and cost of other studies
|
|
|
664
|
|
|
|
670
|
|
Accrued compensation
|
|
|
652
|
|
|
|
341
|
|
Facility lease exit obligation
|
|
|
182
|
|
|
|
263
|
|
Other accrued liabilities
|
|
|
284
|
|
|
|
357
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,730
|
|
|
|
2,203
|
|
Deferred rent
|
|
|
123
|
|
|
|
136
|
|
Facility lease exit obligation, non-current
|
|
|
785
|
|
|
|
828
|
|
Other non-current liabilities
|
|
|
75
|
|
|
|
75
|
|
Note payable and accrued interest
|
|
|
9,113
|
|
|
|
8,896
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
12,826
|
|
|
|
12,138
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders deficit:
|
|
|
|
|
|
|
|
|
Preferred stock, 5,000,000 shares authorized, none
outstanding
|
|
|
|
|
|
|
|
|
Common stock, no par value; authorized shares: 150,000,000 at
June 30, 2010 and December 31, 2009; issued and
outstanding shares: 137,561,464 at June 30, 2010;
102,381,116 at December 31, 2009
|
|
|
352,484
|
|
|
|
348,271
|
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
2
|
|
Accumulated deficit
|
|
|
(352,778
|
)
|
|
|
(348,446
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders deficit
|
|
|
(294
|
)
|
|
|
(173
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders deficit
|
|
$
|
12,532
|
|
|
$
|
11,965
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to the Unaudited Condensed Financial
Statements
F-2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except per share data)
|
|
|
|
(Unaudited)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Royalty revenue
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
2,736
|
|
|
|
2,927
|
|
|
|
5,573
|
|
|
|
6,653
|
|
General and administrative
|
|
|
1,382
|
|
|
|
1,368
|
|
|
|
2,635
|
|
|
|
2,766
|
|
Restructuring and asset impairment
|
|
|
13
|
|
|
|
205
|
|
|
|
26
|
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,131
|
|
|
|
4,500
|
|
|
|
8,234
|
|
|
|
9,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(4,131
|
)
|
|
|
(4,500
|
)
|
|
|
(4,234
|
)
|
|
|
(9,642
|
)
|
Interest income
|
|
|
4
|
|
|
|
14
|
|
|
|
14
|
|
|
|
42
|
|
Interest expense
|
|
|
(109
|
)
|
|
|
(105
|
)
|
|
|
(218
|
)
|
|
|
(209
|
)
|
Other income (expense), net
|
|
|
108
|
|
|
|
(3
|
)
|
|
|
106
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,128
|
)
|
|
$
|
(4,594
|
)
|
|
$
|
(4,332
|
)
|
|
$
|
(9,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common
share
|
|
|
104,891
|
|
|
|
99,298
|
|
|
|
102,396
|
|
|
|
85,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to the Unaudited Condensed Financial
Statements
F-3
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands) (Unaudited)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,332
|
)
|
|
$
|
(9,813
|
)
|
Adjustments to reconcile net loss to cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Impairment loss on property and equipment
|
|
|
|
|
|
|
31
|
|
Amortization and accretion of investments
|
|
|
26
|
|
|
|
(5
|
)
|
Depreciation and amortization
|
|
|
322
|
|
|
|
600
|
|
Stock-based compensation expense
|
|
|
451
|
|
|
|
384
|
|
Loss on retirement and sale of property and equipment
|
|
|
|
|
|
|
3
|
|
Facility lease exit cost
|
|
|
|
|
|
|
158
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(239
|
)
|
|
|
163
|
|
Prepaid and other current assets
|
|
|
(171
|
)
|
|
|
(243
|
)
|
Other assets
|
|
|
3
|
|
|
|
27
|
|
Accounts payable
|
|
|
376
|
|
|
|
724
|
|
Accrued compensation
|
|
|
311
|
|
|
|
139
|
|
Other liabilities
|
|
|
138
|
|
|
|
51
|
|
Deferred rent
|
|
|
(13
|
)
|
|
|
(47
|
)
|
Deferred revenue
|
|
|
|
|
|
|
710
|
|
Facility lease exit obligation
|
|
|
(124
|
)
|
|
|
(195
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(3,252
|
)
|
|
|
(7,313
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(5
|
)
|
|
|
(6
|
)
|
Purchases of short-term investments
|
|
|
|
|
|
|
(8,669
|
)
|
Proceeds from sales and maturities of short-term investments
|
|
|
5,200
|
|
|
|
2,400
|
|
Note receivable payments
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
5,195
|
|
|
|
(6,291
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from public offering of common stock, net
|
|
|
|
|
|
|
3,927
|
|
Proceeds from private placement of common stock, net
|
|
|
3,719
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
43
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
3,762
|
|
|
|
3,964
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
5,705
|
|
|
|
(9,640
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
3,903
|
|
|
|
16,741
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
9,608
|
|
|
$
|
7,101
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to the Unaudited Condensed Financial
Statements
F-4
ARADIGM
CORPORATION
June 30,
2010
|
|
1.
|
Organization,
Basis of Presentation and Liquidity
|
Organization
Aradigm Corporation (the Company, we,
our, or us) is a California corporation
focused on the development and commercialization of drugs
delivered by inhalation for the treatment of severe respiratory
diseases. The Companys principal activities to date have
included conducting research and development and developing
collaborations. Management does not anticipate receiving any
revenues from the sale of products in the upcoming year, except
for royalty revenue from Zogenix. The Company operates as a
single operating segment.
Basis
of Presentation
The accompanying unaudited condensed financial statements have
been prepared in accordance with United States generally
accepted accounting principles for interim financial information
and with the instructions to
Form 10-Q
and Article 10 of
Regulation S-X.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with United
States generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of
the Securities and Exchange Commission (the SEC). In
the opinion of management, the financial statements reflect all
adjustments, which are of a normal recurring nature, necessary
for fair presentation. The accompanying unaudited condensed
financial statements should be read in conjunction with the
financial statements and notes thereto included in the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2009, as filed with the SEC
on March 24, 2010 (the 2009 Annual Report on
Form 10-K).
The results of the Companys operations for the interim
periods presented are not necessarily indicative of operating
results for the full fiscal year or any future interim period.
The balance sheet at December 31, 2009 has been derived
from the audited financial statements at that date, but does not
include all of the information and footnotes required by United
States generally accepted accounting principles for complete
financial statements. For further information, please refer to
the financial statements and notes thereto included in the 2009
Annual Report on
Form 10-K.
Liquidity
The Company had cash and cash equivalents of approximately
$9.6 million as of June 30, 2010. The Company believes
that this amount, as well as anticipated recurring royalty
payments from Zogenix, will be sufficient to enable it to fund
operations through at least the fourth quarter of 2010.
On June 21, 2010, the Company closed a private placement in
which it sold 34,702,512 shares of common stock and
warrants to purchase an aggregate of 7,527,214 shares of
common stock to accredited investors (which included a few
existing significant investors) under the terms of a securities
purchase agreement that was entered into with the investors on
June 18, 2010 (the June 2010 Private
Placement). At the closing of the June 2010 Private
Placement, the Company received approximately $4.1 million
in aggregate gross proceeds from the sale of the common stock
and the warrants. After deducting for fees and expenses, the
aggregate net proceeds from the sale of the common stock and the
warrants were approximately $3.7 million. The warrants have
an exercise price of $0.1184 per share and are exercisable after
the Company has called and held a special meeting of its
shareholders to vote on a proposal to approve an amendment to
the Companys Amended and Restated Articles of
Incorporation to increase the number of authorized shares of
common stock and has received the requisite shareholder approval
for the shareholder proposal. The warrants also include a
mandatory exercise provision whereby the Company has the right
to require the holders to exercise the warrants after it has
received the requisite shareholder approval for the shareholder
proposal. The warrants expire the earlier of 10 business days
after the date on which the requisite shareholder approval for
the shareholder proposal is received and 90 days after the
issuance date of the warrants. Assuming the warrants are fully
exercised at an exercise price of $0.1184 per share, the Company
would receive approximately $0.9 million in additional
aggregate net proceeds from the exercise of the warrants.
F-5
ARADIGM
CORPORATION
NOTES TO
THE UNAUDITED CONDENSED FINANCIAL
STATEMENTS (Continued)
The Company is currently exploring means to fund the further
development of the cystic fibrosis indication for ARD-3100, as
well as the anticipated costs of the Phase 3 liposomal
ciprofloxacin bronchiectasis trials, focusing primarily on
establishing funded partnering agreements and through sale or
out-licensing of non-strategic assets.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Use of
Estimates
The preparation of financial statements, in conformity with
United States generally accepted accounting principles, requires
management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying
notes. These estimates include useful lives for property and
equipment and related depreciation calculations, estimated
amortization period for payments received from product
development and license agreements as they relate to revenue
recognition, assumptions for valuing options and warrants, and
income taxes. Actual results could differ materially from these
estimates.
Cash
and Cash Equivalents
The Company considers all liquid investments purchased with an
initial maturity of three months or less to be cash equivalents.
The Company invests cash and cash equivalents not needed for
operations in money market funds, commercial paper, corporate
bonds and government notes in accordance with the Companys
investment policy.
Investments
Management determines the appropriate classification of the
Companys investments, which consist solely of debt
securities, at the time of purchase. All investments are
classified as
available-for-sale,
carried at estimated fair value and reported in cash and cash
equivalents or short-term investments. Unrealized gains and
losses on
available-for-sale
securities are excluded from earnings and losses and are
reported as a separate component in accumulated other
comprehensive income in shareholders equity until
realized. Fair values of investments are based on quoted market
prices where available. Interest income is recognized when
earned and includes interest, dividends, amortization of
purchase premiums and discounts, and realized gains and losses
on sales of securities. The cost of securities sold is based on
the specific identification method. The Company regularly
reviews all of its investments for
other-than-temporary
declines in fair value. When the Company determines that the
decline in fair value of an investment below the Companys
accounting basis is
other-than-temporary,
the Company reduces the carrying value of the securities held
and records a loss equal to the amount of any such decline. No
such reductions were required during any of the periods
presented.
Property
and Equipment
The Company records property and equipment at cost and
calculates depreciation using the straight-line method over the
estimated useful lives of the respective assets. Machinery and
equipment includes external costs incurred for validation of the
equipment. The Company does not capitalize internal validation
expense. Computer equipment and software includes capitalized
computer software. All of the Companys capitalized
software is purchased; the Company has not internally developed
computer software. Leasehold improvements are depreciated over
the shorter of the term of the lease or useful life of the
improvement.
Impairment
of Long-Lived Assets
In accordance with Accounting Standards Codification
(ASC)
360-10,
Property, Plant, and Equipment Overall, the
Company reviews for impairment whenever events or changes in
circumstances indicate that the carrying amount of property and
equipment may not be recoverable. Determination of
recoverability is based on an estimate of undiscounted future
cash flows resulting from the use of the asset and its eventual
disposition. In the
F-6
ARADIGM
CORPORATION
NOTES TO
THE UNAUDITED CONDENSED FINANCIAL
STATEMENTS (Continued)
event that such cash flows are not expected to be sufficient to
recover the carrying amount of the assets, the assets are
written down to their estimated fair values and the loss is
recognized in the statements of operations.
Accounting
for Costs Associated with Exit or Disposal
Activities
In accordance with ASC 420, Exit or Disposal Cost
Obligations (ASC 420), the Company recognizes a
liability for the cost associated with an exit or disposal
activity that is measured initially at its fair value in the
period in which the liability is incurred. According to
ASC 420, costs to terminate an operating lease or other
contracts are (a) costs to terminate the contract before
the end of its term or (b) costs that will continue to be
incurred under the contract for its remaining term without
economic benefit to the entity. In periods subsequent to initial
measurement, changes to the liability are measured using the
credit-adjusted risk-free rate that was used to measure the
liability initially.
Revenue
Recognition
The Company recognizes revenue under the provisions of the
SECs Staff Accounting Bulletin 104, Topic 13,
Revenue Recognition Revised and Updated
(SAB 104) and ASC 605, Revenue
Recognition. In addition, contract revenue from the
Companys collaboration arrangements typically contain
multiple elements and are accounted for under the guidance of
ASC 605-25,
Revenue Recognition-Multiple Element Arrangements.
Contract Revenue. Contract revenues consist of
revenues from grants, collaboration agreements and feasibility
studies. The Company records license fees, milestone fees and
reimbursement of research and development expenses as contract
revenue. The Company reviews all of these arrangements for the
existence of multiple elements such as license fees, milestone
fees, research and development reimbursements, product steering
committee services and other performance obligations.
The Company reviews elements that have been delivered and
determines whether such items have value to the Companys
collaborators on a stand-alone basis and whether objective
reliable evidence of fair value of the undelivered items exists.
Deliverables that meet these criteria are considered a separate
unit of accounting and are recognized as revenue when delivered
and collection is reasonably assured. Deliverables that do not
meet these criteria are combined and accounted for as a single
unit of accounting. Revenue recognition criteria are identified
and applied to each separate unit of accounting. The Company
typically has not had reliable evidence of separate units and
has treated the entire arrangement as a single unit of
accounting.
Royalty Revenue. The Company earns royalty
revenue under the terms of the asset sale agreement with
Zogenix. Revenue is recognized when the amounts under this
agreement can be determined and when collectability is probable.
The Company has no performance obligations under this agreement.
Revenue will be recognized from the quarterly royalty payments
one quarter in arrears due to the contractual terms in the asset
sale agreement that allow Zogenix sixty days to complete their
royalty report following the end of the quarter. In the first
quarter of 2010, the Company received the $4.0 million
milestone payment that was due upon the first commercial sale by
Zogenix of a product using the DosePro* technology. This
one-time payment was recorded as royalty revenue for the three
months ended March 31, 2010. The Company anticipates
recording the recurring royalty revenue beginning with the three
months ending September 30, 2010 since the terms of the
asset sale agreement provides for royalty payments to be based
on cash received by Zogenix on their product sales and there is
a sixty day period following the end of the quarter for Zogenix
to complete their royalty reporting. The Company has been
informed by Zogenix that wholesalers distributing the SUMAVEL
DosePro product were given net 90 day payments terms for
the first quarter sales, resulting in the effective delay of
first quarter 2010 royalties until the second quarter 2010
royalty payment due in late August 2010. After first quarter
2010, the payment terms for wholesalers reverted to net
30 days.
F-7
ARADIGM
CORPORATION
NOTES TO
THE UNAUDITED CONDENSED FINANCIAL
STATEMENTS (Continued)
Research
and Development
Research and development expenses consist of costs incurred for
company-sponsored, collaborative and contracted research and
development activities. These costs include direct and
research-related overhead expenses. Research and development
expenses under collaborative and government grants approximate
the revenue recognized under such agreements. The Company
expenses research and development costs as such costs are
incurred.
Stock-Based
Compensation
The Company accounts for share-based payment arrangements in
accordance with ASC 718, Compensation-Stock Compensation
and
ASC 505-50,
Equity-Equity Based Payments to Non-Employees which
requires the recognition of compensation expense, using a
fair-value based method, for all costs related to share-based
payments including stock options and restricted stock awards and
stock issued under the Companys employee stock purchase
plan. This guidance requires companies to estimate the fair
value of share-based payment awards on the date of the grant
using an option-pricing model. The Company has adopted the
simplified method to calculate the beginning balance of the
additional paid-in capital, or APIC pool of excess tax benefits,
and to determine the subsequent effect on the APIC pool and
statement of cash flows of the tax effects of stock-based
compensation awards.
Income
Taxes
The Company makes certain estimates and judgments in determining
income tax expense for financial statement purposes. These
estimates and judgments occur in the calculation of certain tax
assets and liabilities, which arise from differences in the
timing of recognition of revenue and expense for tax and
financial statement purposes. As part of the process of
preparing the financial statements, the Company is required to
estimate income taxes in each of the jurisdictions in which it
operates. This process involves the Company estimating its
current tax exposure under the most recent tax laws and
assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which
are included in the balance sheets.
The Company assesses the likelihood that it will be able to
recover its deferred tax assets. It considers all available
evidence, both positive and negative, including the historical
levels of income and losses, expectations and risks associated
with estimates of future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for a
valuation allowance. If the Company does not consider it more
likely than not that it will recover its deferred tax assets,
the Company records a valuation allowance against the deferred
tax assets that it estimates will not ultimately be recoverable.
At June 30, 2010 and December 31, 2009, the Company
believed that the amount of its deferred income taxes would not
be ultimately recovered. Accordingly, the Company recorded a
full valuation allowance for deferred tax assets. However,
should there be a change in the Companys ability to
recover its deferred tax assets, the Company would recognize a
benefit to its tax provision in the period in which it
determines that it is more likely than not that it will recover
its deferred tax assets.
Net
Loss Per Common Share
Basic net loss per common share is computed using the
weighted-average number of shares of common stock outstanding
during the period less the weighted-average number of restricted
shares of common stock subject to repurchase. Potentially
dilutive securities were not included in the net loss per common
share calculation for the three and six months ended
June 30, 2010 and 2009, because the inclusion of such
shares would have had an anti-dilutive effect.
Recently
Issued Accounting Pronouncements
In April 2010, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update
(ASU)
2010-17,
Milestone Method of Revenue Recognition a consensus of the
FASB Emerging Issues Task Force.
F-8
ARADIGM
CORPORATION
NOTES TO
THE UNAUDITED CONDENSED FINANCIAL
STATEMENTS (Continued)
This standard provides guidance on defining a milestone and
determining when it may be appropriate to apply the milestone
method for revenue recognition for research and development
arrangements. This standard provides guidance on the criteria
that should be met to recognize revenue upon achievement of the
related milestone event. This guidance will be effective for us
for the three months ending September 30, 2010. We will
evaluate the impact of this guidance upon entering into any
future collaboration arrangements.
On January 21, 2010, the FASB issued ASU
2010-06,
Improving Disclosures About Fair Value Measurements which
amends ASC 820 to add new requirements for disclosures
about transfers into and out of Levels 1 and 2 and separate
disclosures about purchases, sales, issuances, and settlements
relating to Level 3 measurements.
ASU 2010-06
also clarifies existing fair value disclosures about the level
of disaggregation and about inputs and valuation techniques used
to measure fair value. We adopted this guidance for the three
months ended March 31, 2010. The adoption of this guidance
did not have an impact on the Companys financial position
or results of operations.
In September 2009, the FASB issued ASU
2009-13
Revenue Recognition (Topic 605): Multiple-Deliverable Revenue
Arrangements (formerly EITF Issue
No. 08-1
Revenue Arrangements with Multiple Deliverables).
This standard modifies the revenue recognition guidance for
arrangements that involve the delivery of multiple elements,
such as product, license fees and research and development
reimbursements, to a customer at different times as part of a
single revenue generating transaction. This standard provides
principles and application guidance to determine whether
multiple deliverables exist, how the individual deliverables
should be separated and how to allocate the revenue in the
arrangement among those separate deliverables. The standard also
significantly expands the disclosure requirements for multiple
deliverable revenue arrangements. We will evaluate the impact of
this standard for any multiple-deliverable arrangements that are
entered into in the future.
|
|
3.
|
Cash,
Cash Equivalents and Short-Term Investments
|
A summary of cash and cash equivalents and short-term
investments, classified as
available-for-sale
and carried at fair value is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gain
|
|
|
(Loss)
|
|
|
Fair Value
|
|
|
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,608
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Certificates of deposit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,903
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
500
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
500
|
|
Certificates of deposit
|
|
|
3,183
|
|
|
|
2
|
|
|
|
|
|
|
|
3,185
|
|
U.S. treasury and agencies
|
|
|
1,543
|
|
|
|
|
|
|
|
|
|
|
|
1,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,226
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
5,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-9
ARADIGM
CORPORATION
NOTES TO
THE UNAUDITED CONDENSED FINANCIAL
STATEMENTS (Continued)
The Company considers all liquid investments purchased with a
maturity of three months or less to be cash equivalents. The
Company had no short-term investments at June 30, 2010.
The Company invests its cash and cash equivalents and short-term
investments in money market funds, commercial paper and
corporate and government notes. All of these securities are
classified as available for sale with the unrealized gain and
loss being recorded in accumulated other comprehensive income.
|
|
4.
|
Fair
Value Measurements
|
The Company records its cash and cash equivalents and its short
term investments at fair value. The Company classifies these
assets by using the fair value hierarchy which is based on the
inputs used to measure fair value. The fair value hierarchy has
three levels based on the reliability of the inputs used to
determine fair value. Level 1 values are based on quoted
prices in active markets. Level 2 values are based on
significant other observable inputs. Level 3 values are
based on significant unobservable inputs. The following table
presents the fair value level for the assets that are measured
at fair value on a recurring basis and are categorized using the
fair value hierarchy. The Company does not have any liabilities
that are measured at fair value. The following table summarized
the basis used to measure certain assets at fair value on a
recurring basis at June 30, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Balance
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
June 30, 2010
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Cash and cash equivalents
|
|
$
|
9,608
|
|
|
$
|
5,609
|
|
|
$
|
3,999
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Certificates of deposit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys cash and cash equivalents at June 30,
2010 consisted of cash, commercial paper, U.S. agency notes
and money market funds. Money market funds are valued using
quoted market prices. The Company had no short-term investments
at June 30, 2010. The Company uses an independent third
party pricing service to value its commercial paper, and other
Level 2 investments. The pricing service uses observable
inputs such as new issue money market rates, adjustment spreads,
corporate actions and other factors and applies a series of
matrices pricing model.
|
|
5.
|
Sublease
Agreement and Lease Exit Liability
|
On July 18, 2007, the Company entered into a sublease
agreement with Mendel Biotechnology, Inc. (Mendel),
under which the Company subleases to Mendel approximately
48,000 square feet of the 72,000 square foot facility
located at 3929 Point Eden Way, Hayward, CA. The Company
recorded a $2.1 million impairment expense related to the
sublease for the year ended December, 31, 2007.
The Company recorded this expense and the related lease exit
liability because the monthly payments the Company expects to
receive under the sublease are less than the amounts that the
Company will owe the lessor for the sublease space. The fair
value of the lease exit liability was determined using a
credit-adjusted risk-free rate to discount the estimated future
net cash flows, consisting of the minimum lease payments to the
lessor for the sublease space and payments the Company will
receive under the sublease. The sublease loss and ongoing
accretion expense
F-10
ARADIGM
CORPORATION
NOTES TO
THE UNAUDITED CONDENSED FINANCIAL
STATEMENTS (Continued)
required to record the lease exit liability at its fair value
using the interest method have been recorded as part of
restructuring and asset impairment expense in the statement of
operations.
The lease exit liability activity for the six months ended
June 30, 2010 is as follows (in thousands):
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30, 2010
|
|
|
Balance at January 1, 2010
|
|
$
|
1,091
|
|
Accretion expense
|
|
|
26
|
|
Lease payments
|
|
|
(150
|
)
|
|
|
|
|
|
Balance at June 30, 2010
|
|
$
|
967
|
|
|
|
|
|
|
As of June 30, 2010, $182,000 of the $967,000 balance was
recorded as a current liability and $785,000 was recorded as a
non-current liability.
|
|
6.
|
Collaborations
and Royalty Agreements
|
Zogenix
In August 2006, the Company sold all of its assets related to
the Intraject needle-free injector technology platform and
products, including 12 United States patents along with foreign
counterparts, to Zogenix, Inc., a privately-held pharmaceutical
company. Zogenix is responsible for further development and
commercialization efforts of Intraject (now rebranded under the
name DosePro*). Under the terms of the asset sale agreement, the
Company received a $4.0 million initial payment from
Zogenix and was entitled to a $4.0 million milestone
payment upon initial U.S. commercialization, as well as
quarterly royalty payments upon the sale of DosePro products. In
December 2007, Zogenix submitted a New Drug Application
(NDA) with the U.S. Food and Drug
Administration (FDA) for the migraine drug
sumatriptan using the needle-free injector DosePro
(SUMAVEL* DosePro). The NDA was accepted for filing
by the FDA in March 2008. The same month, Zogenix entered into a
license agreement to grant exclusive rights in the European
Union to Desitin Pharmaceuticals, GmbH to develop and
commercialize SUMAVEL DosePro in the European Union.
On July 16, 2009, Zogenix announced that it had received
approval from the FDA for its NDA for SUMAVEL DosePro
needle-free delivery system. On August 3, 2009, Zogenix and
Astellas Pharma US, Inc. announced that they had entered into an
exclusive co-promotion agreement in the U.S. for the
SUMAVEL DosePro needle-free delivery system. Under the announced
terms of the agreement, the companies will collaborate on the
promotion and marketing of SUMAVEL DosePro with Zogenix focusing
their sales activities primarily on the neurology market while
Astellas will focus mostly on primary care physicians. Zogenix
will have responsibility for manufacturing and distribution of
the product.
On January 13, 2010, Zogenix announced the
U.S. commercial launch of its SUMAVEL DosePro product. The
U.S. launch entitled the Company to the $4.0 million
milestone payment which it received and recorded as royalty
revenue during the three months ended March 31, 2010. The
Company did not record any recurring royalty revenue for the
three and six months ended June 30, 2010. The Company
anticipates recording the recurring royalty revenue beginning
with the three months ending September 30, 2010 since the
terms of the asset sale agreement provides for royalty payments
to be based on cash received by Zogenix on their product sales
and there is a sixty day period following the end of the quarter
for Zogenix to complete their royalty reporting. The Company has
been informed by Zogenix that wholesalers distributing the
SUMAVEL DosePro product were given net 90 day payments
terms for the first quarter sales, resulting in the effective
delay of first quarter 2010 royalties until the second quarter
2010 royalty payment due in late August 2010. After first
quarter 2010, the payment terms for wholesalers reverted to net
30 days.
F-11
ARADIGM
CORPORATION
NOTES TO
THE UNAUDITED CONDENSED FINANCIAL
STATEMENTS (Continued)
|
|
7.
|
Stock-Based
Compensation and Stock Options, Awards and Units
|
The following table shows the stock-based compensation expense
included in the accompanying condensed statements of operations
for the six months ended June 30, 2010 and 2009 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
41
|
|
|
$
|
44
|
|
|
$
|
92
|
|
|
$
|
160
|
|
General and administrative
|
|
|
149
|
|
|
|
127
|
|
|
|
359
|
|
|
|
224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock based compensation expense
|
|
$
|
190
|
|
|
$
|
171
|
|
|
$
|
451
|
|
|
$
|
384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There was no capitalized stock-based employee compensation cost
for the three and six months ended June 30, 2010 and 2009.
Since the Company incurred net losses during the quarters ended
June 30, 2010 and 2009, there was no recognized tax benefit
associated with stock-based compensation expense.
The total amount of unrecognized compensation cost related to
non-vested stock options and stock purchases, net of
forfeitures, was $0.4 million as of June 30, 2010.
This amount will be recognized over a weighted average period of
1.71 years.
For restricted stock awards, the Company recognizes compensation
expense over the vesting period for the fair value of the stock
award on the measurement date. The total fair value of
restricted stock awards that vested during the six months ended
June 30, 2010 was $39,000. The Company retained purchase
rights with respect to 2,497,250 shares of unvested
restricted stock awards issued pursuant to stock purchase
agreements at no cost per share as of June 30, 2010. As of
June 30, 2010, there was $0.2 million of total
unrecognized compensation costs, net of forfeitures, related to
non-vested stock awards which are expected to be recognized over
a weighted average period of 1.34 years.
Stock
Option Plans: 1996 Equity Incentive Plan, 2005 Equity Incentive
Plan and 1996 Non-Employee Directors Plan
The 1996 Equity Incentive Plan (the 1996 Plan) and
the 2005 Equity Incentive Plan (the 2005 Plan),
which amended, restated and retitled the 1996 Plan, were adopted
to provide a means by which selected officers, directors,
scientific advisory board members and employees of and
consultants to the Company and its affiliates could be given an
opportunity to acquire an equity interest in the Company. All
employees, directors, officers, scientific advisory board
members and consultants of the Company are eligible to
participate in the 2005 Plan. During 2000, the board of
directors approved the termination of the 1996 Non-Employee
Directors Stock Option Plan (the Directors
Plan). This termination had no effect on options already
outstanding under the Directors Plan.
F-12
ARADIGM
CORPORATION
NOTES TO
THE UNAUDITED CONDENSED FINANCIAL
STATEMENTS (Continued)
Stock
Option Activity
The following is a summary of activity under the 1996 Plan, the
2005 Plan and the Directors Plan for the six months ended
June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
Shares Available
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
for Grant of
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Option, Award or
|
|
|
Number of
|
|
|
|
|
|
Exercise
|
|
|
|
Unit
|
|
|
Shares
|
|
|
Exercise Price Range
|
|
|
Price
|
|
|
Balance at January 1, 2010
|
|
|
763,185
|
|
|
|
5,088,443
|
|
|
$
|
0.15
|
|
|
|
|
|
|
$
|
120.63
|
|
|
$
|
2.49
|
|
Options authorized
|
|
|
4,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(400,000
|
)
|
|
|
400,000
|
|
|
|
0.12
|
|
|
|
|
|
|
|
0.13
|
|
|
|
0.12
|
|
Options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
526,515
|
|
|
|
(526,515
|
)
|
|
$
|
0.25
|
|
|
|
|
|
|
$
|
120.63
|
|
|
$
|
6.42
|
|
Restricted share awards granted
|
|
|
(350,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted share awards cancelled
|
|
|
229,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted share units awarded
|
|
|
(333,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan shares cancelled and not reauthorized
|
|
|
(4,136
|
)
|
|
|
|
|
|
$
|
120.63
|
|
|
|
|
|
|
$
|
120.63
|
|
|
$
|
120.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010
|
|
|
4,431,231
|
|
|
|
4,961,928
|
|
|
$
|
0.12
|
|
|
|
|
|
|
$
|
115.00
|
|
|
$
|
2.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value is the sum of the amounts by which the
quoted market price of the Companys stock exceeded the
exercise price of the stock options at June 30, 2010 for
those stock options for which the quoted market price was in
excess of the exercise price
(in-the-money
options). As of June 30, 2010, options to purchase
3,506,393 shares of common stock were exercisable and had
an aggregate intrinsic value of zero. In addition, options that
were not yet exercisable also had an intrinsic value of zero.
Thus, all of the Companys options were under
water since all the exercise prices of the Companys
outstanding options exceeded the market value of the
Companys common stock as of June 30, 2010.
No options were exercised during the six months ended
June 30, 2010.
A summary of the Companys unvested restricted stock and
performance bonus stock award as of June 30, 2010 is
presented below representing the maximum number of shares that
could be earned or vested under the 2005 Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Grant Date Fair
|
|
|
|
Shares
|
|
|
Value
|
|
|
Balance at December 31, 2009
|
|
|
2,668,006
|
|
|
$
|
0.41
|
|
Restricted share awards issued
|
|
|
350,000
|
|
|
|
0.12
|
|
Restricted share awards vested
|
|
|
(291,756
|
)
|
|
|
0.23
|
|
Restricted share awards cancelled
|
|
|
(229,000
|
|
|
|
0.20
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010
|
|
|
2,497,250
|
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
|
|
During the three months ended June 30, 2010, the Company
issued 333,333 shares of restricted stock units with no
exercise price to non-employee members of its Board of
Directors. The units will vest on the earlier of either a change
in control of the Company or upon the grantees termination
of service as a Board member. In 2010, the non-employee members
of the Board of Directors elected to forego all or a portion of
their cash compensation in lieu of the aforementioned restricted
stock unit grants and restricted stock awards.
F-13
ARADIGM
CORPORATION
NOTES TO
THE UNAUDITED CONDENSED FINANCIAL
STATEMENTS (Continued)
On June 21, 2010, the Company closed the June 2010 Private
Placement in which it sold 34,702,512 shares of common
stock and warrants to purchase an aggregate of
7,527,214 shares of common stock to accredited investors
(which included three existing significant investors) under the
terms of a securities purchase agreement that was entered into
with the investors on June 18, 2010. At the closing of the
June 2010 Private Placement, the Company received approximately
$4.1 million in aggregate gross proceeds from the sale of
the common stock and the warrants. After deducting for fees and
expenses, the aggregate net proceeds from the sale of the common
stock and the warrants were approximately $3.7 million. The
warrants have an exercise price of $0.1184 per share and are
exercisable after the Company has called and held a special
meeting of its shareholders to vote on a proposal to approve an
amendment to the Companys Amended and Restated Articles of
Incorporation to increase the number of authorized shares of
common stock and has received the requisite shareholder approval
for the shareholder proposal. The warrants also include a
mandatory exercise provision whereby the Company has the right
to require the holders to exercise the warrants after it has
received the requisite shareholder approval for the shareholder
proposal. The warrants expire the earlier of 10 business days
after the date on which the requisite shareholder approval for
the shareholder proposal is received and 90 days after the
issuance date of the warrants. Assuming the warrants are fully
exercised at an exercise price of $0.1184 per share, the Company
would receive approximately $0.9 million in additional
aggregate net proceeds from the exercise of the warrants.
|
|
9.
|
Net Loss
Per Common Share
|
The Company computes basic net loss per common share using the
weighted-average number of shares of common stock outstanding
during the period less the weighted-average number of shares of
common stock subject to repurchase. The effects of including the
incremental shares associated with options, warrants and
unvested restricted stock are anti-dilutive, and are not
included in the diluted weighted average number of shares of
common stock outstanding for the six month periods ended
June 30, 2010 and 2009.
The Company excluded the following securities from the
calculation of diluted net loss per common share for the six
months ended June 30, 2010 and 2009, as their effect would
be anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Outstanding stock options
|
|
|
4,962
|
|
|
|
5,377
|
|
Unvested restricted stock
|
|
|
2,497
|
|
|
|
1,423
|
|
Unvested restricted stock units
|
|
|
333
|
|
|
|
|
|
Outstanding common stock warrants
|
|
|
7,527
|
|
|
|
|
|
Comprehensive loss includes net loss and other comprehensive
income, which for the Company is primarily comprised of
unrealized holding gains and losses on the Companys
available-for-sale
securities that are excluded
F-14
ARADIGM
CORPORATION
NOTES TO
THE UNAUDITED CONDENSED FINANCIAL
STATEMENTS (Continued)
from the accompanying condensed statements of operations in
computing net loss and reported separately in shareholders
equity. Comprehensive loss and its components are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Net loss
|
|
$
|
(4,332
|
)
|
|
$
|
(9,813
|
)
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) on
available-for-sale
securities
|
|
|
(2
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(4,334
|
)
|
|
$
|
(9,821
|
)
|
|
|
|
|
|
|
|
|
|
On September 15, 2010, the Company closed the issuance to
Novo Nordisk A/S of 26,000,000 shares of the Companys
common stock under a stock purchase agreement, dated as of
July 30, 2010, by and among the Company and Novo Nordisk
A/S, which is referred to in this prospectus as the Novo Nordisk
stock purchase agreement, in consideration for the termination
of all of the Companys obligations under a promissory note
and security agreement dated July 3, 2006 in favor of Novo
Nordisk A/S. The closing occurred after the Company held a
special meeting of shareholders on September 14, 2010 and
obtained the requisite shareholder approval on a proposal to
amend the Companys amended and restated articles of
incorporation to increase the total number of authorized shares
of common stock to cover the 26,000,000 shares issuable
under the Novo Nordisk stock purchase agreement. An amended and
restated stock purchase agreement, dated as of January 26,
2005, previously entered into by the Company, Novo Nordisk A/S
and Novo Nordisk Pharmaceuticals, Inc. in connection with the
January 2005 restructuring transaction with Novo Nordisk was
also terminated at the closing. The July 3, 2006 promissory
note and security agreement had evidenced, among other things, a
loan that had been previously made by Novo Nordisk A/S to the
Company in the principal amount of $7.5 million, which had
bore interest accruing at 5% per annum and the principal, along
with the accrued interest, had been payable in three equal
payments of approximately $3.5 million on July 2,
2012, July 1, 2013 and June 30, 2014.
F-15
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Aradigm Corporation
We have audited the accompanying balance sheets of Aradigm
Corporation as of December 31, 2009 and 2008, and the
related statements of operations, shareholders equity
(deficit) and cash flows for the years then ended. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements audited by us present
fairly, in all material respects, the financial position of
Aradigm Corporation at December 31, 2009 and 2008 and the
results of its operations and its cash flows for the years then
ended, in conformity with U.S. generally accepted
accounting principles.
/s/ Odenberg Ullakko Muranishi & Co LLP
San Francisco, California
March 22, 2010
F-16
ARADIGM
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except
|
|
|
|
share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,903
|
|
|
$
|
16,741
|
|
Short-term investments
|
|
|
5,228
|
|
|
|
2,399
|
|
Receivables
|
|
|
155
|
|
|
|
393
|
|
Restricted cash
|
|
|
|
|
|
|
225
|
|
Prepaid and other current assets
|
|
|
328
|
|
|
|
387
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
9,614
|
|
|
|
20,145
|
|
Property and equipment, net
|
|
|
2,166
|
|
|
|
5,093
|
|
Notes receivable
|
|
|
52
|
|
|
|
34
|
|
Other assets
|
|
|
133
|
|
|
|
247
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
11,965
|
|
|
$
|
25,519
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
572
|
|
|
$
|
739
|
|
Accrued clinical and cost of other studies
|
|
|
670
|
|
|
|
94
|
|
Accrued compensation
|
|
|
341
|
|
|
|
1,051
|
|
Facility lease exit obligation
|
|
|
263
|
|
|
|
318
|
|
Other accrued liabilities
|
|
|
357
|
|
|
|
630
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,203
|
|
|
|
2,832
|
|
Deferred rent, non-current
|
|
|
136
|
|
|
|
199
|
|
Facility lease exit obligation, non-current
|
|
|
828
|
|
|
|
1,056
|
|
Deferred revenue, non-current
|
|
|
|
|
|
|
4,122
|
|
Other non-current liabilities
|
|
|
75
|
|
|
|
82
|
|
Note payable and accrued interest
|
|
|
8,896
|
|
|
|
8,472
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
12,138
|
|
|
|
16,763
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders equity (deficit):
|
|
|
|
|
|
|
|
|
Preferred stock, 5,000,000 shares authorized, none
outstanding
|
|
|
|
|
|
|
|
|
Common stock, no par value; authorized shares: 150,000,000 at
December 31, 2009 and 2008; issued and outstanding shares:
|
|
|
|
|
|
|
|
|
102,381,116 at December 31, 2009; 55,029,384 at
December 31, 2008
|
|
|
348,271
|
|
|
|
343,426
|
|
Accumulated other comprehensive income
|
|
|
2
|
|
|
|
4
|
|
Accumulated deficit
|
|
|
(348,446
|
)
|
|
|
(334,674
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity (deficit)
|
|
|
(173
|
)
|
|
|
8,756
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity (deficit)
|
|
$
|
11,965
|
|
|
$
|
25,519
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
F-17
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except
|
|
|
|
share data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Contract revenue
|
|
$
|
4,883
|
|
|
$
|
251
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
11,406
|
|
|
|
16,499
|
|
General and administrative
|
|
|
5,030
|
|
|
|
6,679
|
|
Restructuring and asset impairment
|
|
|
1,874
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
18,310
|
|
|
|
23,257
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(13,427
|
)
|
|
|
(23,006
|
)
|
Interest income
|
|
|
72
|
|
|
|
781
|
|
Interest expense
|
|
|
(428
|
)
|
|
|
(408
|
)
|
Other (expense), net
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(13,787
|
)
|
|
|
(22,633
|
)
|
Income tax benefit
|
|
|
15
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(13,772
|
)
|
|
$
|
(22,608
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.15
|
)
|
|
$
|
(0.42
|
)
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common
share
|
|
|
92,348
|
|
|
|
54,162
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
F-18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Shareholders
|
|
|
|
Common Stock
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
Balances at December 31, 2007
|
|
|
54,772,705
|
|
|
$
|
342,355
|
|
|
$
|
10
|
|
|
$
|
(312,066
|
)
|
|
$
|
30,299
|
|
Issuance of common stock under the employee stock purchase plan
|
|
|
300,524
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
190
|
|
Issuance of common stock upon exercise of common stock options
|
|
|
3,750
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Stock-based compensation
|
|
|
|
|
|
|
877
|
|
|
|
|
|
|
|
|
|
|
|
877
|
|
Reversal of restricted stock award due to forfeiture
|
|
|
(47,595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,608
|
)
|
|
|
(22,608
|
)
|
Unrealized (loss) on
available-for-sale
investments
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008
|
|
|
55,029,384
|
|
|
|
343,426
|
|
|
|
4
|
|
|
|
(334,674
|
)
|
|
|
8,756
|
|
Issuance of common stock in a public offering, net of issuance
costs
|
|
|
44,663,071
|
|
|
|
3,927
|
|
|
|
|
|
|
|
|
|
|
|
3,927
|
|
Issuance of common stock under the employee stock purchase plan
|
|
|
371,036
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
Issuance of common stock upon exercise of common stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock awards
|
|
|
2,418,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of restricted stock award due to forfeiture
|
|
|
(100,625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
873
|
|
|
|
|
|
|
|
|
|
|
|
873
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,772
|
)
|
|
|
(13,772
|
)
|
Unrealized (loss) on
available-for-sale
investments
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2009
|
|
|
102,381,116
|
|
|
$
|
348,271
|
|
|
$
|
2
|
|
|
$
|
(348,446
|
)
|
|
$
|
(173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
F-19
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(13,772
|
)
|
|
$
|
(22,608
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Non-cash asset impairment on property and equipment
|
|
|
1,654
|
|
|
|
|
|
Facility lease exit costs
|
|
|
158
|
|
|
|
|
|
Amortization and accretion of investments
|
|
|
21
|
|
|
|
26
|
|
Depreciation and amortization
|
|
|
1,067
|
|
|
|
871
|
|
Stock-based compensation expense
|
|
|
873
|
|
|
|
877
|
|
Loss on disposition of property and equipment
|
|
|
4
|
|
|
|
1
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
238
|
|
|
|
106
|
|
Prepaid and other current assets
|
|
|
61
|
|
|
|
584
|
|
Restricted cash
|
|
|
225
|
|
|
|
80
|
|
Other assets
|
|
|
14
|
|
|
|
24
|
|
Accounts payable
|
|
|
(167
|
)
|
|
|
(1,113
|
)
|
Accrued compensation
|
|
|
(710
|
)
|
|
|
(201
|
)
|
Accrued liabilities
|
|
|
720
|
|
|
|
(414
|
)
|
Deferred rent
|
|
|
(63
|
)
|
|
|
(84
|
)
|
Deferred revenue
|
|
|
(4,122
|
)
|
|
|
3,242
|
|
Facility lease exit obligation
|
|
|
(325
|
)
|
|
|
(375
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(14,124
|
)
|
|
|
(18,984
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
185
|
|
|
|
(2,548
|
)
|
Purchases of
available-for-sale
investments
|
|
|
(11,438
|
)
|
|
|
(3,629
|
)
|
Proceeds from maturities of
available-for-sale
investments
|
|
|
8,585
|
|
|
|
11,744
|
|
Notes receivable payments
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by investing activities
|
|
|
(2,686
|
)
|
|
|
5,567
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from public offering of common stock, net
|
|
|
3,927
|
|
|
|
|
|
Proceeds from issuance of common stock to Employee Stock
Purchase Plan
|
|
|
45
|
|
|
|
190
|
|
Proceeds from exercise of common stock options
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
3,972
|
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) in cash and cash equivalents
|
|
|
(12,838
|
)
|
|
|
(13,223
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
16,741
|
|
|
|
29,964
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
3,903
|
|
|
$
|
16,741
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
4
|
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
Cash paid (received) for income taxes
|
|
$
|
(25
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
F-20
ARADIGM
CORPORATION
|
|
1.
|
Organization
and Summary of Significant Accounting Policies
|
Organization
Aradigm Corporation (the Company) is a California
corporation focused on the development and commercialization of
drugs delivered by inhalation for the treatment of severe
respiratory diseases. The Companys principal activities to
date have included conducting research and development and
developing collaborations. Management does not anticipate
receiving any revenues from the sale of its products in the
upcoming year, except for milestone and royalty revenue from
Zogenix. The Company operates as a single operating segment.
Liquidity
and Financial Condition
The Company has incurred significant losses and negative cash
flows from operations since its inception. At December 31,
2009, the Company had an accumulated deficit of
$348.4 million, working capital of $7.4 million and
shareholders deficit of $0.2 million. Management
believes that cash, cash equivalents and short-term investments
at December 31, 2009, along with the anticipated Zogenix
milestone and royalty payments will be sufficient to enable the
Company to meet its obligations at least through 2010.
Management plans to continue to fund the Companys
operations with its cash balance, cash obtained through
milestone and royalty payments from Zogenix and proceeds from
the issuance of debt
and/or
equity securities.
Use of
Estimates
The preparation of financial statements, in conformity with
United States generally accepted accounting principles, requires
management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying
notes. These estimates include useful lives for property and
equipment and related depreciation calculations, estimated
amortization period for payments received from product
development and license agreements as they relate to the revenue
recognition, assumptions for valuing options and warrants, and
income taxes. Actual results could differ from these estimates.
Cash
Equivalents
All highly liquid investments with maturities of three months or
less at the time of purchase are classified as cash equivalents.
Investments
Management determines the appropriate classification of the
Companys marketable securities, which consist solely of
debt securities, at the time of purchase. All marketable
securities are classified as
available-for-sale,
carried at estimated fair value and reported in short-term
investments. Unrealized gains and losses on
available-for-sale
securities are excluded from earnings and losses and are
reported as a separate component in the statement of
shareholders equity (deficit) until realized. Fair values
of investments are based on quoted market prices where
available. Investment income is recognized when earned and
includes interest, dividends, amortization of purchase premiums
and discounts and realized gains and losses on sales of
securities. The cost of securities sold is based on the specific
identification method. The Company regularly reviews all of its
investments for
other-than-temporary
declines in fair value. When the Company determines that the
decline in fair value of an investment below the Companys
accounting basis is
other-than-temporary,
the Company reduces the carrying value of the securities held
and records a loss in the amount of any such decline. No such
reductions have been required during any of the periods
presented.
Property
and Equipment
The Company records property and equipment at cost and
calculates depreciation using the straight-line method over the
estimated useful lives of the respective assets. Machinery and
equipment includes external costs
F-21
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
incurred for validation of the equipment. The Company does not
capitalize internal validation expense. Computer equipment and
software includes capitalized computer software. All of the
Companys capitalized software is purchased; the Company
has not internally developed computer software. Leasehold
improvements are depreciated over the shorter of the term of the
lease or useful life of the improvement.
The estimated useful lives of property and equipment are as
follows:
|
|
|
Computer equipment and software
|
|
3 to 5 years
|
Furniture and fixtures
|
|
5 to 7 years
|
Lab equipment
|
|
5 to 7 years
|
Machinery and equipment
|
|
5 years
|
Leasehold improvements
|
|
5 to 17 years
|
Impairment
of Long-Lived Assets
In accordance with Statement of Accounting Standards
Codification (ASC)
360-10,
Property Plant and Equipment Overall, the
Company reviews for impairment whenever events or changes in
circumstances indicate that the carrying amount of property and
equipment may not be recoverable. Determination of
recoverability is based on an estimate of undiscounted future
cash flows resulting from the use of the asset and its eventual
disposition. In the event that such cash flows are not expected
to be sufficient to recover the carrying amount of the assets,
the assets are written down to their estimated fair values and
the loss is recognized in the statements of operations (see
Note 12).
Accounting
for Costs Associated with Exit or Disposal
Activities
In accordance with ASC 420, Exit or Disposal Activities
the Company recognizes a liability for the cost associated
with an exit or disposal activity that is measured initially at
its fair value in the period in which the liability is incurred.
The Company accounted for the partial sublease of its
headquarters building as an exit activity and recorded the
sublease loss in its statement of operations (see Note 6).
According to ASC 420, costs to terminate an operating lease
or other contracts are (a) costs to terminate the contract
before the end of its term or (b) costs that will continue
to be incurred under the contract for its remaining term without
economic benefit to the entity. In periods subsequent to initial
measurement, changes to the liability are measured using the
risk-free rate that was used to measure the liability initially.
Revenue
Recognition
Contract revenues consist of revenues from grants, collaboration
agreements and feasibility studies. The Company recognizes
revenue under the provisions of the Securities and Exchange
Commission issued Staff Accounting Bulletin 10, Topic 13,
Revenue Recognition Revised and Updated
(SAB Topic 13) and
ASC 605-25,
Revenue Recognition-Multiple Elements. Revenue for
arrangements not having multiple deliverables, as outlined in
ASC 605-25,
is recognized once costs are incurred and collectability is
reasonably assured.
In accordance with contract terms, milestone payments from
collaborative research agreements are considered reimbursements
for costs incurred under the agreements and, accordingly, are
recognized as revenue either upon completion of the milestone
effort, when payments are contingent upon completion of the
effort, or are based on actual efforts expended over the
remaining term of the agreement when payments precede the
required efforts. Refundable development payments are deferred
until specific performance criteria are achieved. Refundable
development payments are generally not refundable once specific
performance criteria are achieved and accepted.
Collaborative license and development agreements that require
the Company to provide multiple deliverables, such as a license,
research and product steering committee services and other
performance obligations, are accounted for in accordance with
ASC 605-25.
Under
ASC 605-25,
delivered items are evaluated to determine
F-22
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
whether such items have value to the Companys
collaborators on a stand-alone basis and whether objective
reliable evidence of fair value of the undelivered items exists.
Deliverables that meet these criteria are considered a separate
unit of accounting. Deliverables that do not meet these criteria
are combined and accounted for as a single unit of accounting.
The appropriate revenue recognition criteria are identified and
applied to each separate unit of accounting.
The Company determined that the Lung Rx collaboration agreement,
since it comprised of multiple deliverables without standalone
value, should be treated as a single unit of accounting.
Research
and Development
Research and development expenses consist of costs incurred for
company-sponsored, collaborative and contracted research and
development activities. These costs include direct and
research-related overhead expenses. The Company expenses
research and development costs as incurred.
Advertising
Advertising costs are charged to general and administrative
expense as incurred. Advertising expenses for the years ended
December 31, 2009 and 2008 were zero and $7,000,
respectively.
Stock-Based
Compensation
The Company accounts for share-based payment arrangements in
accordance with ASC 718, Compensation-Stock Compensation
and
ASC 505-50,
Equity-Equity Based Payments to Non-Employees which requires
the recognition of compensation expense, using a fair-value
based method, for all costs related to share-based payments
including stock options and restricted stock awards and stock
issued under the employee stock purchase plan. These standards
require companies to estimate the fair value of share-based
payment awards on the date of the grant using an option-pricing
model. See Note 10 for further discussion of the
Companys stock-based compensation plans.
Income
Taxes
The Company makes certain estimates and judgments in determining
income tax expense for financial statement purposes. These
estimates and judgments occur in the calculation of certain tax
assets and liabilities, which arise from differences in the
timing of the recognition of revenue and expense for tax and
financial statement purposes. As part of the process of
preparing the financial statements, the Company is required to
estimate its income taxes in each of the jurisdictions in which
it operates. This process involves the estimation of the current
tax exposure under the most recent tax laws and assessing
temporary differences resulting from differing treatment of
items for tax and accounting purposes. These differences result
in deferred tax assets and liabilities which are included in the
Companys balance sheets.
The Company assesses the likelihood that they will be able to
recover their deferred tax assets. The Company considers all
available evidence, both positive and negative, including its
historical levels of income and losses, expectations and risks
associated with estimates of future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the
need for a valuation allowance. If the Company does not consider
it more likely than not that they will recover their deferred
tax assets, they will record a valuation allowance against the
deferred tax assets that they estimate will not ultimately be
recoverable. At December 31, 2009 and 2008, the Company
believed that the amount of their deferred income taxes would
not be ultimately recovered. Accordingly, the Company recorded a
full valuation allowance for deferred tax assets. However,
should there be a change in the Companys ability to
recover its deferred tax assets, they would recognize a benefit
to their tax provision in the period in which they determine
that it is more likely than not that they will recover their
deferred tax assets.
F-23
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Net
Loss Per Common Share
Basic net loss per common share is computed using the
weighted-average number of shares of common stock outstanding
less the weighted-average number of shares subject to
repurchase. Unvested restricted stock awards subject to
repurchase totaled 2,668,000 shares and 704,000 shares
for the years ended December 31, 2009 and 2008,
respectively. Potentially dilutive securities were not included
in the net loss per share calculation for the years ended
December 31, 2009 and 2008 because the inclusion of such
shares would have had an anti-dilutive effect.
Potentially dilutive securities include the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
Outstanding stock options
|
|
|
5,088
|
|
|
|
4,185
|
|
Unvested restricted stock
|
|
|
2,668
|
|
|
|
704
|
|
Significant
Concentrations
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash
equivalents and short-term investments. Risks associated with
these instruments are mitigated by banking with, and only
purchasing commercial paper and corporate notes from,
creditworthy institutions. The maximum amount of loss due to
credit risk associated with these financial instruments is their
respective fair values as stated in the accompanying balance
sheets.
Comprehensive
Income (Loss)
ASC 220, Comprehensive Income requires that an
entitys change in equity or net assets during a period
from transactions and other events from non-owner sources be
reported. The Company reports unrealized gains or losses on its
available-for-sale
securities as other comprehensive income (loss). Total
comprehensive income (loss) has been disclosed on the statement
of shareholders equity (deficit).
Recently
Issued Accounting Pronouncements
In September 2009, the FASB issued Accounting Standards Update
(ASU)
No. 2009-13
Revenue Recognition (Topic 605): Multiple-Deliverable Revenue
Arrangements (formerly EITF Issue
No. 08-1
Revenue Arrangements with Multiple Deliverables).
This standard modifies the revenue recognition guidance for
arrangements that involve the delivery of multiple elements,
such as product, license fees and research and development
reimbursements, to a customer at different times as part of a
single revenue generating transaction. This standard provides
principles and application guidance to determine whether
multiple deliverables exist, how the individual deliverables
should be separated and how to allocate the revenue in the
arrangement among those separate deliverables. The standard also
significantly expands the disclosure requirements for multiple
deliverable revenue arrangements. We will evaluate the impact of
this standard for any multiple-deliverable arrangements that are
entered into in the future.
In August 2009, the FASB issued ASU
2009-05 to
provide guidance on measuring the fair value of liabilities
under ASC 820, Fair Value Measurements and
Disclosures. ASU
2009-05
became effective for us during the quarter ended
December 31, 2009. ASU
2009-05
provides guidance regarding valuation for liabilities which
trade as an asset in an active market. The adoption of ASU
2009-05 did
not have an impact on the Companys financial position or
results of operations.
In June 2009, the FASB issued SFAS 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles a replacement of FASB
Statement No 162 (now referred to as ASC 105). This
guidance states that that the codification will become the
source of authoritative United States generally accepted
accounting principles (GAAP). Once the codification
is in effect, all of its content will carry
F-24
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
the same level of authority. Thus, the GAAP hierarchy was
modified to include only two levels of GAAP, authoritative and
nonauthoritative. ASC 105 was effective for the Company in the
quarter ended September 30, 2009. Beginning with this
period, all references to authoritative accounting guidance
refers to the topics contained in the Accounting Standards
Codification. The adoption of ASC 105 did not have an
impact on the Companys financial position or results of
operations.
In May 2009, the FASB issued an accounting standard codified in
ASC 855, Subsequent Events (formerly SFAS 165).
This standard provides guidance on managements assessment
of subsequent events and includes existing guidance that was
previously included in United States generally accepted auditing
standards. In addition, the statement clarifies that management
is responsible for evaluating events and transactions occurring
after the balance sheet date and through the financial statement
issuance date that should be disclosed as subsequent events. The
evaluation and assessment must be performed for interim and
annual reporting periods. ASC 855 was effective for the
Company for the quarter ended June 30, 2009. In February
2010, the FASB issued ASU
2010-09,
Subsequent Events (ASU
2010-09).
ASU 2010-09
updates ASC 855, Subsequent Events and removes the
requirement to disclose the date through which an entity has
evaluated subsequent events. ASU
2010-09
became effective immediately. The adoption ASC 855 did not have
an impact on the Companys financial position or results of
operations.
In February 2008, the FASB issued FASB Staff Position
No. FAS 157-2,
Effective Date of FASB Statement No. 157 (FSP
FAS 157-2),
which defers the effective date of SFAS 157 for all
non-financial assets and non-financial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), for fiscal
years beginning after November 15, 2008 and interim periods
within those fiscal years for items within the scope of FSP
FAS 157-2.
The adoption of FSP
FAS 157-2
did not have a material impact on the Companys financial
position and results of operations.
In December 2007, the FASB issued an accounting standard
codified in ASC 805, Business Combinations (formerly
141(R)). This statement establishes principles and requirements
for how an acquirer in a business combination recognizes and
measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any controlling interest;
recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and determines
what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the
business combination. This guidance was effective for the
Company for any acquisitions that would have occurred beginning
in January 2009. The Company will assess the impact of this
standard and when a future acquisition occurs.
In November 2007, the FASB issued an accounting standard
codified in ASC 808, Collaborative Arrangements
(formerly EITF Issue
07-01).
Companies may enter into arrangements with other companies to
jointly develop, manufacture, distribute, and market a product.
Often the activities associated with these arrangements are
conducted by the collaborators without the creation of a
separate legal entity (that is, the arrangement is operated as a
virtual joint venture). The arrangements generally
provide that the collaborators will share, based on
contractually defined calculations, the profits or losses from
the associated activities. Periodically, the collaborators share
financial information related to product revenues generated (if
any) and costs incurred that may trigger a sharing payment for
the combined profits or losses. The consensus requires
collaborators in such an arrangement to present the result of
activities for which they act as the principal on a gross basis
and report any payments received from (made to) other
collaborators based on other applicable GAAP or, in the absence
of other applicable GAAP, based on analogy to authoritative
accounting literature or a reasonable, rational, and
consistently applied accounting policy election. This standard
was effective for collaborative arrangements in place at the
beginning of the annual period beginning after December 15,
2008. The adoption of this standard did not have a material
impact on the Companys financial position and results of
operations.
In June 2007, the FASB issued an accounting standard codified in
ASC 730, Research and Development (formerly EITF Issue
07-03).
This standard provides guidance on whether non-refundable
advance payments for goods that will be used or services that
will be performed in future research and development activities
should be
F-25
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
accounted for as research and development costs or deferred and
capitalized until the goods have been delivered or the related
services have been rendered. This standard was effective for
fiscal years beginning after December 15, 2007. The
adoption of this standard did not have a material impact on the
Companys financial position and results of operations.
In September 2006, the FASB issued an accounting standard
codified in ASC 820, Fair Value Measurements
(formerly SFAS 157). Among other requirements, this
standard defines fair value and establishes a framework for
measuring fair value and also expands disclosure about the use
of fair value to measure assets and liabilities. This standard
was effective beginning the first fiscal year that began after
November 15, 2007. The Company adopted this standard on
January 1, 2008 and adoption has not had a material impact
on the Companys financial position and results of
operations.
|
|
2.
|
Cash and
Cash Equivalents and Short-term Investments
|
A summary of cash and cash equivalents and short-term
investments, classified as
available-for-sale
and carried at fair value is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gain
|
|
|
(Loss)
|
|
|
Fair Value
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,903
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
500
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
500
|
|
Certificates of deposit
|
|
|
3,183
|
|
|
|
2
|
|
|
|
|
|
|
|
3,185
|
|
U.S. Treasury and agencies
|
|
|
1,543
|
|
|
|
|
|
|
|
|
|
|
|
1,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,226
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
5,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,741
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
16,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
2,395
|
|
|
$
|
4
|
|
|
$
|
|
|
|
$
|
2,399
|
|
U.S. Treasury and agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,395
|
|
|
$
|
4
|
|
|
$
|
|
|
|
$
|
2,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All short-term investments at December 31, 2009 and 2008
mature in less than one year. Unrealized holding gains and
losses on securities classified as
available-for-sale
are recorded in accumulated other comprehensive income. As of
December 31, 2009 and 2008 the difference between the fair
value and amortized cost of
available-for-sale
securities were gains of $2,000 and $4,000, respectively.
|
|
3.
|
Fair
Value Measurements
|
Effective January 1, 2008, the Company adopted
SFAS 157, Fair Value Measurements. (now referred to
as ASC 820) which clarifies the definition of fair
value, prescribes methods for measuring fair value, establishes
a fair value hierarchy based on the inputs used to measure fair
value and expands disclosures about the use of fair value
measurements. The fair value hierarchy has three levels based on
the reliability of the inputs used to determine fair value.
Level 1 values are based on quoted prices in active
markets. Level 2 values are based on significant other
observable inputs. Level 3 values are based on significant
unobservable inputs. The following table presents the fair value
level for the cash and cash equivalents and short-term
investments which represents the assets that are
F-26
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
measured at fair value on a recurring basis and are categorized
using the fair value hierarchy. The Company does not have any
liabilities that are measured at fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
2009
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
3,903
|
|
|
$
|
3,903
|
|
|
$
|
|
|
|
$
|
|
|
Short-term investments
|
|
|
5,228
|
|
|
|
|
|
|
|
5,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,131
|
|
|
$
|
3,903
|
|
|
$
|
5,228
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys cash and cash equivalents at
December 31, 2009 consist of cash and money market funds.
Money market funds are valued using quoted market prices. The
Companys short-term investments at December 31, 2009
consist of commercial paper, certificates of deposit and
U.S. Treasury and agency notes. The Company uses an
independent third party pricing service to value these
securities. The pricing service uses observable inputs such as
new issue money market rates, adjustment spreads, corporate
actions and other factors and applies a series of matrices
pricing model. The Company performs a review of prices reported
by the pricing service to determine if they are reasonable
estimates of fair value. In addition, the Company performs a
review of its securities to determine the proper classification
in accordance with the fair value hierarchy.
|
|
4.
|
Property
and Equipment
|
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Machinery and equipment
|
|
$
|
4,510
|
|
|
$
|
5,282
|
|
Furniture and fixtures
|
|
|
1,138
|
|
|
|
1,142
|
|
Lab equipment
|
|
|
2,488
|
|
|
|
2,488
|
|
Computer equipment and software
|
|
|
2,630
|
|
|
|
2,636
|
|
Leasehold improvements
|
|
|
1,861
|
|
|
|
1,901
|
|
|
|
|
|
|
|
|
|
|
Property and equipment at cost
|
|
|
12,627
|
|
|
|
13,449
|
|
Less accumulated depreciation and amortization
|
|
|
(10,461
|
)
|
|
|
(9,512
|
)
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
2,166
|
|
|
|
3,937
|
|
Construction in progress
|
|
|
|
|
|
|
1,156
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
2,166
|
|
|
$
|
5,093
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $1,067,000 and $871,000 for the years
ended December 31, 2009 and 2008, respectively.
In accordance with the terms of the Companys sublease
agreement with Mendel (see Note 6), the Company maintained
a certificate of deposit as collateral against a letter of
credit to secure the refund to Mendel of any unapplied portion
of the prepaid rent paid by Mendel. The restriction on the
Companys cash was lifted as the prepaid rent was applied
by Mendel. The letter of credit expired in November 2009 and all
of the restricted cash has been remitted to the Companys
main operating bank accounts.
F-27
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
6.
|
Sublease
Agreement and Lease Exit Liability:
|
On July 18, 2007, the Company entered into a sublease
agreement with Mendel to lease approximately 48,000 square
feet of the Companys 72,000 square foot headquarters
facility located in Hayward, California. In April 2009, the
Company entered into an amendment to its sublease agreement with
Mendel to sublease to Mendel an additional 1,550 square
feet. The Company recorded an additional sublease loss on the
amendment since the monthly payments the Company expects to
receive are less than the Company will owe the lessor for the
subleased space.
During the year ended December 31, 2007, the Company
recorded a $2.1 million lease exit liability and related
expense for the expected loss on the sublease, in accordance
with ASC 420 Exit or Disposal Cost Obligations,
because the monthly payments the Company expects to receive
under the sublease are less than the amounts that the Company
will owe the lessor for the sublease space. The fair value of
the lease exit liability was determined using a credit-adjusted
risk-free rate to discount the estimated future net cash flows,
consisting of the minimum lease payments to the lessor for the
sublease space and payments the Company will receive under the
sublease. The sublease loss and ongoing accretion expense
required to record the lease exit liability at its fair value
using the interest method have been recorded as part of
restructuring and asset impairment expense in the statement of
operations. The lease exit liability activity for the years
ended December 31, 2009 and 2008 are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Balance at beginning of year
|
|
$
|
1,374
|
|
|
$
|
1,749
|
|
Loss on sublease amendment to Mendel
|
|
|
42
|
|
|
|
|
|
Accretion expense
|
|
|
61
|
|
|
|
79
|
|
Lease payments
|
|
|
(386
|
)
|
|
|
(454
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of the year
|
|
$
|
1,091
|
|
|
$
|
1,374
|
|
|
|
|
|
|
|
|
|
|
The Company classified $263,000 of the $1,091,000 lease exit
liability in current liabilities and the remaining $828,000 in
non-current liabilities in the accompanying balance sheet at
December 31, 2009. At December 31, 2008, the Company
classified $318,000 of the lease exit liability in current
liabilities and $1,056,000 in non-current liabilities.
F-28
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Other liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Other accrued liabilities:
|
|
|
|
|
|
|
|
|
Accrued expense for services
|
|
$
|
302
|
|
|
$
|
389
|
|
Payroll withholding liabilities
|
|
|
47
|
|
|
|
76
|
|
Deposits
|
|
|
|
|
|
|
153
|
|
Other short term obligations
|
|
|
8
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
Total other accrued liabilities
|
|
$
|
357
|
|
|
$
|
630
|
|
|
|
|
|
|
|
|
|
|
Other non-current liabilities:
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
75
|
|
|
$
|
75
|
|
Other long term obligations
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Total other non-current liabilities
|
|
$
|
75
|
|
|
$
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
Notes
Payable and Accrued Interest
|
On July 3, 2006, Novo Nordisk, pursuant to the July 3,
2006 License Agreement, loaned the Company a principal amount of
$7.5 million under a Promissory Note and Security Agreement
(Promissory Note). The Promissory Note bears
interest accruing at 5% per annum and the principal, along with
the accrued interest, is payable in three equal payments of
$3.5 million at July 2, 2012, July 1, 2013 and
June 30, 2014. The amount outstanding under the Promissory
Note, including accrued interest, was $8.9 million and
$8.5 million as of December 31, 2009 and 2008,
respectively. The Promissory Note along with the related accrued
interest, is recorded on the balance sheets as a non-current
liability under the notes payable and accrued interest line item.
The Promissory Note contains a number of covenants that include
restrictions in the event of changes to corporate structure,
change in control and certain asset transactions. The Promissory
Note was also secured by a pledge of the net royalty stream
payable to the Company by Novo Nordisk pursuant to the
July 3, 2006 License Agreement.
The Company subsequently received a notice of termination of the
July 3, 2006 License Agreement by Novo Nordisk in January
2008. The termination of the July 3, 2006 License Agreement
did not accelerate any of the payment provisions under the
Promissory Note. As of March 22, 2010, there were no
covenant violations or any event of default.
F-29
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
9.
|
Leases,
Commitments and Contingencies
|
The Company has a lease for a building containing office and
laboratory and manufacturing facilities, which expires in 2016.
A portion of this lease obligation was offset by a sublease to
Mendel Biotechnology, Inc. (Mendel). Future minimum
non-cancelable lease payments at December 31, 2009 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Mendel
|
|
|
Net Operating
|
|
|
|
Leases
|
|
|
Sub-Lease
|
|
|
Lease Payments
|
|
|
Year ending December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
1,850
|
|
|
$
|
(957
|
)
|
|
$
|
893
|
|
2011
|
|
|
1,639
|
|
|
|
(986
|
)
|
|
|
653
|
|
2012
|
|
|
1,704
|
|
|
|
(896
|
)
|
|
|
808
|
|
2013
|
|
|
1,774
|
|
|
|
|
|
|
|
1,774
|
|
2014
|
|
|
1,844
|
|
|
|
|
|
|
|
1,844
|
|
2015 and thereafter
|
|
|
2,938
|
|
|
|
|
|
|
|
2,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
11,749
|
|
|
$
|
(2,839
|
)
|
|
$
|
8,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In July 2007, the Company entered into a sublease agreement with
Mendel to lease approximately 48,000 square feet of its
72,000 square foot headquarters located in Hayward,
California. In April 2009, the Company entered into an amendment
to its sublease agreement with Mendel to sublease an additional
1,550 square feet.
The sublease commenced in July 2007 and expires concurrently
with the master lease in July 2016. Under the sublease and
amendment, Mendel will make monthly base rent payments totaling
$2.6 million (exclusive of the termination fee) through
August 2012 that will offset a portion of the Companys
existing building lease obligation. Mendel has the option to
terminate the sublease early on September 1, 2012 for a
termination fee of $225,000. If the option to terminate the
sublease is not exercised by Mendel, the Company will receive
$4.2 million of additional monthly base rent payments
through the expiration of the sublease in 2016. Mendel will also
pay the Company for its share of all pass through costs such as
taxes, operating expenses and utilities based on the percentage
of the facility space occupied by them.
The Companys monthly rent payments fluctuates under the
master lease. In accordance with generally accepted accounting
principles, the Company recognizes rent expense on a
straight-line basis. The Company records deferred rent for the
difference between the amounts paid and recorded as expense. At
December 31, 2009 and 2008, the Company had
$0.1 million and $0.2 million of deferred rent,
respectively.
For the years ended December 31, 2009 and 2008, building
rent expense under operating leases totaled $0.6 million
and $0.7 million, respectively.
Indemnification
The Company from time to time enters into contracts that
contingently require the Company to indemnify parties against
third party claims. These contracts primarily relate to:
(i) real estate leases, under which the Company may be
required to indemnify property owners for environmental and
other liabilities, and other claims arising from the
Companys use of the applicable premises, and
(ii) agreements with the Companys officers, directors
and employees, under which the Company may be required to
indemnify such persons from certain liabilities arising out of
such persons relationships with the Company. To date, the
Company has made no payments related to such indemnifications
and no liabilities have been recorded for these obligations on
the balance sheets at December 31, 2009 or 2008.
F-30
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Legal
Matters
From time to time, the Company is involved in litigation arising
out of the ordinary course of its business. Currently there are
no known claims or pending litigation expected to have a
material effect on the Companys overall financial
position, results of operations, or liquidity.
On February 26, 2009, the Company closed a registered
direct offering covering the sale of an aggregate of
44.7 million shares under a shelf registration statement on
Form S-3
(No. 333-148263)
that was previously filed by the Company on December 21,
2007 and declared effective by the SEC on January 25, 2008.
The Company received net proceeds, after offering expenses, of
$3.9 million.
During 2009, the Company issued 371,036 shares of common
stock pursuant to the Employee Stock Purchase Plan
(ESPP) at an average price of $0.12 per share.
Reserved
Shares
At December 31, 2009 the Company had 5,088,443 shares
reserved for issuance upon exercise of options under all stock
option plans and 763,185 shares of common stock reserved
for issuance of new option grants. The Company had
3,068,880 shares available for future issuances under the
ESPP. The amount of shares available under the ESPP was
increased by 2,500,000 on May 15, 2009. On that date, the
Companys shareholders approved an amendment to the ESPP to
increase the aggregate number of shares of common stock
authorized for issuance.
Shareholder
Rights Plan
In September 2008, the Company adopted an amended and restated
shareholder rights plan, which replaced the rights plan
originally adopted in August 1998. Pursuant to the rights plan,
as amended and restated, the Company distributes rights to
purchase shares of Series A Junior Participating Preferred
Stock as a dividend at the rate of one right for each share of
common stock outstanding. Until the rights are distributed, the
rights trade with, and are not separable from, the
Companys common stock and are not exercisable. The rights
are designed to guard against partial tender offers and other
abusive and coercive tactics that might be used in an attempt to
gain control of the Company or to deprive the Companys
shareholders of their interest in the Companys long-term
value. The shareholder rights plan seeks to achieve these goals
by encouraging a potential acquirer to negotiate with the
Companys board of directors. The rights will expire at the
close of business on September 8, 2018.
Stock
Option Plans: 1996 Equity Incentive Plan, 2005 Equity Incentive
Plan and 1996 Non-Employee Directors Plan
The 1996 Equity Incentive Plan (the 1996 Plan) and
the 2005 Equity Incentive Plan (the 2005 Plan),
which amended, restated and retitled the 1996 Plan, were adopted
to provide a means by which officers, non-employee directors,
scientific advisory board members and employees of and
consultants to the Company and its affiliates could be given an
opportunity to acquire an equity interest in the Company. All
officers, non-employee directors, scientific advisory board
members and employees of and consultants to the Company are
eligible to participate in the 2005 Plan.
In April 1996, the Companys Board of Directors adopted and
the Companys shareholders approved the 1996 Plan, which
amended and restated an earlier stock option plan. The 1996 Plan
reserved 960,000 shares for future grants. During May 2001,
the Companys shareholders approved an amendment to the
Plan to include an evergreen provision. In 2003, the 1996 Plan
was amended to increase the maximum number of shares available
for issuance under the evergreen feature of the 1996 Plan by
400,000 shares to 2,000,000 shares. The evergreen
provision automatically increased the number of shares reserved
under the 1996 Plan, subject to certain limitations, by 6% of
the issued and outstanding shares of common stock of the Company
or such lesser number of shares as determined
F-31
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
by the board of directors on the date of the annual meeting of
shareholders of each fiscal year beginning 2001 and ending 2005.
As of December 31, 2009, the Company had 334,257 options
outstanding and 224,652 shares were available for future
grants under the 1996 Plan.
In March 2005, the Companys board of directors adopted and
in May 2005 the Companys shareholders approved the 2005
Plan, which amended, restated and retitled the 1996 Plan. All
outstanding awards granted under the 1996 Plan remain subject to
the terms of the 1996 Plan. All stock awards granted on or after
the adoption date are subject to the terms of the 2005 Plan. No
shares were added to the share reserve under the 2005 Plan other
than the shares available for future issuance under the 1996
Plan. Pursuant to the 2005 Plan, the Company had
2,918,638 shares of common stock authorized for issuance.
Options (net of canceled or expired options) covering an
aggregate of 1,999,252 shares of the Companys common
stock had been granted under the 1996 Plan, and
919,386 shares became available for future grant under the
2005 Plan. In March 2006, the Companys board of directors
amended, and in May 2006 the Companys shareholders
approved, the amendment to the 2005 Plan, increasing the shares
of common stock authorized for issuance by 2,000,000. In April
2007, the Companys board of directors amended, and in June
2007, the Companys shareholders approved the amendment to
the 2005 Plan, increasing the shares of common stock authorized
for issuance by 1,600,000 shares. In March 2008, the
Companys board of directors amended, and in May 2008 the
Company shareholders approved, the amendment to the 2005
Plan, increasing the shares of common stock authorized by
2,700,000. As of December 31, 2009, 538,533 shares
were available for future grants.
Options granted under the 2005 Plan expire no later than
10 years from the date of grant. Options granted under the
2005 Plan may be either incentive or non-statutory stock
options. For incentive and non-statutory stock option grants,
the option price shall be at least 100% and 85%, respectively,
of the fair value on the date of grant, as determined by the
Companys board of directors. If at any time the Company
grants an option, and the optionee directly or by attribution
owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company, the option price
shall be at least 110% of the fair value and shall not be
exercisable more than five years after the date of grant.
Options granted under the 2005 Plan may be immediately
exercisable if permitted in the specific grant approved by the
board of directors and, if exercised early may be subject to
repurchase provisions. The shares acquired generally vest over a
period of four years from the date of grant. The 2005 Plan also
provides for a transition from employee to consultant status
without termination of the vesting period as a result of such
transition. Under the 2005 Plan, employees may exercise options
in exchange for a note payable to the Company, if permitted
under the applicable grant. As of December 31, 2009 and
2008, there were no outstanding notes receivable from
shareholders. Any unvested stock issued is subject to repurchase
agreements whereby the Company has the option to repurchase
unvested shares upon termination of employment at the original
issue price. The common stock subject to repurchase has voting
rights, but cannot be resold prior to vesting. No grants with
early exercise provisions have been made under the 2005 Plan and
no shares have been repurchased. The Company granted options to
purchase 2,078,000 shares and 898,000 shares during
the years ended December 31, 2009 and 2008, respectively,
under the 2005 Plan, which included option grants to the
Companys non-employee directors in the amount of
600,000 shares and 125,000 shares during 2009 and
2008, respectively. The 2005 Plan had 4,744,450 option shares
outstanding as of December 31, 2009.
The 1996 Non-Employee Directors Stock Option Plan (the
Directors Plan) had 45,000 shares of
common stock authorized for issuance. Options granted under the
Directors Plan expire no later than 10 years from
date of grant. The option price shall be at 100% of the fair
value on the date of grant as determined by the board of
directors. The options generally vest quarterly over a period of
one year. During 2000, the board of directors approved the
termination of the Directors Plan. No more options can be
granted under the plan after its termination. The termination of
the Directors Plan had no effect on the options already
outstanding. There were 3,407 and 1,500 shares cancelled
due to option expirations for the years ended December 31,
2009 and 2008, respectively. As
F-32
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
of December 31, 2009, 9,736 outstanding options with
exercise prices ranging from $107.81 $120.63
remained with no additional shares available for grant.
The following is a summary of activity under the 1996 Plan, the
2005 Plan and the Directors Plan as of December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Shares Available
|
|
|
|
|
|
Average
|
|
|
for Grant of
|
|
Number of
|
|
|
|
Exercise
|
|
|
Option or Award
|
|
Shares
|
|
Price per Share
|
|
Price
|
|
Balance at December 31, 2007
|
|
|
1,837,161
|
|
|
|
3,493,154
|
|
|
$
|
1.02
|
|
|
|
|
|
|
$
|
120.63
|
|
|
$
|
5.37
|
|
Options authorized
|
|
|
2,700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(898,000
|
)
|
|
|
898,000
|
|
|
$
|
0.39
|
|
|
|
|
|
|
$
|
1.57
|
|
|
$
|
0.80
|
|
Options exercised
|
|
|
|
|
|
|
(3,750
|
)
|
|
$
|
1.15
|
|
|
|
|
|
|
$
|
1.15
|
|
|
$
|
1.15
|
|
Restricted stock awards granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
202,343
|
|
|
|
(202,343
|
)
|
|
$
|
1.23
|
|
|
|
|
|
|
$
|
71.25
|
|
|
$
|
10.65
|
|
Restricted share awards cancelled
|
|
|
147,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan shares cancelled and not reauthorized
|
|
|
(1,500
|
)
|
|
|
|
|
|
$
|
71.25
|
|
|
|
|
|
|
$
|
71.25
|
|
|
$
|
71.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
3,987,599
|
|
|
|
4,185,061
|
|
|
$
|
0.39
|
|
|
|
|
|
|
$
|
120.63
|
|
|
$
|
4.14
|
|
Options granted
|
|
|
(2,078,000
|
)
|
|
|
2,078,000
|
|
|
$
|
0.15
|
|
|
|
|
|
|
$
|
0.25
|
|
|
$
|
0.22
|
|
Options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards granted
|
|
|
(2,418,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
1,174,618
|
|
|
|
(1,174,618
|
)
|
|
$
|
0.17
|
|
|
|
|
|
|
$
|
112.50
|
|
|
$
|
4.34
|
|
Restricted share awards cancelled
|
|
|
100,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan shares cancelled and not reauthorized
|
|
|
(3,407
|
)
|
|
|
|
|
|
$
|
41.25
|
|
|
|
|
|
|
$
|
42.19
|
|
|
$
|
41.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
763,185
|
|
|
|
5,088,443
|
|
|
$
|
0.15
|
|
|
|
|
|
|
$
|
120.63
|
|
|
$
|
2.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-33
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
The following table summarizes information about stock options
outstanding and exercisable as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Options Exercisable
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
Weighted
|
|
|
Number
|
|
Remaining
|
|
Average
|
|
|
|
Average
|
|
|
of
|
|
Contractual
|
|
Exercise
|
|
Number of
|
|
Exercise
|
Exercise Price Range
|
|
Shares
|
|
Life (In Years)
|
|
Price
|
|
Shares
|
|
Price
|
|
$ 0.15 - $ 0.25
|
|
|
1,835,000
|
|
|
|
9.16
|
|
|
$
|
0.22
|
|
|
|
557,059
|
|
|
$
|
0.20
|
|
$ 0.26 - $ 0.87
|
|
|
540,000
|
|
|
|
8.59
|
|
|
|
0.63
|
|
|
|
220,311
|
|
|
|
0.69
|
|
$ 0.88 - $ 1.70
|
|
|
1,530,950
|
|
|
|
7.37
|
|
|
|
1.51
|
|
|
|
1,050,906
|
|
|
|
1.51
|
|
$ 1.71 - $ 3.14
|
|
|
762,400
|
|
|
|
6.62
|
|
|
|
1.86
|
|
|
|
678,470
|
|
|
|
1.85
|
|
$ 3.15 - $ 9.45
|
|
|
241,900
|
|
|
|
4.85
|
|
|
|
5.31
|
|
|
|
238,150
|
|
|
|
5.33
|
|
$ 9.46 - $ 18.65
|
|
|
67,866
|
|
|
|
2.92
|
|
|
|
15.65
|
|
|
|
67,866
|
|
|
|
15.65
|
|
$18.66 - $ 29.75
|
|
|
47,300
|
|
|
|
2.08
|
|
|
|
24.33
|
|
|
|
47,300
|
|
|
|
24.33
|
|
$29.76 - $ 48.75
|
|
|
22,642
|
|
|
|
1.25
|
|
|
|
30.99
|
|
|
|
22,642
|
|
|
|
30.99
|
|
$48.76 - $120.63
|
|
|
40,385
|
|
|
|
0.43
|
|
|
|
99.36
|
|
|
|
40,385
|
|
|
|
99.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,088,443
|
|
|
|
7.72
|
|
|
$
|
2.49
|
|
|
|
2,923,089
|
|
|
$
|
3.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value is the sum of the amounts by which the
quoted market price of the Companys stock exceeded the
exercise price of the stock options at December 31, 2009
and 2008 for those stock options for which the quoted market
price was in excess of the exercise price
(in-the-money
options). As of December 31, 2009 and 2008, the
aggregate intrinsic value of options outstanding was zero. As of
December 31, 2009, options to purchase
2,923,089 shares of common stock were exercisable and had
an aggregate intrinsic value of zero. No stock options were
exercised in 2009 and the total intrinsic value of stock options
exercised in 2008 was $200.
A summary of the activity of the Companys unvested
restricted stock and performance bonus stock award activities as
for the years ending December 31, 2009 and 2008 is
presented below. The ending balances represent the maximum
number of shares that could be earned or vested under the 2005
Plan:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Weighted Average
|
|
|
Shares
|
|
Grant Date Fair Value
|
|
Balance at December 31, 2007
|
|
|
870,724
|
|
|
$
|
1.66
|
|
Restricted stock awards granted
|
|
|
|
|
|
|
|
|
Restricted share awards vested
|
|
|
(19,594
|
)
|
|
|
3.63
|
|
Restricted share awards cancelled
|
|
|
(147,595
|
)
|
|
|
1.66
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
703,535
|
|
|
|
1.60
|
|
Restricted stock awards granted
|
|
|
2,418,250
|
|
|
|
0.16
|
|
Restricted share awards vested
|
|
|
(353,154
|
)
|
|
|
0.90
|
|
Restricted share awards cancelled
|
|
|
(100,625
|
)
|
|
|
0.99
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
2,668,006
|
|
|
|
0.41
|
|
|
|
|
|
|
|
|
|
|
For restricted stock awards, the Company recognizes compensation
expense over the vesting period for the fair value of the stock
award on the measurement date. The Companys 2009
restricted stock awards granted included 600,000 shares
with vesting provisions based solely on the achievement of
performance-based milestones. None of the restricted
performance-based milestone awards have yet been achieved. There
were no performance-based stock
F-34
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
awards granted in 2008. The Company records expense for these
awards if achievement of the award is probable. Expense is
recorded over the estimated service period until the
performance-based milestone is achieved.
The total fair value of restricted stock awards that did vest
during the years ended December 31, 2009 and 2008 was
$66,000 and $16,000, respectively. The Company retained purchase
rights to 2,668,000 and 704,000 shares of unvested
restricted stock awards issued pursuant to stock purchase
agreements at no cost per share as of December 31, 2009 and
2008, respectively. Total employee stock-based compensation
expense for restricted stock awards was $346,000 and $206,000
for the years ended December 31, 2009 and 2008,
respectively.
Employee
Stock Purchase Plan
Employees generally are eligible to participate in the Employee
Stock Purchase Plan (ESPP) if they have been
continuously employed by the Company for at least 10 days
prior to the first day of the offering period and are
customarily employed at least 20 hours per week and at
least five months per calendar year and are not a 5% or greater
shareholder. Shares may be purchased under the ESPP at 85% of
the lesser of the fair market value of the common stock on the
grant date or purchase date. Employee contributions, through
payroll deductions, are limited to the lesser of 15% of earnings
or $25,000.
As of December 31, 2009, a total of 1,481,120 shares
had been issued under the ESPP. In April 2008, the
Companys board of directors amended, and in May 2008 the
Company shareholders approved, the amendment to the ESPP
increasing the shares of common stock authorized by 1,000,000.
In April 2009, the Companys board of directors amended,
and in May 2009 the Company shareholders approved, the
amendment to the ESPP increasing the number of shares of common
stock authorized by 2,500,000. As of December 31, 2009,
there was a balance of 3,068,880 available authorized shares.
Compensation expense was $55,000 and $42,000 for the years ended
December 31, 2009 and 2008, respectively. The fair value of
employee stock purchase rights under the ESPP is determined
using the Black-Scholes option pricing model and the following
weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
Employee Stock Purchase Plan
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Volatility factor
|
|
|
115.4
|
%
|
|
|
64.8
|
%
|
Risk-free interest rate
|
|
|
0.9
|
%
|
|
|
1.7
|
%
|
Expected life (years)
|
|
|
2.00
|
|
|
|
0.52
|
|
Weighted-average fair value of purchase rights granted during
the period
|
|
$
|
0.11
|
|
|
$
|
0.15
|
|
Stock-Based
Compensation Expense
The Company adopted the fair value recognition provisions of
SFAS No. 123(R), Share-based Payment, (now
referred to as ASC 718) effective January 1,
2006. Stock-based compensation expense is based on the fair
value of that portion of stock options and restricted stock
awards that are ultimately expected to vest during the period.
Stock-based compensation expense recognized in the statement of
operations during 2009 and 2008 included compensation expense
for stock-based awards granted prior to, but not yet vested, as
of December 31, 2005, based on the grant date fair value
estimated in accordance with the pro forma provisions of
SFAS 123, and share-based payment awards granted subsequent
to December 31, 2005 based on the grant date fair value
estimated in accordance with SFAS 123(R). For stock options
granted after January 1, 2006, the fair value of each award
is amortized using the straight-line single-option method. For
share awards granted prior to 2006, the fair value of each award
was amortized using the accelerated multiple-option valuation
method prescribed by SFAS 123(R). Stock-based compensation
expense is based on awards ultimately expected to vest,
therefore, it has been reduced for estimated forfeitures. The
Companys estimated forfeiture rate is based on historical
experience.
F-35
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
The following table shows share-based compensation expense
included in the statement of operations for the years ended
December 31, 2009 and 2008, respectively (in thousands,
except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
305
|
|
|
$
|
553
|
|
General and administrative
|
|
|
568
|
|
|
|
324
|
|
|
|
|
|
|
|
|
|
|
Total stock-based employee compensation expense
|
|
$
|
873
|
|
|
$
|
877
|
|
|
|
|
|
|
|
|
|
|
Impact on basic and diluted net loss per common share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
There was no capitalized stock-based compensation cost as of
December 31, 2009. Since the Company has cumulative net
losses through December 31, 2009, there was no tax benefit
associated with stock-based compensation expense. As of
December 31, 2009, $441,000 of total unrecognized
compensation costs, net of forfeitures, related to non-vested
awards is expected to be recognized over a weighted average
period of 2.15 years.
Valuation
Assumptions
The fair value of options was estimated at the date of grant
using the Black-Scholes option pricing model. Expected
volatility is based on the historical volatility of the
Companys common stock for similar terms. The expected term
was estimated using a lattice model to estimate the expected
term as an input into the Black-Scholes option pricing model
since the Company has limited recent history regarding the
exercise of options The expected term represents the estimated
period of time that stock options are expected to be
outstanding, which is less than the contractual term which is
generally ten years. The risk-free interest rate is based on the
U.S. Treasury yield. The expected dividend yield is zero,
as the Company does not anticipate paying dividends in the near
future. The weighted average assumptions for employee and
non-employee options are as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
2009
|
|
2008
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Volatility factor
|
|
|
91.6
|
%
|
|
|
67.7
|
%
|
Risk-free interest rate
|
|
|
1.3
|
%
|
|
|
2.8
|
%
|
Expected term (years)
|
|
|
3.7
|
|
|
|
3.8
|
|
Weighted-average fair value of options granted during the periods
|
|
$
|
0.14
|
|
|
$
|
0.33
|
|
Stock-Based
Compensation for Non-Employees
The Company accounts for options issued to non-employees under
ASC 505-50,
Equity Equity Based Payments to Non-Employees,
using the Black-Scholes option-pricing model. The value of
such non-employee options are periodically re-measured over
their vesting terms.
|
|
11.
|
Collaborations
and Royalty Agreements
|
Lung
Rx
On August 30, 2007, the Company signed an Exclusive
License, Development and Commercialization Agreement (the
Lung Rx Agreement) with Lung Rx, Inc., (Lung
Rx), a wholly-owned subsidiary of United Therapeutics
Corporation, pursuant to which the Company granted Lung Rx, upon
the payment of specified amounts, an exclusive license to
develop and commercialize inhaled treprostinil using the
Companys AERx Essence technology for the treatment of
pulmonary arterial hypertension and other potential therapeutic
indications. The Company has received a total of
$4.9 million in milestone, development and other payments
under this
F-36
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
agreement. Up until the quarter ended September 30, 2009,
the Company had not recognized any revenue under the Lung Rx
Agreement due to the existence of certain undelivered
performance obligations.
On June 1, 2009, the Company received a written notice from
United Therapeutics Corporation seeking to terminate the Lung Rx
Agreement on July 1, 2009. During the three months ended
September 30, 2009, the Company engaged Lung Rx in
discussions about continuing or restructuring its collaboration
with Lung Rx. These discussions were not successful and the
Company concluded that the likelihood of further collaboration
with Lung Rx was remote. Therefore, during the three months
ended September 30, 2009, the Company recognized
$4.9 million of revenue relating to the Lung Rx Agreement
that had been previously deferred. In accordance with the
Companys revenue recognition policy, all amounts were
recognized as revenue in the quarter ended September 30,
2009 since the Company no longer had any performance obligations
under the Lung Rx Agreement.
Zogenix
In August 2006, the Company sold all of its assets related to
the Intraject needle-free injector technology platform and
products, including 12 United States patents along with foreign
counterparts, to Zogenix, Inc., a private company. Zogenix is
responsible for further development and commercialization
efforts of Intraject (now rebranded under the name DosePro).
Under the terms of the asset sale agreement, the Company
received a $4.0 million initial payment from Zogenix and it
will be entitled to a $4.0 million milestone payment upon
initial U.S. commercialization as well as royalty payments
upon commercialization of DosePro products. In December 2007,
Zogenix submitted a New Drug Application (NDA) with
the U.S. Food and Drug Administration (FDA) for
the migraine drug sumatriptan using the needle-free injector
DosePro (SUMAVEL DosePro). The NDA was accepted for
filing by the FDA in March 2008. The same month, Zogenix entered
into a license agreement to grant exclusive rights in the
European Union to Desitin Pharmaceuticals, GmbH to develop and
commercialize SUMAVEL DosePro in the European Union.
On July 16, 2009, Zogenix announced that it had received
approval from the FDA for its NDA for SUMAVEL DosePro
needle-free delivery system. On August 3, 2009, Zogenix and
Astellas Pharma US, Inc. announced that they had entered into an
exclusive co-promotion agreement in the U.S. for the
SUMAVEL DosePro needle-free delivery system. Under the announced
terms of the agreement, the companies will collaborate on the
promotion and marketing of SUMAVEL DosePro with Zogenix focusing
their sales activities primarily on the neurology market while
Astellas will focus mostly on primary care physicians. Zogenix
will have responsibility for manufacturing and distribution of
the product.
The Company did not receive any payments or recognize any
revenue under the Zogenix agreement for the years ended
December 31, 2009 and 2008.
In accordance with GAAP, the Company reviews for impairment
whenever events or changes in circumstances indicate that the
carrying amount of assets may not be recoverable. For the
quarter ended September 30, 2009, the Company concluded
that the termination of the Lung Rx Agreement and the subsequent
suspension of development activities warranted reviewing AERx
technology assets for impairment. The Company determined that
the production equipment used to manufacture the AERx product
constituted an asset group that should be reviewed for
impairment. These assets are presently idle and primarily
consist of customized AERx production equipment that does not
have an active resale market due to the specialized nature of
the assets. The Company determined that the net book value of
these assets exceeded the expected future cash flows.
Accordingly, the Company recorded an impairment charge of
$1.6 million to write down the assets to their estimated
fair value. The Company recorded this charge as a component of
restructuring and asset impairment on its Statement of
Operations. In addition, the Company recorded $0.3 million
in restructuring and asset impairment expense related to lease
exit activities.
F-37
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
13.
|
Employee
Benefit Plans
|
The Company provides a 401(k) Plan for substantially all
full-time employees. Employees can contribute on a pretax basis
up to the 2009 statutory limit of $16,500 (plus an additional
$5,500 for employees that are 50 years and older). The
Company matches employees contributions on 50% of the
first 6% of an employees contribution. The Companys
employer matching contribution expense was $62,000 and $108,000
in 2009 and 2008, respectively.
In 2009 and 2008, the Company recorded an income tax benefit of
$15,000 and $25,000, respectively. The income tax benefits were
a result of the refundable research and development credit that
was enacted in 2008. Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting and the amounts
used for tax purposes as well as net operating loss and tax
credit carryforwards.
Significant components of the Companys deferred tax assets
and liabilities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Net operating loss carryforwards
|
|
$
|
7,962
|
|
|
$
|
2,600
|
|
Research and development credits
|
|
|
6,389
|
|
|
|
6,300
|
|
Federal orphan drug credits
|
|
|
3,360
|
|
|
|
|
|
Other
|
|
|
1,818
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
19,529
|
|
|
|
11,900
|
|
Valuation allowance
|
|
|
(19,529
|
)
|
|
|
(11,900
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The Company considers all available evidence, both positive and
negative, including historical levels of taxable income,
expectations and risks associated with estimates of future
taxable income, and ongoing prudent and feasible tax planning
strategies in assessing the need for a valuation allowance. At
December 31, 2009 and 2008, based on the Companys
analysis of all available evidence, both positive and negative,
it was considered more likely than not that the Companys
deferred tax assets would not be realized, and as a result, the
Company recorded a valuation allowance for its deferred tax
assets. The valuation allowance increased by $7.6 million
during the year ended 2009 and decreased by $115.6 million
during the year ended December 31, 2008. The reduction in
the valuation allowance for the year ended December 31,
2008 includes the reversal of fully reserved deferred tax assets
related to net operating loss and credit carryforwards that may
not be available prior to their expiration as a result of
federal and state ownership change limitations. In accordance
with ASC 718 Compensation-Stock Compensation, the
Company has excluded from deferred tax assets tax benefits
attributable to employee stock option exercises.
F-38
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
The difference between the income tax benefit and the amount
computed by applying the federal statutory income tax rate to
loss before income taxes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Income tax benefit at federal statutory rate
|
|
$
|
(4,825
|
)
|
|
$
|
(7,921
|
)
|
Expired net operating losses
|
|
|
11
|
|
|
|
554
|
|
State taxes (net of federal)
|
|
|
(847
|
)
|
|
|
(1,461
|
)
|
Credits
|
|
|
(2,408
|
)
|
|
|
(289
|
)
|
Other
|
|
|
425
|
|
|
|
|
|
Reduction in deferred tax assets due to Section 382
limitations
|
|
|
|
|
|
|
124,743
|
|
Change in valuation allowance
|
|
|
7,629
|
|
|
|
(115,651
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(15
|
)
|
|
$
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the Company had federal net
operating loss carryforwards of approximately
$19.4 million, federal research and development tax credit
carryforwards of approximately $0.1 million and federal
orphan drug credit carryforwards of approximately
$3.4 million, which expire in the years 2010 through 2029.
The Company also had California net operating loss carryforwards
of approximately $20.7 million, which expire in the years
2011 through 2029, and California research and development tax
credit carryforwards of approximately $9.7 million, which
do not expire. None of the federal and state net operating loss
carryforwards represent stock option deductions arising from
activity under the Companys stock option plan.
The Company files income tax returns in the U.S. federal
jurisdiction and various state jurisdictions. The Company is
subject to U.S. federal and state income tax examinations
by tax authorities for tax years 1995 through 2009 due to net
operating losses that are being carried forward for tax purposes.
The Company adopted the provisions of FIN 48 (now referred
to as ASC 740) on January 1, 2007. The Company
did not have any unrecognized tax benefits at January 1,
2007, and does not have any unrecognized tax benefits at
December 31, 2009 and, as a result, there was no effect on
the Companys financial condition or results of operations
as a result of implementing FIN 48.
The Companys policy is to recognize interest and penalties
accrued on any unrecognized tax benefits as a component of
income tax expense. As of the date of adoption of FIN 48,
the Company did not have any accrued interest or penalties
associated with any unrecognized tax benefits, nor was any
interest expense recognized for the years ended
December 31, 2009 and 2008.
Federal and state laws limit the use of net operating loss and
credit carryforwards in certain situations where changes occur
in the stock ownership of a company. The Company conducted an
analysis of its stock ownership changes under Internal Revenue
Code Section 382 as of December 31, 2008 and has
reported its deferred tax assets related to net operating loss
and credit carryforwards after recognizing change of control
limitations that it believes occurred in 2008. The reduction in
deferred tax assets was offset by a reduction in the valuation
allowance. The Company did not have any subsequent
Section 382 limitations for the use of net operating loss
in 2009.
F-39
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
15.
|
Quarterly
Results of Operations (unaudited)
|
Following is a summary of the quarterly results of operations
for the years ended December 31, 2009 and 2008 (amounts in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
Contract revenues
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,883
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
3,726
|
|
|
|
2,927
|
|
|
|
2,426
|
|
|
|
2,327
|
|
General and administrative
|
|
|
1,398
|
|
|
|
1,368
|
|
|
|
1,323
|
|
|
|
941
|
|
Restructuring and asset impairment
|
|
|
17
|
|
|
|
205
|
|
|
|
1,638
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
5,141
|
|
|
|
4,500
|
|
|
|
5,387
|
|
|
|
3,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(5,141
|
)
|
|
|
(4,500
|
)
|
|
|
(504
|
)
|
|
|
(3,282
|
)
|
Net interest income (expense)
|
|
|
(76
|
)
|
|
|
(91
|
)
|
|
|
(93
|
)
|
|
|
(96
|
)
|
Other income (expense)
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(5,218
|
)
|
|
|
(4,594
|
)
|
|
|
(596
|
)
|
|
|
(3,379
|
)
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,218
|
)
|
|
$
|
(4,594
|
)
|
|
$
|
(596
|
)
|
|
$
|
(3,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.07
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common
share
|
|
|
70,704
|
|
|
|
99,298
|
|
|
|
99,347
|
|
|
|
99,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
Contract revenues
|
|
$
|
|
|
|
$
|
54
|
|
|
$
|
197
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
4,329
|
|
|
|
5,364
|
|
|
|
3,199
|
|
|
|
3,607
|
|
General and administrative
|
|
|
1,549
|
|
|
|
1,825
|
|
|
|
1,615
|
|
|
|
1,690
|
|
Restructuring and asset impairment
|
|
|
22
|
|
|
|
20
|
|
|
|
19
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
5,900
|
|
|
|
7,209
|
|
|
|
4,833
|
|
|
|
5,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(5,900
|
)
|
|
|
(7,155
|
)
|
|
|
(4,636
|
)
|
|
|
(5,315
|
)
|
Net interest income (expense)
|
|
|
263
|
|
|
|
102
|
|
|
|
41
|
|
|
|
(33
|
)
|
Other income (expense)
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
( 5,638
|
)
|
|
|
(7,052
|
)
|
|
|
(4,596
|
)
|
|
|
(5,347
|
)
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,638
|
)
|
|
$
|
(7,052
|
)
|
|
$
|
(4,596
|
)
|
|
$
|
(5,322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.10
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common
share
|
|
|
54,007
|
|
|
|
54,159
|
|
|
|
54,165
|
|
|
|
54,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zogenix
On January 13, 2010, Zogenix announced the
U.S. commercial launch of its SUMAVEL DosePro product. The
U.S. launch entitled the Company to the $4.0 million
milestone payment which the Company announced receiving
F-40
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
on February 4, 2010. The Company will be entitled to
quarterly royalty payments beginning with the quarter ending
March 31, 2010.
Property
Tax Assessment
On February 8, 2010, the Company received a Stipulation
Letter from the Office of the Assessor of the County of Alameda
(Assessor). The Assessor reduced the appraised value
of the property subject to the previously received assessment
and validated the Companys position on its appeal of the
original audit findings. The Company has not received revised
property tax bills or received refunds of amounts previously
paid, but it anticipates that the previously received
assessments of $508,000 will be significantly reduced.
June
2010 Private Placement
On June 21, 2010, the Company closed a private placement,
which is referred to in this prospectus as the June 2010 private
placement, in which the Company sold 34,702,512 shares of
the Companys common stock and warrants to purchase an
aggregate of 7,527,214 shares of common stock to accredited
investors (which included a few then-existing significant
shareholders) under the terms of a securities purchase agreement
that the Company entered into with the selling shareholders on
June 18, 2010. At the closing of the June 2010 private
placement, the Company received approximately $4.1 million
in aggregate gross proceeds from the sale of the common stock
and the warrants. After deducting for fees and expenses, the
aggregate net proceeds from the sale of the common stock and the
warrants were approximately $3.7 million. After the Company
held a special meeting of shareholders on September 14,
2010 and obtained the requisite shareholder approval on a
proposal to amend the Companys amended and restated
articles of incorporation to increase the total number of
authorized shares of common stock to cover the shares issuable
upon exercise of the warrants, the warrants were exercised and
the Company received approximately $891,000 in additional
aggregate net proceeds from the exercise of the warrants.
Novo
Nordisk Stock Purchase Agreement
On September 15, 2010, the Company closed the issuance to
Novo Nordisk A/S of 26,000,000 shares of the Companys
common stock under a stock purchase agreement, dated as of
July 30, 2010, by and among the Company and Novo Nordisk
A/S, which is referred to in this prospectus as the Novo Nordisk
stock purchase agreement, in consideration for the termination
of all of the Companys obligations under a promissory note
and security agreement dated July 3, 2006 in favor of Novo
Nordisk A/S. The closing occurred after the Company held a
special meeting of shareholders on September 14, 2010 and
obtained the requisite shareholder approval on a proposal to
amend the Companys amended and restated articles of
incorporation to increase the total number of authorized shares
of common stock to cover the 26,000,000 shares issuable
under the Novo Nordisk stock purchase agreement. An amended and
restated stock purchase agreement, dated as of January 26,
2005, previously entered into by the Company, Novo Nordisk A/S
and Novo Nordisk Pharmaceuticals, Inc. in connection with the
January 2005 restructuring transaction with Novo Nordisk was
also terminated at the closing. The July 3, 2006 promissory
note and security agreement had evidenced, among other things, a
loan that had been previously made by Novo Nordisk A/S to the
Company in the principal amount of $7.5 million, which had
bore interest accruing at 5% per annum and the principal, along
with the accrued interest, had been payable in three equal
payments of approximately $3.5 million on July 2,
2012, July 1, 2013 and June 30, 2014.
F-41
Aradigm Corporation
Up to 68,229,726 shares of
Common Stock
PROSPECTUS
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus or
any prospectus supplement. This prospectus is not an offer of
these securities in any jurisdiction where an offer and sale is
not permitted.
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution.
|
The estimated expenses (except for the SEC registration fee,
which is an actual expense) payable by the Registrant in
connection with the issuance and distribution of the securities
being registered are as follows:
|
|
|
|
|
SEC registration fee
|
|
$
|
656.75
|
|
Legal fees
|
|
|
85,000.00
|
|
Accounting fees
|
|
|
3,500.00
|
|
Miscellaneous fees
|
|
|
23,180.00
|
|
Total
|
|
$
|
112,336.75
|
|
|
|
Item 14.
|
Indemnification
of Directors and Officers.
|
Our articles of incorporation and bylaws include provisions to
(i) eliminate the personal liability of our directors for
monetary damages resulting from breaches of their fiduciary
duty, to the extent permitted by California law and
(ii) permit us to indemnify our directors and officers,
employees and other agents to the fullest extent permitted by
the California Corporations Code. Pursuant to Section 317
of the California Corporations Code, a corporation generally has
the power to indemnify its present and former directors,
officers, employees and agents against any expenses incurred by
them in connection with any suit to which they are, or are
threatened to be made, a party by reason of their serving in
such positions so long as they acted in good faith and in a
manner they reasonably believed to be in, or not opposed to, the
best interests of a corporation and, with respect to any
criminal action, they had no reasonable cause to believe their
conduct was unlawful. We believe that these provisions are
necessary to attract and retain qualified persons as directors
and officers. These provisions do not eliminate liability for
breach of the directors duty of loyalty to us or our
shareholders, for acts or omissions not in good faith or
involving intentional misconduct or knowing violations of law,
for any transaction from which the director derived an improper
personal benefit or for any willful or negligent payment of any
unlawful dividend.
We entered into indemnification agreements with certain
officers, including each of our named executive officers, and
each of our directors that provide, among other things, that we
will indemnify such officer or director, under the circumstances
and to the extent provided for therein, for expenses, damages,
judgments, fines and settlements such officer or director may be
required to pay in actions or proceedings to which such officer
or director is or may be made a party by reason of such
officers or directors position as an officer,
director or other agent of us, and otherwise to the full extent
permitted under California law and our bylaws.
|
|
Item 15.
|
Recent
Sales of Unregistered Securities.
|
On June 21, 2010, we closed a private placement, which we
refer to in this prospectus as the June 2010 private placement,
in which we sold 34,702,512 shares of our common stock and
warrants to purchase an aggregate of 7,527,214 shares of
our common stock to accredited investors (which included a few
then-existing significant shareholders) under the terms of a
securities purchase agreement that we entered into with the
selling shareholders on June 18, 2010. At the closing of
the June 2010 private placement, we received approximately
$4.1 million in aggregate gross proceeds from the sale of
the common stock and the warrants. After deducting for fees and
expenses, the aggregate net proceeds from the sale of the common
stock and the warrants were approximately $3.7 million.
After we held our special meeting of shareholders on
September 14, 2010 and obtained the requisite shareholder
approval on a proposal to amend our amended and restated
articles of incorporation to increase the total number of
authorized shares of our common stock to cover the shares
issuable upon exercise of the warrants, the warrants were
exercised and we received approximately $891,000 in additional
aggregate net proceeds from the exercise of the warrants. The
common stock and the warrants were offered and sold to the
selling shareholders without registration under the Securities
Act of 1933, as amended (the Securities Act), or any
state securities laws in reliance on the exemption from the
registration requirements of the Securities Act pursuant to
Section 4(2) thereof and Rule 506 of Regulation D
promulgated thereunder.
On September 15, 2010, we closed the issuance to Novo
Nordisk A/S of 26,000,000 shares of our common stock under
a stock purchase agreement, dated as of July 30, 2010, by
and among us and Novo Nordisk A/S, which
II-1
we refer to in this prospectus as the Novo Nordisk stock
purchase agreement, in consideration for the termination of all
of our obligations under a promissory note and security
agreement dated July 3, 2006 in favor of Novo Nordisk A/S.
The closing occurred after we held our special meeting of
shareholders on September 14, 2010 and obtained the
requisite shareholder approval on a proposal to amend our
amended and restated articles of incorporation to increase the
total number of authorized shares of our common stock to cover
the 26,000,000 shares issuable under the Novo Nordisk stock
purchase agreement. An amended and restated stock purchase
agreement, dated as of January 26, 2005, previously entered
into by us, Novo Nordisk A/S and Novo Nordisk Pharmaceuticals,
Inc. in connection with our January 2005 restructuring
transaction with Novo Nordisk was also terminated at the
closing. The July 3, 2006 promissory note and security
agreement had evidenced, among other things, a loan that had
been previously made by Novo Nordisk A/S to us in the principal
amount of $7.5 million, which had bore interest accruing at
5% per annum and the principal, along with the accrued interest,
had been payable in three equal payments of approximately
$3.5 million on July 2, 2012, July 1, 2013 and
June 30, 2014. The shares were offered and issued to Novo
Nordisk without registration under the Securities Act, or any
state securities laws in reliance on the exemption from the
registration requirements of the Securities Act afforded by
Section 4(2) thereof.
|
|
Item 16.
|
Exhibits
and Financial Statement Schedules.
|
(a) See the exhibit index immediately following the
signature page.
(b) No financial statement schedules are required.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by
section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20% change in the maximum aggregate
offering price set forth in the Calculation of
Registration Fee table in the effective registration
statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering; and
(4) That, for the purpose of determining liability under
the Securities Act of 1933 to any purchaser, each prospectus
filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses
filed in reliance on Rule 430A, shall be deemed to be part
of and included in the registration statement as of the date it
is first used after effectiveness. Provided, however, that no
statement made in a registration statement or prospectus that is
part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of
contract of sale prior to such first use, supersede or modify
any statement that was made in the registration
II-2
statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such
date of first use.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, we
have duly caused this Pre-Effective Amendment No. 2 to
Registration Statement on
Form S-1
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Hayward, State of California, on the
25th day of October, 2010.
ARADIGM CORPORATION
Igor Gonda
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 2 to Registration Statement has
been signed by the following persons in the capacities and on
the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Igor
Gonda
Igor
Gonda
|
|
President, Chief Executive
Officer and Director
(Principal Executive Officer)
|
|
October 25, 2010
|
|
|
|
|
|
/s/ Nancy
E. Pecota
Nancy
E. Pecota
|
|
Vice President, Finance and Chief Financial Officer (Principal
Financial and Accounting Officer)
|
|
October 25, 2010
|
|
|
|
|
|
*
Virgil
D. Thompson
|
|
Chairman of the Board and Director
|
|
October 25, 2010
|
|
|
|
|
|
*
Frank
H. Barker
|
|
Director
|
|
October 25, 2010
|
|
|
|
|
|
*
John
M. Siebert
|
|
Director
|
|
October 25, 2010
|
|
|
|
|
|
|
|
*By:
|
|
/s/ Igor
Gonda
Name:
Igor Gonda
Title: Attorney-in-fact
|
|
|
|
|
II-4
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
3
|
.1(1)
|
|
Amended and Restated Articles of Incorporation of the Company,
as amended.
|
|
3
|
.2(2)
|
|
Amended and Restated Bylaws of the Company, as amended.
|
|
3
|
.3(3)
|
|
Certificate of Determination of Series A Junior
Participating Preferred Stock.
|
|
3
|
.4(4)
|
|
Amended and Restated Certificate of Determination of Preferences
of Series A Convertible Preferred Stock.
|
|
3
|
.5(3)
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company.
|
|
3
|
.6(3)
|
|
Certificate of Amendment of Certificate of Determination of
Series A Junior Participating Preferred Stock.
|
|
3
|
.7(5)
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company.
|
|
3
|
.8(5)
|
|
Certificate of Amendment of Certificate of Determination of
Series A Junior Participating Preferred Stock.
|
|
3
|
.9(6)
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company.
|
|
3
|
.10(17)
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company.
|
|
3
|
.11(24)
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company.
|
|
4
|
.1
|
|
Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5, 3.6,
3.7, 3.8, 3.9 and 3.10.
|
|
4
|
.2(1)
|
|
Specimen common stock certificate.
|
|
5
|
.1
|
|
Opinion of Morrison & Foerster LLP
|
|
10
|
.1(1)+
|
|
Form of Indemnity Agreement between the Registrant and each of
its directors and officers.
|
|
10
|
.2(1)+
|
|
Form of the Companys Incentive Stock Option Agreement
under the 2005 Equity Incentive Plan.
|
|
10
|
.3(1)+
|
|
Form of the Companys Non-statutory Stock Option Agreement
under the 2005 Equity Incentive Plan.
|
|
10
|
.4(1)+
|
|
1996 Non-Employee Directors Stock Option Plan.
|
|
10
|
.5(1)+
|
|
Form of the Companys Non-statutory Stock Option Agreement
under the 1996 Non-Employee Directors Stock Option Plan.
|
|
10
|
.6(1)+
|
|
Form of the Companys Employee Stock Purchase Plan Offering
Document.
|
|
10
|
.7(6)+
|
|
Form of the Companys Restricted Stock Bonus Agreement
under the 2005 Equity Incentive Plan.
|
|
10
|
.8(7)
|
|
Promissory Note and Security Agreement, dated July 3, 2006,
by and between the Company and Novo Nordisk AS
|
|
10
|
.9(7)
|
|
Amended and Restated Stock Purchase Agreement, dated as of
January 26, 2005, by and among the Company, Novo Nordisk
A/S and Novo Nordisk Pharmaceuticals, Inc.
|
|
10
|
.10(7)#
|
|
Asset Purchase Agreement, dated as of August 25, 2006, by
and between the Company and Zogenix, Inc.
|
|
10
|
.11(7)+
|
|
Employment Agreement, dated as of August 10, 2006, with
Dr. Igor Gonda.
|
|
10
|
.12(8)
|
|
Lease Agreement for the property located in Phase V of the
Britannia Point Eden Business Park in Hayward, California, dated
January 28, 1998, between the Company and Britannia Point
Eden, LLC.
|
|
10
|
.13(9)#
|
|
Restructuring Agreement, dated as of September 28, 2004, by
and among the Company, Novo Nordisk A/S and Novo Nordisk
Delivery Technologies, Inc.
|
|
10
|
.14(10)
|
|
Securities Purchase Agreement, dated as of December 17,
2004, by and among the Company and the purchasers named therein.
|
|
10
|
.15(11)#
|
|
Second Amended and Restated License Agreement, dated as of
July 3, 2006, by and between the Company and Novo Nordisk
A/S.
|
|
10
|
.16(12)
|
|
Consulting Agreement effective as of July 2, 2007 by and
between the Company and Norman Halleen.
|
II-5
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
10
|
.17(13)
|
|
Sublease between the Company and Mendel Biotechnology, Inc.,
dated July 11, 2007, under the Lease Agreement by and
between the Company and Hayward Point Eden I Limited
Partnership, a Delaware limited partnership, as
successor-in-interest
to Britannia Point Eden, LLC, as amended, for 3929 Point Eden
Way, Hayward, California.
|
|
10
|
.18(14)
|
|
Manufacturing Agreement between the Company and Enzon
Pharmaceuticals, Inc. dated August 8, 2007.
|
|
10
|
.19(15)#
|
|
Exclusive License, Development and Commercialization Agreement,
dated as of August 30, 2007, by and between the Company and
Lung Rx, Inc.
|
|
10
|
.20(15)#
|
|
Collaboration Agreement, dated as of August 31, 2007, by
and between the Company and CyDex, Inc.
|
|
10
|
.21 (16)+
|
|
2005 Equity Incentive Plan, as amended
|
|
10
|
.22(17)+
|
|
Employee Stock Purchase Plan, as amended.
|
|
10
|
.23(18)
|
|
Amended and Restated Rights Agreement, dated as of
September 5, 2008 by and between the Company and
ComputerShare Trust Company, N.A.
|
|
10
|
.24(19)
|
|
Separation Agreement between the Company and Dr. Babatunde
Otulana, dated as of December 12, 2008.
|
|
10
|
.25(19)
|
|
Consulting Agreement for Independent Contractors between the
Company and Dr. Babatunde Otulana, effective as of
January 1, 2009.
|
|
10
|
.26(19)
|
|
International Scientific Advisory Agreement between the Company
and Dr. Babatunde Otulana, effective as of January 1,
2009.
|
|
10
|
.27(20)+
|
|
Amended and Restated form of Change of Control Agreement entered
into between the Company and certain of the Companys
senior officers.
|
|
10
|
.28(20)+
|
|
Amended and Restated Executive Officer Severance Benefit Plan.
|
|
10
|
.29(21)+
|
|
Amended and Restated Change of Control Agreement, dated as of
July 30, 2009 by and between Aradigm Corporation and Igor
Gonda.
|
|
10
|
.30(21)+
|
|
Amended and Restated Change of Control Agreement, dated as of
July 30, 2009 by and between Aradigm Corporation and Nancy
Pecota.
|
|
10
|
.31(21)+
|
|
Amended and Restated Change of Control Agreement, dated as of
July 30, 2009 by and between Aradigm Corporation and
Jeffery Grimes.
|
|
10
|
.32(21)
|
|
Security Agreement, dated as of July 30, 2009 by and among
Aradigm Corporation, Igor Gonda, Jeffery Grimes and Nancy Pecota.
|
|
10
|
.33(22)
|
|
Securities Purchase Agreement, dated June 18, 2010, by and
among Aradigm Corporation and the investors listed on the
Schedule of Buyers attached thereto.*
|
|
10
|
.34(22)
|
|
Form of Registration Rights Agreement used in connection with
the June 2010 private placement.
|
|
10
|
.35(22)
|
|
Form of Warrant used in connection with the June 2010 private
placement.
|
|
10
|
.36(23)
|
|
Stock Purchase Agreement, dated as of July 30, 2010, by and
among Aradigm Corporation and Novo Nordisk A/S.*
|
|
10
|
.37(23)
|
|
Registration Rights Agreement, dated as of July 30, 2010,
by and among Aradigm Corporation and Novo Nordisk A/S.
|
|
10
|
.38(23)
|
|
First Amendment to Securities Purchase Agreement and
Registration Rights Agreement, dated as of July 20, 2010,
by and among Aradigm Corporation and the investors party thereto.
|
|
23
|
.1
|
|
Consent of Odenberg Ullakko Muranishi & Co LLP,
Independent Registered Public Accounting Firm.
|
|
23
|
.2
|
|
Consent of Morrison & Foerster LLP (included in
Exhibit 5.1)
|
|
24
|
.1
|
|
Power of Attorney. Reference is made to the signature page
included with the initial filing of the Registration Statement
on August 11, 2010.
|
|
|
|
|
|
To be filed by amendment. |
II-6
|
|
|
+ |
|
Represents a management contract or compensatory plan or
arrangement. |
|
# |
|
The Commission has granted the Companys request for
confidential treatment with respect to portions of this exhibit. |
|
* |
|
Certain schedules have been omitted. The registrant agrees to
furnish supplementally a copy of any omitted schedule or exhibit
to the Commission upon request. |
|
(1) |
|
Incorporated by reference to the Companys
Form S-1
(No. 333-4236)
filed on April 30, 1996, as amended. |
|
(2) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on August 14, 1998. |
|
(3) |
|
Incorporated by reference to the Companys
Form 10-K
filed on March 29, 2002. |
|
(4) |
|
Incorporated by reference to the Companys
Form S-3
(No. 333-76584)
filed on January 11, 2002, as amended. |
|
(5) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on August 13, 2004. |
|
(6) |
|
Incorporated by reference to the Companys
Form 10-K
filed on March 31, 2006. |
|
(7) |
|
Incorporated by reference to the Companys
Form S-1
(No. 333-138169)
filed on October 24, 2006, as amended. |
|
(8) |
|
Incorporated by reference to the Companys
Form 10-K
filed on March 24, 1998, as amended. |
|
(9) |
|
Incorporated by reference to the Companys
Form 8-K
filed on December 23, 2004. |
|
(10) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on August 14, 2006. |
|
(11) |
|
Incorporated by reference to the Companys
Form 8-K
filed on October 13, 2005. |
|
(12) |
|
Incorporated by reference to the Companys
Form 8-K
filed on July 11, 2007. |
|
(13) |
|
Incorporated by reference to the Companys
Form 8-K
filed on July 24, 2007. |
|
(14) |
|
Incorporated by reference to the Companys
Form 8-K
filed on August 14, 2007. |
|
(15) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on November 14, 2007. |
|
(16) |
|
Incorporated by reference to the Companys definitive proxy
statement filed on April 7, 2008. |
|
(17) |
|
Incorporated by reference to the Companys
Form 8-K
filed on May 21, 2009. |
|
(18) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on November 12, 2008. |
|
(19) |
|
Incorporated by reference to the Companys
Form 8-K
filed on December 19, 2008. |
|
(20) |
|
Incorporated by reference to the Companys
Form 8-K
filed on January 8, 2009. |
|
(21) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on November 6, 2009. |
|
(22) |
|
Incorporated by reference to the Companys
Form 8-K
filed on June 21, 2010. |
|
(23) |
|
Incorporated by reference to the Companys
Form 8-K
filed on August 2, 2010. |
|
(24) |
|
Incorporated by reference to the Companys
Form 8-K
filed on September 20, 2010. |
II-7