sv1za
As filed with the Securities and Exchange Commission on
January 4, 2007
Registration
No. 333-138169
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
Aradigm Corporation
(Exact name of Registrant as specified in its charter)
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California |
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2834 |
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94-3133088 |
(State or other jurisdiction of
incorporation or organization) |
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(Primary Standard Industrial
Classification Code Number) |
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(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)
Dr. 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)
Copies to:
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James C. Kitch, Esq.
Peter H. Werner, Esq.
Tarak I. Shah, Esq.
COOLEY GODWARD KRONISH LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, California 94306
(650) 843-5000 |
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Jeffrey S. Marcus, Esq.
J. Nathan Jensen, Esq.
MORRISON & FOERSTER LLP
1290 Avenue of the Americas
New York, New York 10104
(212) 468-8000 |
Approximate date of commencement of proposed sale to the
public:
As soon as practicable 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. o
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
CALCULATION OF REGISTRATION FEE
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Title of Each Class |
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of Securities to be |
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Amount Being |
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Maximum Offering |
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Proposed Maximum |
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Amount of |
Registered |
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Registered (1) |
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Price Per Security (2) |
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Aggregate Offering Price (2) |
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Registration Fee (3) |
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Common Stock, no par value
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34,500,000 |
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$0.81 |
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$27,945,000 |
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$2,990.12 |
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(1) |
Includes 4,500,000 shares that the underwriters have the
option to purchase to cover over-allotments, if any. |
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(2) |
Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the
Securities Act of 1933, as amended. |
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(3) |
$3,494.62 was previously paid on October 24, 2006. |
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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. We may
not sell these securities 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.
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Subject to
completion, dated January 4, 2007
30,000,000 Shares
ARADIGM CORPORATION
Common Stock
We are offering 30,000,000 shares of our common stock. We
have granted the underwriters a
30-day option to
purchase up to an additional 4,500,000 shares to cover
over-allotments.
Our common stock is quoted on the OTC Bulletin Board under the
symbol ARDM. The last reported sale price of our
common stock on the OTC Bulletin Board on January 3, 2007
was $0.99 per share.
Investing in our common stock involves risks. See Risk
Factors beginning on page 7.
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Per Share | |
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Total | |
Public Offering Price
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$ |
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$ |
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Underwriting Discount
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$ |
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$ |
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Proceeds to Aradigm (before expenses)
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$ |
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$ |
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Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these
securities, or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The underwriters expect to deliver the shares to purchasers
on ,
2007.
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PUNK, ZIEGEL & COMPANY |
MERRIMAN CURHAN FORD & CO. |
The date of this prospectus
is ,
2007.
TABLE OF CONTENTS
You should rely only on the information contained in this
prospectus. We have not, and the underwriters have not,
authorized anyone to provide you with information that is
different. This prospectus is not an offer to sell, nor is it
seeking an offer to buy, these securities in any jurisdiction
where the offer or sale of these securities is not permitted.
You should assume that the information contained in this
prospectus is accurate as of the date on the front of this
prospectus only. Our business, financial condition, results of
operations and prospects may have changed since that date.
Aradigm®,
AERx®
and the
Aradigm®
logo are registered trademarks of Aradigm Corporation. This
prospectus also includes other trademarks of Aradigm Corporation
and trademarks of other persons.
This prospectus also contains statistical data that we obtained
from industry publications and reports generated by Business
Insights, Wolters Kluwer PHAST, the Cystic Fibrosis Foundation,
the American Lung Association, the American Diabetes
Association, Datamonitor and Decision Resources. These industry
publications and reports generally indicate that the information
contained therein was obtained from sources believed to be
reliable, but do not guarantee the accuracy and completeness of
such information. Although we believe that the publications and
reports are reliable, we have not independently verified the
data.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in
this prospectus and does not contain all of the information that
you should consider in making your investment decision. Before
investing in our common stock, you should carefully read this
entire prospectus, including our financial statements and the
related notes and the information set forth under the headings
Risk Factors and Managements Discussion
and Analysis of Financial Condition and Results of
Operations, in each case included elsewhere in this
prospectus.
Our Business
We are an emerging specialty pharmaceutical company focused on
the development and commercialization of a portfolio of drugs
delivered by inhalation for the treatment of severe respiratory
diseases by pulmonologists. Local delivery of drugs to the
respiratory tract by inhalation for the treatment of respiratory
disease has been shown to be safe and efficacious and to provide
a rapid onset of action in conditions such as asthma, chronic
bronchitis and cystic fibrosis. We have developed a significant
amount of expertise and intellectual property in pulmonary drug
delivery for respiratory and systemic diseases over the last
decade. We have demonstrated in our laboratory research and
clinical trials that our hand-held AERx pulmonary drug delivery
system, with a product candidate currently in Phase 3
clinical trials, is particularly suitable for drugs where highly
efficient and precise delivery to the respiratory tract is
advantageous or essential.
We currently have four respiratory products in development:
innovative treatments for cystic fibrosis, asthma, pulmonary
arterial hypertension, and inhalation anthrax. Two of these
programs are in collaboration with others. In selecting our
development programs, we seek drugs approved by the United
States Food and Drug Administration, or the 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 to patients. We believe that this strategy will
allow us to reduce cost, development time and risk of failure,
when compared to the discovery and development of new chemical
entities. We intend to commercialize our respiratory products
with our own focused sales and marketing force addressing
pulmonary specialty doctors in the United States, where we
believe that a proprietary sales force will enhance the return
to our shareholders. Where our products can benefit a broader
population of patients in the United States or in other
countries, we may enter into co-development, co-promotion or
other marketing arrangements with collaborators, thereby
reducing costs and increasing revenues through license fees,
milestone payments and royalties.
Pulmonary delivery by inhalation is already a widely used, 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, offering 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. Based on our
analysis of market data from Business Insights and Wolters
Kluwer PHAST, we believe that we could potentially address a
market opportunity currently estimated at approximately
$20 billion, and growing at over 10% per year, for
inhaled treatments of chronic respiratory diseases.
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 via 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. The
most advanced product candidate based on the AERx delivery
system is in Phase 3 clinical trials being conducted by our
licensee, Novo Nordisk A/S, to deliver insulin systemically via
the lungs for the treatment of diabetes. We believe particular
opportunities exist for the use of our pulmonary
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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 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 the opportunities in the respiratory disease
market as well as other pharmaceutical markets that would
benefit from the efficient, non-invasive inhalation delivery of
drugs.
Our Strategy
We have developed a business strategy, comprised of five key
elements, that we believe will allow us to achieve a leading
position in the specialty pharmaceutical market for respiratory
disease therapies.
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We intend to develop a proprietary portfolio of respiratory
disease therapies, where we apply our delivery and formulation
technologies to existing drugs to provide a superior therapeutic
profile or other valuable benefits to the patient when compared
with existing treatment options. |
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We will seek to use regulatory pathways that will allow us to
reduce the time, risks and costs associated with product
development. |
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As we approach commercialization of our own products, we intend
to establish a specialty sales and marketing force addressing
pulmonologists and subspecialists in the United States. |
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We will continue to explore and exploit the potentially broad
applicability of our validated delivery technologies for
systemic applications in collaborations with companies that will
fund development and commercialization. |
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We plan to outsource the late stage clinical and commercial
scale manufacturing of our products to conserve our capital for
product development. |
Product Candidates
The following table shows the disease indication and stage of
development for each product candidate in our portfolio.
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Product Candidate |
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Indication |
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Stage of Development |
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Proprietary Programs Under Development
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ARD-3100 (Liposomal ciprofloxacin)
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Cystic Fibrosis (CF) |
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Preclinical |
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ARD-1100 (Liposomal ciprofloxacin)
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Inhalation Anthrax |
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Preclinical |
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Collaborative Programs Under Development
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AERx iDMS (Insulin)
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Type 1 and Type 2 Diabetes |
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Phase 3 |
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ARD-1300 (Hydroxychloroquine)
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Asthma |
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Phase 2 (1 |
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ARD-1500 (Liposomal treprostinil)
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Pulmonary Arterial Hypertension |
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Preclinical |
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(1) |
A Phase 2a clinical study did not meet pre-specified clinical
endpoints. The program is currently under review. |
Our ARD-3100 program for the management of CF represents the
first product candidate that we intend to develop and
commercialize ourselves. We have received orphan drug
designation for this indication from the FDA. We believe that
the local lung delivery of the antibiotic ciprofloxacin in a
sustained release formulation could provide improved treatment
of the debilitating and often life-threatening lung infections
that afflict patients with CF. This program relies on much of
the laboratory and production development efforts, as well as
the preclinical safety database that we have developed, in
conjunction with our ARD-1100 anti-bioterrorism product
candidate for use in the prevention and treatment of inhalation
anthrax and similar life-threatening inhaled infections. The
ARD-1100 program is currently being co-funded by Defence
Research and
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Development Canada, a division of the Canadian Department of
National Defence. We intend to use the human safety data to be
obtained from the CF product development to support the approval
of the ARD-1100 product candidate. We also intend to explore the
utility of the liposomal formulation of ciprofloxacin for other
respiratory diseases including infections associated with
chronic obstructive pulmonary disease.
Our collaborative programs typically involve our proprietary
AERx delivery platform and address larger markets or systemic
conditions in which we anticipate sharing the development costs
and commercialization revenues with our collaborators.
The most advanced program using our AERx technology platform is
AERx iDMS for the treatment of diabetes with inhaled insulin, as
an alternative to injectable insulin, which is being developed
by Novo Nordisk and is now in Phase 3 clinical trials. We
have shown in the development program with AERx iDMS that the
system is capable of delivering insulin into the blood stream
faster than by subcutaneous injection of regular insulin, thus
providing a more convenient, patient-friendly approach to
controlling meal-time glucose levels. The total market for
insulin and insulin analogues worldwide is forecast by Business
Insights to reach $9.8 billion in 2011, of which
$2.0 billion to $3.0 billion is from sales of inhaled
insulin. Pursuant to our agreement with Novo Nordisk, Novo
Nordisk is responsible for and is funding all development,
manufacturing and commercialization activities, and we will be
entitled to receive a royalty on net sales that we estimate will
average five percent over the life of the product. Novo Nordisk
announced in October 2006 that it expects commercial launch of
the product in 2010.
The ARD-1300 program is investigating a novel aerosolized
formulation of hydroxychloroquine, or HCQ, as an inhaled
treatment for asthma, under a collaboration with APT
Pharmaceuticals, a privately held biotechnology company. APT has
funded all aspects of this program to date. HCQ is an approved
drug currently used orally as an alternative to steroid
treatment in other indications. We recently completed a Phase 2a
clinical study of inhaled HCQ that did not meet its
pre-specified clinical efficacy endpoints. While APT and Aradigm
are currently analyzing the data from this study in order to
determine whether additional studies of inhaled HCQ are
warranted, it is unlikely that the current development path for
HCQ for the treatment of asthma can be advanced without further
research. This will delay development of this product candidate.
Moreover, APT may choose not to conduct such research, in which
case this collaborative program would be terminated.
The ARD-1500 program, in collaboration with United Therapeutics,
is investigating the application of both our AERx delivery
technology and our liposomal formulation technology to United
Therapeutics approved injectable drug treprostinil for the
treatment of pulmonary arterial hypertension. We believe that
our inhaled sustained release formulation may lead to a
reduction in the number of daily administrations that are needed
to be effective. We also believe that the ARD-1500 product
candidate could potentially offer a non-invasive, more direct
and patient-friendly approach to treatment that would complement
or replace currently available treatments.
Risks Affecting Us
Our business is subject to a number of risks, which are
explained in detail under the section entitled Risk
Factors.
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None of our product candidates has been approved or
commercialized, and we may never successfully develop any
products. |
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We recently changed our product development strategy, and if we
do not successfully implement this new strategy our business and
reputation will be damaged. |
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We will need additional capital, and we may not be able to
obtain it. |
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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. |
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Our dependence on collaborators may delay or prevent the
progress of certain of our programs. |
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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. |
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If our clinical trials are delayed because of patient enrollment
or other problems, we would incur additional cost and postpone
the potential receipt of revenues. |
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We are subject to extensive regulation, including the
requirement of approval before any of our product candidates can
be marketed. We may not obtain regulatory approval for our
product candidates on a timely basis, or at all. |
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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. |
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If any products that we or our collaborators may develop do not
attain adequate market acceptance by healthcare professionals
and patients, our business prospects and results of operations
will suffer. |
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We depend upon our proprietary technologies, and we may not be
able to protect our potential competitive proprietary advantage. |
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Our common stock was delisted from the Nasdaq Capital Market;
this delisting may reduce the liquidity of our common stock and
the price may decline. |
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Corporate Information
We were incorporated in California in January 1991. Our
principal executive offices are located at 3929 Point Eden Way,
Hayward, California 94545, and our telephone number is
(510) 265-9000. Our Internet address is www.aradigm.com.
The information on, or accessible through, our website is not
part of this prospectus. Unless the context requires otherwise,
references in this prospectus to Aradigm,
we, us and our refer to
Aradigm Corporation.
4
The Offering
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Common stock offered by us |
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30,000,000 shares |
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Common stock to be outstanding after this offering |
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46,012,113 shares |
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Use of proceeds |
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We estimate that our net proceeds from this offering will be
approximately $27.3 million. We intend to use approximately
$20 million of the net proceeds of this offering for the
further development of our ARD-3100 product for the treatment of
cystic fibrosis, $2 million for the completion of
development of our next-generation AERx pulmonary drug
delivery device and the remaining net proceeds for general
corporate purposes, including the continued development and
advancement of our other programs. We may also use a portion of
the net proceeds to acquire complementary technologies or
businesses. See Use of Proceeds. |
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OTC Bulletin Board symbol |
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ARDM |
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The number of shares of common stock that will be outstanding
after this offering is based on 14,776,412 shares of common
stock outstanding as of September 30, 2006 and excludes:
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3,253,894 shares of common stock issuable upon the exercise
of outstanding options with a weighted average exercise price of
$9.29 per share; |
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2,119,766 shares of common stock issuable upon exercise of
outstanding warrants with a weighted average exercise price of
$11.11 per share; and |
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1,633,998 shares of common stock reserved for future
issuance under our 2005 Equity Incentive Plan and our Employee
Stock Purchase Plan. |
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Except as otherwise noted, all information in this prospectus:
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Reflects a one-for-five reverse split of our common stock
effected in January 2006; |
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Assumes the automatic conversion of all outstanding shares of
Series A Convertible Preferred Stock into
1,235,701 shares of common stock upon the completion of
this offering; and |
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Assumes no exercise of the underwriters over-allotment
option. |
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5
Summary Financial Data
The following tables present summary historical and as adjusted
financial data. The summary statement of operations data for the
years ended December 31, 2003, 2004 and 2005 have been
derived from our audited financial statements included elsewhere
in this prospectus. The summary statement of operations data for
the nine months ended September 30, 2005 and 2006 and the
summary balance sheet data as of September 30, 2006 have
been derived from our unaudited financial statements included
elsewhere in this prospectus. You should read this information
together with Managements Discussion and Analysis of
Financial Condition and Results of Operations and our
audited and unaudited financial statements and related notes,
each included elsewhere in this prospectus. Our interim results
are not necessarily indicative of results for the full fiscal
year and our historical results are not necessarily indicative
of the results to be expected in any future period.
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Nine Months Ended | |
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Year Ended December 31, | |
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September 30, | |
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2003 | |
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2004 | |
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2005 | |
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2005 | |
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2006 | |
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(Unaudited) | |
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(In thousands, except per share data) | |
Statements of operations data:
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Contract and license revenues
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$ |
33,857 |
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$ |
28,045 |
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$ |
10,507 |
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$ |
9,645 |
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$ |
4,006 |
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Operating expenses:
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Research and development
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49,636 |
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46,477 |
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30,174 |
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20,858 |
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17,645 |
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General and administrative
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10,391 |
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11,934 |
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10,895 |
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8,274 |
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9,051 |
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Restructuring and asset impairment
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5,717 |
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Total operating expenses
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60,027 |
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58,411 |
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41,069 |
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29,132 |
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32,413 |
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Loss from operations
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(26,170 |
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(30,366 |
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(30,562 |
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(19,487 |
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(28,407 |
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Gain on sale of patent and royalty interest (to related party)
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20,000 |
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Interest income
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338 |
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194 |
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1,317 |
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980 |
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839 |
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Interest expense
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(138 |
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(16 |
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(6 |
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(101 |
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Other income (expense)
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(1 |
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36 |
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(37 |
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26 |
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Net loss
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$ |
(25,970 |
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$ |
(30,189 |
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$ |
(29,215 |
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|
$ |
(18,544 |
) |
|
$ |
(7,643 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$ |
(2.59 |
) |
|
$ |
(2.37 |
) |
|
$ |
(2.01 |
) |
|
$ |
(1.28 |
) |
|
$ |
(0.52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per share
|
|
|
10,039 |
|
|
|
12,741 |
|
|
|
14,513 |
|
|
|
14,497 |
|
|
|
14,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006 |
|
|
|
|
|
Actual |
|
As Adjusted (1) |
|
|
|
|
|
|
|
(Unaudited, in thousands) |
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short term investments
|
|
$ |
32,784 |
|
|
$ |
60,092 |
|
Working capital
|
|
|
30,216 |
|
|
|
57,524 |
|
Total assets
|
|
|
37,270 |
|
|
|
64,578 |
|
Convertible preferred stock
|
|
|
23,669 |
|
|
|
|
|
Accumulated deficit
|
|
|
(282,481 |
) |
|
|
(282,481 |
) |
Total shareholders equity
|
|
|
1,100 |
|
|
|
52,077 |
|
|
|
(1) |
The as adjusted balance sheet data as of September 30, 2006
gives effect to the automatic conversion of all outstanding
shares of our Series A Convertible Preferred Stock into
1,235,701 shares of our common stock upon the completion of
this offering, resulting in an increase in shareholders
equity of approximately $23.7 million, and the receipt of net
proceeds of approximately $27.3 million from the sale of
30,000,000 shares of common stock offered by us at the
assumed public offering price of $0.99 per share, after
deducting the estimated underwriting discount and estimated
offering expenses payable by us. The Series A Convertible
Preferred Stock converts automatically into common stock upon
the completion of an underwritten public offering of common
stock with gross proceeds of at least $25 million. |
6
RISK FACTORS
Investing in our common stock involves a high degree of risk.
You should carefully consider the following risk factors, as
well as the other information in this prospectus and the
information incorporated by reference in this prospectus, before
deciding whether to invest in shares of our common stock. The
occurrence of any of the following risks, or other risks that
are currently unknown or unforeseen by us, could harm our
business, financial condition, results of operations or growth
prospects. If any of these events occur, the trading price of
our common stock could decline, and you may lose all or part of
your investment.
Risks Related to Our Business
None of our product candidates has been approved or
commercialized, and we may never successfully develop any
products.
Most of our product candidates are in an early stage of
development. Development of our products will require extensive
additional time, effort and cost in preclinical testing and
clinical trials. Our products also require lengthy regulatory
reviews before they can be marketed. None of our products has
yet received FDA approval, and our development efforts may never
result in a commercialized product. We have spent more than
10 years developing AERx iDMS for the treatment of diabetes
and it is still not on the market. We may abandon the
development of some or all of our product candidates at any time
and without prior notice. We must incur substantial up-front
expenses to develop and commercialize products and failure to
achieve commercial feasibility, demonstrate safety, achieve
clinical efficacy, obtain regulatory approval or successfully
manufacture and market products will significantly hurt our
results of operations.
We recently changed our product development strategy, and if
we do not successfully implement this new strategy our business
and reputation will be damaged.
Since our inception in 1991 we have focused on developing drug
delivery technologies. We have recently transitioned our
business focus from the development of delivery technologies to
the application of our pulmonary drug delivery technologies and
expertise to the development of novel drug products to treat
respiratory diseases. As part of this transition we have
implemented workforce reductions in an effort to reduce our
expenses and improve our cash flows. We have not yet implemented
or are only in the early stages of implementing various aspects
of our new strategy, and we may not be successful in
implementing our new strategy. Even if we are able to implement
the various aspects of our new strategy, it may not be
successful.
We will need additional capital, and we may not be able to
obtain it.
Our operations to date have consumed substantial amounts of cash
and have generated no product revenues. While our refocused
development strategy will reduce capital expenditures, we expect
negative operating cash flows to continue for at least the
foreseeable future. Even though we do not plan to engage in drug
discovery, we will nevertheless need to commit substantial funds
to develop our product candidates and we may not be able to
obtain sufficient funds on acceptable terms or at all. Our
future capital requirements will depend on many factors,
including:
|
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|
|
our progress in the application of our delivery and formulation
technologies, which may require further refinement of these
technologies; |
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|
the number of product development programs we pursue and the
pace of each program; |
|
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|
our progress with formulation development; |
|
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|
the scope, rate of progress, results and costs of preclinical
testing and clinical trials; |
|
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|
the time and costs associated with seeking regulatory approvals; |
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our ability to outsource the manufacture of our product
candidates and the costs of doing so; |
|
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the time and costs associated with establishing in-house
resources to market and sell certain of our products; |
7
|
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our ability to establish and maintain collaborative arrangements
with others and the terms of those arrangements; |
|
|
|
the costs of preparing, filing, prosecuting, maintaining and
enforcing patent claims; and |
|
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|
our need to acquire licenses or other rights for our product
candidates. |
Since inception, we have financed our operations primarily
through private placements and public offerings of our capital
stock, proceeds from equipment lease financings, contract
research funding and interest earned on investments. We believe
that our existing cash and cash equivalent balances at
September 30, 2006, together with funding commitments from
collaborators, interest earned on our investments and the
estimated net proceeds from this offering, should be sufficient
to meet our needs for at least the next 18 months. We will
need to obtain substantial additional funds before we would be
able to bring any of our product candidates to market. Our
estimates of future capital use are uncertain, and changing
circumstances, including those related to implementation of our
new development strategy or further changes to our development
strategy, could cause us to consume capital significantly faster
than currently expected, and our expected sources of funding may
not be sufficient. If adequate funds are not available, we will
be required to delay, reduce the scope of, or eliminate one or
more of our product development programs and reduce
personnel-related costs, or to obtain funds through arrangements
with collaborators or other sources that may require us to
relinquish rights to certain of our technologies or products
that we would not otherwise relinquish. If we are able to obtain
funds through the issuance of debt securities or borrowing, the
terms may restrict our operations. If we are able to obtain
funds through the issuance of equity securities, your interest
will be diluted and our stock price may drop as a result.
We have a history of losses, we expect to incur losses for at
least the foreseeable future, and we may never attain or
maintain profitability.
We have never been profitable and have incurred significant
losses in each year since our inception. Through
September 30, 2006, we have incurred a cumulative deficit
of $282.5 million. We have not had any product sales and do
not anticipate receiving any revenues from product sales for at
least the next few years, if ever. While our recent shift in
development strategy may result in reduced capital expenditures,
we expect to continue to incur substantial losses over at least
the next several years as we:
|
|
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|
|
expand drug product development efforts; |
|
|
|
conduct preclinical testing and clinical trials; |
|
|
|
pursue additional applications for our existing delivery
technologies; |
|
|
|
outsource the commercial-scale production of our
products; and |
|
|
|
establish a sales and marketing force to commercialize certain
of our proprietary products if these products obtain regulatory
approval. |
To achieve and sustain profitability, we must, alone or with
others, successfully develop, obtain regulatory approval for,
manufacture, market and sell our products. We will incur
substantial expenses in our efforts to develop and commercialize
products and we may never generate sufficient product or
contract research revenues to become profitable or to sustain
profitability.
Our dependence on collaborators may delay or prevent the
progress of certain of our programs.
Our commercialization strategy for certain of our product
candidates depends on our ability to enter into agreements with
collaborators to obtain assistance and funding for the
development and potential commercialization of our product
candidates. Collaborations may involve greater uncertainty for
us, as we have less control over certain aspects of our
collaborative programs than we do over our proprietary
development and commercialization programs. We may determine
that continuing a collaboration under the terms provided is not
in our best interest, and we may terminate the collaboration.
Our existing collaborators could delay or terminate their
agreements, and our products subject to collaborative
arrangements may never
8
be successfully commercialized. For example, Novo Nordisk has
control over and responsibility for development and
commercialization of AERx iDMS. The development and
commercialization of AERx iDMS could be delayed further or
terminated if Novo Nordisk fails to conduct these activities in
a timely manner or at all. In 2004, Novo Nordisk amended the
protocols of a Phase 3 clinical program, which resulted in
a significant delay of the development of the product. If, due
to delays or otherwise, we do not receive development funds or
achieve milestones set forth in the agreements governing our
collaborations, or if any of our collaborators breach or
terminate their collaborative agreements or do not devote
sufficient resources or priority to our programs, our business
prospects and potential to receive revenues would be hurt.
Further, our existing or future collaborators may pursue
alternative technologies or develop alternative products either
on their own or in collaboration with others, including our
competitors, and the priorities or focus of our collaborators
may shift such that our programs receive less attention or
resources than we would like. Any such actions by our
collaborators may adversely affect our business prospects and
ability to earn revenues. In addition, we could have disputes
with our existing or future collaborators regarding, for
example, the interpretation of terms in our agreements. Any such
disagreements could lead to delays in the development or
commercialization of any potential products or could result in
time-consuming and expensive litigation or arbitration, which
may not be resolved in our favor.
Even with respect to certain other programs that we intend to
commercialize ourselves, we may enter into agreements with
collaborators to share in the burden of conducting clinical
trials, manufacturing and marketing our product candidates or
products. In addition, our ability to apply our proprietary
technologies to develop proprietary drugs will depend on our
ability to establish and maintain licensing arrangements or
other collaborative arrangements with the holders of proprietary
rights to such drugs. We may not be able to establish such
arrangements on favorable terms or at all, and our existing or
future collaborative arrangements may not be successful.
The results of later stage clinical trials of our product
candidates may not be as favorable as earlier trials and that
could result in additional costs and delay or prevent
commercialization of our products.
Although we believe the limited and preliminary data we have
regarding our potential products is encouraging, the results of
initial preclinical testing and clinical trials do not
necessarily predict the results that we will get from subsequent
or more extensive preclinical testing and clinical trials.
Clinical trials of our product candidates may not demonstrate
that they are safe and effective to the extent necessary to
obtain regulatory approvals. Many companies in the
biopharmaceutical industry have suffered significant setbacks in
advanced clinical trials, even after receiving promising results
in earlier trials. If we cannot adequately demonstrate through
the clinical trial process that a therapeutic product we are
developing is safe and effective, regulatory approval of that
product would be delayed or prevented, which would impair our
reputation, increase our costs and prevent us from earning
revenues.
If our clinical trials are delayed because of patient
enrollment or other problems, we would incur additional cost and
postpone the potential receipt of revenues.
Before we or our collaborators can file for regulatory approval
for the commercial sale of our potential products, the FDA will
require extensive preclinical safety testing and clinical trials
to demonstrate their safety and efficacy. Completing clinical
trials in a timely manner depends on, among other factors, the
timely enrollment of patients. Our collaborators and our
ability to recruit patients depends on a number of factors,
including the size of the patient population, the proximity of
patients to clinical sites, the eligibility criteria for the
study and the existence of competing clinical trials. Delays in
planned patient enrollment in our current or future clinical
trials may result in increased costs, program delays or both,
and the loss of potential revenues.
9
We are subject to extensive regulation, including the
requirement of approval before any of our product candidates can
be marketed. We may not obtain regulatory approval for our
product candidates on a timely basis, or at all.
We, our collaborators and our products are subject to extensive
and rigorous regulation by the federal government, principally
the FDA, and by state and local government agencies. Both before
and after regulatory approval, the development, testing,
manufacture, quality control, labeling, storage, approval,
advertising, promotion, sale, distribution and export of our
potential products are subject to regulation. Pharmaceutical
products that are marketed abroad are also subject to regulation
by foreign governments. Our products cannot be marketed in the
United States without FDA approval. The process for obtaining
FDA approval for drug products is generally lengthy, expensive
and uncertain. To date, we have not sought or received approval
from the FDA or any corresponding foreign authority for any of
our product candidates.
Even though we intend to apply for approval of most of our
products in the United States under Section 505(b)(2) of
the United States Food, Drug and Cosmetic Act, which applies to
reformulations of approved drugs and that may require smaller
and shorter safety and efficacy testing than that for entirely
new drugs, the approval process will still be costly,
time-consuming and uncertain. We or our collaborators may not be
able to obtain necessary regulatory approvals on a timely basis,
if at all, for any of our potential products. Even if granted,
regulatory approvals may include significant limitations on the
uses for which products may be marketed. Failure to comply with
applicable regulatory requirements can, among other things,
result in warning letters, imposition of civil penalties or
other monetary payments, delay in approving or refusal to
approve a product candidate, suspension or withdrawal of
regulatory approval, product recall or seizure, operating
restrictions, interruption of clinical trials or manufacturing,
injunctions and criminal prosecution.
Regulatory authorities may not approve our product candidates
even if the product candidates meet safety and efficacy
endpoints in clinical trials or the approvals may be too limited
for us to earn sufficient revenues.
The FDA and other foreign regulatory agencies can delay approval
of or refuse to approve our product candidates for a variety of
reasons, including failure to meet safety and efficacy endpoints
in our clinical trials. Our product candidates may not be
approved even if they achieve their endpoints in clinical
trials. Regulatory agencies, including the FDA, may disagree
with our trial design and our interpretations of data from
preclinical studies and clinical trials. Even if a product
candidate is approved, it may be approved for fewer or more
limited indications than requested or the approval may be
subject to the performance of significant post-marketing
studies. In addition, regulatory agencies may not approve the
labeling claims that are necessary or desirable for the
successful commercialization of our product candidates. Any
limitation, condition or denial of approval would have an
adverse affect on our business, reputation and results of
operations.
Even if we are granted initial FDA approval for any of our
product candidates, we may not be able to maintain such
approval, which would reduce our revenues.
Even if we are granted initial regulatory approval for a product
candidate, the FDA and similar foreign regulatory agencies can
limit or withdraw product approvals for a variety of reasons,
including failure to comply with regulatory requirements,
changes in regulatory requirements, problems with manufacturing
facilities or processes or the occurrence of unforeseen
problems, such as the discovery of previously undiscovered side
effects. If we are able to obtain any product approvals, they
may be limited or withdrawn or we may be unable to remain in
compliance with regulatory requirements. Both before and after
approval we, our collaborators and our products are subject to a
number of additional requirements. For example, certain changes
to the approved product, such as adding new indications, certain
manufacturing changes and additional labeling claims are subject
to additional FDA review and approval. Advertising and other
promotional material must comply with FDA requirements and
established requirements applicable to drug samples. We, our
collaborators and our manufacturers will be subject to
continuing review and periodic inspections by the FDA and other
authorities where applicable and must comply with ongoing
requirements, including the FDAs Good Manufacturing
Practices, or GMP, requirements. Once the FDA approves a
10
product, a manufacturer must provide certain updated safety and
efficacy information, submit copies of promotional materials to
the FDA and make certain other required reports. Product
approvals may be withdrawn if regulatory requirements are not
complied with or if problems concerning safety or efficacy of
the product occur following approval. Any limitation or
withdrawal of approval of any of our products could delay or
prevent sales of our products, which would adversely affect our
revenues. Further continuing regulatory requirements involve
expensive ongoing monitoring and testing requirements.
Since one of our key proprietary programs, the ARD-3100
liposomal ciprofloxacin program, relies on the FDAs
granting of orphan drug designation for potential market
exclusivity, the product may not be able to obtain market
exclusivity and could be barred from the market for up to seven
years.
The FDA has granted orphan drug designation for our proprietary
liposomal ciprofloxacin for the management of cystic fibrosis.
Orphan drug designation is intended to encourage research and
development of new therapies for diseases that affect fewer than
200,000 patients in the United States. The designation
provides the opportunity to obtain market exclusivity for seven
years from the date of the FDAs approval of a new drug
application, or NDA. However, the market exclusivity is granted
only to the first chemical entity to be approved by the FDA for
a given indication. Therefore, if another inhaled ciprofloxacin
product were to be approved by the FDA for a cystic fibrosis
indication before our product, then we may be blocked from
launching our product in the United States for seven years,
unless we are able to demonstrate to the FDA clinical
superiority of our product on the basis of safety or efficacy.
We may seek to develop additional products that incorporate
drugs that have received orphan drug designations for specific
indications. In each case, if our product is not the first to be
approved by the FDA for a given indication, we will be unable to
access the target market in the United States, which would
adversely affect our ability to earn revenues.
We have limited manufacturing capacity and will have to
depend on contract manufacturers and collaborators; if they do
not perform as expected, our revenues and customer relations
will suffer.
We have limited capacity to manufacture our requirements for the
development and commercialization of our product candidates. We
intend to use contract manufacturers to produce key components,
assemblies and subassemblies in the clinical and commercial
manufacturing of our products. We may not be able to enter into
or maintain satisfactory contract manufacturing arrangements.
Specifically, an affiliate of Novo Nordisk has agreed to supply
devices and dosage forms to us for use in the development of our
products that incorporate our proprietary AERx technology
through January 27, 2008. We may not be able to extend this
agreement at satisfactory terms, if at all, and we may not be
able to find a replacement contract manufacturer at satisfactory
terms.
We may decide to invest in additional clinical manufacturing
facilities in order to internally produce critical components of
our product candidates and to handle critical aspects of the
production process, such as assembly of the disposable unit-dose
packets and filling of the unit-dose packets. If we decide to
produce components of any of our product candidates in-house,
rather than use contract manufacturers, it will be costly and we
may not be able to do so in a timely or cost-effective manner or
in compliance with regulatory requirements.
With respect to some of our product development programs
targeted at large markets, either our collaborators or we will
have to invest significant amounts to attempt to provide for the
high-volume manufacturing required to take advantage of these
product markets, and much of this spending may occur before a
product is approved by the FDA for commercialization. Any such
effort will entail many significant risks. For example, the
design requirements of our products may make it too costly or
otherwise infeasible for us to develop them at a commercial
scale, or manufacturing and quality control problems may arise
as we attempt to expand production. Failure to address these
issues could delay or prevent late-stage clinical testing and
commercialization of any products that may receive FDA approval.
Further, we, our contract manufacturers and our collaborators
are required to comply with the FDAs GMP requirements that
relate to product testing, quality assurance, manufacturing and
maintaining records and documentation. We, our contract
manufacturers or our collaborators may not be able to comply
with the
11
applicable GMP and other FDA regulatory requirements for
manufacturing, which could result in an enforcement or other
action, prevent commercialization of our product candidates and
impair our reputation and results of operations.
We rely on a small number of vendors and contract
manufacturers to supply us with specialized equipment, tools and
components; if they do not perform as we need them to, we will
not be able to develop or commercialize products.
We rely on a small number of vendors and contract manufacturers
to supply us and our collaborators with specialized equipment,
tools and components for use in development and manufacturing
processes. These vendors may not continue to supply such
specialized equipment, tools and components, and we may not be
able to find alternative sources for such specialized equipment
and tools. Any inability to acquire or any delay in our ability
to acquire necessary equipment, tools and components would
increase our expenses and could delay or prevent our development
of products.
In order to market our proprietary products, we are likely to
establish our own sales, marketing and distribution
capabilities. We have no experience in these areas, and if we
have problems establishing these capabilities, the
commercialization of our products would be impaired.
We intend to establish our own sales, marketing and distribution
capabilities to market products to concentrated, easily
addressable prescriber markets. We have no experience in these
areas, and developing these capabilities will require
significant expenditures on personnel and infrastructure. While
we intend to market products that are aimed at a small patient
population, we may not be able to create an effective sales
force around even a niche market. In addition, some of our
product development programs will require a large sales force to
call on, educate and support physicians and patients. While we
intend to enter into collaborations with one or more
pharmaceutical companies to sell, market and distribute such
products, we may not be able to enter into any such arrangement
on acceptable terms, if at all. Any collaborations we do enter
into may not be effective in generating meaningful product
royalties or other revenues for us.
If any products that we or our collaborators may develop do
not attain adequate market acceptance by healthcare
professionals and patients, our business prospects and results
of operations will suffer.
Even if we or our collaborators successfully develop one or more
products, such products may not be commercially acceptable to
healthcare professionals and patients, who will have to choose
our products over alternative products for the same disease
indications, and many of these alternative products will be more
established than ours. For our products to be commercially
viable, we will need to demonstrate to healthcare professionals
and patients that our products afford benefits to the patient
that are cost-effective as compared to the benefits of
alternative therapies. Our ability to demonstrate this depends
on a variety of factors, including:
|
|
|
|
|
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. |
12
Our product revenues will be adversely affected if, due to these
or other factors, the products we or our collaborators are able
to commercialize do not gain significant market acceptance.
We depend upon our proprietary technologies, and we may not
be able to protect our potential competitive proprietary
advantage.
Our business and competitive position is dependent upon our and
our collaborators ability to protect our proprietary
technologies related to various aspects of pulmonary drug
delivery and drug formulation. While our intellectual property
rights may not provide a significant commercial advantage for
us, our patents and know-how are intended to provide protection
for important aspects of our technology, including methods for
aerosol generation, devices used to generate aerosols, breath
control, compliance monitoring, certain pharmaceutical
formulations, design of dosage forms and their manufacturing and
testing methods. In addition, we are maintaining as non-patented
trade secrets some of the key elements of our manufacturing
technologies, for example, those associated with production of
disposable unit-dose packets for our AERx delivery system.
Our ability to compete effectively will also depend to a
significant extent on our and our collaborators ability to
obtain and enforce patents and maintain trade secret protection
over our proprietary technologies. The coverage claimed in a
patent application typically is significantly reduced before a
patent is issued, either in the United States or abroad.
Consequently, any of our pending or future patent applications
may not result in the issuance of patents and any patents issued
may be subjected to further proceedings limiting their scope and
may in any event not contain claims broad enough to provide
meaningful protection. Any patents that are issued to us or our
collaborators may not provide significant proprietary protection
or competitive advantage, and may be circumvented or
invalidated. In addition, unpatented proprietary rights,
including trade secrets and know-how, can be difficult to
protect and may lose their value if they are independently
developed by a third party or if their secrecy is lost. Further,
because development and commercialization of pharmaceutical
products can be subject to substantial delays, patents may
expire early and provide only a short period of protection, if
any, following commercialization of products.
In July 2006, we assigned 23 issued United States patents to
Novo Nordisk along with corresponding non-United States
counterparts and certain related pending applications. In August
2006, Novo Nordisk brought suit against Pfizer, Inc. claiming
infringement of certain claims in one of the assigned United
States patents. In December 2006, Novo Nordisks motion for
a preliminary injunction in this case was denied. That patent is
placed at risk in connection with this infringement lawsuit.
Other patents assigned to Novo Nordisk may become the subject of
future litigation. If all or any of the patents assigned to Novo
Nordisk are invalidated, it may reduce Novo Nordisks
commitment to move forward with AERx iDMS and would adversely
affect any royalties or other compensation which we might
potentially otherwise receive based directly on such patents.
Further, the patents assigned to Novo Nordisk encompass, in some
instances, technology beyond inhaled insulin and, if all or any
of these patents are invalidated, it could harm our ability to
obtain market exclusivity with respect to other product
candidates.
We may infringe on the intellectual property rights of
others, and any litigation could force us to stop developing or
selling potential products and could be costly, divert
management attention and harm our business.
We must be able to develop products without infringing the
proprietary rights of other parties. Because the markets in
which we operate involve established competitors with
significant patent portfolios, including patents relating to
compositions of matter, methods of use and methods of drug
delivery, it could be difficult for us to use our technologies
or develop products without infringing the proprietary rights of
others. We may not be able to design around the patented
technologies or inventions of others and we may not be able to
obtain licenses to use patented technologies on acceptable
terms, or at all. If we cannot operate without infringing the
proprietary rights of others, we will not earn product revenues.
If we are required to defend ourselves in a lawsuit, we could
incur substantial costs and the lawsuit could divert management
attention, regardless of the lawsuits merit or outcome.
These legal actions could seek
13
damages and seek to enjoin testing, manufacturing and marketing
of the accused product or process. In addition to potential
liability for significant damages, we could be required to
obtain a license to continue to manufacture or market the
accused product or process and any license required under any
such patent may not be made available to us on acceptable terms,
if at all.
Periodically, we review publicly available information regarding
the development efforts of others in order to determine whether
these efforts may violate our proprietary rights. We may
determine that litigation is necessary to enforce our
proprietary rights against others. Such litigation could result
in substantial expense, regardless of its outcome, and may not
be resolved in our favor.
Furthermore, patents already issued to us or our pending patent
applications may become subject to dispute, and any disputes
could be resolved against us. For example, Eli Lilly and Company
brought an action against us seeking to have one or more
employees of Eli Lilly named as co-inventors on one of our
patents. This case was determined in our favor in 2004, but we
may face other similar claims in the future and we may lose or
settle cases at significant loss to us. In addition, because
patent applications in the United States are currently
maintained in secrecy for a period of time prior to issuance,
and patent applications in certain other countries generally are
not published until more than 18 months after they are
first filed, and because publication of discoveries in
scientific or patent literature often lags behind actual
discoveries, we cannot be certain that we were the first creator
of inventions covered by our pending patent applications or that
we were the first to file patent applications on such inventions.
We are in a highly competitive market, and our competitors
have developed or may develop alternative therapies for our
target indications, which would limit the revenue potential of
any product we may develop.
We are in competition with pharmaceutical, biotechnology and
drug delivery companies, hospitals, research organizations,
individual scientists and nonprofit organizations engaged in the
development of drugs and therapies for the disease indications
we are targeting. Our competitors may succeed before we can, and
many already have succeeded, in developing competing
technologies for the same disease indications, obtaining FDA
approval for products or gaining acceptance for the same markets
that we are targeting. If we are not first to
market, it may be more difficult for us and our
collaborators to enter markets as second or subsequent
competitors and become commercially successful. We are aware of
a number of companies that are developing or have developed
therapies to address indications we are targeting, including
major pharmaceutical companies such as Bayer, Eli Lilly,
Genentech, Gilead Sciences, Merck & Co., Novartis and
Pfizer. Certain of these companies are addressing these target
markets with pulmonary products that are similar to ours. These
companies and many other potential competitors have greater
research and development, manufacturing, marketing, sales,
distribution, financial and managerial resources and experience
than we have and many of these companies may have products and
product candidates that are on the market or in a more advanced
stage of development than our product candidates. Our ability to
earn product revenues and our market share would be
substantially harmed if any existing or potential competitors
brought a product to market before we or our collaborators were
able to, or if a competitor introduced at any time a product
superior to or more cost-effective than ours.
If we do not continue to attract and retain key employees,
our product development efforts will be delayed and impaired.
We depend on a small number of key management and technical
personnel. Our success also depends on our ability to attract
and retain additional highly qualified marketing, management,
manufacturing, engineering and development personnel. There is a
shortage of skilled personnel in our industry, we face intense
competition in our recruiting activities, and we may not be able
to attract or retain qualified personnel. Losing any of our key
employees, particularly our new President and Chief Executive
Officer, Dr. Igor Gonda, who plays a central role in our
strategy shift to a specialty pharmaceutical company, could
impair our product development efforts and otherwise harm our
business. Any of our employees may terminate their employment
with us at will.
14
Acquisition of complementary businesses or technologies could
result in operating difficulties and harm our results of
operations.
While we have not identified any definitive targets, we may use
a portion of the proceeds from this offering to acquire
products, businesses or technologies that we believe are
complementary to our business strategy. The process of
investigating, acquiring and integrating any business or
technology into our business and operations is risky and we may
not be able to accurately predict or derive the benefits of any
such acquisition. The process of acquiring and integrating any
business or technology may create operating difficulties and
unexpected expenditures, such as:
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diversion of our management from the development and
commercialization of our pipeline product candidates; |
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difficulty in assimilating and efficiently using the acquired
assets or personnel; and |
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inability to retain key personnel. |
In addition to the factors set forth above, we may encounter
other unforeseen problems with acquisitions that we may not be
able to overcome. Any future acquisitions may require us to
issue shares of our stock or other securities that dilute the
ownership interests of our other shareholders, expend cash,
incur debt, assume liabilities, including contingent or unknown
liabilities, or incur additional expenses related to write-offs
or amortization of intangible assets, any of which could
materially adversely affect our operating results.
If we market our products in other countries, we will be
subject to different laws and we may not be able to adapt to
those laws, which could increase our costs while reducing our
revenues.
If we market any approved products in foreign countries, we will
be subject to different laws, particularly with respect to
intellectual property rights and regulatory approval. To
maintain a proprietary market position in foreign countries, we
may seek to protect some of our proprietary inventions through
foreign counterpart patent applications. Statutory differences
in patentable subject matter may limit the protection we can
obtain on some of our inventions outside of the United States.
The diversity of patent laws may make our expenses associated
with the development and maintenance of intellectual property in
foreign jurisdictions more expensive than we anticipate. We
probably will not obtain the same patent protection in every
market in which we may otherwise be able to potentially generate
revenues. In addition, in order to market our products in
foreign jurisdictions, we and our collaborators must obtain
required regulatory approvals from foreign regulatory agencies
and comply with extensive regulations regarding safety and
quality. We may not be able to obtain regulatory approvals in
such jurisdictions and we may have to incur significant costs in
obtaining or maintaining any foreign regulatory approvals. If
approvals to market our products are delayed, if we fail to
receive these approvals, or if we lose previously received
approvals, our business would be impaired as we could not earn
revenues from sales in those countries.
We may be exposed to product liability claims, which would
hurt our reputation, market position and operating results.
We face an inherent risk of product liability as a result of the
clinical testing of our product candidates in humans and will
face an even greater risk upon commercialization of any
products. These claims may be made directly by consumers or by
pharmaceutical companies or others selling such products. We may
be held liable if any product we develop causes injury or is
found otherwise unsuitable during product testing, manufacturing
or sale. Regardless of merit or eventual outcome, liability
claims would likely result in negative publicity, decreased
demand for any products that we may develop, injury to our
reputation and suspension or withdrawal of clinical trials. Any
such claim will be very costly to defend and also may result in
substantial monetary awards to clinical trial participants or
customers, loss of revenues and the inability to commercialize
products that we develop. Although we currently have product
liability insurance, we may not be able to maintain such
insurance or obtain additional insurance on acceptable terms, in
amounts sufficient to protect our business, or at all. A
successful claim brought against us in excess of our insurance
coverage would have a material adverse effect on our results of
operations.
15
If we cannot arrange for adequate third-party reimbursement
for our products, our revenues will suffer.
In both domestic and foreign markets, sales of our potential
products will depend in substantial part on the availability of
adequate reimbursement from third-party payors such as
government health administration authorities, private health
insurers and other organizations. Third-party payors often
challenge the price and cost-effectiveness of medical products
and services. Significant uncertainty exists as to the adequate
reimbursement status of newly approved health care products. Any
products we are able to successfully develop may not be
reimbursable by third-party payors. In addition, our products
may not be considered cost-effective and adequate third-party
reimbursement may not be available to enable us to maintain
price levels sufficient to realize a profit. Legislation and
regulations affecting the pricing of pharmaceuticals may change
before our products are approved for marketing and any such
changes could further limit reimbursement. If any products we
develop do not receive adequate reimbursement, our revenues will
be severely limited.
Our use of hazardous materials could subject us to
liabilities, fines and sanctions.
Our laboratory and clinical testing sometimes involve use of
hazardous and toxic materials. We are subject to federal, state
and local laws and regulations governing how we use,
manufacture, handle, store and dispose of these materials.
Although we believe that our safety procedures for handling and
disposing of such materials comply in all material respects with
all federal, state and local regulations and standards, there is
always the risk of accidental contamination or injury from these
materials. In the event of an accident, we could be held liable
for any damages that result and such liability could exceed our
financial resources. Compliance with environmental and other
laws may be expensive and current or future regulations may
impair our development or commercialization efforts.
If we are unable to effectively implement or maintain a
system of internal controls over financial reporting, we may not
be able to accurately or timely report our financial results and
our stock price could be adversely affected.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us
to evaluate the effectiveness of our internal controls over
financial reporting as of the end of each fiscal year, and to
include a management report assessing the effectiveness of our
internal controls over financial reporting in our annual report
on Form 10-K for
that fiscal year. Section 404 also requires our independent
registered public accounting firm, beginning with our fiscal
year ending December 31, 2007, to attest to, and report on,
managements assessment of our internal controls over
financial reporting. Our ability to comply with the annual
internal control report requirements will depend on the
effectiveness of our financial reporting and data systems and
controls across our company. We expect these systems and
controls to involve significant expenditures and to become
increasingly complex as our business grows and to the extent
that we make and integrate acquisitions. To effectively manage
this complexity, we will need to continue to improve our
operational, financial and management controls and our reporting
systems and procedures. Any failure to implement required new or
improved controls, or difficulties encountered in the
implementation or operation of these controls, could harm our
operating results and cause us to fail to meet our financial
reporting obligations, which could adversely affect our business
and reduce our stock price.
Risks Related to This Offering
Our stock price is likely to remain volatile.
The market prices for securities of many companies in the drug
delivery and pharmaceutical industries, including ours, have
historically been highly volatile, and the market from time to
time has experienced significant price and volume fluctuations
unrelated to the operating performance of particular companies.
Prices for our common stock may be influenced by many factors,
including:
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investor perception of us; |
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research analyst recommendations and our ability to meet or
exceed quarterly performance expectations of analysts or
investors; |
16
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fluctuations in our operating results; |
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market conditions relating to our segment of the industry or the
securities markets in general; |
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announcements of technological innovations or new commercial
products by us or our competitors; |
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publicity regarding actual or potential developments relating to
products under development by us or our competitors; |
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failure to maintain existing or establish new collaborative
relationships; |
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developments or disputes concerning patents or proprietary
rights; |
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delays in the development or approval of our product candidates; |
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regulatory developments in both the United States and foreign
countries; |
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concern of the public or the medical community as to the safety
or efficacy of our products, or products deemed to have similar
safety risk factors or other similar characteristics to our
products; |
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period-to-period
fluctuations in financial results; |
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future sales or expected sales of substantial amounts of common
stock by shareholders; |
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our ability to raise financing; and |
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economic and other external factors. |
In the past, class action securities litigation has often been
instituted against companies promptly following volatility in
the market price of their securities. Any such litigation
instigated against us would, regardless of its merit, result in
substantial costs and a diversion of managements attention
and resources.
Our common stock was delisted from the Nasdaq Capital Market;
this delisting may reduce the liquidity of our common stock and
the price may decline.
On November 10, 2006, our common stock was delisted from
the Nasdaq Capital Market due to
non-compliance with
Nasdaqs continued listing standards. Our common stock is
currently quoted on the OTC Bulletin Board. This delisting
may reduce the liquidity of our common stock, may cause
investors not to trade in our stock and may result in a lower
stock price. In addition, investors may find it more difficult
to obtain accurate quotations of the share price of our common
stock.
We have implemented certain anti-takeover provisions, which
make it less likely that we would be acquired and you would
receive a premium price for your shares.
Certain provisions of our articles of incorporation and the
California Corporations Code could discourage a party from
acquiring, or make it more difficult for a party to acquire,
control of our company without approval of our board of
directors. These provisions could also limit the price that
certain investors might be willing to pay in the future for
shares of our common stock. Certain provisions allow our board
of directors to authorize the issuance, without shareholder
approval, of preferred stock with rights superior to those of
the common stock. We are also subject to the provisions of
Section 1203 of the California Corporations Code, which
requires us to provide a fairness opinion to our shareholders in
connection with their consideration of any proposed
interested party reorganization transaction.
We have adopted a shareholder rights plan, commonly known as a
poison pill. We have also adopted an Executive
Officer Severance Plan and a Form of Change of Control
Agreement, both of which may provide for the payment of benefits
to our officers in connection with an acquisition. The
provisions of our articles of incorporation, our poison pill,
our severance plan and our change of control agreements, and
provisions of the California Corporations Code may discourage,
delay or prevent another party from acquiring us or reduce the
price that a buyer is willing to pay for our common stock.
17
Because management has broad discretion as to the use of the
net proceeds from this offering, you may not agree with how we
use them, and such proceeds may not be applied successfully.
Our management will have broad discretion with respect to the
use of the net proceeds from this offering. We currently intend
to use the net proceeds from the offering to fund the further
development of ARD-3100, as well as other development programs
and for working capital and general corporate purposes. You will
be relying on the judgment of our management concerning these
uses and you will not have the opportunity, as part of your
investment decision, to assess whether the proceeds are being
used appropriately. The failure of our management to apply these
funds effectively could result in unfavorable returns and
uncertainty about our prospects, each of which would cause the
price of our common stock to decline.
We have never paid dividends on our capital stock, and we do
not anticipate paying cash dividends for at least the
foreseeable future.
We have never declared or paid cash dividends on our capital
stock. We do not anticipate paying any cash dividends on our
common stock for at least the foreseeable future. We currently
intend to retain all available funds and future earnings, if
any, to fund the development and growth of our business. As a
result, capital appreciation, if any, of our common stock will
be your sole source of potential gain for at least the
foreseeable future.
18
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. When used
in this prospectus the words anticipate,
objective, may, might,
should, could, can,
intend, expect, believe,
estimate, predict,
potential, plan or the negative of these
and similar expressions identify forward-looking statements.
Forward-looking statements include, but are not limited to,
statements about:
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our expectations regarding our future expenses, sales and
operations; |
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our anticipated cash needs and our estimates regarding our
capital requirements and our need for additional financing; |
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the expected development path and timing of our product
candidates; |
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our expectations regarding the use of Section 505(b)(2) of
the United States Food, Drug and Cosmetic Act and an expedited
development and regulatory process; |
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our ability to obtain and derive benefits from orphan drug
designation; |
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our ability to anticipate the future needs of our customers; |
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our plans for future products and enhancements of existing
products; |
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our growth strategy elements; |
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our intellectual property; |
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the anticipated trends and challenges in the markets in which we
operate; and |
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our ability to attract customers. |
These statements reflect our current views with respect to
uncertain future events and are based on imprecise estimates and
assumptions and subject to risk and uncertainties. Given these
uncertainties, you should not place undue reliance on these
forward-looking statements. While we believe our plans,
intentions and expectations reflected in those forward-looking
statements are reasonable, these plans, intentions or
expectations may not be achieved. Our actual results,
performance or achievements could differ materially from those
contemplated, expressed or implied by the forward-looking
statements contained in this prospectus for a variety of
reasons, including those under the heading Risk
Factors.
All forward-looking statements attributable to us or persons
acting on our behalf are expressly qualified in their entirety
by the risk factors and other cautionary statements set forth in
this prospectus. Other than as required by applicable securities
laws, we are under no obligation, and we do not intend, to
update any forward-looking statement, whether as result of new
information, future events or otherwise.
19
USE OF PROCEEDS
We estimate that our net proceeds from the sale of our common
stock in this offering will be approximately $27.3 million,
or approximately $31.5 million if the underwriters exercise
their over-allotment option in full, based upon an assumed
public offering price of $0.99 per share and after
deducting the estimated underwriting discount and estimated
offering expenses payable by us.
We currently expect to use the net proceeds from this offering
as follows:
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approximately $20 million for preclinical and clinical
testing in our ARD-3100 program, including manufacturing of
clinical trial supplies; |
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approximately $2 million for completion of development of
our next-generation AERx pulmonary drug delivery device; and |
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the balance for working capital and general corporate expenses
as well as general development efforts. |
We may also use a portion of the proceeds for the potential
acquisition of, or investment in, product candidates,
technologies, formulations or companies that complement our
business, although we have no current understandings,
commitments or agreements to do so.
As of September 30, 2006 we had $32.8 million in cash,
cash equivalents and short-term investments. We believe that our
existing capital resources, together with funding commitments
from collaborators, interest earned on our investments and the
estimated net proceeds from this offering, will be sufficient to
enable us to maintain currently planned operations through at
least the next 18 months. We do not expect our existing
capital resources and the estimated net proceeds from this
offering to be sufficient to enable us to fund to completion the
development of any of our product candidates. During the next
18 months we expect to:
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announce initial clinical results for our ARD-3100 program; and |
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initiate additional preclinical testing for our ARD-1500 program. |
We will need additional funds to develop our product candidates
and to continue our operations. Such funds may not be available
when needed on acceptable terms or at all. In order to reach
commercialization of ARD-3100, we estimate we will need to spend
an additional $15 million to $20 million. If we
cannot raise sufficient funds when needed, we may have to delay,
scale back or abandon clinical trials or other product
development activities, or we may be forced to license or sell
rights to our product candidates that we would have preferred to
retain. If we are able to raise additional capital through the
issuance of equity securities, your equity interest will be
diluted. If we are able to raise additional capital through the
issuance of debt securities, the terms of the debt securities
may restrict our operations, including our ability to pay
dividends on our common stock.
The actual costs and timing of clinical trials are highly
uncertain, subject to risk and may change depending upon the
clinical indication targeted, the development strategy pursued
and the results of preclinical testing and early stage clinical
trials. The amounts and timing of other expenditures will depend
on numerous factors, including the status of our product
development and commercialization efforts, the amount of
proceeds actually raised in this offering, competition,
manufacturing activities and any collaborative arrangements we
may enter into. As a result, our management will have broad
discretion to allocate the net proceeds from this offering.
20
PRICE RANGE OF COMMON STOCK
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. 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
SmallCap Market); and between November 10, 2006 and
December 20, 2006 our common stock was quoted on the Pink
Sheets.
The following table sets forth the high and low closing sale
prices of our common stock for the periods indicated.
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High |
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Low |
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2004
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First Quarter
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$ |
13.70 |
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$ |
9.05 |
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Second Quarter
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11.35 |
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4.20 |
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Third Quarter
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6.40 |
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3.30 |
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Fourth Quarter
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10.00 |
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5.90 |
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2005
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First Quarter
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$ |
8.65 |
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$ |
5.60 |
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Second Quarter
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5.90 |
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5.00 |
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Third Quarter
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6.05 |
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4.95 |
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Fourth Quarter
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5.25 |
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3.45 |
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2006
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First Quarter
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$ |
5.04 |
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$ |
3.03 |
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Second Quarter
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3.32 |
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1.29 |
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Third Quarter
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2.24 |
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1.40 |
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Fourth Quarter
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1.69 |
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0.83 |
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On January 3, 2007, the last reported sale price of our
common stock on the OTC Bulletin Board was $0.99. As of
January 3, 2007, there were 14,765,474 shares of our
common stock outstanding, held by 124 holders of record.
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.
21
CAPITALIZATION
The following table sets forth our unaudited capitalization as
of September 30, 2006:
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on an actual basis; and |
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on an as adjusted basis to reflect (1) the automatic
conversion of our outstanding Series A Convertible
Preferred Stock into 1,235,701 shares of our common stock
upon completion of this offering, resulting in an increase in
shareholders equity of approximately $23.7 million,
and (2) the receipt of net proceeds from the sale of
30,000,000 shares of our common stock in this offering at
an assumed public offering price of $0.99 per share, after
deducting the estimated underwriting discount and estimated
offering expenses payable by us. The Series A Convertible
Preferred Stock converts automatically into common stock upon
the completion of an underwritten public offering of common
stock with gross proceeds of at least $25 million. |
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You should read this table together with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our audited and unaudited financial
statements and the related notes, each appearing elsewhere in
this prospectus.
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As of September 30, 2006 | |
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Actual | |
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As Adjusted | |
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(In thousands, | |
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except share data) | |
Convertible preferred stock, no par value; 2,050,000 shares
authorized, 1,544,626 shares issued and outstanding,
actual; no shares issued and outstanding, as adjusted;
liquidation preference of $41,866 at September 30, 2006,
actual
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$ |
23,669 |
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Shareholders equity:
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Common stock, no par value; 100,000,000 shares authorized,
14,776,412 shares issued and outstanding, actual;
100,000,000 shares authorized, 46,012,113 shares
issued and outstanding, as adjusted
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283,578 |
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$ |
334,555 |
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Accumulated other comprehensive income
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3 |
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3 |
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Accumulated deficit
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(282,481 |
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(282,481 |
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Total shareholders equity
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1,100 |
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52,077 |
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Total
capitalization
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$ |
24,769 |
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$ |
52,077 |
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The outstanding share information in the table above excludes as
of September 30, 2006:
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3,253,894 shares of common stock issuable upon the exercise
of outstanding options with a weighted average exercise price of
$9.29 per share; |
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2,119,766 shares of common stock issuable upon exercise of
outstanding warrants with a weighted average exercise price of
$11.11 per share; and |
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1,633,998 shares of common stock reserved for future
issuance under our 2005 Equity Incentive Plan and our Employee
Stock Purchase Plan. |
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22
SELECTED FINANCIAL DATA
We present below our selected financial data. The statement of
operations data for the years ended December 31, 2003, 2004
and 2005 and the balance sheet data as of December 31, 2004
and 2005 have been derived from our audited financial statements
included elsewhere in this prospectus. The statement of
operations data for the years ended December 31, 2001 and
2002 and the balance sheet data as of December 31, 2001,
2002 and 2003 have been derived from our audited financial
statements not included in this prospectus. The statement of
operations data for the nine months ended September 30,
2005 and 2006 and the balance sheet data as of
September 30, 2006 have been derived from our unaudited
financial statements included elsewhere in this prospectus. You
should read this information together with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our audited and
unaudited financial statements and related notes, each included
elsewhere in this prospectus. Our interim results are not
necessarily indicative of results for the full fiscal year and
our historical results are not necessarily indicative of the
results to be expected in any future period.
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Nine Months | |
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Ended | |
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Years Ended December 31, | |
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2001 | |
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2002 | |
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2003 | |
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2004 | |
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2005 (1) | |
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2005 | |
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2006 | |
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(Unaudited) | |
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(In thousands, except per share data) | |
Statements of operations data:
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|
|
|
|
|
Contract and license revenues
|
|
$ |
28,916 |
|
|
$ |
28,967 |
|
|
$ |
33,857 |
|
|
$ |
28,045 |
|
|
$ |
10,507 |
|
|
$ |
9,645 |
|
|
$ |
4,006 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
58,836 |
|
|
|
54,680 |
|
|
|
49,636 |
|
|
|
46,477 |
|
|
|
30,174 |
|
|
|
20,858 |
|
|
|
17,645 |
|
|
General and administrative
|
|
|
9,355 |
|
|
|
10,394 |
|
|
|
10,391 |
|
|
|
11,934 |
|
|
|
10,895 |
|
|
|
8,274 |
|
|
|
9,051 |
|
|
Restructuring and asset impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
68,191 |
|
|
|
65,074 |
|
|
|
60,027 |
|
|
|
58,411 |
|
|
|
41,069 |
|
|
|
29,132 |
|
|
|
32,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(39,275 |
) |
|
|
(36,107 |
) |
|
|
(26,170 |
) |
|
|
(30,366 |
) |
|
|
(30,562 |
) |
|
|
(19,487 |
) |
|
|
(28,407 |
) |
Gain on sale of patent and royalty interest (to related party)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000 |
|
Interest income
|
|
|
1,324 |
|
|
|
818 |
|
|
|
338 |
|
|
|
194 |
|
|
|
1,317 |
|
|
|
980 |
|
|
|
839 |
|
Interest expense
|
|
|
(899 |
) |
|
|
(499 |
) |
|
|
(138 |
) |
|
|
(16 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
(101 |
) |
Other income (2)
|
|
|
6,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
(182 |
) |
|
|
(143 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
36 |
|
|
|
(37 |
) |
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(32,357 |
) |
|
|
(35,931 |
) |
|
|
(25,970 |
) |
|
|
(30,189 |
) |
|
|
(29,215 |
) |
|
|
(18,544 |
) |
|
|
(7,643 |
) |
Deemed dividend (3)
|
|
|
(10,722 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss applicable to common shareholders
|
|
$ |
(43,079 |
) |
|
$ |
(35,931 |
) |
|
$ |
(25,970 |
) |
|
$ |
(30,189 |
) |
|
$ |
(29,215 |
) |
|
$ |
(18,544 |
) |
|
$ |
(7,643 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share applicable to common
shareholders
|
|
$ |
(9.89 |
) |
|
$ |
(5.94 |
) |
|
$ |
(2.59 |
) |
|
$ |
(2.37 |
) |
|
$ |
(2.01 |
) |
|
$ |
(1.28 |
) |
|
$ |
(0.52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per share
|
|
|
4,358 |
|
|
|
6,052 |
|
|
|
10,039 |
|
|
|
12,741 |
|
|
|
14,513 |
|
|
|
14,497 |
|
|
|
14,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
As of | |
|
|
| |
|
September 30, | |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 (1) | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited) | |
|
|
(In thousands) | |
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$ |
71,164 |
|
|
$ |
31,443 |
|
|
$ |
29,770 |
|
|
$ |
16,763 |
|
|
$ |
27,694 |
|
|
$ |
32,784 |
|
Working capital
|
|
|
48,308 |
|
|
|
16,039 |
|
|
|
19,708 |
|
|
|
4,122 |
|
|
|
21,087 |
|
|
|
30,216 |
|
Total assets
|
|
|
132,100 |
|
|
|
97,129 |
|
|
|
95,218 |
|
|
|
79,741 |
|
|
|
39,497 |
|
|
|
37,270 |
|
Noncurrent portion of notes payable and capital lease obligations
|
|
|
2,427 |
|
|
|
497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,593 |
|
Convertible preferred stock
|
|
|
30,735 |
|
|
|
30,665 |
|
|
|
23,669 |
|
|
|
23,669 |
|
|
|
23,669 |
|
|
|
23,669 |
|
Accumulated deficit
|
|
|
(153,535 |
) |
|
|
(189,443 |
) |
|
|
(215,436 |
) |
|
|
(245,623 |
) |
|
|
(274,838 |
) |
|
|
(282,481 |
) |
Total shareholders equity
|
|
|
71,149 |
|
|
|
41,410 |
|
|
|
52,970 |
|
|
|
35,754 |
|
|
|
7,171 |
|
|
|
1,100 |
|
|
|
|
(1) |
|
On January 26, 2005, we completed the restructuring of our
AERx iDMS program, pursuant to a restructuring agreement entered
into with Novo Nordisk and an affiliate of Novo Nordisk. In
accordance with the restructuring transaction, we received
$51.3 million in cash and applied $4.0 million of
deposits from Novo Nordisk in consideration for our transfer to
Novo Nordisk of $54.5 million of property and equipment at
net book value, $515,000 of inventory and $317,000 for prepaid
and other assets. As a result of the restructuring transaction,
our contract revenues from our development agreement with Novo
Nordisk ceased in 2005. Of the amount recorded in deferred
revenue at December 31, 2004, we recorded
$11.3 million in the first quarter of 2005, consisting of:
project development revenues of $2.1 million, deferred
milestone revenues of $5.2 million, and $4.0 million
as partial payment for the sale of the insulin development
program assets in accordance with the restructuring agreement.
We recorded no material gain or loss as a result of the sale of
these assets. |
|
(2) |
|
Other income consists of the gain related to forgiveness of
outstanding notes and interest by Genentech, previously
classified as an extraordinary item. In 2002, we early adopted
Statement of Financial Accounting Standard 145, Rescission
of FASB Statements No. 4, 44 and 64, Amendment of FASB 13
and Technical Corrections, which requires the
reclassification of this type of extraordinary item as a
component of operating results. |
|
(3) |
|
The deemed dividend represents the beneficial conversion feature
on our Series A Convertible Preferred Stock, measured as
the difference between the fair market value of our common stock
and the discounted conversion price. We reported the value of
the beneficial conversion feature on the statements of
operations for the year ended December 31, 2001 as a deemed
dividend and included the value in the calculation of net loss
applicable to the common shareholders. |
24
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with Selected Financial Data and our
financial statements and related notes appearing elsewhere in
this prospectus. In addition to historical information, this
discussion and analysis contains forward-looking statements that
involve risks, uncertainties and assumptions. Our actual results
may differ materially from those anticipated in these
forward-looking statements as a result of certain factors,
including but not limited to, those set forth under Risk
Factors and elsewhere in this prospectus.
Overview
We are an emerging specialty pharmaceutical company focused on
the development and commercialization of a portfolio of drugs
delivered by inhalation for the treatment of severe respiratory
diseases by pulmonologists. Over the last decade, we have
invested a large amount of capital to develop drug delivery
technologies, and in doing so we have developed a significant
amount of expertise in pulmonary drug delivery. We have also
invested considerable effort into the generation of a large
volume of laboratory and clinical data demonstrating the
performance of our AERx pulmonary drug delivery platform. We
have not been profitable since inception and expect to incur
additional operating losses over at least the next several years
as we expand product development efforts, preclinical testing
and clinical trial activities and possible sales and marketing
efforts and as we secure production capabilities from outside
contract manufacturers. To date, we have not had any significant
product sales, and we do not anticipate receiving any revenues
from the sale of products for at least the next several years.
As of September 30, 2006, we had an accumulated deficit of
$282.5 million. Historically we have funded our operations
primarily through private placements and public offerings of our
capital stock, proceeds from equipment lease financings, license
fees and milestone payments from collaborators, proceeds from
our restructuring transaction with Novo Nordisk and interest
earned on investment.
We have performed initial feasibility work and conducted early
stage clinical work on a number of potential products and have
been compensated for expenses incurred while performing this
work in several cases pursuant to feasibility study agreements
and other collaborative arrangements. We will seek to develop
certain potential products ourselves, including those that can
benefit from our experience in pulmonary delivery, and that have
markets we can address with a targeted sales and marketing force
and that we believe are likely to provide a superior therapeutic
profile or other valuable benefits to patients when compared to
existing products. For other potential products with larger or
less concentrated markets we may seek to enter into development
and commercialization agreements with collaborators.
In 2004, we executed a development agreement with Defence
Research and Development Canada, a division of the Canadian
Department of National Defence, for the development of liposomal
ciprofloxacin for the treatment of biological terrorism-related
inhalation anthrax. We are also exploring the use of liposomal
ciprofloxacin to treat other indications. We have received
orphan drug designation for this formulation from the United
States Food and Drug Administration, or the FDA, for the
management of cystic fibrosis, or CF. We initiated preclinical
studies for our ARD-3100 product candidate in 2006 and expect to
initiate human clinical studies for the CF indication in the
first half of 2007. We anticipate using safety data from these
studies to support our expected application for approval of the
ARD-1100 product candidate for the prevention and treatment of
inhalation anthrax and possibly other inhaled life-threatening
bioterrorism infections as well.
The AERx insulin Diabetes Management System, or AERx iDMS, which
we initially developed and is now licensed to Novo Nordisk, is
being developed to control blood glucose levels in patients with
diabetes. Following the restructuring of our collaborative
arrangement in January 2005, all responsibility for funding and
conducting the remaining development and commercialization of
this product, including manufacturing, clinical trials,
regulatory filings, marketing and sales, has been transferred to
Novo Nordisk. We have the right to receive royalties on any
sales of AERx iDMS. AERx iDMS is currently undergoing testing in
a Phase 3 clinical program, which began in May 2006. This
program follows significant prior clinical work
25
which provided preliminary evidence that AERx iDMS is comparable
to regular injectable insulin in the overall management of
Type 1 and Type 2 diabetes. The Phase 3 clinical
program is expected to include a total of approximately 3,400
Type 1 and Type 2 diabetes patients and is taking
place worldwide with primary focus on Europe and the United
States. The program includes treatment comparisons with other
antidiabetics. The longest of these trials is expected to last
27 months. Novo Nordisk announced in October 2006 that it
expects commercial launch of the product in 2010. As with any
clinical program, there are many factors that could delay the
launch or could result in AERx iDMS not receiving or maintaining
regulatory approval.
We have other ongoing collaborator-funded and proprietary
programs under development. In 2006, we expect self-initiated
research and development expenses to decrease from 2005;
however, the extent of and costs associated with future research
and development efforts are uncertain and difficult to predict
due to the early stage of development of our programs.
Restructured Relationship with Novo Nordisk
During 2005, our collaborative agreement with Novo Nordisk and
its subsidiary, Novo Nordisk Delivery Technologies, or NNDT,
contributed approximately 76% of our total contract revenues.
From the inception of our collaboration in June 1998 through
December 31, 2005, we have received from Novo Nordisk
$137.1 million in product development payments,
$13.0 million in milestone payments and $35.0 million
from the purchase of our common stock by Novo Nordisk and its
affiliates. All product development and milestone payments
received to date have been recognized as revenue.
As of January 26, 2005, we restructured the AERx iDMS
program, pursuant to a restructuring agreement entered into with
Novo Nordisk and NNDT in September 2004. Under the terms of the
restructuring agreement, we sold certain equipment, leasehold
improvements and other tangible assets used in the AERx iDMS
program to NNDT, for a cash payment of $55.3 million
(before refund of cost advances made by Novo Nordisk). Our
expenses related to this transaction for legal and other
consulting costs were $1.1 million. In connection with the
restructuring transaction, we entered into various related
agreements with Novo Nordisk and NNDT, including the following:
|
|
|
|
|
an amended and restated license agreement amending the
development and license agreement previously in place with Novo
Nordisk, expanding Novo Nordisks development and
manufacturing rights to the AERx iDMS program and providing for
royalties to us on future AERx iDMS net sales in lieu of a
percentage interest in the gross profits from the
commercialization of AERx iDMS, which royalties run until the
later of last patent expiry or last use of our intellectual
property and which apply to future enhancements or generations
of our AERx delivery technology; |
|
|
|
a three-year agreement under which NNDT agreed to perform
contract manufacturing of AERx iDMS-identical devices and dosage
forms filled with compounds provided by us in support of
preclinical and initial clinical development of other products
that incorporate our AERx delivery system; and |
|
|
|
an amendment of the common stock purchase agreement in place
with Novo Nordisk prior to the closing of the restructuring
transaction, (i) deleting the provisions whereby we can
require Novo Nordisk to purchase certain additional amounts of
common stock, (ii) imposing certain restrictions on the
ability of Novo Nordisk to sell shares of our common stock and
(iii) providing Novo Nordisk with certain registration and
information rights with respect to these shares. |
As a result of this transaction, we recorded our final project
development revenues from Novo Nordisk in the first quarter of
2005, and, as we were no longer obligated to continue work
related to the non-refundable milestone payment from Novo
Nordisk in connection with the commercialization of AERx, we
recognized the remaining balance of the deferred revenue
associated with the milestone of $5.2 million as revenue in
the first quarter of 2005. In 2005 we recorded revenues of
approximately $727,000 from NNDT related to transition and
support agreements. As a result of this transaction, we were
released from our contractual obligations relating to future
operating lease payments for two buildings assigned to NNDT and
accordingly reversed the deferred rent liability related to the
two buildings of $1.4 million, resulting in a reduction of
26
operating expenses in 2005. In addition, pursuant to the
restructuring agreement, we terminated a manufacturing and
supply agreement and a patent cooperation agreement, each
previously in place with Novo Nordisk and dated October 22,
2001.
On July 3, 2006, we further restructured our relationship
with Novo Nordisk through an intellectual property assignment, a
royalty prepayment and an eight-year promissory note with Novo
Nordisk. The promissory note was secured by the royalty payments
on any AERx iDMS sales by Novo Nordisk under the license with
us. The key features of this restructuring included:
|
|
|
|
|
our transfer to Novo Nordisk of the ownership of 23 issued
United States patents and their corresponding non-United States
counterparts, if any, as well as related pending applications,
in exchange for $12.0 million paid to us in cash. We
retained exclusive, royalty-free control of these patents
outside the field of glucose control and will continue to be
entitled to royalties with respect to any inhaled insulin
products marketed or licensed by Novo Nordisk. |
|
|
|
our receipt of a royalty prepayment of $8.0 million in
exchange for a one percent reduction on our average royalty rate
for the commercialized AERx iDMS product. As a result, we will
receive royalty rates under our license agreement with Novo
Nordisk that will commence at a minimum of 3.25% on launch, and
that we estimate will average 5% over the life of the product. |
|
|
|
our issuance of an eight-year promissory note to Novo Nordisk in
connection with our receipt from Novo Nordisk of a loan in the
principal amount of $7.5 million with interest accruing at
5% per year. The principal and interest will be payable to Novo
Nordisk in three equal payments of $3.5 million on
July 2, 2012, July 1, 2013 and June 30, 2014. Our
obligations under the note are secured by royalty payments upon
any commercialization of the AERx iDMS product. |
We and Novo Nordisk continue to cooperate and share in
technology development, as well as intellectual property
development and defense. Both we and Novo Nordisk have access to
any developments or improvements the other might make to the
AERx delivery system, within their respective fields of use.
Novo Nordisk also remains a substantial holder of our common
stock and is restricted from disposing of any of our common
stock until January 1, 2009 or the earlier occurrence of
certain specified events.
In August 2006, Novo Nordisk announced that it had filed a
lawsuit against Pfizer claiming that Exubera, an inhaled insulin
product that Pfizer has been developing with Nektar
Therapeutics, infringes a patent originally owned by us and now
owned by Novo Nordisk with rights retained by us outside the
field of glucose control. In December 2006, Novo Nordisks
motion for a preliminary injunction in this case was denied.
While the outcome of this lawsuit is highly uncertain, we are
entitled to a portion of any proceeds, net of litigation costs,
that may be received by Novo Nordisk from a favorable outcome.
Purchase and Sale of Intraject Technology
In May 2003, we acquired select assets from the Weston Medical
Group, a company based in the United Kingdom, including the
Intraject needle-free delivery technology, related manufacturing
equipment and intellectual property and associated transfer
costs, for a total of $2.9 million. The purchase price and
additional costs were allocated to the major pieces of purchased
commercial equipment for the production of Intraject and were
recorded in property and equipment as construction in progress.
No costs or expenses were allocated to intellectual property or
in-process research and development on a pro-rata basis, because
of the lack of market information, the early stage of
development and the immateriality of any allocation to
intellectual property or in-process research and development
based on the substantial value of the tangible assets acquired.
In October 2004, we announced positive results from the clinical
performance verification trial of the Intraject needle-free
delivery system. Following the results from the configuration
trial, we initiated a pilot pharmacokinetic study comparing
Intraject with sumatriptan, a treatment for migraines, to the
currently marketed needle-injected product. In June 2005, we
announced results from this study, which showed that Intraject
sumatriptan was bioequivalent to the marketed injectable product
and that patients were able to self-administer using Intraject.
27
In August 2006, we sold all of our assets related to the
Intraject technology platform and products, including 12 United
States patents along with any foreign counterparts corresponding
to those United States patents, to Zogenix, Inc., a newly
created private company that has some officers who were former
officers of our company. Zogenix is responsible for further
development and commercialization efforts of Intraject. We
received a $4.0 million initial payment and we will be
entitled to a milestone payment upon initial commercialization
and royalty payments upon any commercialization of products that
may be developed and sold using the Intraject technology. Our
potential royalty payments will be affected by the ability of
Zogenix to maintain and, if necessary, enforce the patents we
assigned to it.
Nasdaq Listing
On May 18, 2006, we received a notice indicating that we
had failed to comply with Marketplace Rule 4310(c)(2)(B) of
the Nasdaq Stock Market (Nasdaq), requiring us to either
maintain a minimum market value or shareholders equity or
meet certain net income levels. Upon subsequently receiving a
staff determination letter from Nasdaq stating that our common
stock was subject to delisting from the Nasdaq Capital Market
for not meeting specific listing criteria, we requested and were
granted a hearing before the Nasdaq Listing Qualifications
Panel. On August 22, 2006, the panel granted our request
for continued listing, pending receipt of third quarter
financial statements demonstrating continued compliance. On
October 24, 2006, we notified Nasdaq that our third quarter
financial statements were not expected to demonstrate continued
compliance and requested a hearing to show our plan to regain
and maintain compliance. On November 9, 2006, we announced
that the Nasdaq Listing Qualifications Panel had determined to
delist our common stock from the Nasdaq Capital Market,
effective with the commencement of trading on Friday,
November 10, 2006. Our common stock is currently quoted on
the OTC Bulletin Board, an electronic quotation service for
securities traded over-the-counter.
Critical Accounting Policies and Estimates
We consider certain accounting policies related to revenue
recognition, stock-based compensation and impairment of
long-lived assets to be critical accounting policies that
require the use of significant judgments and estimates relating
to matters that are inherently uncertain and may result in
materially different results under different assumptions and
conditions. The preparation of financial statements in
conformity with United States generally accepted accounting
principles requires us to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes to the financial statements. These estimates
include useful lives for property and equipment and related
depreciation calculations, estimated amortization periods for
payments received from product development and license
agreements as they relate to the revenue recognition of deferred
revenue and assumptions for valuing options, warrants and other
stock-based compensation. Our actual results could differ from
these estimates.
Revenue Recognition
Contract revenues consist of revenues from collaboration
agreements and feasibility studies. We recognize revenues under
the provisions of the Securities and Exchange Commission issued
Staff Accounting Bulletin, or SAB, No. 104, Revenue
Recognition. Under collaboration agreements, revenues are
recognized as costs are incurred. Deferred revenue represents
the portion of all refundable and nonrefundable research
payments received that have not been earned. In accordance with
contract terms, milestone payments from collaborative research
agreements are considered reimbursements for costs incurred
under the agreements and, accordingly, are generally recognized
as revenues either upon the completion of the milestone effort
when payments are contingent upon completion of the effort or
are based on actual efforts expended over the remaining term of
the agreements when payments precede the required efforts. Costs
of contract revenues are approximate to or are greater than such
revenues and are included in research and development expenses
when incurred. Refundable development and license fee payments
are deferred until the specified performance criteria are
achieved. Refundable development and license fee payments are
generally not refundable once the specific performance criteria
are achieved and accepted.
28
Impairment of Long-Lived Assets
We review for impairment whenever events or changes in
circumstances indicate that the carrying amount of property and
equipment may not be recoverable in accordance with Statement of
Financial Accounting Standard, or SFAS, No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. Determination of recoverability is based on an
estimate of undiscounted future cash flows resulting from the
use of the asset and its eventual disposition. Future cash flows
that are contingent in nature are generally not recognized. In
the event that such cash flows are not expected to be sufficient
to recover the carrying amount of the assets, the assets are
written down to their estimated fair values and the loss is
recognized in the statements of operations. We recorded a
non-cash impairment charge of $4.0 million during the nine
months ended September 30, 2006 related to our estimate of
the net realizable value of the Intraject-related assets, based
on the expected sale of those assets.
Stock-Based Compensation Expense
Effective January 1, 2006, we adopted the fair value
recognition provisions of SFAS No. 123 (revised 2004),
Share-Based Payment, or SFAS No. 123R, using the
modified prospective transition method and, therefore, have not
restated prior periods results. Under this method, we
recognize compensation expense, net of estimated forfeitures,
for all stock-based payments granted after January 1, 2006
and all stock-based payments granted prior to but not vested as
of January 1, 2006.
Under the provisions of SFAS No. 123R, stock-based
compensation cost is estimated at the grant date based on the
awards fair value and is recognized as expense, net of
estimated forfeitures, ratably over the requisite vesting
period. We have elected to calculate an awards fair value
based on the Black-Scholes option-pricing model. The
Black-Scholes model requires various assumptions including
expected option life and expected stock price volatility. If any
of the assumptions used in the Black-Scholes model or the
estimated forfeiture rate change significantly, stock-based
compensation expense may differ materially in the future from
that recorded in the current period.
Under SFAS No. 123R, we recognized compensation expense for
stock-based compensation of $1.3 million for the nine
months ended September 30, 2006.
Comparison of Nine Months Ended September 30, 2006 and
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
Change in |
|
Change in |
|
|
2005 |
|
2006 |
|
Dollars |
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenues
|
|
$ |
4,378 |
|
|
$ |
3,715 |
|
|
$ |
(663 |
) |
|
|
(15 |
)% |
|
Milestone revenues
|
|
|
5,267 |
|
|
|
291 |
|
|
|
(4,976 |
) |
|
|
(94 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
9,645 |
|
|
$ |
4,006 |
|
|
$ |
(5,639 |
) |
|
|
(58 |
)% |
Total revenues consist of contract and milestone revenues. Total
revenues decreased $5.6 million for the nine months ended
September 30, 2006 over the comparable period in 2005 due
to decreases in both contract and milestone revenues. The
decreases were primarily due to the restructuring of the AERx
iDMS program in January 2005, which resulted in a decrease in
revenues associated with that program. In the nine months ended
September 30, 2006, we recorded revenues from a transition
agreement with Zogenix of $360,000 and increased contract
revenues of $1.8 million from our AERx programs, including
increases from the
ARD-3100, ARD-1500,
ARD-1300 and AERx Smoking Cessation programs of $545,000,
$378,000, $679,000 and $166,000, respectively. This increase was
primarily offset by a net decrease in contract revenues of
$2.1 million due to the January 2005 restructuring with
Novo Nordisk and a decrease of $566,000 due to the conclusion of
a transition service agreement with Novo Nordisk on
January 27, 2006. Milestone revenues for the nine months
ended September 30, 2006 decreased by approximately
$5.0 million due primarily to the
29
consummation of the restructuring with Novo Nordisk on
January 26, 2005, which resulted in a decrease of
$5.2 million, offset by an increase of $210,000 for the
ARD-1300 development program. We expect contract revenues to
decrease as we decrease collaborative activities in favor of
self-initiated development activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
Change in |
|
Change in |
|
|
2005 |
|
2006 |
|
Dollars |
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
Research and development expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaborative
|
|
$ |
4,372 |
|
|
$ |
4,107 |
|
|
$ |
(265 |
) |
|
|
(6 |
)% |
|
Self-initiated
|
|
|
16,486 |
|
|
|
13,538 |
|
|
|
(2,948 |
) |
|
|
(18 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses
|
|
$ |
20,858 |
|
|
$ |
17,645 |
|
|
$ |
(3,213 |
) |
|
|
(15 |
)% |
Research and development expenses include salaries, payments to
contract manufacturers and contract research organizations,
contractor and consultant fees, stock-based compensation
expense, and other support costs including facilities,
depreciation and travel costs. Stock-based compensation expense
charged to research and development for the nine months ended
September 30, 2006 was $665,000 due to the adoption of
SFAS No. 123R effective January 1, 2006.
The decrease in collaborative program expenses in the nine
months ended September 30, 2006 was due primarily to the
conclusion of the January 2005 restructuring agreement with Novo
Nordisk. Similarly, the decrease in research and development
expense for self-initiated projects was due primarily to a
decrease in our Intraject clinical batch registration lot
activities that were substantially completed at year-end 2005
and finalized in early 2006. In August 2006, we sold all of our
assets related to the Intraject technology platform to Zogenix,
a newly created private company that is responsible for further
development and commercialization efforts of Intraject. We
expect that our research and development expenses will remain
relatively constant over the next few quarters as we redirect
our focus from Intraject programs to our AERx programs.
|
|
|
General and Administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
Change in |
|
Change in |
|
|
2005 |
|
2006 |
|
Dollars |
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
General and administrative expenses
|
|
$ |
8,274 |
|
|
$ |
9,051 |
|
|
$ |
777 |
|
|
|
9% |
|
General and administrative expenses are comprised of salaries,
legal fees, insurance, marketing research, contractor and
consultant fees, stock-based compensation expense and other
support costs including facilities, depreciation and travel
costs. Stock-based compensation expense charged to general and
administrative expenses for the nine months ended
September 30, 2006 was $614,000 due to the adoption of
SFAS 123R effective January 1, 2006.
General and administrative expenses for the nine months ended
September 30, 2006 increased over the comparable period in
2005 primarily as a result of legal expenses incurred related to
the restructuring transaction entered into with Novo Nordisk in
July 2006 and an increase in stock-based compensation. We expect
that our general and administrative expenses will remain
relatively constant over the next few quarters; however, there
may be increased expenses associated with additional financings.
|
|
|
Restructuring and Asset Impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months |
|
|
|
|
|
|
Ended September 30, |
|
|
|
|
|
|
|
|
Change in |
|
Change in |
|
|
2005 |
|
2006 |
|
Dollars |
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
Restructuring and asset impairment expenses
|
|
|
|
|
|
$ |
5,717 |
|
|
$ |
5,717 |
|
|
|
100% |
|
30
Restructuring and asset impairment expenses are comprised of
severance-related expenses including payroll, health insurance
payments, outplacement expenses and Intraject-related asset
impairment expenses. Severance-related expenses for the nine
months ended September 30, 2006 were $1.7 million,
primarily due to the reduction in workforce announced on
May 15, 2006. In addition, we recorded $566,000 in
severance expense related to the resignation of V. Bryan Lawlis,
our former President and Chief Executive Officer, and Bobba
Venkatadri, our former Senior Vice President of Operations, in
August 2006, which was offset by a reduction in previously
recorded severance expense of $233,000 related to the departure
of employees in connection with the sale of Intraject-related
assets to Zogenix. We expect to pay the severance-related
balance in full by the end of 2007. In addition, we recorded a
non-cash asset impairment charge of $4.0 million during the
nine months ended September 30, 2006 related to our
estimate of the net realizable value of the Intraject-related
assets, based on the expected sale of those assets.
|
|
|
Gain on Sale of Patent and Royalty Interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months |
|
|
|
|
|
|
Ended September 30, |
|
|
|
|
|
|
|
|
Change in |
|
Change in |
|
|
2005 |
|
2006 |
|
Dollars |
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
Gain on sale of patent and royalty interest
|
|
|
|
|
|
$ |
20,000 |
|
|
$ |
20,000 |
|
|
|
100% |
|
The gain on sale of patent and royalty interest reflects two
transactions we entered into with Novo Nordisk, a related party:
(i) our transfer of certain intellectual property,
including all right, title and interest to our patents that
contain claims that pertain generally to breath control or
specifically to the pulmonary delivery of monomeric insulin and
monomeric insulin analogs, together with interrelated patents,
which are linked via terminal disclaimers, as well as certain of
our pending patent applications and continuations thereof for a
cash payment of $12.0 million, with us retaining exclusive,
royalty-free control of these patents outside the field of
glucose control; and (ii) a reduction by 100 basis points
of each royalty rate payable by Novo Nordisk to us for a cash
payment of $8.0 million.
|
|
|
Interest Income, Interest Expense and Other Income
(Expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months | |
|
|
|
|
|
|
Ended September 30, | |
|
|
|
|
|
|
| |
|
Change in | |
|
Change in | |
|
|
2005 | |
|
2006 | |
|
Dollars | |
|
Percent | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
Interest income, interest expense and other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$ |
980 |
|
|
$ |
839 |
|
|
$ |
(141 |
) |
|
|
(14 |
)% |
|
Interest expense
|
|
|
|
|
|
|
(101 |
) |
|
|
(101 |
) |
|
|
(100 |
)% |
|
Other income (expense)
|
|
|
(37 |
) |
|
|
26 |
|
|
|
63 |
|
|
|
170 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income, interest expense and other income
(expense)
|
|
$ |
943 |
|
|
$ |
764 |
|
|
$ |
(179 |
) |
|
|
(19 |
)% |
Interest income primarily represents interest earned on our
investments. Interest income for the nine months ended
September 30, 2006 decreased $141,000 over the comparable
period in 2005 due to a lower average invested balance. Interest
expense primarily reflects interest on the $7.5 million
note payable issued to Novo Nordisk in July 2006 with an
interest rate of 5%. Interest expense was $101,000 for the nine
months ended September 30, 2006 as opposed to no interest
expense for the comparable period in 2005. Other income
(expense) primarily represents realized gains from exchange
rate transactions and loss on the disposition of assets.
31
Comparison of Years Ended December 31, 2005, 2004 and
2003
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
Change in |
|
Change in |
|
|
2004 |
|
2005 |
|
Dollars |
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenues
|
|
$ |
26,752 |
|
|
$ |
5,159 |
|
|
$ |
(21,593 |
) |
|
|
(81 |
)% |
|
Milestone revenues
|
|
|
1,293 |
|
|
|
5,348 |
|
|
|
4,055 |
|
|
|
314 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
28,045 |
|
|
$ |
10,507 |
|
|
$ |
(17,538 |
) |
|
|
(63 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
Change in |
|
Change in |
|
|
2003 |
|
2004 |
|
Dollars |
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenues
|
|
$ |
32,109 |
|
|
$ |
26,752 |
|
|
$ |
(5,357 |
) |
|
|
(17)% |
|
|
Milestone revenues
|
|
|
1,748 |
|
|
|
1,293 |
|
|
|
(455 |
) |
|
|
(26)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
33,857 |
|
|
$ |
28,045 |
|
|
$ |
(5,812 |
) |
|
|
(17)% |
|
The 63% decrease in total revenues in 2005 compared to 2004 is
due primarily to decreases in contract revenues as a result of
the January 2005 restructuring of the AERx iDMS program. A
decrease in contract revenues of $23.6 million in 2005 from
the AERx iDMS program was offset by an increase of $727,000 in
AERx iDMS consulting revenues and an increase of
$1.3 million as a result of initiating four new feasibility
projects. Milestone revenues increased by $3.9 million due
to the recognition of deferred revenue from a non refundable
milestone balance of $5.2 million and by $162,000 from the
initiation of a new feasibility project.
The 17% decrease in total revenues in 2004 compared to 2003 is
due primarily to decreases in contract revenues and milestone
revenues as a result of the maturation of the collaboration
agreement with Novo Nordisk. This decrease of $6.1 million
was offset by a $734,000 increase in other collaborator-funded
programs. Milestone revenues from Novo Nordisk decreased in 2004
by $455,000.
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
Change in |
|
Change in |
|
|
2004 |
|
2005 |
|
Dollars |
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
Research and development expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaborative
|
|
$ |
28,164 |
|
|
$ |
5,996 |
|
|
$ |
(22,168 |
) |
|
|
(79 |
)% |
|
Self-initiated
|
|
|
18,313 |
|
|
|
24,178 |
|
|
|
5,865 |
|
|
|
32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses
|
|
$ |
46,477 |
|
|
$ |
30,174 |
|
|
$ |
(16,303 |
) |
|
|
(35 |
)% |
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
Change in |
|
Change in |
|
|
2003 |
|
2004 |
|
Dollars |
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
Research and development expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaborative
|
|
$ |
33,512 |
|
|
$ |
28,164 |
|
|
$ |
(5,348 |
) |
|
|
(16 |
)% |
|
Self-initiated
|
|
|
16,124 |
|
|
|
18,313 |
|
|
|
2,189 |
|
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses
|
|
$ |
49,636 |
|
|
$ |
46,477 |
|
|
$ |
(3,159 |
) |
|
|
(6 |
)% |
The decrease in research and development expenses in 2005
compared to 2004 is primarily due to a reduction in headcount
and facility costs associated with the restructuring transaction
with Novo Nordisk and cost reduction programs. This was offset
by a $5.9 million increase in self-initiated development
efforts primarily relating to Intraject. The decrease in
research and development expenses in 2004 compared to 2003 is
primarily due to cost reduction programs, including a reduction
in force implemented in July 2003 in order to align our costs
with the reduced revenues from collaborators. These decreases
were offset by a net increase of $2.2 million in
self-initiated program costs. A reduction in pulmonary delivery
development efforts was offset by increased spending on the
Intraject program. The reduced head count affected six months of
2003 and all of 2004.
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
Change in |
|
Change in |
|
|
2004 |
|
2005 |
|
Dollars |
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
General and administrative expenses
|
|
$ |
11,934 |
|
|
$ |
10,895 |
|
|
$ |
(1,039 |
) |
|
|
(9)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
Change in |
|
Change in |
|
|
2003 |
|
2004 |
|
Dollars |
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
General and administrative expenses
|
|
$ |
10,391 |
|
|
$ |
11,934 |
|
|
$ |
1,543 |
|
|
|
15% |
|
The decrease in general and administrative expenses in 2005 as
compared to 2004 resulted primarily from legal and consulting
costs incurred in 2004 associated with the January 2005
restructuring transaction with Novo Nordisk. Other than the
restructuring transaction, there were no significant corporate
transactions in 2005, 2004 and 2003.
Interest Income, Interest Expense and Other Income
(Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
Change in |
|
Change in |
|
|
2004 |
|
2005 |
|
Dollars |
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
Interest income, interest expense and other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$ |
194 |
|
|
$ |
1,317 |
|
|
$ |
1,123 |
|
|
|
579% |
|
|
Interest expense
|
|
|
(16 |
) |
|
|
(6 |
) |
|
|
10 |
|
|
|
63% |
|
|
Other income (expense)
|
|
|
(1 |
) |
|
|
36 |
|
|
|
37 |
|
|
|
370% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income, interest expense and other income
(expense)
|
|
$ |
177 |
|
|
$ |
1,347 |
|
|
$ |
1,170 |
|
|
|
661% |
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
Change in |
|
Change in |
|
|
2003 |
|
2004 |
|
Dollars |
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
Interest income, interest expense and other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$ |
338 |
|
|
$ |
194 |
|
|
$ |
(144 |
) |
|
|
(43 |
)% |
|
Interest expense
|
|
|
(138 |
) |
|
|
(16 |
) |
|
|
122 |
|
|
|
88 |
% |
|
Other income (expense)
|
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(100 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income, interest expense and other income
(expense)
|
|
$ |
200 |
|
|
$ |
177 |
|
|
$ |
(23 |
) |
|
|
(12 |
)% |
The increase in interest income in 2005 compared to 2004 is due
to an increase in interest rates earned and higher average
invested balances in 2005. The average cash and investment
balances were higher in 2005 primarily due to receipt of net
proceeds of $11.7 million from a private placement of
common stock in December 2004 and net proceeds of
$51.3 million from the closing of the January 2005
restructuring transaction with Novo Nordisk. The decrease in
interest income in 2004 compared to 2003 was primarily due to
lower average cash and investment balances in 2004 and, to a
lesser extent, a decrease in interest rates earned on invested
cash balances.
The decrease in interest expense in 2005 and 2004 compared to
2003 is primarily due to lower outstanding capital lease and
equipment loan balances under various equipment and lease lines
of credit which were completely paid off during 2004. The
increase in other income (expense) in 2005 compared to 2004
is due primarily to the $49,000 net gain on the sale of
assets and $10,000 reduction in interest expense, offset by
$12,000 loss on foreign exchange translation.
34
Selected Quarterly Financial Information
The following table sets forth our unaudited quarterly
statements of operations for each of the eleven quarters in the
period ended September 30, 2006. You should read the
following table in conjunction with our financial statements and
related notes contained elsewhere in this prospectus. We have
prepared the unaudited information on the same basis as our
audited financial statements. This table includes all
adjustments, consisting only of normal recurring adjustments,
that we consider necessary for a fair presentation of our
financial position and operating results for the quarters
presented. Operating results for any quarter are not necessarily
indicative of results for the full fiscal year or any other
future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mar. 31, | |
|
June 30, | |
|
Sept. 30, | |
|
Dec. 31, | |
|
Mar. 31, | |
|
June 30, | |
|
Sept. 30, | |
|
Dec. 31, | |
|
Mar. 31, | |
|
June 30, | |
|
Sept. 30, | |
|
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
2006 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
|
|
Statements of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract and license revenues
|
|
$ |
6,643 |
|
|
$ |
7,078 |
|
|
$ |
6,352 |
|
|
$ |
7,972 |
|
|
$ |
7,714 |
|
|
$ |
1,212 |
|
|
$ |
719 |
|
|
$ |
862 |
|
|
$ |
1,073 |
|
|
$ |
1,807 |
|
|
$ |
1,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
11,887 |
|
|
|
11,412 |
|
|
|
11,407 |
|
|
|
11,771 |
|
|
|
7,070 |
|
|
|
7,317 |
|
|
|
6,471 |
|
|
|
9,316 |
|
|
|
6,740 |
|
|
|
6,357 |
|
|
|
4,547 |
|
|
General and administrative
|
|
|
2,536 |
|
|
|
3,167 |
|
|
|
3,217 |
|
|
|
3,014 |
|
|
|
3,235 |
|
|
|
2,713 |
|
|
|
2,326 |
|
|
|
2,621 |
|
|
|
2,853 |
|
|
|
2,685 |
|
|
|
3,514 |
|
|
Restructuring and asset impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,370 |
|
|
|
347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
14,423 |
|
|
|
14,579 |
|
|
|
14,624 |
|
|
|
14,785 |
|
|
|
10,305 |
|
|
|
10,030 |
|
|
|
8,797 |
|
|
|
11,937 |
|
|
|
9,593 |
|
|
|
14,412 |
|
|
|
8,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(7,780 |
) |
|
|
(7,501 |
) |
|
|
(8,272 |
) |
|
|
(6,813 |
) |
|
|
(2,591 |
) |
|
|
(8,818 |
) |
|
|
(8,078 |
) |
|
|
(11,075 |
) |
|
|
(8,520 |
) |
|
|
(12,605 |
) |
|
|
(7,282 |
) |
Gain on sale of patent and royalty interest (to related party)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000 |
|
Interest income
|
|
|
66 |
|
|
|
49 |
|
|
|
45 |
|
|
|
34 |
|
|
|
288 |
|
|
|
350 |
|
|
|
342 |
|
|
|
337 |
|
|
|
245 |
|
|
|
135 |
|
|
|
459 |
|
Interest expense
|
|
|
(10 |
) |
|
|
(5 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(95 |
) |
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
1 |
|
|
|
(37 |
) |
|
|
(8 |
) |
|
|
8 |
|
|
|
73 |
|
|
|
(7 |
) |
|
|
40 |
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(7,724 |
) |
|
$ |
(7,457 |
) |
|
$ |
(8,230 |
) |
|
$ |
(6,778 |
) |
|
$ |
(2,340 |
) |
|
$ |
(8,476 |
) |
|
$ |
(7,728 |
) |
|
$ |
(10,671 |
) |
|
$ |
(8,285 |
) |
|
$ |
(12,433 |
) |
|
$ |
13,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share
|
|
$ |
(0.61 |
) |
|
$ |
(0.59 |
) |
|
$ |
(0.65 |
) |
|
$ |
(0.52 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.58 |
) |
|
$ |
(0.53 |
) |
|
$ |
(0.73 |
) |
|
$ |
(0.57 |
) |
|
$ |
(0.85 |
) |
|
$ |
0.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share
|
|
$ |
(0.61 |
) |
|
$ |
(0.59 |
) |
|
$ |
(0.65 |
) |
|
$ |
(0.52 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.58 |
) |
|
$ |
(0.53 |
) |
|
$ |
(0.73 |
) |
|
$ |
(0.57 |
) |
|
$ |
(0.85 |
) |
|
$ |
0.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic net income (loss) per common share
|
|
|
12,588 |
|
|
|
12,706 |
|
|
|
12,713 |
|
|
|
12,955 |
|
|
|
14,459 |
|
|
|
14,512 |
|
|
|
14,518 |
|
|
|
14,563 |
|
|
|
14,563 |
|
|
|
14,656 |
|
|
|
14,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted net income (loss) per common
share
|
|
|
12,588 |
|
|
|
12,706 |
|
|
|
12,713 |
|
|
|
12,955 |
|
|
|
14,459 |
|
|
|
14,512 |
|
|
|
14,518 |
|
|
|
14,563 |
|
|
|
14,563 |
|
|
|
14,656 |
|
|
|
15,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
Since inception, we have financed our operations primarily
through private placements and public offerings of our capital
stock, proceeds from equipment lease financings, contract
research funding, proceeds from our restructuring transactions
with Novo Nordisk and interest earned on investments. As of
35
September 30, 2006, we had cash, cash equivalents and
short-term investments of $32.8 million and total working
capital of $30.2 million. During the three months ended
September 30, 2006, we received proceeds of
$20.0 million from the sale of patents and royalty interest
to Novo Nordisk, proceeds from a $7.5 million promissory
note we issued to Novo Nordisk and proceeds of $4.0 million
from the sale of Intraject-related assets to Zogenix. Our
principal requirements for cash are to fund working capital
needs and, to a lesser extent, capital expenditures for
equipment purchases.
For the nine months ended September 30, 2006, our operating
activities used net cash of $25.4 million and reflect our
net loss of $7.6 million offset by non-cash charges,
including stock-based compensation expense under
SFAS No. 123R, an asset impairment charge on property
and equipment and depreciation expense, and our use of operating
cash to fund changes in operating assets and liabilities. Cash
was used to pay for an increase in invoices outstanding for the
Intraject program, to pay for severance-related expenses accrued
for the reduction in workforce and to fund accounts receivable,
primarily related to our partnered programs. This compares to
the net cash used in our operating activities for the nine
months ended September 30, 2005 of $26.8 million
reflecting our net loss of $18.5 million offset by non-cash
charges, including depreciation expense and our use of cash to
fund changes in operating assets and liabilities. The primary
changes in operating assets and liabilities were the recognition
of deferred revenues of $7.2 million and reduction in
deferred rent of $1.3 million, recognized in the statement
of operations in the nine months ended September 30, 2005
in conjunction with the January 2005 Novo Nordisk restructuring.
For the nine months ended September 30, 2006, net cash
provided by investing activities was $22.2 million, which
consisted primarily of $20.0 million in proceeds from the
sale of patents and royalty interest and $4.0 million in
proceeds from the sale of Intraject-related assets. This was
partly offset by $1.3 million for purchases of equipment
primarily for the Intraject commercialization program and
$507,000 used to purchase short-term investments. This compares
to net cash provided by investing activities for the nine months
ended September 30, 2005 of $45.4 million, which
consisted primarily of $50.3 million in net proceeds from
Novo Nordisk in connection with the January 2005 restructuring
and $4.5 million in proceeds from sale of investments,
offset by our purchase of $4.0 million of fixed assets
relating to our Intraject platform and our purchases of
$5.3 million in securities classified as short-term
investments with funds received in connection with the
restructuring.
Net cash provided by financing activities was $7.8 million
for the nine months ended September 30, 2006, primarily
representing proceeds from the $7.5 million promissory note
issued to Novo Nordisk and net cash provided by purchases under
our employee stock plans, compared to $557,000 for the
comparable period in 2005.
As of September 30, 2006, we had an accumulated deficit of
$282.5 million, working capital of $30.2 million and
shareholders equity of $1.1 million. Management
believes that cash and cash equivalents on hand at September 30,
2006, together with funding commitments from collaborators,
interest earned on our investments and the estimated net
proceeds from this offering, will be sufficient to enable us to
meet our obligations through at least the next 18 months.
We will likely need to raise additional capital to fund our
operations and to develop our product candidates. Such funds may
not be available when needed on acceptable terms or at all. If
we cannot raise sufficient funds when needed, we may have to
delay, scale back or abandon clinical trials or other product
development activities, or we may be forced to license or sell
rights to our product candidates that we would have preferred to
retain. If we are able to raise additional capital through the
issuance of equity securities, your equity interest will be
diluted. If we are able to raise additional capital through the
issuance of debt securities, the terms of the debt securities
may restrict our operations, including our ability to pay
dividends on our common stock.
Our development efforts have and will continue to require a
commitment of substantial funds to conduct the preclinical
safety testing and clinical testing activities necessary to
develop and refine such technology and proposed products and to
bring any such products to market. Our future capital
requirements will depend on many factors, including continued
progress with product development, our ability to establish and
maintain favorable collaborative arrangements with others,
progress with preclinical studies and clinical trials and the
36
results thereof, the time and costs involved in seeking
regulatory approvals, the cost to us of
scale-up of our
technologies, mainly through contract manufacturers, the cost
involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims, and the need to acquire licenses or
other rights to new technology.
We continue to review our planned operations through the end of
2006 and beyond. We particularly focus on capital spending
requirements to ensure that capital outlays are not expended
sooner than necessary. If we make good progress in our
development programs, we would expect our cash requirements for
capital spending and operations to increase in future periods.
Our capital expenditure budget through the end of 2007 is for a
total of $3.0 million, primarily for investment in
manufacturing processes and equipment.
Contractual Obligations
Our contractual obligations and future minimum lease payments
that are non-cancelable at December 31, 2005 are disclosed
in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period | |
|
|
| |
|
|
|
|
Less than | |
|
|
|
After | |
|
|
Total | |
|
1 Year | |
|
1-3 Years | |
|
3-5 Years | |
|
5 Years | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Operating lease obligations
|
|
$ |
22,811 |
|
|
$ |
1,660 |
|
|
$ |
4,677 |
|
|
$ |
4,541 |
|
|
$ |
11,933 |
|
Unconditional capital purchase obligations
|
|
|
1,015 |
|
|
|
1,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconditional purchase obligations
|
|
|
2,113 |
|
|
|
2,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual commitments
|
|
$ |
25,939 |
|
|
$ |
4,788 |
|
|
$ |
4,677 |
|
|
$ |
4,541 |
|
|
$ |
11,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Financings and Liabilities
Other than contractual obligations incurred in the normal course
of business, we do not have any off-balance sheet financing
arrangements or liabilities, guarantee contracts, retained or
contingent interests in transferred assets or any obligation
arising out of a material variable interest in an unconsolidated
entity. We do not have any majority-owned subsidiaries.
Quantitative and Qualitative Disclosure About Market Risk
In the normal course of business, our financial position is
routinely subject to a variety of risks, including market risk
associated with interest rate movement. We regularly assess
these risks and have established policies and business practices
intended to protect against these and other exposures. As a
result, we do not anticipate material potential losses in these
areas.
As of September 30, 2006, we had cash, cash equivalents and
short-term investments of $32.8 million, consisting of
cash, cash equivalents and highly liquid short-term investments.
Our short-term investments will likely decline by an immaterial
amount if market interest rates increase and, therefore, we
believe our exposure to interest rate changes is immaterial.
Declines of interest rates over time will, however, reduce our
interest income from short-term investments.
37
BUSINESS
We are an emerging specialty pharmaceutical company focused on
the development and commercialization of a portfolio of drugs
delivered by inhalation for the treatment of severe respiratory
diseases by pulmonologists. Historically we have focused on the
development of our drug delivery technologies, including our
AERx pulmonary drug delivery platform for both respiratory and
systemic diseases. Today, our core business focus is to utilize
our expertise and our pulmonary delivery and formulation
technologies to develop treatments for patients with respiratory
diseases that we believe could be better than the therapies that
are currently available. We select for development those inhaled
drugs for respiratory disease indications that, due to expected
development costs, market size and other factors, we believe we
can successfully develop and market with our own sales force.
Where we determine it would not be desirable or feasible for us
to develop or commercialize product candidates on our own, we
enter into co-development and co-marketing arrangements in order
to benefit from cost and risk reduction during development and
increased sales from collaborators marketing activities.
Additionally, multiple opportunities exist for the use of our
pulmonary delivery technology for the treatment of systemic
diseases, both for the delivery of biologics, including
proteins, antibodies and peptides, that today must be delivered
by injection, and for small molecule drugs, where rapid
absorption is desirable. We have demonstrated with a variety of
drugs and biologics that pulmonary delivery of drugs using our
proprietary technologies enhances their absorption profiles. We
believe that our technologies can provide advantages in terms of
convenience, efficiency, safety and reproducibility over other
methods of administration. Where appropriate, we will
out-license aspects of our technology and intellectual property
assets for these products that lie outside our strategic
interests and core expertise.
Our Strategy
We are transitioning our business model toward a specialty
pharmaceutical company focused on development and
commercialization of a portfolio of drugs delivered by
inhalation for the treatment 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, which showed 10.3% growth
overall in 2005 with higher growth rates in the areas of
innovative products. There are five key elements of our strategy:
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Develop a proprietary portfolio of products for the
treatment of respiratory diseases. We believe our
expertise in the development of pulmonary pharmaceutical
products should enable us to advance and commercialize
respiratory products for a variety of indications. We will
continue to evaluate appropriate drugs and biologics for
inclusion in our proprietary pipeline. We will do so in
consideration of the expected market opportunity, cost, time and
potential returns and the resources needed to advance our
self-initiated programs and programs with collaborators. We
select for development those products 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. A key
component of our strategy will be to continue to actively seek
product opportunities where we can pursue either a new
indication or route of administration for drugs already approved
by the United States Food and Drug Administration, or the FDA.
In each case, we will then combine the drug with the most
appropriate pulmonary delivery system and formulation to create
a proprietary product candidate with an attractive therapeutic
profile and that is safe, effective and convenient for patients
to use. |
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Accelerate the regulatory approval process. We
believe our management teams regulatory 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 many of our product candidates incorporate FDA-approved
drugs, we believe that the most expedient |
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review and approval pathway for many of these product candidates
in the United States will be under Section 505(b)(2) of the
Food, Drug and Cosmetic Act, or the FDCA. Section 505(b)(2)
permits the FDA to rely on scientific literature or on the
FDAs prior findings of safety and/or effectiveness for
approved drug products. By choosing to develop new applications
or reformulations of FDA-approved drugs, we believe that we can
substantially reduce or potentially eliminate the significant
time, expenditure and risks associated with preclinical testing
of new chemical entities and biologics, as well as utilize
knowledge of these approved drugs to reduce the risk, time and
cost of the clinical trials needed to obtain drug approval. In
addressing niche market opportunities, we 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 up to
seven years as well as regulatory assistance, reduced filing
fees and possible tax credits. |
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Develop our own sales and marketing capacity for products
in niche markets. We intend 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 segments, 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 will also establish collaborative relationships
to commercialize our products in cases where we cannot meet
these goals with a small sales force or when we need
collaborators with relevant expertise and capabilities, such as
the ability to address international markets. Through such
collaborations, we may also utilize our collaborators
resources and expertise to conduct large late-stage clinical
development. |
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Exploit the broad applicability of our delivery technology
through opportunistic collaborations. We continue to
believe that companies can benefit by collaborating with us when
our proprietary delivery technologies can create new
pharmaceutical and biologics product opportunities. We will
continue to exploit the broad applicability of our delivery
technologies for systemic applications of our validated
technologies in collaborations with companies that will fund
development and commercialization. We will continue to
out-license technologies and product opportunities that we have
already developed to a certain stage and that are outside of our
core strategic focus. Collaborations and out-licensing may
generate additional revenues while we progress towards the
development and potential launch of our own proprietary products. |
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Outsource manufacturing activities. We plan to
outsource the late stage clinical and commercial scale
manufacturing of our products to conserve our capital for
product development. We believe that the manufacturing processes
for our AERx delivery systems are now sufficiently advanced that
the required late stage clinical and commercial manufacturing
capacity can be obtained from contract manufacturers. We are
also utilizing contract manufacturers to make our liposomal
formulations. With this approach, we seek manufacturers whose
expertise should allow us to reduce risk and costs normally
incurred if we were to build, operate and maintain large-scale
production facilities ourselves. |
Product Candidates
Products in development include both our own proprietary
products and products under development with collaborators. They
consist of approved drugs combined with our controlled
inhalation delivery and/or
39
formulation technologies. The following table shows the disease
indication and stage of development for each product candidate
in our portfolio.
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Product Candidate |
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Indication |
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Stage of Development |
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Proprietary Programs Under Development
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ARD-3100 (Liposomal ciprofloxacin)
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Cystic Fibrosis |
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Preclinical |
ARD-1100 (Liposomal ciprofloxacin)
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Inhalation Anthrax |
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Preclinical |
Collaborative Programs Under Development
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AERx iDMS (Insulin)
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Type 1 and Type 2 Diabetes |
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Phase 3 |
ARD-1300 (Hydroxychloroquine)
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Asthma |
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Phase 2 (1) |
ARD-1500 (Liposomal treprostinil)
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Pulmonary Arterial Hypertension |
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Preclinical |
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(1) |
A Phase 2a clinical study did not meet pre-specified
clinical endpoints. The program is currently under review. |
In addition to these programs, we are continually evaluating
opportunities for product development where we can apply our
expertise and intellectual property to produce better therapies
and where we believe the investment could provide significant
value to our shareholders.
Ciprofloxacin is approved by the FDA as an anti-infective agent
and is widely used for the treatment of a variety of bacterial
infections. Today ciprofloxacin is delivered by oral or
intravenous administration. We believe that delivering this
potent antibiotic directly to the lung may improve its safety
and efficacy in the treatment of pulmonary infections. We
believe that our novel sustained release formulation of
ciprofloxacin may be able to maintain therapeutic concentrations
of the antibiotic within infected lung tissues, while reducing
systemic exposure and the resulting side effects seen with
currently marketed ciprofloxacin products. To achieve this
sustained release, we employ liposomes, which are lipid-based
nanoparticles dispersed in water that encapsulate the drug
during storage and release the drug slowly upon contact with
fluid covering the airways and the lung. In an animal
experiment, ciprofloxacin delivered to the lung of mice appeared
to be rapidly absorbed into the bloodstream, with no drug
detectable four hours after administration. In contrast, the
liposomal formulation of ciprofloxacin produced significantly
higher levels of ciprofloxacin in the lung at all time points
and was still detectable at 12 hours. We also believe that
for certain respiratory disease indications it may be possible
that a liposomal formulation enables better interaction of the
drug with the disease target, leading to improved effectiveness
over other therapies. We have at present two target indications
with distinct delivery systems for this formulation that share
much of the laboratory and production development efforts, as
well as a common safety data base.
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ARD-3100 Liposomal Ciprofloxacin for the
Treatment of Cystic Fibrosis |
One of our liposomal ciprofloxacin programs is a proprietary
program using our liposomal formulation of ciprofloxacin for the
treatment and control of respiratory infections common to
patients with cystic fibrosis, or CF. CF is a genetic disease
that causes thick, sticky mucus to form in the lungs, pancreas
and other organs. In the lungs, the mucus tends to block the
airways, causing lung damage and making these patients highly
susceptible to lung infections. According to the Cystic Fibrosis
Foundation, CF affects roughly 30,000 children and adults in the
United States and roughly 70,000 children and adults worldwide.
According to the American Lung Association, the direct medical
care costs for an individual with CF are currently estimated to
be in excess of $40,000 per year.
The inhalation route affords direct administration of the drug
to the infected part of the lung, maximizing the dose to the
affected site and minimizing the wasteful exposure to the rest
of the body where it could cause side effects. Therefore,
treatment of CF-related
lung infections by direct administration of antibiotics to the
lung may improve both the safety and efficacy of treatment
compared to systemic administration by other routes, as well as
improving patient convenience as compared to injections. Oral
and injectable forms of ciprofloxacin are approved for the
treatment of Pseudomonas aeruginosa, a lung infection to
which CF patients are vulnerable. Currently, there is only one
inhalation antibiotic approved for the treatment of this
40
infection. We believe that local lung delivery via inhalation of
ciprofloxacin in a sustained release formulation could provide a
convenient, effective and safe treatment of the debilitating and
often life-threatening lung infections that afflict patients
with CF.
Our liposomal ciprofloxacin CF program represents the first
program in which we intend to retain full ownership and
development rights. We believe we have the preclinical
development, clinical and regulatory knowledge to advance this
product through development in the most efficient manner. We
intend to commercialize this program on our own.
We have received orphan drug designation from the FDA for this
product for the management of CF. As a designated orphan drug,
liposomal ciprofloxacin is eligible for tax credits based upon
its clinical development costs, as well as assistance from the
FDA to coordinate study design. The designation also provides
the opportunity to obtain market exclusivity for seven years
from the date of New Drug Application, or NDA, approval.
We initiated preclinical studies for liposomal ciprofloxacin in
2006 and expect to initiate human clinical studies in the first
half of 2007. We expect to use approximately $20 million of
the net proceeds from this offering to complete preclinical
studies and fund early stage clinical trials and related
manufacturing requirements for
ARD-3100. In order to
reach commercialization of ARD-3100, we estimate we will need to
spend an additional $15 million to $20 million. In
order to expedite anticipated time to market and increase market
acceptance, we have elected to deliver ciprofloxacin via
nebulizer, as most CF patients already own a nebulizer and are
familiar with this method of drug delivery. We intend to examine
the potential for delivery of ciprofloxacin via our AERx
delivery system. We share the formulation and manufacturing
development as well as the safety data developed for our
inhalation anthrax program discussed below in the development of
this CF opportunity. We also intend to explore the utility of
liposomal ciprofloxacin for the treatment of serious infections
associated with other respiratory diseases, such as chronic
obstructive pulmonary disease and bronchiectasis.
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ARD-1100 Liposomal Ciprofloxacin for the
Treatment of Inhalation Anthrax |
The second of our liposomal ciprofloxacin programs is for the
prevention and treatment of pulmonary anthrax infections.
Anthrax spores are naturally occurring in soil throughout the
world. Anthrax infections are most commonly acquired through
skin contact with infected animals and animal products or, less
frequently, by inhalation or ingestion of spores. With
inhalation anthrax, once symptoms appear, fatality rates are
high even with the initiation of antibiotic and supportive
therapy. Further, a portion of the anthrax spores, once inhaled,
may remain dormant in the lung for several months and germinate.
Anthrax has been identified by the Centers for Disease Control
as a likely potential agent of bioterrorism. In the fall of
2001, when anthrax-contaminated mail was deliberately sent
through the United States Postal Service to government
officials and members of the media, five people died and many
more became sick. These attacks highlighted the concern that
inhalation anthrax as a bioterror agent represents a real and
current threat.
Ciprofloxacin has been approved orally and via injection for the
treatment of inhalation anthrax (post-exposure) since 2000. This
ARD-1100 research and
development program has been funded by Defence Research and
Development Canada, or DRDC, a division of the Canadian
Department of National Defence. We believe that this product
candidate may potentially be able to deliver a long acting
formulation of ciprofloxacin directly into the lung and could
have fewer side effects and be more effective to prevent and
treat inhalation anthrax than currently available therapies.
We began our research into liposomal ciprofloxacin under a
technology demonstration program funded by DRDC as part of their
interest to develop products to counter bioterrorism. DRDC had
already demonstrated the feasibility of inhaled liposomal
ciprofloxacin for post-exposure prophylaxis of Francisella
tularensis, a potential bioterrorism agent similar to
anthrax. Mice were exposed to a lethal dose of
F. tularensis and then
41
24 hours later were exposed via inhalation to a single dose
of free ciprofloxacin, liposomal ciprofloxacin or saline. All
the mice in the control group and the free ciprofloxacin group
were dead within 11 days post-infection; in contrast, all
the mice in the liposomal ciprofloxacin group were alive
14 days post-infection. The same results were obtained when
the mice received the single inhaled treatment as late as 48 or
72 hours post-infection. The DRDC has funded our
development efforts to date and additional development of this
program is dependent on negotiating for and obtaining continued
funding from DRDC or on identifying other collaborators or
sources of funding. We plan to use our preclinical and clinical
safety data from our CF program to supplement the data needed to
have this product candidate considered for approval for use in
treating inhalation anthrax and possibly other inhaled
life-threatening bioterrorism infections.
If we can obtain sufficient additional funding, we would
anticipate developing this drug for approval under FDA
regulations relating to the approval of new drugs or biologics
for potentially fatal diseases where human studies cannot be
conducted ethically or practically. Unlike most drugs, which
require large, well controlled Phase 3 clinical trials in
patients with the disease or condition being targeted, these
regulations allow for a drug to be evaluated and approved by the
FDA on the basis of demonstrated safety in humans combined with
studies in animal models to show effectiveness.
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AERx iDMS Inhaled Insulin for the Treatment of
Diabetes |
AERx iDMS is being developed to control blood glucose levels in
patients with diabetes. This product is currently in
Phase 3 clinical trials, and our licensee, Novo Nordisk, is
responsible for all remaining development, manufacturing and
commercialization. We will receive royalties from any sales of
this product as well as from future enhancements or generations
of this technology. According to 2005 statistics from the
American Diabetes Association, approximately 20.8 million
Americans suffer from either Type 1 or Type 2
diabetes. Over 90% of these Americans have Type 2 diabetes,
the prevalence of which is increasing dramatically due to
lifestyle factors such as inappropriate diet and lack of
physical activity. Patients with Type 1 diabetes do not
have the ability to produce their own insulin and must
administer insulin injections to survive. Patients with
Type 2 diabetes are insulin resistant and unable to
efficiently use the insulin that their bodies produce. While
many Type 2 patients can initially maintain adequate
control over blood glucose through diet, exercise and oral
medications, most Type 2 patients progress within three
years to where they cannot maintain adequate control over their
glucose levels and insulin therapy is needed. However, given the
less acute nature of Type 2 diabetes, many of these
patients are reluctant to take insulin by injection despite the
risks. Inadequate regulation of glucose levels in diabetes
patients is associated with a variety of short and long-term
effects, including blindness, kidney disease, heart disease,
amputation resulting from chronic or extended periods of reduced
blood circulation to body tissue and other circulatory
disorders. The global market for diabetes therapies in 2005 was
in excess of $18 billion, according to Business Insights.
The majority of this amount was from sales of oral
antidiabetics, while insulin and insulin analogues accounted for
$7.3 billion, a 17% increase over the prior year.
Sales of insulin and insulin analogues are forecast to grow to
$9.8 billion in 2011. Type 2 patients consume the
majority of insulin used in the United States. We believe that
when patients are provided a non-invasive delivery alternative
to injection, they will be more likely to self-administer
insulin as often as needed to keep tight control over their
blood-glucose levels.
We believe that AERx iDMS possesses features that will benefit
diabetes patients and will provide an advantage over competitive
pulmonary insulin products or can be used as a replacement for
or adjunct to currently available therapies. Our patented breath
control methods and technologies guide patients into the optimal
breathing pattern for effective insulin deposition in and
absorption from the lung. An optimal breathing pattern for
insulin delivery depends on several elements: actuation of drug
delivery at the early part of inspiration, control of
inspiratory flow rate, and the state of inflation of the lung
after the insulin is deposited, with the fully inflated lung
providing the most desirable absorption profile. We believe a
patients ability to breathe reproducibly will be required
to assure adequate safety and efficacy of inhaled insulin for
the treatment of Type 1 and Type 2 diabetes. Our system also
allows patients to adjust dosage in single unit increments,
which is key to proper glucose control in diabetes. AERx iDMS
offers the ability for patients and physicians to monitor and
review a patients dosing regimen. We believe the
combination of breath control,
42
high efficiency of delivery to the lung and single unit
adjustable dosing in an inhalation device will make AERx iDMS a
competitively attractive product.
Over a decade ago, we initiated research and development into
the inhalation delivery of insulin to meet a major unmet medical
need in the treatment of Type 1 and Type 2 diabetes: a system
that could provide similar levels of safety and efficacy as
injected insulin but with the added benefit of a non-invasive
route of delivery. We successfully completed a Phase 1
clinical study and filed an Investigational New Drug
application, or IND, relating to our AERx iDMS program in 1998.
After our initial work, we entered into a collaboration for our
AERx iDMS in June 1998 with a world leader in the treatment of
diabetes, Novo Nordisk. From 1998 to January 2005, we received
an aggregate of $150.1 million from Novo Nordisk to fund
development of the AERx delivery system for delivering insulin,
production for preclinical and clinical testing and process
development and scale up. In January 2005, we transferred the
partially completed initial commercial production facility and
associated personnel to Novo Nordisk for $55.3 million, and
Novo Nordisk assumed responsibility for continuing production
and bringing the facility up to its planned capacity of
750 million dosage forms per year.
AERx iDMS is currently undergoing testing in Phase 3
clinical trials, begun in May 2006 by Novo Nordisk. These trials
follow significant prior clinical work that showed AERx iDMS to
be comparable to injectable insulin in the overall management of
Type 1 and Type 2 diabetes. Past clinical testing has shown:
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HbAlc levels, a key marker of blood glucose control, are
statistically the same in patients using AERx iDMS and patients
using subcutaneous insulin injections. |
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The onset of action of inhaled insulin via AERx iDMS is not
significantly different from subcutaneous injection of
rapid-acting insulin, but significantly faster than subcutaneous
injection of human regular insulin. |
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The duration of action of inhaled insulin via AERx iDMS is not
significantly different from subcutaneous injection of human
regular insulin, but significantly longer than subcutaneous
injection of rapid-acting insulin. |
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Although small declines were seen on some pulmonary function
parameters following
12-24 months of
dosing on AERx iDMS, these declines were not considered to be of
clinical significance, and the findings are not expected to have
an impact on overall pulmonary safety of the product. |
The Phase 3 clinical trials are expected to include a total
of approximately 3,400 Type 1 and Type 2 diabetes patients. The
trials include treatment comparisons with other antidiabetics.
The longest trial is expected to last 27 months. Novo
Nordisk announced in October 2006 that it expects the commercial
launch of the product in 2010. As with any clinical program,
there are many factors that could delay the launch or could
result in AERx iDMS not receiving or maintaining regulatory
approval.
In January 2005 and in July 2006, we announced restructurings of
the AERx iDMS program. Under the new arrangements, Novo Nordisk
is responsible for all further clinical, manufacturing and
commercial development, while we and Novo Nordisk continue to
cooperate and share in technology development, as well as
intellectual property development and defense. We will receive
royalty payments on any commercial sales. Novo Nordisk also
remains a substantial holder of our common stock.
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ARD-1300 Hydroxychloroquine for the Treatment of
Asthma |
The ARD-1300 program is
investigating a novel aerosolized formulation of
hydroxychloroquine, or HCQ, as a treatment for asthma under a
collaboration with APT Pharmaceuticals, a privately held
biotechnology company. Asthma is a common chronic disorder of
the lungs characterized by airway inflammation, airway
hyperresponsiveness or airway narrowing due to certain stimuli.
Despite several treatment options, asthma remains a major
medical problem associated with high morbidity and large
economic costs to the society. According to the American Lung
Association, asthma accounts for $11.5 billion in direct
healthcare costs
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annually in the United States, of which the largest single
expenditure, at $5 billion, was prescription drugs. Primary
symptoms of asthma include coughing, wheezing, shortness of
breath and tightness of the chest with symptoms varying in
frequency and degree. According to Datamonitor, asthma affected
41.5 million people in developed countries in 2005, with
9.5 million of those affected being children. The highest
prevalence of asthma occurs in the United States and the United
Kingdom.
The most common treatment for the inflammatory condition causing
chronic asthma is inhaled steroid therapy via metered dose
inhalers, dry powder inhalers or nebulizers. While steroids are
effective, they have side effects, including oral thrush, throat
irritation, hoarseness and growth retardation in children,
particularly at high doses and with prolonged use. HCQ is an
FDA-approved drug that has been used for over 20 years in
oral formulations as an alternative to steroid therapy for
treatment for lupus and rheumatoid arthritis. Data from studies
in which HCQ was orally administered to humans suggested that
HCQ could be effective in the treatment of asthma. APT and
Aradigm hypothesized that targeted delivery of HCQ to the
airways may enhance the effectiveness of the treatment of asthma
relative to systemic delivery of HCQ while reducing side effects
by decreasing exposure of the drug to other parts of the body.
APT has funded all activities in the development of this program
to date. The ARD-1300 program advanced into Phase 2
clinical trials following positive preclinical testing and
Phase 1 clinical results. The Phase 2a clinical trial,
begun in March 2006, was a randomized, double-blind,
placebo-controlled, multi-dose study in patients with asthma.
The trial enrolled 100 patients with moderate-persistent
asthma who were randomized to one of two treatments groups:
either aerosolized placebo or aerosolized HCQ given once daily
for 21 consecutive days. Both treatment groups were
administered the drug via our AERx delivery system with
efficacy, safety and tolerability assessments being performed
throughout the study. The dosing of patients in the trial was
completed in August 2006 and the results of the study were
announced in November.
The results of the Phase 2a clinical study of inhaled HCQ as a
treatment for patients with moderate-persistent asthma did not
meet the pre-specified clinical efficacy endpoints. No serious
adverse effects were noted or associated with the aerosolized
HCQ or with the AERx system. While APT and Aradigm are currently
analyzing the data from this study in order to determine whether
additional studies of inhaled HCQ are warranted, it is unlikely
that the current development path for HCQ for the treatment of
asthma can be advanced without further research. This will delay
development of this product candidate. Moreover, APT may choose
not to conduct such research, in which case this collaborative
program would be terminated.
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ARD-1500 Treprostinil for the Treatment of
Pulmonary Arterial Hypertension |
The ARD-1500 program is
being developed as part of a commercial agreement with United
Therapeutics and is investigating a sustained-release liposomal
formulation of a prostacyclin analogue for administration using
our AERx delivery system for the treatment of pulmonary arterial
hypertension, or PAH. PAH is a rare disease that results in the
progressive narrowing of the arteries of the lungs, causing
continuous high blood pressure in the pulmonary artery and
eventually leading to heart failure. According to Decision
Resources, in 2003, the more than 130,000 people worldwide
affected by PAH purchased $600 million of PAH-related
medical treatments and sales are expected to reach
$1.2 billion per year by 2013.
Prostacyclin analogues are an important class of drugs used for
the treatment of pulmonary arterial hypertension. However, the
current methods of administration of these drugs are burdensome
on patients. Treprostinil is marketed by United Therapeutics
under the name Remodulin and is administered by intravenous or
subcutaneous infusion. CoTherix markets in the United States
another prostacyclin analogue, iloprost, under the name Ventavis
that is administered six to nine times per day using a
nebulizer, with each treatment lasting four to six minutes. We
believe administration of liposomal treprostinil by inhalation
using our AERx delivery system may be able to deliver an
adequate dose for the treatment of PAH in a small number of
breaths. We also believe that our sustained release formulation
may lead to a reduction in the number of daily administrations
that are needed to be effective when compared to existing
therapies. We
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believe that our
ARD-1500 product
candidate potentially could offer a
non-invasive, more
direct and patient-friendly approach to treatment to replace or
complement currently available treatments.
United Therapeutics has funded our activities in this program to
date. We have completed initial preclinical testing of selected
formulations and are now examining performance of the
formulations in the AERx delivery system before a joint decision
is taken with our collaborator regarding how to proceed with the
ARD-1500 program.
Additional Potential Product Applications
We have demonstrated in human clinical trials to date effective
deposition and, where required, systemic absorption of a wide
variety of drugs, including small molecules, peptides and
proteins, using our AERx delivery system. We intend to identify
additional pharmaceutical product opportunities that could
potentially utilize our proprietary delivery systems for the
pulmonary delivery of various drug types, including proteins,
peptides, oligonucleotides, gene products and small molecules.
We have demonstrated in the past our ability to successfully
enter into collaborative arrangements for our programs, and we
believe additional opportunities for collaborative arrangements
exist outside of our core respiratory disease focus, for some of
which we have data as well as intellectual property positions.
The following are descriptions of two potential opportunities:
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Smoking Cessation. Based on internal work and work
funded under grants from the National Institutes of Health, we
are developing intellectual property in the area of smoking
cessation. To date, we have two issued United States patents
containing claims directed towards the use of titrated nicotine
replacement therapy for smoking cessation. |
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Pain Management System. Based on our internal work
and a currently dormant collaboration with GlaxoSmithKline, we
have developed a significant body of preclinical and
Phase 1 clinical data on the use of inhaled morphine and
fentanyl, and Phase 2 clinical data on inhaled morphine,
with our proprietary AERx delivery system for the treatment of
breakthrough pain in cancer and post-surgical patients. |
We are currently examining our previously conducted preclinical
and clinical programs to identify molecules that may be suitable
for further development consistent with our current business
strategy. In most cases, we have previously demonstrated the
feasibility of delivering these compounds via our proprietary
AERx delivery system but we have not been able to continue
development due to a variety of reasons, most notably the lack
of funding from collaborators. If we identify any such programs
during this review, we will consider continuing the development
of such compounds on our own.
Pulmonary Drug Delivery Background
Pulmonary delivery describes the delivery of drugs by oral
inhalation and is a common method of treatment of many
respiratory diseases, including asthma, chronic bronchitis and
CF. 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 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.
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The efficacy, safety and efficient delivery of any inhaled drug
depend on delivering the dose of the drug to the specified area
of the respiratory tract. To achieve reproducible delivery of
the dose, it is essential to control three factors:
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emitted dose; |
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particle size distribution; and |
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Breathing maneuver includes synchronization of the dose
administration with the inhalation, inspiratory flow rate and
the amount of air that the patient inhales at the time of
dose the lung volume.
Lack of control of any of these factors may impair patient
safety and therapeutic benefits. Further, the efficiency of
delivery has economic implications, especially for drugs whose
inherent production costs are high, such as biologics.
Traditional inhalation delivery systems, such as inhalers, have
been designed and used primarily for delivery of drugs to the
respiratory airways, not to the deep lung. While these systems
have been useful in the treatment of certain diseases such as
asthma, they generate a wide range of particle sizes, only a
portion of which can reach the deep lung tissues. In order for
an aerosol to be delivered to the deep lung where there is a
large absorptive area suitable for effective systemic
absorption, the medication needs to be delivered into the
airstream early during inhalation. This is best achieved with
systems that are breath-actuated, i.e., the dose delivery
is automatically started at the beginning of inhalation.
Further, the drug formulation must be transformed into very fine
particles or droplets (typically one to three microns in
diameter). In addition, the velocity of these particles must be
low as they pass through the airways into the deep lung. The
particle velocity is determined by the particle generator and
the inspiratory flow rate of the patient. Large or fast-moving
particles typically get deposited in the mouth and upper
airways, where they may not be absorbed and could cause side
effects. Most of the traditional drug inhalation delivery
systems have difficulty in generating appropriate drug particle
sizes or consistent emitted doses, and they also rely heavily on
proper patient breathing technique to ensure adequate and
reproducible lung delivery. To achieve appropriate drug particle
sizes and consistent emitted doses, most traditional inhalation
systems require the use of various additives such as powder
carrier materials, detergents, lubricants, propellants,
stabilizers and solvents, which may potentially cause toxicity
or allergic reactions. It is also well documented that the
typical patient frequently strays from proper inhalation
technique after training and may not be able to maintain a
consistent approach over even moderate periods of time. Since
precise and reproducible dosing with medications is necessary to
ensure safety and therapeutic efficacy, any variability in
breathing technique among patients or from dose to dose may
negatively impact the therapeutic benefits to the patient. We
believe high efficiency and reproducibility of lung delivery
will be required in order for inhalation to successfully replace
certain injectable products.
The rate of absorption of drug molecules such as insulin from
the lung has been shown to depend also on the lung volume
following the deposition of the drug in the lung. In order to
achieve safety and efficacy comparable to injections, this
absorption step also needs to be highly reproducible. We
therefore believe that an inhalation system that will coach the
patient to breathe reproducibly to the same lung volume will be
required to assure adequate safety and reproducibility of
delivery of certain drugs delivered systemically via the lung.
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 due to its
enhanced efficiency, compared to nebulization treatments, which
commonly last about 15 minutes. We believe the ability to
make small micron-
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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 key features of the AERx delivery
system include the following:
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Liquid Formulation. Most drugs being considered
for pulmonary delivery, especially biologics, are currently
marketed in stable water formulations. The AERx delivery system
takes advantage of existing liquid-drug formulations, reducing
the time, cost and risk of formulation development compared to
dry-powder-based technologies. The formulation technology of the
AERx delivery system allows us to use conventional, sterile
pharmaceutical manufacturing techniques. We believe that this
approach will result in lower cost production methods than those
used in dry powder systems because we are able to bypass
entirely the complex formulation and manufacturing processes
required for those systems. Moreover, the liquid drug
formulations used in the AERx delivery system are expected to
have the same stability profile as the currently marketed
versions of the same drugs. Because of the nature of liquid
formulations, the additives we use are standard and therefore
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Efficient, Precise Aerosol Generation. Our
proprietary technology produces the low-velocity, small-particle
aerosols necessary for efficient deposition of a drug in the
deep lung. The AERx delivery system aerosolizes liquid drug
formulations from pre-packaged, single-use, disposable packets.
Each disposable packet comprises a small blister package of the
drug and an adjacent aerosolization nozzle. The AERx device
compresses the packet to push the drug through the nozzle and
thereby creates the aerosol. No propellants are required since
mechanical pressure is used to generate the aerosol. Each packet
is used only once to avoid plugging or wearing that could
degenerate aerosol quality if reused. Through this technology,
we believe we can achieve highly efficient and reproducible
aerosols. The AERx device also has the ability to deliver a
range of patient-selected doses, making it ideal for
applications where the dose must be changed between uses or over
time. |
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Breath-Control Technology and Automated Breath-Controlled
Delivery. Studies have shown that even well trained
patients tend to develop improper inhalation technique over
time, resulting in less effective therapy. The typical problems
are associated with the inability to coordinate the start of
inhalation with the activation of the dose delivery,
inappropriate inspiratory flow rate and inhaled volume of air
with the medication. The AERx delivery system employs breath
control methods and technologies to guide the patient into the
proper breathing maneuver. As a result, a consistent dose of
medication is delivered each time the product is used. The
characteristics of the breath control can be customized for
different patient groups, such as young children or other
patients with small lung volumes. |
The AERx delivery system offers additional patented features
that we believe provide an advantage over competitive pulmonary
products for certain important indications. For example, we
believe our system for insulin delivery is unique in allowing
the patients to adjust dosage in single insulin unit increments.
This adjustable dosing feature may provide an advantage in
certain other types of disease management where precise dosing
adjustment is critical. The electronic version of the AERx
delivery system can also be designed to incorporate the ability
for a physician to monitor and download a patients dosing
regimen, which we believe will aid in patient care and assist
physicians in addressing potential issues of non-compliance. We
have also developed a lockout feature for the AERx delivery
system, which can be used to prevent use of the system by anyone
other than the prescribed patient, and to prevent excessive
dosing in any given time frame. These features of our AERx
delivery system are protected by our strong intellectual
property estate that
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includes patent claims directed toward the design, manufacture
and testing of the AERx dosage forms and the various AERx
pulmonary drug delivery systems.
We currently have two versions of the first-generation hand-held
AERx delivery system in clinical use: AERx iDMS, which has been
customized for the delivery of insulin, and the AERx Single Dose
Platform, which is designed for general clinical use. We are
also in the final stages of development of a next-generation
system, the AERx Essence, which retains the key features of
breath control and aerosol quality, but which is a much smaller,
palm-sized device.
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 the manufacture and testing
of inhaled drug formulations. We have been exploring the use of
liposomal formulations of drugs that may be used for the
prevention and treatment of respiratory diseases. Liposomes are
lipid-based nanoparticles dispersed in water that encapsulate
the drug during storage and release the drug slowly upon contact
with fluid covering the airways and the lung. We are developing
liposomal formulations particularly for those drugs that
currently need to be dosed several times a day, or when the slow
release of the drug is likely to improve the efficacy and safety
profile. We believe a liposomal formulation will provide
extended duration of protection and treatment against lung
infection, greater convenience for the patient and reduced
systemic levels of the drug. The formulation may also enable
better interaction of the drug with the disease target,
potentially leading to greater efficacy. We have applied this
technology to ciprofloxacin and treprostinil. We are also
examining other potential applications of this formulation
technology for respiratory therapies.
Intellectual Property and Other Proprietary Rights
Our success will depend to a significant extent on our ability
to obtain, expand and protect our intellectual property estate,
enforce patents, maintain trade secret protection and operate
without infringing the proprietary rights of other parties. As
of January 3, 2007, we had 70 issued United
States patents, with 19 additional United
States patent applications pending. In addition, we had
82 issued foreign patents and additional 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 connection with the further restructuring of our
collaboration with Novo Nordisk in July 2006, we transferred to
Novo Nordisk the ownership of 23 issued United
States patents and their corresponding
non-United
States counterparts, if any. These transferred patents are
especially important for the AERx iDMS program. We retain
exclusive, royalty-free control of these patents outside the
field of glucose control and will continue to be entitled to
royalties in respect of any inhaled insulin products marketed or
licensed by Novo Nordisk.
In December 2004, as part of our research and development
efforts funded by 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, and may have the ability to expand
the exclusive license to other fields.
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We seek to protect our proprietary position by protecting
inventions that we determine are or may be important to our
business. We do this when we are able through the filing of
patent applications with claims directed toward the devices,
methods and technologies we develop. Our ability to compete
effectively will depend to a significant extent on our ability
and the ability of our collaborators to obtain and enforce
patents and maintain trade secret protection over our
proprietary technologies. The coverage claimed in a patent
application typically is significantly reduced before a patent
is issued, either in the United States or abroad. Consequently,
any of our pending or future patent applications may not result
in the issuance of patents or, to the extent patents have been
issued or will be issued, these patents may be subjected to
further proceedings limiting their scope and may in any event
not contain claims broad enough to provide meaningful
protection. Patents that are issued to us or our collaborators
may not provide significant proprietary protection or
competitive advantage, and may be circumvented or invalidated.
We also rely on our trade secrets and the know-how of our
employees, officers, 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 and 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
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product candidates that are in a more advanced stage of
development than our product candidates. If we are not
first to market for a particular indication, it may
be more difficult for us or our collaborators to enter markets
unless we can demonstrate our products are clearly superior to
existing therapies.
Examples of competitive therapies include:
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ARD-3100. Currently marketed products include Tobi
marketed by Novartis, Pulmozyme marketed by Genentech, Zithromax
marketed by Pfizer and Cipro marketed by Bayer. CF products
under development include inhaled aztreonam under development by
Gilead, inhaled amikacin under development by Transave,
Doripenam under development by Johnson & Johnson and
inhaled ciprofloxacin under development by Bayer. |
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ARD-1100. Current anthrax treatment products
include various oral generic and proprietary antibiotics, such
as Cipro marketed by Bayer. |
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AERx iDMS. Currently marketed diabetes products
include insulin products marketed by companies such as Novo
Nordisk, Eli Lilly and sanofi-aventis. Pfizer, in collaboration
with Nektar Therapeutics, has recently obtained FDA approval for
Exubera, an inhaled form of insulin. Eli Lilly, in collaboration
with Alkermes Pharmaceuticals, and Mannkind Corporation have
announced they have inhaled insulin products in development. |
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ARD-1300. Currently marketed products include
Advair marketed by GlaxoSmithKline, Xolair marketed by Novartis
in collaboration with Genentech, Singulair marketed by Merck,
Asmanex marketed by Schering-Plough and Pulmicort marketed by
AstraZeneca International. Similar asthma products under
development include Symbicort under development by AstraZeneca
and Alvesco under development by sanofi-aventis. |
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ARD-1500. Currently marketed products include
intravenous delivery and subcutaneous infusion of prostacyclins,
such as Remodulin marketed by United Therapeutics, and inhaled
prostacyclins, such as Ventavis, marketed by Schering AG and
CoTherix. |
Many 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, would 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, Nektar, 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 or our product development collaborators fail to comply
with the FDCA or FDA regulations, we, our collaborators, 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.
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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 FDA as drugs.
The steps required before a drug may be approved for marketing
in the United States generally include:
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preclinical laboratory and animal tests, and formulation studies; |
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the submission to the FDA of an Investigational New Drug
application, or IND, for human clinical testing that must become
effective before human clinical trials may begin; |
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adequate and well controlled human clinical trials to establish
the safety and efficacy of the product candidate for each
indication for which approval is sought; |
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the submission to the FDA of a New Drug Application, or NDA, and
FDAs acceptance of the NDA for filing; |
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satisfactory completion of an FDA inspection of the
manufacturing facilities at which the product is to be produced
to assess compliance with the FDAs Good Manufacturing
Practices, or GMP; and |
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FDA review and approval of the NDA. |
Preclinical Testing
The testing and approval process requires very substantial time,
effort, and financial resources, and the receipt and timing of
approval, if any, is highly uncertain. Preclinical tests include
laboratory evaluations of product chemistry, toxicity, and
formulation, as well as animal studies. The results of the
preclinical studies, together with manufacturing information and
analytical data, are submitted to the FDA as part of the IND.
The IND automatically becomes effective 30 days after
receipt by the FDA, unless the FDA raises concerns or questions
about the conduct of the proposed clinical trials as outlined in
the IND prior to that time. In such a case, the IND sponsor and
the FDA must resolve any outstanding FDA concerns or questions
before clinical trials can proceed. Submission of an IND may not
result in FDA authorization to commence clinical trials. Once an
IND is in effect, the protocol for each clinical trial to be
conducted under the IND must be submitted to the FDA, which may
or may not allow the trial to proceed.
Clinical Trials
Clinical trials involve the administration of the
investigational drug to human subjects under the supervision of
qualified investigators and healthcare personnel. Clinical
trials are conducted under protocols detailing, for example, the
parameters to be used in monitoring patient safety and the
safety and effectiveness criteria, or end points, to be
evaluated. Clinical trials are typically conducted in three
defined phases, but the phases may overlap or be combined. Each
trial must be reviewed and approved by an independent
institutional review board overseeing the institution conducting
the trial before it can begin.
These phases generally include the following:
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Phase 1. Phase 1 clinical trials
usually involve the initial introduction of the drug into human
subjects, frequently healthy volunteers. In Phase 1, the
drug is usually evaluated for safety, including adverse effects,
dosage tolerance, absorption, distribution, metabolism,
excretion and pharmacodynamics. |
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Phase 2. Phase 2 usually involves
studies in a limited patient population with the disease or
condition for which the drug is being developed to
(1) preliminarily evaluate the efficacy of the drug for
specific, targeted indications; (2) determine dosage
tolerance and appropriate dosage; and (3) identify possible
adverse effects and safety risks. |
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Phase 3. If a drug is found to be
potentially effective and to have an acceptable safety profile
in Phase 2 studies, the clinical trial program will be
expanded, usually to further evaluate clinical efficacy and
safety by administering the drug in its final form to an
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geographically dispersed clinical trial sites. Phase 3
studies usually include several hundred to several thousand
patients. |
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, our product development
collaborators, 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. For example,
in 2004, Novo Nordisk, our collaborator in the AERx iDMS
program, amended the protocols of a Phase 3 clinical
program, which resulted in significant delay in the development
of AERx iDMS.
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.
If regulatory approval of a product is granted, such approval
will usually entail limitations on the indicated uses for which
such 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) will 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 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
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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 and
our collaborators are required to comply with a number of FDA
requirements. For example, we are required to report certain
adverse reactions and production problems, if any, to the FDA,
and to comply with certain limitations and other requirements
concerning advertising and promotion for our products. Also,
quality control and manufacturing procedures must continue to
conform to continuing GMP after approval, and the FDA
periodically inspects manufacturing facilities to assess
compliance with continuing GMP. In addition, discovery of
problems such as safety problems may result in changes in
labeling or restrictions on a product manufacturer or NDA
holder, including removal of the product from the market.
Orphan Drug Designation
The FDA may grant orphan drug designation to drugs intended to
treat a rare disease or condition which generally is
a disease or condition that affects fewer than 200,000
individuals in the United States. A sponsor may request orphan
drug designation of a previously unapproved drug, or of a new
indication for an already marketed drug. Orphan drug designation
must be requested before an NDA is submitted. If the FDA grants
orphan drug designation, which it may not, the identity of the
therapeutic agent and its potential orphan status are publicly
disclosed by the FDA. Orphan drug designation does not convey an
advantage in, or shorten the duration of, the review and
approval process. If a drug which has an orphan drug designation
subsequently receives the first FDA approval for the indication
for which it has such designation, the drug is entitled to
orphan 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. 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.
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, hormonal and
metabolic disorders, 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
53
limited amount of time on our affairs. We access scientific and
medical experts in academia, as needed, to support our
scientific advisory board. The scientific advisory board assists
us on issues related to potential product applications, product
development and clinical testing. Its members, and their
affiliations and areas of expertise, include:
|
|
|
|
|
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 Powell, Ph.D.
|
|
Sofinnova Ventures |
|
Drug Development |
Robert E. Ratner, M.D.
|
|
MedStar Research Institute |
|
Endocrinology |
Adam Warner, M.D.
|
|
University of Miami |
|
Chronic Obstructive Pulmonary Disease (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 January 3, 2007, we had 54 employees, 15 of whom have
advanced degrees. Of these, 36 are involved in research and
development, product development and commercialization; and 18
are involved in business development, finance and
administration. Our employees are not represented by any
collective bargaining agreement.
Facilities
We lease one building with an aggregate of 72,000 square
feet of office and laboratory facilities in Hayward, California.
The aggregate lease payments for our building in 2006 are
approximately $1.7 million, and decrease to approximately
$1.2 million by 2016. The lease expires in June 2016,
subject to our option to extend the term for six months to
December 2016. We believe that the facilities we currently lease
are sufficient for at least the next year and that anticipated
future growth thereafter can be accommodated by leasing
additional space near our current facilities at a comparable
price per square foot.
Legal Proceedings
We are not currently a party to any pending legal proceedings.
54
MANAGEMENT
Executive Officers and Directors
Our directors and executive officers and their ages as of
January 3, 2007 are as follows:
|
|
|
|
|
Name |
|
Age |
|
Position |
|
|
|
|
|
Igor Gonda, Ph.D.
|
|
59 |
|
President, Chief Executive Officer and Director |
Thomas C. Chesterman
|
|
47 |
|
Senior Vice President and Chief Financial Officer |
Babatunde A. Otulana, M.D.
|
|
50 |
|
Senior Vice President, Development |
Frank H. Barker (1)(2)(3)
|
|
76 |
|
Director |
Stephen O. Jaeger (1)(2)(3)
|
|
62 |
|
Director |
John M. Siebert, Ph.D.
|
|
66 |
|
Director |
Virgil D. Thompson (1)(2)(3)
|
|
67 |
|
Chairman of the Board |
|
|
(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.
Thomas C. Chesterman has served as our Senior Vice
President and Chief Financial Officer since August 2002. From
March 1996 to December 2001, Mr. Chesterman was Vice
President and Chief Financial Officer at Bio-Rad Laboratories,
Inc., a life-science research products and clinical diagnostics
company. From 1993 to 1996, Mr. Chesterman was Vice
President of Strategy and Chief Financial Officer of Europolitan
AB, a telecommunications company. Mr. Chesterman holds a
B.A. from Harvard University and an M.B.A. in Finance and
Accounting from the University of California at Davis.
Babatunde A. Otulana, M.D. has served as our Senior
Vice President, Development, since August 2006. Prior to that,
Dr. Otulana served as our Vice President, Clinical and
Regulatory Affairs since October 1997. From 1991 to September
1997, Dr. Otulana was a Medical Reviewer in the Division of
Pulmonary Drug Products at the Center for Drug Evaluation and
Research of the United States Food and Drug Administration.
Dr. Otulana currently serves as an Associate Clinical
Professor in Pulmonary Medicine at the School of Medicine,
University of California at Davis. Dr. Otulana holds an
M.D. from the University of Ibadan, Nigeria, and completed
Pulmonary Fellowships at Papworth Hospital, University of
Cambridge, United Kingdom, and at Howard University Hospital,
Washington, D.C.
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. Mr. Barker is a
director of Jenex Corporation, a Canadian medical devices
company.
Stephen O. Jaeger has been a director since March 2004.
Mr. Jaeger was Chairman, President and Chief Executive
Officer of eBT International, Inc. a privately held software
products and services company, from
55
1999 to December 2005. Prior to joining eBT, Mr. Jaeger was
the Executive Vice President and Chief Financial Officer of
Clinical Communications Group, Inc., a provider of educational
marketing services to the pharmaceutical and biotech industries,
from 1997 to 1998. From 1995 to 1997, Mr. Jaeger served as
Vice President, Chief Financial Officer and Treasurer of Applera
Corp., formerly known as Perkin Elmer Corporation, an analytical
instrument and systems company with a focus on life science and
genetic discovery. Prior to 1995, Mr. Jaeger was Chief
Financial Officer and a director of Houghton Mifflin Company and
held various financial positions with BP, Weeks Petroleum
Limited and Ernst & Young LLP. Mr. Jaeger holds a
B.A. in Psychology from Fairfield University and an M.B.A. in
Accounting from Rutgers University and is a Certified Public
Accountant. Mr. Jaeger is the Chairman of the Board of
Savient Pharmaceuticals Inc., a publicly traded specialty
pharmaceutical company, and Arlington Tankers, Ltd., a publicly
traded shipping company. Mr. Jaeger is the Chairman of and
the designated audit committee financial expert on
our, Savient Pharmaceuticals and Arlington Tankers
audit committees.
John M. Siebert Ph.D. has been a director since November
2006. Since May 2003, Dr. Siebert has been 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.
Virgil D. Thompson has been a director since June 1995
and has been Chairman of the Board since January 2005. Since
November 2002, Mr. Thompson has been 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 of Questcor Pharmaceuticals, Inc., a publicly traded
pharmaceutical company, and Savient Pharmaceuticals.
56
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. Although the Committee has not adopted any formal
guidelines for allocating total compensation between equity
compensation and cash compensation, our executives
compensation packages have more recently reflected an increased
focus on performance and equity-based compensation, as we
believe it is important to maintain a strong link between
executive incentives and the creation of shareholder value. We
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.
Compensation Discussion and Analysis
Overall, we 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. We intend to be competitive
with other similarly situated companies in our industry.
Benchmarking of Cash and Equity Compensation
The Committee believes it is important when making its
compensation-related decisions to be informed as to current
practices of similarly situated publicly held companies in the
life sciences industry. In early 2006 the Committee commissioned
a study conducted by an outside consulting firm that specializes
in executive compensation. This study reviewed the cash and
equity compensation practices of 19 publicly held companies in
the life sciences industry. These companies were chosen for
inclusion in the study based on certain business characteristics
similar to ours, including revenues, stage of development,
employee headcount and market capitalization. In addition to
benchmarking studies, the Committee has historically taken into
account input from other sources, including input from other
independent members of the board of directors and publicly
available data relating to the compensation practices and
policies of other companies within and outside of our industry.
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, we
generally believe that gathering this information is an
important part of our compensation-related decision-making
process.
The Committee intends to retain the services of third-party
executive compensation specialists from time to time, as the
Committee sees fit, in connection with the establishment of cash
and equity compensation and related policies.
Compensation Components
Base Salary. Generally, we 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. We believe that
maintaining base salary amounts at or near the industry median
minimizes competitive disadvantage while avoiding paying amounts
in excess of what we believe to be necessary to motivate
executives to meet corporate goals. Base salaries are generally
reviewed annually, and the Committee and board will seek to
adjust base salary amounts to realign such salaries with median
market levels after taking into account individual
responsibilities, performance and experience.
For 2006, the average increase in the salaries of the executive
officers, including the CEO, from 2005 salaries was 3%. For
2007, base salaries for executives will not be increased from
their 2006 levels.
57
Annual Executive Bonus Plan. In addition to base
salaries, we believe that performance-based cash bonuses play an
important role in providing incentives to our executives to
achieve defined annual corporate goals. Near the beginning of
each year, the board, upon the recommendation of the Committee
and subject to any applicable employment agreement, determines a
target bonus amount for each executive. The target percentages
are set at levels that, upon achievement of 100% of the target
percentage, are likely to result in bonus payments that the
Committee believes to be at or near the median for target bonus
amounts for comparable companies and that, upon achievement
beyond target, can result in bonuses of up to 150% of that
amount. The Committee then reviews a detailed set of overall
corporate performance 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 reasonably achieve with hard
work over the next year.
At the end of each year, the board, upon the recommendation of
the Committee, determines the level of achievement for each
corporate goal 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 our assessment as to the overall success of our company and
the development of our business. Actual bonuses are 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. Bonus
payments under our annual bonus plan are contingent on continued
employment with the company at the end of the year.
In March 2006, the board, upon recommendation of the Committee,
established target bonus awards (as a percentage of base salary)
of 50% for Dr. V. Bryan Lawlis, our former CEO, and 40% for
Mr. Chesterman, Dr. Otulana, Dr. Stephen J.
Farr, our former Senior Vice President and Chief Scientific
Officer, and Mr. Bobba Venkatadri, our former Senior Vice
President of Operations. Upon Dr. Gondas appointment
as our CEO in August 2006, pursuant to the terms of his
employment offer letter, the board set his target bonus at 33%
of his prorated 2006 salary. In 2006, the corporate goals
identified by the Committee and the board included meeting
various objectives relating generally to the development and
progression of existing product candidates and collaborations,
establishing new collaborative arrangements, developing our
supply chain and successfully securing funding and managing
expense levels.
In December 2006, the Committee and board determined that
applicable corporate performance goals that were achieved in
2006 merited a bonus award of 79% of the target bonus award for
executive officers. However, based on the overall development of
our business in 2006, the Committee and board decided to apply a
discretionary discount and awarded the executive officers
reduced bonuses of $22,364 to Dr. Gonda, $48,202 to
Mr. Chesterman and $45,352 to Dr. Otulana. The bonus
awards were 20%, 16% and 16% of the 2006 salary paid to
Dr. Gonda, Mr. Chesterman and Dr. Otulana,
respectively. The board also indicated to management that it
would consider awarding additional discretionary bonuses to the
executive officers upon successful completion of this offering.
Dr. Gondas bonus award is based on the prorated
salary for the portion of 2006 during which Dr. Gonda
served as our CEO. Drs. Lawlis and Farr and
Mr. Venkatadri did not receive 2006 bonuses as they were
not serving as officers at the end of 2006.
The Committee has not yet determined the corporate performance
goals that it will apply in determining the executives
bonuses for 2007. In 2007, as contemplated by
Dr. Gondas employment offer letter, the Committee
expects to base half of the CEOs 2007 bonus on the
achievement of company-wide corporate performance goals and the
other half on the achievement of personalized performance goals
that will be developed by the Committee to measure his
individual performance.
For 2007, subject to further consideration, the Committee
expects to establish target bonus awards (as a percentage of
base salary) of 33% for Dr. Gonda and 40% for
Mr. Chesterman and Dr. Otulana. Actual bonuses will be
determined by the Committee and the board and paid at the end of
2007, or in early 2008, and may be above or below target bonus
levels. We expect 2007 bonus awards will again be capped at 150%
of the target award, based on maximum goal achievement.
58
Equity Awards. We believe that providing a significant
portion of our executives total compensation package in
stock options and other equity awards aligns the incentives of
our executives with the interests of our shareholders and with
our long-term success. The Committee and board 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. This
judgment is based in part on information provided by
benchmarking studies.
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 note 6 to our financial
statements included elsewhere in this prospectus.
In March 2006, we issued to Dr. Lawlis,
Mr. Chesterman, Dr. Otulana, Dr. Farr and
Mr. Venkatadri options to purchase up to 150,000, 80,000,
60,000, 60,000 and 40,000 shares of our common stock,
respectively. In June 2006, we issued to each of
Mr. Chesterman and Dr. Otulana an option to purchase
up to 300,000 shares of our common stock. Upon
Dr. Gondas appointment as our CEO in August 2006, we
granted to Dr. Gonda an option to purchase up to 500,000
shares of our common stock. All options we granted have an
exercise price equal to the fair market of our common stock on
the date of grant.
In addition, in October 2006, as provided in
Dr. Gondas employment offer letter, we agreed to pay
to Dr. Gonda a stock bonus of up to 100,000 shares of our
common stock to be earned based on our common stock price
reaching certain price targets after each of the first two years
of his employment as more fully described below in the section
entitled 2006 Grants of Plan-based Awards. We
believe this award structure is consistent with our approach of
providing significant equity-based compensation to our
executives in order to align our executives interests with
those of our shareholders.
For 2007, the Committee has yet to consider whether to grant
additional equity awards to our executives.
Severance Benefits. We have adopted an Executive Officer
Severance Plan and have entered into change of control
agreements with each of our executive officers, the terms of
which are more described below in the section entitled
Potential Payments Upon Termination or Change in
Control. We 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.
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 salaried 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.
59
2006 Summary Compensation Table
The following table sets forth information regarding
compensation earned in 2006 by our CEO, our Chief Financial
Officer, our Chief Medical Officer, our former CEO and two other
former executive officers who would have been among the five
most highly compensated executives if they had been employed at
the end of the fiscal year (these individuals are collectively
referred to as our named executive officers):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity | |
|
|
|
|
|
|
|
|
|
|
|
|
Stock | |
|
Option | |
|
Incentive Plan | |
|
All Other | |
|
|
|
|
|
|
Salary | |
|
Bonus | |
|
Awards | |
|
Awards (1) | |
|
Compensation (2) | |
|
Compensation | |
|
Total | |
|
|
Year | |
|
($) | |
|
($) | |
|
($) | |
|
($) | |
|
($) | |
|
($) | |
|
($) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Igor Gonda, Ph.D. (3)
|
|
|
2006 |
|
|
|
113,230 |
|
|
|
100,000 |
|
|
|
48,526 |
|
|
|
68,942 |
|
|
|
22,363 |
|
|
|
50,101 |
|
|
|
403,162 |
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas C. Chesterman
|
|
|
2006 |
|
|
|
305,076 |
|
|
|
|
|
|
|
|
|
|
|
202,417 |
|
|
|
48,202 |
|
|
|
23,757 |
|
|
|
579,506 |
|
|
Senior Vice President and Chief Financial Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Babatunde A. Otulana, M.D.
|
|
|
2006 |
|
|
|
287,038 |
|
|
|
|
|
|
|
|
|
|
|
183,319 |
|
|
|
45,352 |
|
|
|
21,584 |
|
|
|
537,293 |
|
|
Senior Vice President of Development and Chief Medical Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Former Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
V. Bryan Lawlis, Jr., Ph.D. (4)
|
|
|
2006 |
|
|
|
219,423 |
|
|
|
|
|
|
|
|
|
|
|
259,936 |
|
|
|
|
|
|
|
452,743 |
|
|
|
932,102 |
|
|
Former President and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen J. Farr, Ph.D. (5)
|
|
|
2006 |
|
|
|
157,854 |
|
|
|
|
|
|
|
|
|
|
|
163,357 |
|
|
|
|
|
|
|
167,382 |
|
|
|
488,593 |
|
|
Former Senior Vice President and Chief Scientific Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bobba Venkatadri (6)
|
|
|
2006 |
|
|
|
217,327 |
|
|
|
|
|
|
|
|
|
|
|
141,237 |
|
|
|
|
|
|
|
379,389 |
|
|
|
737,953 |
|
|
Former Senior Vice President of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The method of and assumptions used to calculate the value of the
options granted to our named executive officers is discussed in
note 1 to our financial statements included elsewhere in
this prospectus. |
|
|
|
(2) |
Each executive officer employed at the end of 2006 received a
cash bonus for achievement of certain corporate and personal
goals pursuant to our 2006 Executive Bonus Plan. |
|
|
|
(3) |
Dr. Gonda commenced his employment with us on
August 10, 2006. Dr. Gondas bonus reflects a $100,000
signing bonus for accepting his offer of employment.
Dr. Gonda also received a stock bonus award for up to
100,000 shares of our common stock. We have not yet determined
the value of Dr. Gondas stock bonus award. We have
currently estimated the value of the stock bonus award by
multiplying the number of shares underlying the award by the
closing price of our common stock on the date the award was
granted. In accordance with Securities and Exchange Commission
regulations, the cost reflected in the table above only includes
the portion of the awards value that was amortized for
2006. Dr. Gondas compensation includes $21,000 in
director fees and options expense of $2,485 that were both
attributable to his services as a director prior to his
appointment as our CEO in August 2006. Dr. Gonda has not
received any additional compensation for his services as a
director since he was appointed CEO in August 2006. |
|
|
|
(4) |
Dr. Lawlis ceased serving as our CEO on August 10,
2006. |
|
|
|
(5) |
Dr. Farr ceased serving as an executive officer on
June 16, 2006. |
|
|
|
(6) |
Mr. Venkatadri ceased serving as an executive officer on
September 15, 2006. |
|
60
All Other Compensation in the summary compensation table above
includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life | |
|
401(k) | |
|
Employee | |
|
|
|
|
|
|
|
|
|
|
Club | |
|
Health Care | |
|
Moving | |
|
Insurance | |
|
Matching | |
|
Stock | |
|
Director | |
|
Severance | |
|
|
|
|
|
|
Memberships | |
|
Contribution | |
|
Allowance | |
|
Premiums | |
|
Contributions | |
|
Purchase | |
|
Fees | |
|
Benefits | |
|
Total | |
Name |
|
Year | |
|
($) | |
|
($) | |
|
($) | |
|
($) | |
|
($) | |
|
($) | |
|
($) | |
|
($) | |
|
($) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Igor Gonda, Ph.D.
|
|
|
2006 |
|
|
|
350 |
|
|
|
2,559 |
|
|
|
23,530 |
|
|
|
446 |
|
|
|
2,215 |
|
|
|
|
|
|
|
21,000 |
|
|
|
|
|
|
|
50,101 |
|
Thomas C. Chesterman
|
|
|
2006 |
|
|
|
350 |
|
|
|
13,593 |
|
|
|
|
|
|
|
1,565 |
|
|
|
5,631 |
|
|
|
2,618 |
|
|
|
|
|
|
|
|
|
|
|
23,757 |
|
Babatunde A. Otulana, M.D.
|
|
|
2006 |
|
|
|
350 |
|
|
|
13,593 |
|
|
|
|
|
|
|
1,478 |
|
|
|
6,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,584 |
|
Former Executive Officers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
V. Bryan Lawlis, Jr., Ph.D.
|
|
|
2006 |
|
|
|
350 |
|
|
|
6,585 |
|
|
|
|
|
|
|
1,172 |
|
|
|
7,000 |
|
|
|
|
|
|
|
|
|
|
|
437,636 |
|
|
|
452,743 |
|
Stephen J. Farr, Ph.D.
|
|
|
2006 |
|
|
|
350 |
|
|
|
7,427 |
|
|
|
|
|
|
|
748 |
|
|
|
4,643 |
|
|
|
|
|
|
|
|
|
|
|
154,214 |
|
|
|
167,382 |
|
Bobba Venkatadri
|
|
|
2006 |
|
|
|
350 |
|
|
|
7,230 |
|
|
|
|
|
|
|
1,184 |
|
|
|
5,344 |
|
|
|
|
|
|
|
|
|
|
|
365,281 |
|
|
|
379,389 |
|
Employment Agreements
As stated in our employment offer letter to Dr. Gonda, his
employment relationship with us is at will. In addition to his
annual base salary of $320,000 (which is subject to increase at
our discretion), Dr. Gonda received a $100,000 sign-on
bonus and up to $75,000 toward relocation expenses. Under his
employment offer letter, Dr. Gonda is eligible to receive a
target bonus of 16.7% of his base salary and a maximum bonus of
25% of his base salary based on the achievement of corporate
performance goals and a target bonus of 16.7% of his base salary
and a maximum bonus of 25% of his base salary based on the
achievement of personal performance goals, as our board of
directors may, in its discretion, determine to award him.
Dr. Gonda is also entitled to earn a stock bonus of 100,000
shares to be earned by the end of 2008 under our 2005 Equity
Incentive Plan based on our common stock price reaching certain
price targets after each of the first two years of his
employment. The aggregate value of the stock bonus is limited to
$1,000,000. In addition, Dr. Gonda is eligible for standard
employee benefits, including participation in our 2005 Equity
Incentive Plan, and is eligible for severance and change in
control benefits described in the section below entitled
Payments Upon Termination or Change in Control.
Our other executive officers, Mr. Chesterman and
Dr. Otulana, are employed at will. These officers are
eligible for standard employee benefits, including participation
in our annual bonus program and our 2005 Equity Incentive Plan,
and are eligible for severance and change in control benefits
described below. Our former named executive officers,
Dr. Lawlis, Dr. Farr and Mr. Venkatadri, were
also employed at will. The former executive officers were
eligible to participate in the same standard employee benefits,
including participation in our annual bonus program and our 2005
Equity Incentive Plan, and received severance benefits as
described below.
61
2006 Grants of Plan-Based Awards
The following table sets forth information regarding plan-based
awards to our named executive officers in 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other | |
|
|
|
|
|
|
|
|
|
|
Estimated Future | |
|
Estimated Future | |
|
Option | |
|
|
|
Grant | |
|
|
|
|
|
|
Payouts Under Non- | |
|
Payouts Under | |
|
Awards: | |
|
Exercise | |
|
Date Fair | |
|
|
|
|
|
|
Equity Incentive | |
|
Equity Incentive | |
|
Number of | |
|
or Base | |
|
Value of | |
|
|
|
|
|
|
Plan Awards (1) | |
|
Plan Awards (2) | |
|
Securities | |
|
Price of | |
|
Stock and | |
|
|
|
|
|
|
| |
|
| |
|
Underlying | |
|
Option | |
|
Option | |
|
|
Grant | |
|
Approval | |
|
Target | |
|
Maximum | |
|
Target | |
|
Maximum | |
|
Options | |
|
Awards | |
|
Awards (3) | |
Name |
|
Date | |
|
Date | |
|
($) | |
|
($) | |
|
(#) | |
|
(#) | |
|
(#) | |
|
($/sh) | |
|
($) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Igor Gonda, Ph.D.
|
|
|
5/18/2006 |
|
|
|
5/18/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000 |
|
|
|
1.52 |
|
|
|
3,996 |
|
|
|
|
8/10/2006 |
|
|
|
8/8/2006 |
|
|
|
37,743 |
|
|
|
56,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8/10/2006 |
|
|
|
8/8/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500,000 |
|
|
|
1.87 |
|
|
|
621,500 |
|
|
|
|
10/4/2006 |
|
|
|
10/4/2006 |
|
|
|
|
|
|
|
|
|
|
|
100,000 |
|
|
|
100,000 |
|
|
|
|
|
|
|
|
|
|
|
164,000 |
|
Thomas C. Chesterman
|
|
|
3/7/2006 |
|
|
|
3/2/2006 |
|
|
|
122,031 |
|
|
|
183,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/7/2006 |
|
|
|
3/2/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,000 |
|
|
|
3.77 |
|
|
|
198,032 |
|
|
|
|
6/27/2006 |
|
|
|
6/27/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300,000 |
|
|
|
1.29 |
|
|
|
255,660 |
|
Babatunde A. Otulana, M.D.
|
|
|
3/7/2006 |
|
|
|
3/2/2006 |
|
|
|
114,815 |
|
|
|
172,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/7/2006 |
|
|
|
3/2/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,000 |
|
|
|
3.77 |
|
|
|
148,524 |
|
|
|
|
6/8/2006 |
|
|
|
6/8/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300,000 |
|
|
|
1.70 |
|
|
|
334,650 |
|
Former Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
V. Bryan Lawlis, Jr., Ph.D.
|
|
|
3/7/2006 |
|
|
|
3/2/2006 |
|
|
|
157,500 |
|
|
|
236,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/7/2006 |
|
|
|
3/2/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000 |
|
|
|
3.77 |
|
|
|
371,310 |
|
Stephen J. Farr, Ph.D.
|
|
|
3/7/2006 |
|
|
|
3/2/2006 |
|
|
|
119,524 |
|
|
|
179,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/7/2006 |
|
|
|
3/2/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,000 |
|
|
|
3.77 |
|
|
|
148,524 |
|
Bobba Venkatadri
|
|
|
3/7/2006 |
|
|
|
3/2/2006 |
|
|
|
112,692 |
|
|
|
169,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/7/2006 |
|
|
|
3/2/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,000 |
|
|
|
3.77 |
|
|
|
99,016 |
|
|
|
|
(1) |
Reflects each executive officers participation in our 2006
Executive Bonus Plan. The amount of bonus actually paid under
the plan is reflected in the summary compensation table above. |
|
|
|
(2) |
Reflects a stock bonus award for up to 100,000 shares of our
common stock granted to Dr. Gonda. Dr. Gonda will earn
half of the shares underlying his award if the average closing
price of our common stock between June 9, 2007 and
August 9, 2007 is 120% of the average closing price between
June 9, 2006 and August 9, 2006 and he will earn the other
half of the shares underlying his award if the average closing
price of our common stock between June 9, 2008 and
August 9, 2008 is 125% of the greater of (i) the
average closing price between June 9, 2006 and
August 9, 2006 or (ii) the average closing price
between June 9, 2007 and August 9, 2007. In addition,
if the average closing price of our common stock between
June 9, 2008 and August 9, 2008 is 150% of the average
closing price between June 9, 2006 and August 9, 2006,
Dr. Gonda will be entitled to receive the full award of
100,000 share notwithstanding either of the first two price
targets being achieved. If we undergo a change in control on or
prior to August 9, 2008, Dr. Gonda, will earn the full
100,000 shares underlying the award if our shareholders receive
consideration in the transaction that reflects at least a 15%
return per annum from the average closing price of our common
stock between June 9, 2006 and August 9, 2006. If we
terminate Dr. Gondas employment without cause between
August 10, 2007 and August 9, 2008 and Dr. Gonda
had previously received the first half of his bonus award, he
will be entitled to receive the second half of the bonus award
upon his termination. In no event will the value of the shares
awarded to Dr. Gonda under the bonus award exceed
$1,000,000. |
|
|
|
(3) |
The method of and assumptions used to calculate the value of
options granted to our named executive officers is discussed in
note 1 to our Financial Statements included elsewhere in
this prospectus. We have not yet determined the value of Dr.
Gondas stock bonus award. We have currently estimated the
value of the stock bonus award by multiplying the number of
shares underlying the award by the closing price of our common
stock on the date the award was granted. |
|
62
Outstanding Equity Awards At December 31, 2006
The following table provides information regarding each
unexercised stock option held by each of our named executive
officers as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards | |
|
Stock Awards | |
|
|
|
|
| |
|
| |
|
|
|
|
|
|
|
|
Market or | |
|
|
|
|
|
|
Number of | |
|
Payout Value | |
|
|
|
|
|
|
|
|
Unearned | |
|
of Unearned | |
|
|
|
|
Number of Securities | |
|
|
|
Shares, Units | |
|
Shares, Units | |
|
|
|
|
Underlying Unexercised | |
|
|
|
or Other | |
|
or Other | |
|
|
|
|
Options | |
|
Option | |
|
|
|
Rights That | |
|
Rights That | |
|
|
|
|
| |
|
Exercise | |
|
Option | |
|
Have Not | |
|
Have Not | |
|
|
|
|
Exercisable | |
|
Unexercisable | |
|
Price (1) | |
|
Expiration | |
|
Vested | |
|
Vested | |
Name |
|
|
|
(#) | |
|
(#) | |
|
($) | |
|
Date | |
|
(#) | |
|
($) | |
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Igor Gonda, Ph.D.
|
|
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000 |
|
|
|
90,000 |
|
|
|
(3) |
|
|
|
|
|
|
500,000 |
|
|
|
1.87 |
|
|
|
08/10/2016 |
|
|
|
|
|
|
|
|
|
|
|
(4) |
|
|
2,000 |
|
|
|
2,000 |
|
|
|
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 |
|
|
|
|
|
|
|
|
|
Thomas C. Chesterman
|
|
(5) |
|
|
37,500 |
|
|
|
262,500 |
|
|
|
1.29 |
|
|
|
06/27/2016 |
|
|
|
|
|
|
|
|
|
|
|
(6) |
|
|
|
|
|
|
80,000 |
|
|
|
3.77 |
|
|
|
03/07/2016 |
|
|
|
|
|
|
|
|
|
|
|
(6) |
|
|
15,312 |
|
|
|
19,688 |
|
|
|
5.90 |
|
|
|
02/22/2015 |
|
|
|
|
|
|
|
|
|
|
|
(6) |
|
|
13,061 |
|
|
|
5,939 |
|
|
|
12.00 |
|
|
|
02/27/2014 |
|
|
|
|
|
|
|
|
|
|
|
(5) |
|
|
6,562 |
|
|
|
438 |
|
|
|
4.75 |
|
|
|
02/19/2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,000 |
|
|
|
|
|
|
|
13.00 |
|
|
|
09/05/2012 |
|
|
|
|
|
|
|
|
|
Babatunde A. Otulana, M.D.
|
|
(5) |
|
|
37,500 |
|
|
|
262,500 |
|
|
|
1.70 |
|
|
|
06/08/2016 |
|
|
|
|
|
|
|
|
|
|
|
(6) |
|
|
|
|
|
|
60,000 |
|
|
|
3.77 |
|
|
|
03/07/2016 |
|
|
|
|
|
|
|
|
|
|
|
(6) |
|
|
10,936 |
|
|
|
14,064 |
|
|
|
5.90 |
|
|
|
02/22/2015 |
|
|
|
|
|
|
|
|
|
|
|
(6) |
|
|
15,123 |
|
|
|
6,877 |
|
|
|
12.00 |
|
|
|
02/27/2014 |
|
|
|
|
|
|
|
|
|
|
|
(5) |
|
|
9,375 |
|
|
|
625 |
|
|
|
4.75 |
|
|
|
02/19/2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,000 |
|
|
|
|
|
|
|
24.10 |
|
|
|
02/11/2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,000 |
|
|
|
|
|
|
|
17.20 |
|
|
|
09/20/2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,000 |
|
|
|
|
|
|
|
30.00 |
|
|
|
03/15/2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,000 |
|
|
|
|
|
|
|
112.50 |
|
|
|
02/15/2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000 |
|
|
|
|
|
|
|
35.00 |
|
|
|
05/21/2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000 |
|
|
|
|
|
|
|
60.00 |
|
|
|
02/02/2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000 |
|
|
|
|
|
|
|
61.25 |
|
|
|
03/30/2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,000 |
|
|
|
|
|
|
|
64.38 |
|
|
|
10/21/2007 |
|
|
|
|
|
|
|
|
|
V. Bryan Lawlis, Jr., Ph.D.
|
|
|
|
|
9,420 |
|
|
|
|
|
|
|
5.90 |
|
|
|
02/22/2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,437 |
|
|
|
|
|
|
|
12.00 |
|
|
|
02/27/2014 |
|
|
|
|
|
|
|
|
|
Stephen J. Farr, Ph.D.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bobba Venkatadri
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents the fair market value of a share of our common stock
on the grant date of the option. |
|
|
|
(2) |
The stock bonus award vests as described in the section above
entitled 2006 Grants of Plan-based Awards. |
|
|
|
(3) |
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. |
|
63
|
|
|
(4) |
The option vests over one year with 1/4 of the shares of
underlying common stock vesting every three months from the
grant date. |
|
|
|
(5) |
The option vests over four years with 1/16 of the shares of
underlying common stock vesting every three months from the
grant date. |
|
|
|
(6) |
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. |
|
2006 Option Exercises and Stock Vested
None of our named executive officers exercised options or had
shares of stock vest in 2006.
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.
Potential Payments Upon Termination or Change in Control
The following table and summary set forth potential payments
payable to our current 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
executive officers assuming their employment was terminated on
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination Without | |
|
|
|
|
|
|
|
|
Cause or | |
|
|
|
|
|
|
|
|
Constructive | |
|
|
|
|
Termination Without | |
|
|
|
Termination | |
|
|
|
|
Cause Prior to a | |
|
Change in | |
|
Following a Change | |
|
|
|
|
Change in Control | |
|
Control | |
|
in Control | |
Name |
|
Benefit |
|
($) | |
|
($) | |
|
($) | |
|
|
|
|
| |
|
| |
|
| |
Igor Gonda, Ph.D.
|
|
Salary
|
|
|
320,000 |
|
|
|
|
|
|
|
640,000 |
|
|
|
Bonus
|
|
|
114,032 |
|
|
|
|
|
|
|
228,064 |
|
|
|
Option acceleration
|
|
|
|
|
|
|
|
|
|
|
562,180 |
|
|
|
Stock bonus acceleration (1)
|
|
|
|
|
|
|
90,000 |
|
|
|
90,000 |
|
|
|
Benefits continuation
|
|
|
12,539 |
|
|
|
|
|
|
|
25,078 |
|
|
|
Career transition assistance
|
|
|
|
|
|
|
|
|
|
|
20,000 |
|
|
|
Total value:
|
|
|
446,571 |
|
|
|
90,000 |
|
|
|
1,565,322 |
|
Thomas C. Chesterman
|
|
Salary
|
|
|
306,000 |
|
|
|
|
|
|
|
459,000 |
|
|
|
Bonus
|
|
|
87,234 |
|
|
|
|
|
|
|
130,851 |
|
|
|
Option acceleration
|
|
|
|
|
|
|
|
|
|
|
482,388 |
|
|
|
Benefits continuation
|
|
|
18,906 |
|
|
|
|
|
|
|
28,360 |
|
|
|
Career transition assistance
|
|
|
|
|
|
|
|
|
|
|
10,000 |
|
|
|
Total value:
|
|
|
412,140 |
|
|
|
|
|
|
|
1,110,599 |
|
Babatunde A. Otulana, M.D.
|
|
Salary
|
|
|
289,000 |
|
|
|
|
|
|
|
433,500 |
|
|
|
Bonus
|
|
|
82,388 |
|
|
|
|
|
|
|
123,582 |
|
|
|
Option acceleration
|
|
|
|
|
|
|
|
|
|
|
497,583 |
|
|
|
Benefits continuation
|
|
|
18,906 |
|
|
|
|
|
|
|
28,360 |
|
|
|
Career transition assistance
|
|
|
|
|
|
|
|
|
|
|
10,000 |
|
|
|
Total value:
|
|
|
390,294 |
|
|
|
|
|
|
|
1,093,025 |
|
|
|
(1) |
The value of Dr. Gondas stock bonus is calculated
using a value of $0.90 per share of common stock, which was the
last reported closing sale price of our common stock prior to
December 31, 2006. Dr. Gonda is only entitled to
acceleration of his stock bonus upon a change in control if our
shareholders receive consideration in the transaction that
reflects at least a 15% return per annum from the average
closing price of our common stock between June 9, 2006 and
August 9, 2006. |
64
Termination without cause prior to a change in control.
If any of our executives 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. |
|
In addition, if we terminate Dr. Gondas employment
without cause between August 10, 2007 and August 9,
2008 and he received the initial 50,000 shares of his stock
bonus award on August 9, 2007, he will be entitled to
receive the remaining 50,000 unvested shares of his stock bonus
award.
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 such executives annual base
salary multiplied by two, in the case of Dr. Gonda, and one
and one-half, in the case of Mr. Chesterman and
Dr. Otulana; |
|
|
|
|
|
a lump sum payment equal to such executives current target
bonus multiplied by (i) the average annual percentage
achievement of corporate goals for the three complete fiscal
years preceding the termination date and (ii) two, in the
case of Dr. Gonda, and one and one-half, in the case of
Mr. Chesterman and Dr. Otulana; |
|
|
|
|
|
continuation of such executives health insurance benefits
for 24 months, in the case of Dr. Gonda, and
18 months, in the case of Mr. Chesterman and
Dr. Otulana; |
|
|
|
|
|
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 Mr. Chesterman
and Dr. Otulana; and |
|
|
|
|
|
acceleration of vesting of any stock options or restricted stock
awards that remain unvested as of the date of such
executives termination. |
|
Severance Payments to Former Executive Officers
Following is a description of the severance benefits earned by
former executive officers in 2006:
Dr. V. Bryan Lawlis, Jr. Dr. Lawlis ceased
serving as our CEO in August 2006 and received aggregate
severance benefits of $437,636, consisting of 12 months of
salary ($340,000), an amount equal to his 2006 target bonus
multiplied by the average annual percentage achievement of
corporate goals for the three complete fiscal years preceding
his termination ($78,188) and 12 months of health benefits
continuation ($19,448).
Dr. Stephen Farr. Dr. Farr ceased serving as an
executive officer in June 2006 and, pursuant to an agreement
between him and us, he received aggregate severance benefits of
$154,214, consisting of $117,597 in salary, $33,522 in bonus and
$3,095 in benefits continuation.
Mr. Bobba Venkatadri. Mr. Venkatadri ceased
serving as an executive officer in September 2006 and received
aggregate severance benefits of $365,281, consisting of
12 months of salary ($291,000), an amount equal to his 2006
target bonus multiplied by the average annual percentage
achievement of corporate goals for the three complete fiscal
years preceding his termination ($61,953) and 12 months of
health benefits continuation ($12,328).
65
Compensation Committee Interlocks and Insider
Participation
During the 2006 fiscal year, the Committee initially consisted
of Messrs. Jaeger and V. Thompson and Dr. Gonda.
Dr. Gonda had previously served as an officer from October
1995 until December 2001. Dr. Gonda stepped down from the
Compensation Committee after his appointment as our CEO and was
replaced by Mr. Barker. No interlocking relationship exists
between our board or the Committee and the board of directors or
the compensation committee of any other company, nor has any
such interlocking relationship existed in the past.
Non-Employee Director Compensation
The following table sets forth a summary of the compensation we
paid to our non-employee directors in 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees | |
|
|
|
|
|
|
Earned or | |
|
|
|
|
|
|
Paid in | |
|
Option | |
|
|
|
|
Cash | |
|
Awards (1) | |
|
Total | |
Name |
|
($) | |
|
($) | |
|
($) | |
|
|
| |
|
| |
|
| |
Frank H. Barker (2)
|
|
|
39,500 |
|
|
|
12,266 |
|
|
|
51,766 |
|
Igor Gonda (3)
|
|
|
21,000 |
|
|
|
2,485 |
|
|
|
23,485 |
|
Stephen O. Jaeger (4)
|
|
|
45,750 |
|
|
|
12,266 |
|
|
|
58,016 |
|
John Nehra (5)
|
|
|
8,500 |
|
|
|
5,626 |
|
|
|
14,126 |
|
Wayne Roe (6)
|
|
|
10,000 |
|
|
|
5,626 |
|
|
|
15,626 |
|
John M. Siebert (7)
|
|
|
4,810 |
|
|
|
3,165 |
|
|
|
7,975 |
|
Richard Thompson (8)
|
|
|
10,000 |
|
|
|
213,333 |
|
|
|
223,333 |
|
Virgil D. Thompson (9)
|
|
|
68,250 |
|
|
|
20,889 |
|
|
|
89,139 |
|
|
|
|
(1) |
The method of and assumptions used to calculate the value of the
options granted to our directors is discussed in note 1 to
our financial statements included elsewhere in this prospectus. |
|
|
|
(2) |
Mr. Barker owns options to purchase up to 54,043 shares of
our common stock as of December 31, 2006, of which 36,043
shares are vested as of December 31, 2006. |
|
|
|
(3) |
Represents compensation received by Dr. Gonda in 2006 for
services as a director prior to his appointment as our CEO in
August 2006. Dr. Gonda did not receive compensation for his
services as a director after he was appointed as our CEO.
Dr. Gonda owns options to purchase up to 551,809 shares of
our common stock as of December 31, 2006, of which 49,809
shares are vested as of December 31, 2006. |
|
|
|
(4) |
Mr. Jaeger owns options to purchase up to 32,000 shares of
our common stock as of December 31, 2006, of which 14,000
shares are vested as of December 31, 2006. |
|
|
|
(5) |
Mr. Nehra did not stand for re-election to our board of
directors at the 2006 Annual Meeting of Shareholders.
Mr. Nehra did not own any outstanding options as of
December 31, 2006. |
|
|
|
(6) |
Mr. Roe did not stand for re-election to our board of
directors at the 2006 Annual Meeting of Shareholders.
Mr. Roe did not own any outstanding options as of
December 31, 2006. |
|
|
|
(7) |
Dr. Siebert joined our board in November 2006. The fees
paid to him represent a pro-rated portion of his retainer for
the period during which he served as a director.
Dr. Siebert owns options to purchase up to 30,000 shares of
our common stock as of December 31, 2006, of which no
shares are vested as of December 31, 2006. |
|
|
|
(8) |
Mr. R. Thompson did not stand for re-election to our board
of directors at the 2006 Annual Meeting of Shareholders.
Mr. R. Thompsons option awards includes option
expense related to the options that were granted when he
previously served as our CEO. Mr. R. Thompson did not own
any outstanding options as of December 31, 2006. |
|
|
|
(9) |
Mr. V. Thompson owns options to purchase up to 87,600
shares of our common stock as of December 31, 2006, of
which 54,600 shares are vested as of December 31, 2006. |
|
In 2007, the Chairman of the Board will receive an annual
retainer of $50,000 and all other non-employee directors will
receive an annual cash retainer of $30,000. Board members also
receive additional annual retainers 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
66
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 compensation, each non-employee director
will be granted an annual stock option award. Each non-employee
director will automatically receive an option to purchase up to
30,000 shares of our common stock upon election to the board.
The Chairman of the Board will be granted automatically an
option to purchase up to 35,000 shares of our common stock upon
re-election to the board and the other members of the board will
be granted automatically an option to purchase up to 20,000
shares of our common stock upon re-election to the board.
Limitation of Liability of Officers and Directors and
Indemnification
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 have 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.
67
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Independence of Directors
Our board of directors has determined that Messrs. Barker,
Jaeger and V. Thompson and Dr. Siebert are each
independent under the standards set forth in Nasdaq Stock
Market, or Nasdaq, Marketplace Rule 4200(a)(15). We intend
to maintain at least two directors on the board that meet these
independence standards. Our board has also determined that each
member of our Compensation Committee and Nominating and
Corporate Governance Committee is independent under Nasdaq
Marketplace Rule 4200(a)(15) and each member of our Audit
Committee is independent under the standards set forth in Nasdaq
Marketplace Rules 4350(d)(2)(A)(i) and (ii).
Review, Approval or Ratification of Transactions with Related
Persons
Our policy is to require that any transaction with a related
party required to be reported under applicable Securities and
Exchange Commission rules, other than compensation-related
matters and waivers of our code of business conduct and ethics,
be reviewed and approved or ratified by a majority of
independent, disinterested directors. We have not adopted
procedures for review of, or standards for approval of, these
transactions, but instead review such transactions on a case by
case basis. Our policy is to require that all
compensation-related matters be recommended for board approval
by the Compensation Committee and that any waiver of our code of
business conduct and ethics be reviewed and approved by the
Nominating and Corporate Governance Committee and be reported
under applicable SEC rules.
Transactions with Novo Nordisk
As of January 26, 2005, we restructured the AERx iDMS
program, pursuant to a restructuring agreement entered into with
Novo Nordisk and its subsidiary, Novo Nordisk Delivery
Technologies, or NNDT, in September 2004. Under the terms
of the restructuring agreement, we sold certain equipment,
leasehold improvements and other tangible assets used in the
AERx iDMS program to NNDT, for a cash payment of
$55.3 million (before refund of cost advances made by Novo
Nordisk). Our expenses related to this transaction for legal and
other consulting costs were $1.1 million. In connection
with the restructuring transaction, we entered into various
related agreements with Novo Nordisk and NNDT, including the
following:
|
|
|
|
|
an amended and restated license agreement amending the
development and license agreement previously in place with Novo
Nordisk, expanding Novo Nordisks development and
manufacturing rights to the AERx iDMS program and providing for
royalties to us on future AERx iDMS net sales in lieu of a
percentage interest in the gross profits from the
commercialization of AERx iDMS, which royalties run until the
later of last patent expiry or last use of our intellectual
property and which apply to future enhancements or generations
of our AERx delivery technology; |
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a three-year agreement under which NNDT agreed to perform
contract manufacturing of AERx iDMS-identical devices and dosage
forms filled with compounds provided by us in support of
preclinical and initial clinical development of other products
that incorporate our AERx delivery system; and |
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an amendment of the common stock purchase agreement in place
with Novo Nordisk prior to the closing of the restructuring
transaction, (i) deleting the provisions whereby we can
require Novo Nordisk to purchase certain additional amounts of
common stock, (ii) imposing certain restrictions on the
ability of Novo Nordisk to sell shares of our common stock and
(iii) providing Novo Nordisk with certain registration and
information rights with respect to these shares. |
As a result of this transaction, we were no longer obligated to
continue work related to the non-refundable milestone payment
from Novo Nordisk in connection with the commercialization of
AERx iDMS. We also entered into transition and support
agreements with NNDT and we were released from our contractual
obligations relating to future operating lease payments for two
buildings assigned to NNDT.
68
Pursuant to the restructuring agreement, we terminated a
manufacturing and supply agreement and a patent cooperation
agreement, each previously in place with Novo Nordisk and dated
October 22, 2001. As part of the restructuring, one of our
officers and many of our employees became employees of NNDT.
On July 3, 2006, we further restructured our relationship
with Novo Nordisk through an intellectual property assignment, a
royalty prepayment and an eight-year promissory note with Novo
Nordisk. The promissory note was secured by the royalty payments
on any AERx iDMS sales by Novo Nordisk under the license with
us. The key features of this restructuring included:
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our transfer to Novo Nordisk of the ownership of 23 issued
United States patents and their corresponding non-United States
counterparts, if any, as well as related pending applications,
in exchange for $12.0 million paid to us in cash. We
retained exclusive, royalty-free control of these patents
outside the field of glucose control and will continue to be
entitled to royalties with respect to any inhaled insulin
products marketed or licensed by Novo Nordisk. |
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our receipt of a royalty prepayment of $8.0 million in
exchange for a one percent reduction on our average royalty rate
for the commercialized AERx iDMS product. As a result, we will
receive royalty rates under our license agreement with Novo
Nordisk that will commence at a minimum of 3.25% on launch, and
that we estimate will average 5% over the life of the product. |
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our issuance of an eight-year promissory note to Novo Nordisk in
connection with our receipt from Novo Nordisk of a loan in the
principal amount of $7.5 million with interest accruing at
5% per year. The principal and accrued interest will be payable
to Novo Nordisk in three equal payments of $3.5 million on
July 2, 2012, July 1, 2013 and June 30, 2014,
commencing in six years at a five percent annual interest rate.
Our obligations under the note are secured by royalty payments
upon any commercialization of the AERx iDMS product. |
We and Novo Nordisk continue to cooperate and share in
technology development, as well as intellectual property
development and defense. Both we and Novo Nordisk have access to
any developments or improvements the other might make to the
AERx delivery system, within their respective fields of use. In
August 2006, Novo Nordisk announced that it had filed a lawsuit
against Pfizer claiming that Exubera, an inhaled insulin product
that Pfizer has been developing with Nektar Therapeutics,
infringes a patent originally developed by us and now owned by
Novo Nordisk with rights retained by us outside the field of
glucose control. In December 2006, Novo Nordisks motion
for a preliminary injunction in this case was denied. While the
outcome of this lawsuit is highly uncertain, we are entitled to
a portion of any proceeds, net of litigation costs, that may be
received by Novo Nordisk from a favorable outcome.
As of January 3, 2007, Novo Nordisk beneficially owned
1,573,673 shares, or 10.6%, of our outstanding common
stock, and is considered a related party. There are restrictions
on the ability of Novo Nordisk to dispose of any shares of our
common stock.
69
PRINCIPAL SHAREHOLDERS
The following table sets forth the beneficial ownership
information of our common stock at December 31, 2006 on an
actual basis and as adjusted to reflect the sale of the shares
of common stock in this offering, for:
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each person known to us to be the beneficial owner of more than
5% of any class of outstanding voting securities; |
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our previously identified named executive officers; |
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each of our directors; and |
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all of our current executive officers and directors as a group. |
Unless otherwise noted below, the address of the persons and
entities listed on the table is c/o Aradigm Corporation,
3929 Point Eden Way, Hayward, California 94545.
This table is based upon information supplied by officers,
directors and principal shareholders and supplied in
Schedules 13D and 13G filed with the SEC. Except as
indicated by the footnotes below, we believe, based on the
information furnished to us, that the persons and entities named
in the table below have sole voting and investment power with
respect to all shares of common stock reflected as beneficially
owned, subject to applicable community property laws.
We have determined beneficial ownership in accordance with the
rules of the SEC. In computing the number of shares of common
stock beneficially owned by a person and the percentage
ownership of that person, we deemed outstanding shares of common
stock subject to options or warrants held by that person that
are currently exercisable or exercisable within 60 days of
December 31, 2006. We did not deem these shares
outstanding, however, for the purpose of computing the
percentage ownership of any other person.
We have based our calculation of the percentage of beneficial
ownership on 14,765,474 shares of common stock and
1,544,626 shares of convertible preferred stock outstanding
on December 31, 2006 and 46,001,175 shares of common
stock outstanding upon completion of this offering. The
beneficial ownership of our stock after this offering listed in
the table below assumes the automatic conversion of all
outstanding shares of our Series A Convertible Preferred
Stock into 1,235,701 shares of common stock upon completion
of this offering. We have granted the underwriters an option to
purchase up to 4,500,000 additional shares of our common
stock to cover over-allotments, if any, and the table below
assumes no exercise of that option. Beneficial ownership
representing less than 1% is denoted with an asterisk (*).
70
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Beneficial Ownership | |
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Before This Offering | |
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After This Offering | |
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Common | |
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Series A Preferred | |
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Common | |
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Number of |
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Percent of | |
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Number of |
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Percent of | |
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Number of | |
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Percent of | |
Beneficial owner |
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Shares |
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Total (%) | |
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Total (%) | |
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Total (%) | |
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Novo Nordisk A/ S (1)
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1,573,673 |
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10.7 |
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1,573,673 |
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3.4 |
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Novo Alle DK-2880 |
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Bagsvaerd, Denmark |
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New Enterprise Associates 10,
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937,638 |
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6.2 |
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1,033,057 |
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66.9 |
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1,764,084 |
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3.8 |
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Limited Partnership (2)
1119 St. Paul Street
Baltimore, MD 21202 |
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Laurence W. Lytton (3)
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860,753 |
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5.8 |
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860,753 |
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1.9 |
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467 Central Park West
New York, NY 10025 |
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Domain Public Equity Partners, LP (4)
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417,523 |
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2.8 |
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154,958 |
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10.0 |
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541,489 |
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1.2 |
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One Palmer Square
Princeton, NJ 08542 |
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MPM BioEquities Master Fund LP (5)
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107,436 |
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* |
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206,611 |
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13.4 |
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272,725 |
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* |
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501 Gateway Blvd., Suite 360
South San Francisco, CA 94080 |
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Camden Partners Strategic
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Fund II-A, LP (6) |
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150,000 |
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9.7 |
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120,000 |
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c/o Camden Partners, Inc.
One South Street, Suite 2150
Baltimore, MD 21202 |
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Igor Gonda (7)
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59,626 |
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* |
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59,626 |
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Thomas C. Chesterman (8)
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116,251 |
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* |
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116,251 |
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Babatunde A. Otulana (9)
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152,517 |
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1.0 |
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152,517 |
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Virgil D. Thompson (10)
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67,250 |
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* |
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67,250 |
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Frank H. Barker (11)
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41,043 |
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* |
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41,043 |
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Stephen O. Jaeger (12)
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19,000 |
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19,000 |
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John M. Siebert (13)
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7,500 |
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7,500 |
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V. Bryan Lawlis (14)
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43,869 |
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* |
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43,869 |
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Stephen J. Farr (15)
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10,470 |
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10,470 |
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All executive officers and directors as a group
(7 persons) (16)
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463,187 |
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3.1 |
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463,187 |
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(1) |
Represents 1,573,673 shares of common stock held by Novo
Nordisk A/S, a company publicly traded in Denmark. According to
a Schedule 13D Amendment No. 4 dated
September 28, 2004, Novo Nordisk A/S holds the shares
through Novo Nordisk Pharmaceuticals, Inc., a Delaware
corporation. Novo Nordisk Pharmaceuticals, Inc. is a wholly
owned subsidiary of Novo Nordisk North America, Inc., a Delaware
corporation. Novo Nordisk North America, Inc. is wholly owned by
Novo Nordisk A/S. Novo A/S, a private limited Danish company,
owns approximately 26.7% of Novo Nordisk A/Ss total share
capital, representing approximately 69.0% of the voting rights
of Novo Nordisk A/S and may be deemed to control Novo Nordisk
A/S. Novo A/S is a wholly owned subsidiary of Novo Nordisk
Foundation, a self-governing and self-owned foundation. |
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(2) |
Includes 497,917 shares of common stock and warrants to
purchase an aggregate of 439,721 shares of common stock
exercisable within 60 days of December 31, 2006 held by New
Enterprise Associates 10, Limited Partnership
(NEA 10). According to a Schedule 13D Amendment
No. 4 dated June 25, 2003, NEA Partners 10,
Limited Partnership (NEA Partners 10) is the sole general
partner of NEA 10, and Stewart Alsop, James Barrett, Peter
J. Barris, Robert T. Coneybeer, Nancy L. Dorman, Ronald H. Kase,
C. Richard Kramlich, Thomas C. McConnell, Peter T. Morris,
Charles W. Newhall III, Mark W. Perry, Scott D. Sandell and
Eugene A. Trainor III are general partners of NEA
Partners 10. NEA Partners 10 and each of the
aforementioned general partners of NEA Partners 10 have
shared dispositive and shared voting power with respect to the
shares held by NEA 10. Each of the aforementioned disclaims
beneficial ownership as to the shares held by NEA 10,
except to the extent of their pecuniary interest therein. |
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(3) |
According to a Schedule 13G Amendment No. 2 dated
November 3, 2006, represents 860,753 shares of common
stock held directly by Laurence W. Lytton. |
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(4) |
Includes 240,430 shares of common stock issuable upon
exercise of warrants exercisable within 60 days of
December 31, 2006. |
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(5) |
Includes 107,436 shares of common stock issuable upon
exercise of warrants exercisable within 60 days of
December 31, 2006. |
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(6) |
Includes 8,400 shares of Series A Convertible
Preferred Stock held by Camden Partners Strategic
Fund II-B, L.P. |
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(7) |
Includes 30,000 shares of common stock subject to options
exercisable within 60 days of December 31, 2006. |
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(8) |
Includes 106,818 shares of common stock subject to options
exercisable within 60 days of December 31, 2006.
Includes 570 shares of common stock issuable upon exercise
of warrants exercisable within 60 days of December 31,
2006. |
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(9) |
Includes 149,497 shares of common stock subject to options
exercisable within 60 days of December 31, 2006. |
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(10) |
Includes 63,350 shares of common stock subject to options
exercisable within 60 days of December 31, 2006. |
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(11) |
Includes 41,043 shares of common stock subject to options
exercisable within 60 days of December 31, 2006. |
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(12) |
Includes 19,000 shares of common stock subject to options
exercisable within 60 days of December 31, 2006. |
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(13) |
Includes 7,500 shares of common stock subject to options
exercisable within 60 days of December 31, 2006. |
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(14) |
Includes 32,857 shares of common stock subject to options
exercisable within 60 days of December 31, 2006.
Includes 1,709 shares of common stock issuable upon
exercise of warrants exercisable within 60 days of
December 31, 2006. Dr. Lawlis ceased serving as our
President and Chief Executive Officer as of August 10, 2006. |
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(15) |
Dr. Farr ceased serving as an executive officer on
June 16, 2006. |
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(16) |
See footnotes (7) through (13) above. |
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72
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares
of common stock, no par value per share, and
5,000,000 shares of preferred stock, no par value per
share. The rights and preferences of the preferred stock may be
established from time to time by our board of directors, without
shareholder approval. 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. For a complete description you should refer to our
articles of incorporation and bylaws, which are incorporated by
reference as exhibits to the registration statement of which the
prospectus is a part.
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As of January 3, 2007, 14,765,474 shares of common
stock and 1,544,626 shares of Series A Convertible
Preferred Stock, convertible into 1,235,701 shares of
common stock, were issued and outstanding. |
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As of January 3, 2007, we had 124 holders of record of
common stock and four holders of record of Series A
Convertible Preferred Stock. |
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Immediately after the closing of this offering, we will have
approximately 46,001,175 shares of common stock outstanding
and no shares of preferred stock outstanding. |
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Common Stock
The holders of our common stock are entitled to one vote for
each share held of record on all matters submitted to a vote of
the shareholders. Our articles of incorporation provide
shareholders the ability to cumulate their votes in the election
of directors; provided, however, that the shareholders shall not
be entitled to cumulate as long as we are a listed
corporation as defined in Section 301.5 of the
California Corporations Code. Subject to preferences that may be
applicable to any then outstanding shares of preferred stock,
holders of our common stock are entitled to receive ratably such
dividends as may be declared by our board of directors out of
funds legally available therefor. In the event of our
liquidation, dissolution or winding up, holders of our common
stock are entitled to share ratably in all assets remaining
after payment of liabilities and the liquidation preference of
any then outstanding shares of preferred stock. Holders of our
common stock have no preemptive rights and no right to convert
their common stock into any other securities. There are no
redemption or sinking fund provisions applicable to our common
stock. All outstanding shares of our common stock are, and all
shares of common stock to be outstanding upon completion of this
offering will be, fully paid and non-assessable.
Preferred Stock
Our board of directors has designated 1,500,000 shares of
preferred stock as Series A Junior Participating Preferred
Stock and 2,050,000 shares of our preferred stock as
Series A Convertible Preferred Stock. The Series A
Convertible Preferred Stock will convert automatically into
common stock upon completion of this offering. The terms of the
Series A Convertible Preferred Stock are described in
note 5 to our financial statements included elsewhere in
this prospectus. The Series A Junior Participating
Preferred Stock is purchasable only upon exercise of the rights
under our shareholder rights plan, discussed below. Our board of
directors has the authority to issue the remaining undesignated
shares of preferred stock in one or more series and to determine
the powers, preferences and rights and the qualifications,
limitations or restrictions granted to or imposed upon any new
series of preferred stock, including dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption,
prices, liquidation preferences, and to fix the number of shares
constituting any series and the designation of such series,
without any further vote or action by our shareholders. The
issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control transaction and may
adversely affect the voting and other rights of the holders of
our common stock. The issuance of shares of preferred stock with
voting and conversion rights may adversely affect the voting
power of the holders of our common stock, including the loss of
voting control to others. At present, we have no plans to issue
any additional shares of our preferred stock.
73
Warrants
As of January 3, 2007, we had outstanding warrants to
purchase an aggregate of 1,254,592 shares of our common
stock with a weighted average exercise price of $9.38 per
share. The warrants expire between March 10, 2007 and
December 22, 2008, with a weighted average remaining term
of 365 days.
Shareholder Rights Plan
In August 1998, we adopted a shareholder rights plan pursuant to
which we distributed rights to purchase shares of Series A
Junior Participating Preferred Stock as a dividend at the rate
of one right for each share of common stock outstanding. The
rights are designed to guard against partial tender offers and
other abusive and coercive tactics that might be used in an
attempt to gain control of us or to deprive our shareholders of
their interest in our long-term value. The shareholder rights
plan seeks to achieve these goals by encouraging a potential
acquirer to negotiate with our board of directors to redeem the
rights and allow the potential acquirer to acquire our shares
without suffering significant dilution. However, these rights
could deter or prevent transactions that shareholders deem to be
in their interests and could reduce the price that investors or
an acquirer might be willing to pay in the future for shares of
our common stock.
Until the earlier to occur of (i) the date of a public
announcement that a person, entity or group of affiliated or
associated persons have acquired beneficial ownership of 15% or
more of our outstanding common stock, such person or entity
being referred to as an acquiring person, or (ii) 10
business days (or such later date as may be determined by action
of our board of directors prior to such time as any person or
entity acquires beneficial ownership of 15% or more of our
outstanding common stock) following the commencement of, or
announcement of an intention to commence, a tender offer or
exchange offer the consummation of which would result in any
person or entity acquires beneficial ownership of 15% or more of
our outstanding common stock, the earlier of such dates being
called the distribution date, the rights trade with, and are not
separable from, our common stock and are not exercisable.
In the event that any person or group of affiliated or
associated persons becomes a beneficial ownership of 15% or more
of our outstanding common stock, each holder of a right, other
than rights beneficially owned by the acquiring person and its
associates and affiliates (which will thereafter be void), will
for a 60-day period
have the right to receive upon exercise that number of shares of
our common stock having a market value of two times the exercise
price of the right. In the event that we are acquired in a
merger or other business combination transaction or 50% or more
of our consolidated assets or earning power are sold to an
acquiring person, its associates or affiliates or certain other
persons in which such persons have an interest, each holder of a
right will thereafter have the right to receive, upon the
exercise thereof at the then current exercise price of the
right, that number of shares of common stock of the acquiring
company which at the time of such transaction will have a market
value of two times the exercise price of the right.
The rights will expire at the close of business on
September 8, 2008. At any time prior to the earliest of
(i) the day of the first public announcement that a person
has acquired beneficial ownership of 15% or more of our
outstanding common stock or (ii) September 8, 2008,
our board of directors may redeem the rights in whole, but not
in part, at a price of $.001 per right. Following the
expiration of the above periods, the rights become
nonredeemable. Immediately upon any redemption of the rights,
the right to exercise the rights will terminate and the only
right of the holders of rights will be to receive the redemption
price.
The terms of the rights may be amended by our board of directors
without the consent of the holders of the rights, except that,
from and after such time as the rights are distributed, no such
amendment may adversely affect the interest of the holders of
the rights, excluding the interests of an acquiring person.
Anti-Takeover Effects of Provisions of Our Articles of
Incorporation, Our Bylaws, California Law and Our Other
Agreements
Certain provisions of our articles of incorporation, our bylaws
and the California Corporations Code could discourage a third
party from acquiring, or make it more difficult for a third
party to acquire, control of our company without approval of our
board of directors. These provisions could also limit the price
that
74
certain investors might be willing to pay in the future for
shares of our common stock. Certain provisions allow the board
of directors to authorize, without shareholder approval, the
issuance of preferred stock with rights superior to those of the
common stock. We are also subject to the provisions of
Section 1203 of the California Corporations Code which
requires us to provide a fairness opinion to our shareholders in
connection with their consideration of any proposed
interested party reorganization transaction.
We have 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 severance plan and our change of control
agreements may discourage, delay or prevent a third party from
acquiring us.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is
Computershare Trust Company, N.A.
OTC Bulletin Board Listing
Our common stock is currently quoted on the OTC Bulletin Board,
an electronic quotation service for securities traded
over-the-counter, under the symbol ARDM.
75
SHARES ELIGIBLE FOR FUTURE SALE
Based on 14,765,474 shares of common stock outstanding as
of January 3, 2007 and assuming no exercise of the
underwriters over-allotment option, there will be
46,001,175 shares of our common stock outstanding upon
completion of this offering. Of these shares,
44,381,523 shares will be freely tradable, except that any
shares held by our affiliates, as that term is
defined under Rule 144 promulgated under the Securities Act
of 1933, may only be sold in compliance with certain
requirements of Rule 144, including volume limitations,
manner of sale provisions, notice requirements and the
availability of current public information about us. As of
January 3, 2007, 45,979 shares are subject to
90-day
lock-up agreements
entered into by certain of our officers, directors and
shareholders with the underwriters.
As of January 3, 2007, Novo Nordisk A/S beneficially owned
1,573,673 shares, or 10.6%, of our outstanding common stock
and is considered a related party. Pursuant to that certain
Amended and Restated Stock Purchase Agreement we entered into
with Novo Nordisk A/S and Novo Nordisk Pharmaceuticals, Inc. in
connection with the January 2005 restructuring of our
collaboration with Novo Nordisk, Novo Nordisk agreed not to
transfer or dispose of any shares of our common stock, with
limited exceptions, until one of the following occurs:
|
|
|
|
|
the first AERx iDMS product is made available for sale in
commercial quantities anywhere in the world; |
|
|
|
the acquisition of all or substantially all of our outstanding
common stock by a third party; |
|
|
|
the termination of our Amended and Restated License Agreement
with Novo Nordisk; |
|
|
|
our filing of a voluntary petition for bankruptcy protection (or
the filing of an involuntary petition that is not dismissed or
withdrawn within 60 days after it is filed); |
|
|
|
our initiation of an assignment for the benefit of creditors or
other similar insolvency proceeding; |
|
|
|
the cessation of all of our business activities; |
|
|
|
a judicial or other governmental determination of our insolvency; |
|
|
|
a material change in our business activities that is
incompatible with accepted ethical standards within the
pharmaceutical industry; or |
|
|
|
January 1, 2009. |
76
UNDERWRITING
We intend to enter into an underwriting agreement with Punk,
Ziegel & Company, L.P. and Merriman Curhan Ford &
Co., as underwriters, with respect to the shares being offered.
Subject to the terms and conditions of the underwriting
agreement, the underwriters have severally agreed to purchase
from us the number of shares of our common stock set forth on
the cover page of this prospectus at the public offering price,
less the underwriting discount set forth on the cover page of
this prospectus. Subject to the terms and conditions stated in
the underwriting agreement, each underwriter has agreed to
purchase, and we have agreed to sell to that underwriter, the
number of shares of our common stock set forth opposite each
underwriters name below.
|
|
|
|
|
|
Underwriter |
|
Number of Shares |
|
|
|
Punk, Ziegel & Company, L.P.
|
|
|
|
|
Merriman Curhan Ford & Co.
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
30,000,000 |
|
|
|
|
|
|
The underwriting agreement provides that the obligations of the
underwriters to purchase the shares of common stock offered
hereby are conditional and may be terminated at the
underwriters discretion based on their assessment of the
state of the financial markets. The obligations of the
underwriters may also be terminated upon the occurrence of other
events specified in the underwriting agreement. The underwriters
are committed to purchase all of the shares of common stock
being offered by us if any shares are purchased.
The underwriters propose to offer the shares of common stock to
the public at the public offering price set forth on the cover
page of this prospectus. The underwriters may offer the common
stock to securities dealers at the price to the public less a
concession not in excess of
$ per
share. Securities dealers may reallow a concession not in excess
of
$ per
share to other dealers. After the shares of common stock are
released for sale to the public, the underwriters may vary the
offering price and other selling terms from time to time.
We have granted to the underwriters an option, exercisable not
later than 30 days after the date of this prospectus, to
purchase up to an aggregate of 4,500,000 additional shares
of common stock at the public offering price set forth on the
cover page of this prospectus, less the underwriting discount.
The underwriters may exercise this option only to cover
over-allotments, if any, made in connection with the sale of
common stock offered hereby.
The following table summarizes the compensation to be paid to
the underwriters by us and the proceeds, before expenses,
payable to us.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | |
|
|
|
|
| |
|
|
|
|
Without | |
|
With | |
|
|
Per Share | |
|
Over-Allotment | |
|
Over-Allotment | |
|
|
| |
|
| |
|
| |
Public Offering Price
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Underwriting Discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds to Us (before expenses)
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
We estimate that the total expenses of this offering, excluding
the underwriting discount, will be approximately $610,000.
We have agreed to indemnify the underwriters against certain
civil liabilities, including liabilities under the Securities
Act of 1933, and to contribute to payments the underwriters may
be required to make in respect of any such liabilities.
Our directors and executive officers have agreed with the
underwriters that, for a period of 90 days from the date of
this prospectus, they will not offer, sell, assign, transfer,
pledge, contract to sell or otherwise dispose of, or hedge any
shares of our common stock or any securities convertible into or
exchangeable for, shares of common stock. However, so long as
the transferee agrees to be bound by the terms of the
lock-up
77
agreement, a director, executive officer or other holder may
transfer his or her securities by gift or for estate planning
purposes and in some other limited circumstances. Punk,
Ziegel & Company may, in its sole discretion, release
all or any portion of the shares from the restrictions in any
such agreement at any time without prior notice. We have entered
into a similar agreement with the underwriters. Currently, we
are not aware of any agreements between the underwriters and any
of our security holders releasing them from these
lock-up agreements
prior to the expiration of the
90-day period. This
90-day period may be
extended for up to an additional 18 days if we are
expecting to issue an announcement of our financial results or
of a material event or other material news within 17 days
before or 16 days after the end of such
90-day period. In
considering any request to release shares subject to a
lock-up agreement,
Punk, Ziegel & Company will consider the facts and
circumstances relating to a request at the time of that request.
The underwriters may engage in over-allotment, stabilizing
transactions, syndicate-covering transactions and passive market
making in accordance with Regulation M under the Securities
Exchange Act of 1934. Over-allotment involves syndicate sales in
excess of the offering size, which creates a syndicate short
position. Covered short sales are sales made in an amount not
greater than the number of shares available for purchase by the
underwriters under the over-allotment option. The underwriters
may close out a covered short sale by exercising the
over-allotment option or purchasing shares in the open market.
Naked short sales are sales made in an amount in excess of the
number of shares available under the over-allotment option. The
underwriters must close out any naked short sale by purchasing
shares in the open market. Stabilizing transactions permit bids
to purchase the underlying security so long as the stabilizing
bids do not exceed a specified maximum. Syndicate-covering
transactions involve purchases of the shares of common stock in
the open market after the distribution has been completed in
order to cover syndicate short positions. In passive market
making, market makers in the shares of common stock who are
underwriters or prospective underwriters may, subject to certain
limitations, make bids for or purchases of the shares of common
stock until the time, if any, at which a stabilizing bid is
made. These stabilizing transactions and syndicate-covering
transactions may cause the price of the shares of our common
stock to be higher than it would otherwise be in the absence of
these transactions. These transactions may be commenced and
discontinued at any time without notice.
An electronic prospectus will be available on the website
maintained by Punk, Ziegel & Company, at www.pzk.com.
Other than the prospectus in electronic format, the information
on this website is not part of this prospectus or the
registration statement of which this prospectus forms a part,
has not been approved or endorsed by us or any underwriter in
its capacity as underwriter, and should not be relied upon by
investors.
78
LEGAL MATTERS
The validity of our common stock offered by this prospectus will
be passed upon for us by Cooley Godward Kronish
llp, Palo Alto,
California. Certain legal matters in connection with this
offering will be passed upon for the underwriters by
Morrison & Foerster
llp, New York, New
York.
EXPERTS
Ernst & Young LLP, independent registered public
accounting firm, has audited our financial statements at
December 31, 2005 and 2004, and for each of the three years
in the period ended December 31, 2005, as set forth in
their report. We have included our financial statements in the
prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLPs report, given on
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We file electronically with the Securities and Exchange
Commission our annual reports on
Form 10-K,
quarterly interim reports on
Form 10-Q, current
reports on
Form 8-K and
amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934. We have also filed with the Securities and Exchange
Commission a registration statement on
Form S-1 under the
Securities Act of 1933, as amended, with respect to the shares
of our common stock offered hereby. This prospectus does not
contain all of the information set forth in the registration
statement and the exhibits and schedules thereto. Some items are
omitted in accordance with the rules and regulations of the SEC.
For further information with respect to us and the common stock
offered hereby, we refer you to the registration statement and
the exhibits and schedules filed therewith. Statements contained
in this prospectus as to the contents of any contract, agreement
or any other document are summaries of the material terms of the
contract, agreement or other document. With respect to each of
these contracts, agreements or other documents filed or
incorporated by reference as an exhibit to the registration
statement, reference is made to the exhibits for a more complete
description of the matter involved.
We make available on or through our website at www.aradigm.com,
free of charge, copies of these reports as soon as reasonably
practicable after we electronically file or furnish such reports
to the SEC. A copy of the registration statement, the exhibits
and schedules thereto and any other document we file with the
SEC may be inspected without charge, or copies may be obtained,
at the SECs Public Reference Room maintained by the SEC at
100 F Street, N.E., Washington, D.C. 20549. Please call the
SEC at 1-800-SEC-0330
for further information on the operation of the public reference
facility. The SEC maintains a website that contains our
registration statement and the other documents that we file
electronically with the SEC. The address of the SECs
website is http://www.sec.gov.
79
ARADIGM CORPORATION
INDEX TO FINANCIAL STATEMENTS
F-1
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, 2005 and 2004, and the
related statements of operations, convertible preferred stock
and shareholders equity, and cash flows for each of the
three years in the period ended December 31, 2005. 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 audit 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 referred to above
present fairly, in all material respects, the financial position
of Aradigm Corporation at December 31, 2005 and 2004, and
the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2005, in
conformity with U.S. generally accepted accounting
principles.
/s/ Ernst &
Young LLP
Palo Alto, California
March 10, 2006
F-2
ARADIGM CORPORATION
BALANCE SHEETS
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
|
|
| |
|
September 30, | |
|
|
2004 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
|
|
|
|
|
(unaudited) | |
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
14,308 |
|
|
$ |
27,694 |
|
|
$ |
32,280 |
|
|
Short-term investments
|
|
|
2,455 |
|
|
|
|
|
|
|
504 |
|
|
Receivables
|
|
|
99 |
|
|
|
400 |
|
|
|
623 |
|
|
Current portion of notes receivable from officers and employees
|
|
|
67 |
|
|
|
62 |
|
|
|
|
|
|
Prepaid and other current assets
|
|
|
1,602 |
|
|
|
874 |
|
|
|
790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
18,531 |
|
|
|
29,030 |
|
|
|
34,197 |
|
Property and equipment, net
|
|
|
60,555 |
|
|
|
9,875 |
|
|
|
2,471 |
|
Noncurrent portion of notes receivable from officers and
employees
|
|
|
216 |
|
|
|
129 |
|
|
|
151 |
|
Other assets
|
|
|
439 |
|
|
|
463 |
|
|
|
451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
79,741 |
|
|
$ |
39,497 |
|
|
$ |
37,270 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND
SHAREHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
2,469 |
|
|
$ |
3,034 |
|
|
$ |
705 |
|
|
Accrued clinical and cost of other studies
|
|
|
293 |
|
|
|
398 |
|
|
|
205 |
|
|
Accrued compensation
|
|
|
2,984 |
|
|
|
3,814 |
|
|
|
2,471 |
|
|
Deferred revenue
|
|
|
7,525 |
|
|
|
222 |
|
|
|
104 |
|
|
Other accrued liabilities
|
|
|
1,138 |
|
|
|
475 |
|
|
|
496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
14,409 |
|
|
|
7,943 |
|
|
|
3,981 |
|
Noncurrent portion of deferred revenue
|
|
|
3,966 |
|
|
|
|
|
|
|
|
|
Noncurrent portion of deferred rent
|
|
|
1,943 |
|
|
|
714 |
|
|
|
927 |
|
Note payable to related party
|
|
|
|
|
|
|
|
|
|
|
7,593 |
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock, no par value; 2,050,000 shares
authorized; issued and outstanding shares: 1,544,626 at
December 31, 2004 and 2005 and September 30, 2006;
liquidation preference of $41,866 at December 31, 2005 and
2004 and September 30, 2006
|
|
|
23,669 |
|
|
|
23,669 |
|
|
|
23,669 |
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, no par value; authorized shares: 150,000,000 at
December 31, 2004 and 2005; 100,000,000 at
September 30, 2006; issued and outstanding shares:
14,459,145 at December 31, 2004; 14,562,809 at
December 31, 2005; 14,776,412 at September 30, 2006
|
|
|
281,387 |
|
|
|
282,004 |
|
|
|
283,578 |
|
|
Accumulated other comprehensive income (loss)
|
|
|
(10 |
) |
|
|
5 |
|
|
|
3 |
|
|
Accumulated deficit
|
|
|
(245,623 |
) |
|
|
(274,838 |
) |
|
|
(282,481 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
35,754 |
|
|
|
7,171 |
|
|
|
1,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, convertible preferred stock and
shareholders equity
|
|
$ |
79,741 |
|
|
$ |
39,497 |
|
|
$ |
37,270 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
F-3
ARADIGM CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended | |
|
|
Years ended December 31, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(unaudited) | |
Contract and license revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related parties
|
|
$ |
33,546 |
|
|
$ |
26,999 |
|
|
$ |
8,013 |
|
|
$ |
624 |
|
|
$ |
59 |
|
|
Unrelated parties
|
|
|
311 |
|
|
|
1,046 |
|
|
|
2,494 |
|
|
|
9,021 |
|
|
|
3,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
33,857 |
|
|
|
28,045 |
|
|
|
10,507 |
|
|
|
9,645 |
|
|
|
4,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
49,636 |
|
|
|
46,477 |
|
|
|
30,174 |
|
|
|
20,858 |
|
|
|
17,645 |
|
|
General and administrative
|
|
|
10,391 |
|
|
|
11,934 |
|
|
|
10,895 |
|
|
|
8,274 |
|
|
|
9,051 |
|
|
Restructuring and asset impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
60,027 |
|
|
|
58,411 |
|
|
|
41,069 |
|
|
|
29,132 |
|
|
|
32,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(26,170 |
) |
|
|
(30,366 |
) |
|
|
(30,562 |
) |
|
|
(19,487 |
) |
|
|
(28,407 |
) |
Gain on sale of patent and royalty interest (to related party)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000 |
|
Interest income
|
|
|
338 |
|
|
|
194 |
|
|
|
1,317 |
|
|
|
980 |
|
|
|
839 |
|
Interest expense
|
|
|
(138 |
) |
|
|
(16 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
(101 |
) |
Other income (expense)
|
|
|
|
|
|
|
(1 |
) |
|
|
36 |
|
|
|
(37 |
) |
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(25,970 |
) |
|
$ |
(30,189 |
) |
|
$ |
(29,215 |
) |
|
$ |
(18,544 |
) |
|
$ |
(7,643 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$ |
(2.59 |
) |
|
$ |
(2.37 |
) |
|
$ |
(2.01 |
) |
|
$ |
(1.28 |
) |
|
$ |
(0.52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common
share
|
|
|
10,039 |
|
|
|
12,741 |
|
|
|
14,513 |
|
|
|
14,497 |
|
|
|
14,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
F-4
ARADIGM CORPORATION
STATEMENT OF CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS EQUITY (DEFICIT)
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible | |
|
|
|
|
|
Accumulated | |
|
|
|
Total | |
|
|
preferred stock | |
|
Common stock | |
|
|
|
other | |
|
|
|
shareholders | |
|
|
| |
|
| |
|
Deferred | |
|
comprehensive | |
|
Accumulated | |
|
equity | |
|
|
Shares | |
|
Amount | |
|
Shares | |
|
Amount | |
|
compensation | |
|
income (loss) | |
|
deficit | |
|
(deficit) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balances at December 31, 2002
|
|
|
2,001,236 |
|
|
$ |
30,665 |
|
|
|
6,231,522 |
|
|
$ |
230,853 |
|
|
$ |
|
|
|
$ |
21 |
|
|
$ |
(189,464 |
) |
|
$ |
41,410 |
|
Issuance of common stock for cash, net of issuance costs of
$7,353, including warrants valued at $5,657
|
|
|
|
|
|
|
|
|
|
|
5,354,588 |
|
|
|
27,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,312 |
|
Issuance of common stock through conversion of Series A
Preferred Stock
|
|
|
(456,610 |
) |
|
|
(6,996 |
) |
|
|
365,288 |
|
|
|
6,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,996 |
|
Issuance of common stock under the employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
110,606 |
|
|
|
596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
596 |
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
5,425 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
Issuance of common stock upon exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
482,810 |
|
|
|
2,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,522 |
|
Issuance of options and warrants to purchase common stock for
services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116 |
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,970 |
) |
|
|
(25,970 |
) |
Net change in unrealized loss on available-for-sale investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23 |
) |
|
|
|
|
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,993 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2003
|
|
|
1,544,626 |
|
|
|
23,669 |
|
|
|
12,550,239 |
|
|
|
268,406 |
|
|
|
|
|
|
|
(2 |
) |
|
|
(215,434 |
) |
|
|
52,970 |
|
Issuance of common stock for cash, net of issuance costs of
$817, including warrants valued at $2,278
|
|
|
|
|
|
|
|
|
|
|
1,666,679 |
|
|
|
11,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,683 |
|
Issuance of common stock under the employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
167,946 |
|
|
|
911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
911 |
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
81 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Issuance of common stock upon exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
74,200 |
|
|
|
304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
304 |
|
Issuance of options and warrants to purchase common stock for
services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82 |
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,189 |
) |
|
|
(30,189 |
) |
Net change in unrealized loss on available-for-sale investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,197 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2004
|
|
|
1,544,626 |
|
|
|
23,669 |
|
|
|
14,459,145 |
|
|
|
281,387 |
|
|
|
|
|
|
|
(10 |
) |
|
|
(245,623 |
) |
|
|
35,754 |
|
Issuance of common stock under the employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
93,662 |
|
|
|
458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
458 |
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
10,077 |
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42 |
|
Adjustment to common stock shares for rounding of partial shares
from the reverse stock split
|
|
|
|
|
|
|
|
|
|
|
(75 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant revaluation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90 |
|
Issuance of options for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27 |
|
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
6 |
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
21 |
|
F-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible | |
|
|
|
|
|
Accumulated | |
|
|
|
Total | |
|
|
preferred stock | |
|
Common stock | |
|
|
|
other | |
|
|
|
shareholders | |
|
|
| |
|
| |
|
Deferred |
|
comprehensive | |
|
Accumulated | |
|
equity | |
|
|
Shares | |
|
Amount | |
|
Shares | |
|
Amount | |
|
compensation |
|
income (loss) | |
|
deficit | |
|
(deficit) | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
|
| |
|
| |
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,215 |
) |
|
|
(29,215 |
) |
Net change in unrealized loss on available-for-sale investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2005
|
|
|
1,544,626 |
|
|
|
23,669 |
|
|
|
14,562,809 |
|
|
|
282,004 |
|
|
|
|
|
|
|
5 |
|
|
|
(274,838 |
) |
|
|
7,171 |
|
Issuance of common stock under the employee stock purchase plan
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
111,553 |
|
|
|
86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
286 |
|
Issuance of common stock under the restricted stock award plan
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
145,500 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23 |
|
Issuance of common stock upon exercise of stock options
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
645 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Stock-based compensation related to issuance of employee and
non- employee stock options (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,263 |
|
Reversal of restricted stock award due to forfeiture (unaudited)
|
|
|
|
|
|
|
|
|
|
|
(44,095 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,643 |
) |
|
|
(7,643 |
) |
Net change in unrealized loss on available-for-sale investments
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,646 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2006 (unaudited)
|
|
|
1,544,626 |
|
|
$ |
23,669 |
|
|
|
14,776,412 |
|
|
$ |
283,578 |
|
|
$ |
|
|
|
$ |
3 |
|
|
$ |
(282,481 |
) |
|
$ |
1,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
F-6
ARADIGM CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended | |
|
|
Years ended December 31, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(unaudited) | |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(25,970 |
) |
|
$ |
(30,189 |
) |
|
$ |
(29,215 |
) |
|
$ |
(18,544 |
) |
|
$ |
(7,643 |
) |
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash asset impairment on property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,014 |
|
|
Amortization and accretion of investments
|
|
|
83 |
|
|
|
166 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
5,983 |
|
|
|
3,813 |
|
|
|
1,412 |
|
|
|
1,074 |
|
|
|
698 |
|
|
Stock-based compensation expense related to employee stock
options and employee stock purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,286 |
|
|
Loss on impairment, retirement and sale of property and equipment
|
|
|
|
|
|
|
544 |
|
|
|
268 |
|
|
|
25 |
|
|
|
21 |
|
|
Cost of warrants and common stock options for services
|
|
|
116 |
|
|
|
82 |
|
|
|
117 |
|
|
|
94 |
|
|
|
|
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
Amortization and accretion of investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
Gain on sale of patent and royalty interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,000 |
) |
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
142 |
|
|
|
41 |
|
|
|
(301 |
) |
|
|
(187 |
) |
|
|
(222 |
) |
|
|
Prepaid and other current assets
|
|
|
(454 |
) |
|
|
308 |
|
|
|
728 |
|
|
|
629 |
|
|
|
84 |
|
|
|
Other assets
|
|
|
21 |
|
|
|
(51 |
) |
|
|
(24 |
) |
|
|
(111 |
) |
|
|
12 |
|
|
|
Accounts payable
|
|
|
(1,066 |
) |
|
|
1,584 |
|
|
|
565 |
|
|
|
(975 |
) |
|
|
(2,329 |
) |
|
|
Accrued compensation
|
|
|
(174 |
) |
|
|
963 |
|
|
|
830 |
|
|
|
421 |
|
|
|
(1,344 |
) |
|
|
Accrued liabilities
|
|
|
294 |
|
|
|
439 |
|
|
|
(558 |
) |
|
|
(795 |
) |
|
|
(79 |
) |
|
|
Deferred rent
|
|
|
215 |
|
|
|
620 |
|
|
|
(1,229 |
) |
|
|
(1,283 |
) |
|
|
214 |
|
|
|
Deferred revenue
|
|
|
(3,921 |
) |
|
|
(1,440 |
) |
|
|
(7,250 |
) |
|
|
(7,201 |
) |
|
|
(118 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(24,731 |
) |
|
|
(23,120 |
) |
|
|
(34,607 |
) |
|
|
(26,837 |
) |
|
|
(25,406 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(5,362 |
) |
|
|
(2,300 |
) |
|
|
(5,311 |
) |
|
|
(4,047 |
) |
|
|
(1,329 |
) |
|
Proceeds from sale of property and equipment to Novo Nordisk
Delivery Technologies, Inc., a related party
|
|
|
|
|
|
|
|
|
|
|
50,292 |
|
|
|
50,292 |
|
|
|
4,000 |
|
|
Purchases of available-for-sale investments
|
|
|
(9,962 |
) |
|
|
(6,376 |
) |
|
|
(5,330 |
) |
|
|
(5,530 |
) |
|
|
(507 |
) |
|
Proceeds from sales and maturities of available-for-sale
investments
|
|
|
7,056 |
|
|
|
15,190 |
|
|
|
7,750 |
|
|
|
4,457 |
|
|
|
|
|
|
Proceeds from sale of patents and royalty interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(8,268 |
) |
|
|
6,514 |
|
|
|
47,401 |
|
|
|
45,372 |
|
|
|
22,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of note payable to related party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,500 |
|
|
Proceeds from issuance of common stock, net
|
|
|
30,441 |
|
|
|
12,899 |
|
|
|
500 |
|
|
|
457 |
|
|
|
286 |
|
|
Proceeds from exercise of options and warrants for common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42 |
|
|
|
2 |
|
|
Payments received on notes receivable from officers and employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58 |
|
|
|
40 |
|
|
Forgiveness of (cash used in issuance of) notes receivable with
officers and employees
|
|
|
(93 |
) |
|
|
115 |
|
|
|
92 |
|
|
|
|
|
|
|
|
|
|
Payments on capital lease obligations and equipment loans
|
|
|
(1,822 |
) |
|
|
(427 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
28,526 |
|
|
|
12,587 |
|
|
|
592 |
|
|
|
557 |
|
|
|
7,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended | |
|
|
Years ended December 31, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(unaudited) | |
Net increase (decrease) in cash and cash equivalents
|
|
|
(4,473 |
) |
|
|
(4,019 |
) |
|
|
13,386 |
|
|
|
19,092 |
|
|
|
4,586 |
|
Cash and cash equivalents at beginning of year
|
|
|
22,800 |
|
|
|
18,327 |
|
|
|
14,308 |
|
|
|
14,308 |
|
|
|
27,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$ |
18,327 |
|
|
$ |
14,308 |
|
|
$ |
27,694 |
|
|
$ |
33,400 |
|
|
$ |
32,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
126 |
|
|
$ |
16 |
|
|
$ |
6 |
|
|
$ |
|
|
|
$ |
8 |
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of options and warrants to purchase common stock for
services
|
|
|
116 |
|
|
|
82 |
|
|
|
117 |
|
|
|
94 |
|
|
|
|
|
|
Issuance of common stock through conversion of Series A
preferred stock
|
|
|
6,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants in conjunction with private placement of
common stock
|
|
|
5,657 |
|
|
|
2,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
F-8
ARADIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Information as of September 30, 2006
and for the nine months ended September 30, 2005 and
2006 is unaudited)
|
|
1. |
Organization and Summary of Significant Accounting
Policies |
Organization
Aradigm Corporation (the Company) is a California
corporation focused on the development and commercialization of
a portfolio of drugs delivered by inhalation for the treatment
of severe respiratory diseases by pulmonologists. The
Companys principal activities to date have included
obtaining financing, recruiting management and technical
personnel, securing operating facilities, conducting research
and development, and expanding commercial production
capabilities. The Company does not anticipate receiving any
revenues from the sale of products in the upcoming year. The
Company operates as a single operating segment.
Liquidity and Financial Condition
The Company has incurred significant operating losses and
negative cash flows from operations since its inception. At
December 31, 2005, the Company has an accumulated deficit
of $274.8 million and working capital of $21.1 million
and shareholders equity of $7.2 million. Management
believes that cash and cash equivalents on hand at
September 30, 2006, together with funding commitments from
collaborators, interest earned on investments and equity or debt
financing(s), will be sufficient to enable the Company to meet
its obligations for at least the next 18 months. If
anticipated operating results are not achieved and funds from
equity or debt financings are not available, the Company may be
required to delay, reduce the scope of, or eliminate one or more
of its development programs or obtain funds through
collaborative arrangements with others that may require the
Company to relinquish rights of certain of its technologies or
programs that the Company would otherwise seek to develop or
commercialize itself, and to reduce personnel-related costs.
Management plans to continue to fund the Company with funds
obtained through collaborative arrangements, equity issuances
and/or debt arrangements.
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 of deferred revenue and assumptions for valuing
options and warrants. Actual results could differ from these
estimates.
Unaudited Interim Results
The accompanying balance sheet as of September 30, 2006,
the statements of operations and of cash flows for the nine
months ended September 30, 2005 and 2006 and the statement
of convertible preferred stock and shareholders
equity for the nine months ended September 30, 2006
are unaudited. The unaudited interim financial statements have
been prepared on the same basis as the annual financial
statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments,
necessary to state fairly the Companys financial position
at September 30, 2006 and results of operations and cash
flows for the nine months ended September 30, 2005 and
2006. The financial data and other information disclosed in
these notes to financial statements related to the nine-month
periods are unaudited. The results for the nine months ended
September 30, 2006 are not necessarily indicative of the
results to be expected for the year ending December 31,
2006 or for any other interim period or for any future year.
F-9
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased
with a maturity of three months or less from purchase date to be
cash equivalents. The Company places its cash and cash
equivalents in money market funds, commercial paper and
corporate notes.
Investments
Management determines the appropriate classification of the
Companys marketable securities, which consist solely of
debt securities, at the time of purchase and re-evaluates such
designation at each balance sheet date. All marketable
securities are classified as available-for-sale, carried at
estimated fair value and reported in either cash equivalents or
short-term investments. Unrealized gains and losses on
available-for-sale securities are excluded from earnings and
reported as a separate component of the statements of redeemable
convertible preferred stock and 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 in the amount of
any such decline. No such reductions have been required during
any of the periods presented.
Notes Receivable
Notes receivable are related to advances granted to employees
for relocation. All amounts classified as current are due within
12 months. All amounts classified as long-term are due no
later than April 2008. All balances are believed to be
collectible and are stated at approximate fair value at
September 30, 2006.
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.
The estimated useful lives of property and equipment are as
follows:
|
|
|
|
|
Machinery and equipment
|
|
|
5 to 7 years |
|
Furniture and fixtures
|
|
|
5 to 7 years |
|
Lab equipment
|
|
|
5 to 7 years |
|
Computer equipment and software
|
|
|
3 to 5 years |
|
Leasehold improvements
|
|
|
5 to 17 years |
|
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the Company
reviews for impairment whenever events or changes in
circumstances indicate that the carrying amount of property and
equipment may not be recoverable. Determination of
recoverability is based on an estimate of undiscounted future
cash flows resulting from the use of the asset and its eventual
disposition. In the event that such cash flows are not expected
to be sufficient to recover the carrying amount of the assets,
the assets are written down to their estimated fair values and
the loss is recognized in the Statements of Operations. The
Company recorded an impairment charge of $4.0 million
during the nine months ended September 30, 2006 related to
the anticipated sale of Intraject related assets (see
Note 12).
F-10
Revenue Recognition
Contract revenues consist of revenues from grants, collaboration
agreements and feasibility studies. The Company recognizes
revenue under the provisions of the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 104,
Revenue Recognition. Under the agreements, revenue
is recognized once costs are incurred and collectibility is
reasonably assured. Under some agreements the Companys
collaborators have the right to withhold reimbursement of costs
incurred until the work performed under the agreement is
mutually agreed upon. For these agreements revenue is recognized
upon confirmation from the collaborator of acceptance of work
performed and payment amount. Deferred revenue represents the
portion of all refundable and nonrefundable research payments
received that have not been earned. In accordance with contract
terms, milestone payments from collaborative research agreements
are considered reimbursements for costs incurred under the
agreements and, accordingly, are generally recognized as revenue
either upon the completion of the milestone effort, when
payments are contingent upon completion of the effort, or are
based on actual efforts expended over the remaining term of the
agreements when payments precede the required efforts. Costs of
contract revenues are approximate to or are greater than such
revenues and are included in research and development expenses.
Refundable development and license fee payments are deferred
until the specified performance criteria are achieved.
Refundable development and license fee payments are generally
not refundable once the specific performance criteria are
achieved and accepted.
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.
Advertising
Advertising costs are charged to general and administrative
expense as incurred. Advertising expenses for the years ended
December 31, 2005, 2004 and 2003 were $265,000, $223,000
and $199,000, respectively.
Stock-Based Compensation
Prior to January 1, 2006, the Company had elected to follow
Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to
Employees (APB 25), and related
interpretations in accounting for its employee stock options.
Compensation expense is based on the difference, if any, between
the fair value of the Companys common stock and the
exercise price of the option or share right on the measurement
date, which is typically the date of grant. In accordance with
SFAS 123, Accounting for Stock-Based
Compensation, as amended by SFAS 148,
Accounting for Stock-Based Compensation
Transition and Disclosure, the Company has provided below
the pro forma disclosures of the effect on net
F-11
loss and loss per share as if SFAS 123 had been applied in
measuring compensation expense for all periods presented (in
thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, | |
|
Nine months | |
|
|
| |
|
ended September 30, | |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Net loss as reported
|
|
$ |
(25,970 |
) |
|
$ |
(30,189 |
) |
|
$ |
(29,215 |
) |
|
$ |
(18,544 |
) |
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based employee compensation expense included in reported
net loss
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
10 |
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based employee compensation expense determined under
fair value based method for all awards
|
|
|
(5,400 |
) |
|
|
(4,585 |
) |
|
|
(3,066 |
) |
|
|
(2,432 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$ |
(31,370 |
) |
|
$ |
(34,774 |
) |
|
$ |
(32,260 |
) |
|
$ |
(20,966 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
(2.59 |
) |
|
$ |
(2.37 |
) |
|
$ |
(2.01 |
) |
|
$ |
(1.28 |
) |
|
Pro forma
|
|
$ |
(3.12 |
) |
|
$ |
(2.73 |
) |
|
$ |
(2.22 |
) |
|
$ |
(1.45 |
) |
Pro forma information regarding net loss and basic and diluted
net loss per common share is required by SFAS 123, which
also requires that the information be determined as if the
Company had accounted for its employee and non-employee director
stock options granted using the fair value method prescribed by
this statement. The fair value of options was estimated at the
date of grant using the
Black-Scholes option
pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months |
|
|
Years ended December 31, |
|
ended September 30, |
|
|
|
|
|
|
|
2003 |
|
2004 |
|
2005 |
|
2005 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Volatility factor
|
|
|
98.0 |
% |
|
|
98.0 |
% |
|
|
97.6 |
% |
|
|
97.8 |
% |
|
|
86.7 |
% |
Risk-free interest rate
|
|
|
2.5 |
% |
|
|
3.1 |
% |
|
|
3.8 |
% |
|
|
3.7 |
% |
|
|
4.9 |
% |
Expected life (years)
|
|
|
4.0 |
|
|
|
4.0 |
|
|
|
4.0 |
|
|
|
4.0 |
|
|
|
4.2 |
|
Weighted-average fair value of options granted during the periods
|
|
$ |
3.75 |
|
|
$ |
5.50 |
|
|
$ |
4.08 |
|
|
$ |
4.20 |
|
|
$ |
1.42 |
|
Additionally, the weighted average fair value of options granted
during 2005 with an exercise price greater than the fair value
of the Companys common stock on the day of grant was $3.82.
The Company accounts for options and warrants issued to
non-employees under SFAS 123 and Emerging Issues Task Force
Issue No. (EITF) 96-18, Accounting for Equity
Instruments that are Issued to Other than Employees for
Acquiring, or in Conjunction with Selling, Goods or
Services, using the Black-Scholes option pricing model.
The value of such non-employee options and warrants are
periodically re-measured over their vesting terms. The fair
value of options and warrants was remeasured at period-end using
the Black-Scholes option pricing model with the following
assumptions: a risk-free interest rate of 2.0% to 4.0%, using
applicable United States Treasury rates; a dividend yield
of 0.0%; the annual volatility factor of 87% to 98%; and an
average expected life based on the terms of the option grant or
contractual term of the warrant of 1 to 4 years. Expense
recognized related to options and warrants issued to
non-employees was $117,000, $82,000, and $116,000 during the
years ended December 31, 2005, 2004, and 2003, respectively.
F-12
Adoption of SFAS No. 123R
The following table shows the effect of SFAS No. 123R
(revised 2004), Share-based Payments, stock-based
employee compensation expense included in the condensed
statement of operations for the nine months ended
September 30, 2006 (in thousands):
|
|
|
|
|
|
|
Nine months | |
|
|
ended September 30, | |
|
|
2006 | |
|
|
| |
Costs and expenses:
|
|
|
|
|
Research and development
|
|
$ |
665 |
|
General and administrative
|
|
|
614 |
|
|
|
|
|
Total stock-based compensation expense
|
|
$ |
1,279 |
|
|
|
|
|
Impact on basic and diluted net loss per share
|
|
$ |
(0.09 |
) |
|
|
|
|
There was no capitalized stock-based employee compensation cost
as of September 30, 2006. Since the Company incurred net losses
in 2006, there was no recognized tax benefit during the nine
months ended September 30, 2006 associated with stock-based
compensation expense.
For restricted common stock issued at discounted prices, the
Company recognizes compensation expense over the vesting period
for the difference between the exercise or purchase price and
the fair market value on the measurement date. There are
101,405 shares subject to restricted share awards issued
and outstanding as of September 30, 2006. Total
compensation expense for restricted stock awards recognized by
the Company under SFAS No. 123R was $67,000 for the nine
months ended September 30, 2006.
During the nine months ended September 30, 2006, the Company
granted options to purchase approximately 2,361,000 shares
of common stock, with an estimated weighted-average fair value
of $1.42 per share, respectively, on the date of grant.
The weighted-average period over which compensation expense
related to options outstanding at September 30, 2006 is expected
to be recognized is 1.39 years.
Income Taxes
The Company uses the liability method to account for income
taxes as required by SFAS 109, Accounting for Income
Taxes. Under this method, deferred income taxes reflect
the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Net Loss Per Share
Basic net loss per share on a historical basis is computed using
the weighted-average number of shares of common stock
outstanding less the weighted-average number of shares subject
to repurchase. There were no shares subject to repurchase in the
years ended December 31, 2005, 2004 and 2003. No separate
diluted loss per share information has been presented in the
accompanying statements of operations since potential common
shares from stock options, warrants and convertible preferred
stock are antidilutive. For the years ended December 31,
2005, 2004 and 2003, the total number of shares excluded, based
on the treasury stock method, from diluted loss per share
relating to these securities was 1,241,936, 1,650,082, and
1,658,377 shares, respectively.
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 from creditworthy institutions. The
F-13
maximum amount of loss due to credit risk associated with these
financial instruments is their respective fair values as stated
in the balance sheet.
The Company has development arrangements with various
collaborators. For the years ended December 31, 2005, 2004
and 2003, the Novo Nordisk AERx iDMS program contributed
approximately 76%, 96% and 99% of total contract revenues,
respectively and $50,170 for the six months ended 2006. In
January 2005, the Company completed the restructuring of the
AERx iDMS program, pursuant to the Restructuring Agreement
entered into with Novo Nordisk A/S (Novo Nordisk)
and Novo Nordisk Delivery Technologies, Inc. (NNDT)
in September 2004. Under the Companys current agreements
with Novo Nordisk, Novo Nordisk has assumed responsibility of
the completion of development, manufacturing and
commercialization of the AERx iDMS insulin product. The Company
will be entitled to receive royalties on any future sales of the
commercialized product. Novo Nordisk, a company publicly traded
in Denmark, is considered to be a related party due to its
ownership interest in the Company. Novo Nordisk owned
approximately 9.9% of the Companys common stock on an
as-converted basis as of September 30, 2006.
Comprehensive Income (Loss)
SFAS 130, Reporting Comprehensive Income,
requires unrealized gains or losses on the Companys
available-for-sales securities to be recorded in other
comprehensive income (loss). Total comprehensive loss has been
disclosed on the balance sheet and on the statement of
redeemable convertible preferred stock and shareholders
equity.
Reclassifications
Certain reclassifications of prior year amounts have been made
to conform to current-year presentation. The Company
reclassified amounts from investing activity to operating
activity in order to separately disclose amortization and
accretion of investments on the statements of cash flows. The
Company made clarifications in regards to the liquidation
preference of preferred stock to include the accumulated
undeclared dividends of 6% in Note 6 and on the balance
sheet.
|
|
2. |
Cash and Cash Equivalents and Investments |
The following summarizes the fair value of cash and cash
equivalents and investments (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
|
|
| |
|
September 30, | |
|
|
2004 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
|
|
|
|
|
(unaudited) | |
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market fund
|
|
$ |
800 |
|
|
$ |
1,321 |
|
|
$ |
1,426 |
|
|
Commercial paper
|
|
|
13,508 |
|
|
|
26,373 |
|
|
|
30,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
14,308 |
|
|
$ |
27,694 |
|
|
$ |
32,280 |
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and government notes
|
|
$ |
2,455 |
|
|
|
|
|
|
$ |
504 |
|
|
|
|
|
|
|
|
|
|
|
All short-term investments at December 31, 2005 and 2004
and September 30, 2006 mature in less than one year.
As of September 30, 2006, December 31, 2005 and 2004,
the difference between the fair value and the amortized cost of
available-for-sale securities was $3,000 gain, $5,000 gain and
$10,000 loss, respectively. The individual gross unrealized
gains and individual gross unrealized losses for all periods
presented were immaterial.
F-14
|
|
3. |
Property and Equipment |
Property and equipment consist of the following (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
|
|
| |
|
September 30, | |
|
|
2004 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
|
|
|
|
|
(unaudited) | |
Machinery and equipment
|
|
$ |
14,364 |
|
|
$ |
4,505 |
|
|
$ |
3,322 |
|
Furniture and fixtures
|
|
|
1,917 |
|
|
|
1,150 |
|
|
|
1,142 |
|
Lab equipment
|
|
|
4,086 |
|
|
|
2,539 |
|
|
|
2,658 |
|
Computer equipment and software
|
|
|
6,256 |
|
|
|
3,790 |
|
|
|
3,801 |
|
Leasehold improvements
|
|
|
12,225 |
|
|
|
1,564 |
|
|
|
1,068 |
|
|
|
|
|
|
|
|
|
|
|
Property and equipment at cost
|
|
|
38,848 |
|
|
|
13,548 |
|
|
|
11,991 |
|
Less accumulated depreciation and amortization
|
|
|
(27,740 |
) |
|
|
(10,201 |
) |
|
|
(10,005 |
) |
|
|
|
|
|
|
|
|
|
|
Net depreciable assets
|
|
|
11,108 |
|
|
|
3,347 |
|
|
|
1,986 |
|
Construction in progress
|
|
|
49,447 |
|
|
|
6,528 |
|
|
|
485 |
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$ |
60,555 |
|
|
$ |
9,875 |
|
|
$ |
2,471 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $1.4 million, $3.8 million
and $6.0 million in 2005, 2004 and 2003, respectively. For
the nine months ended September 30, 2006, depreciation
expense was $698,000.
|
|
4. |
Leases, Commitments and Contingencies |
Subsequent to completion in January 2005 of the
restructuring transaction between the Company and Novo Nordisk,
the Company had commitments under two leases. The first lease is
for a building containing office, laboratory and manufacturing
facilities, and expires in 2016. A minor portion of this lease
expense is offset by a sublease to NNDT of $10,000 per
month through December 2006. The second lease, which
expired in December 2005, was for a warehouse.
Additionally, the Company entered into a new copier lease
agreement in July 2005 for $5,030 per month for
60 months. Future minimum lease payments non-cancelable at
December 31, 2005 for the remaining lease agreements are as
follows (amounts in thousands):
|
|
|
|
|
|
|
Operating | |
|
|
leases | |
|
|
| |
Year ending December 31:
|
|
|
|
|
2006
|
|
$ |
1,660 |
|
2007
|
|
|
2,306 |
|
2008
|
|
|
2,371 |
|
2009
|
|
|
2,318 |
|
2010
|
|
|
2,223 |
|
2011 and thereafter
|
|
|
11,933 |
|
|
|
|
|
Total minimum lease payments
|
|
$ |
22,811 |
|
|
|
|
|
The Companys operating lease has a rent escalation clause
and, accordingly, the Company recognizes rent expense on a
straight-line basis. At December 31, 2005 and 2004, the
Company had $714,000 and $1.9 million of deferred rent,
respectively. The overall reduction in deferred rent is due to
reversing of $1.4 million of expense associated with the
deferred rent on two buildings transferred to NNDT as part of
the restructuring agreement. A portion of the lease commitment
for 2006 is offset by a sublease to NNDT of $10,000 per
month through December 2006.
For the years ended December 31, 2005, 2004 and 2003,
building rent expense, net of sublease income, under operating
leases totaled $1.3 million, $5.5 million and
$5.4 million, respectively. For the nine months ended
September 30, 2006, building rent expense totaled
$1.5 million.
F-15
At December 31, 2005, the Company had contractual
non-cancelable purchase commitments for capital equipment
purchases of $1.0 million and for services of
$2.1 million.
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 as of September 30, 2006, and
December 31, 2005 or 2004.
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.
|
|
5. |
Convertible Preferred Stock and Common Stock Warrants |
The Company completed a $48.4 million preferred stock
financing in December 2001. Under the terms of the financing the
Company sold to a group of investors 2,001,236 shares of
Series A convertible preferred stock (preferred
stock) at a purchase price of $24.20 per share. Each
share of preferred stock, together with accrued and unpaid
dividends, is convertible at the option of the holder into
0.8 shares of common stock. The Company also issued
warrants to the investors to purchase approximately
1,040,642 shares of common stock at an exercise price of
$34.85 per share. Issuance costs of approximately
$3.0 million were accounted for as a reduction to proceeds
from the preferred stock financing. The warrants are exercisable
through December 2006.
In March, June and July 2003, certain holders of shares of
the Companys preferred stock elected to convert an
aggregate of 456,610 shares of preferred stock to common
stock. The Company issued 365,288 shares of common stock in
connection with those conversions.
During the two year period following the original issue dates
holders of preferred stock are entitled to dividends, at an
annual rate of 6%, payable only when and if declared by the
Board of Directors. Such dividends are cumulative and accrue
whether or not they are declared. At the option of the Company,
dividends may be paid in either cash or in shares of common
stock, which will be valued at a price equal to the then current
market price. The current market price of the common stock on
any dividend payment date shall be based on the closing price of
the Companys common stock as quoted on the OTC Bulletin
Board. There were no dividends declared as of December 31,
2005 or 2004, or September 30, 2006.
The conversion rate of the preferred stock is fixed and not
subject to any adjustments except for stock splits, stock
dividends, combinations, reorganizations, mergers or other
similar events. Each share of outstanding preferred stock will
automatically convert into common stock upon either the closing
of a registered underwritten public offering covering the offer
and sale of common stock with gross proceeds (before
underwriting discounts, commissions and fees) to the Company
exceeding $25.0 million or the date on which the common
stock closing bid price has been above $52.9375 per share
for at least 20 consecutive trading days.
Upon any change of control, liquidation,
dissolution, redemption or winding up of the Company, whether
voluntary or involuntary, the holders of outstanding preferred
stock will be entitled to a liquidation preference of $41.9
million, equal to the original issue price plus all accrued and
unpaid dividends (as adjusted for any stock dividends,
combinations, splits, recapitalizations and other similar
events) to the holders of preferred stock. Any remaining assets
will be available for distribution to holders of common
F-16
stock. A change of control is defined for this
purpose as a consolidation or merger of the Company with or into
any other entity resulting in the Companys shareholders
owning less than 50% of the voting power of the surviving
entity, any transaction or series of transactions to which the
Company is a party whereby more than 50% of the Companys
voting power is transferred and any sale, lease or other
disposition of all or substantially all of the Companys
assets.
Each holder of preferred stock has the number of votes equal to
the number of shares of common stock issuable upon conversion of
such holders shares of preferred stock and voting rights
and powers equal to the voting rights and powers of the
Companys common stock.
Summary of Preferred Stock Accounting
The Companys articles of incorporation, as amended,
provide that a mandatory redemption is triggered if a change in
control occurs. Accordingly, in accordance with
EITF D-98,
Classification and Measurement of Redeemable
Securities, which clarifies
Rule #5-02.28 of
Regulation S-X
previously adopted in accounting series Release No. 268,
Presentation in Financial Statements of Redeemable
Preferred Stock, the Company has classified the preferred
stock outside of permanent equity.
In a private placement in December 2004, the Company issued
1,666,679 shares of common stock at a price of
$7.50 per share and warrants to purchase
416,669 shares of common stock at $10.50 per share,
for aggregate consideration of approximately $12.5 million.
The warrants are exercisable at the election of the warrant
holders for a four-year term. The Company valued the warrants as
of December 2004, the date of financing, using the
Black-Scholes option pricing model using the following
assumptions: estimated volatility of 88%, risk-free interest
rate of 3.6%, no dividend yield, and an expected life of four
years, and recorded approximately $2.3 million as issuance
costs related to the private placement. These warrants are
exercisable through December 2008.
In November 2003 the Company issued 1,556,110 shares
of common stock at $9.00 per share and warrants to
purchase 389,027 shares of common stock at
$12.50 per share to certain investors for an aggregate
purchase price of approximately $14.0 million in a private
placement. The warrants are exercisable at the election of the
warrant holders for a four-year term. The Company valued the
warrants as of November 2003, the date of financing, using
the Black-Scholes option pricing model using the following
assumptions: estimated volatility of 88%, risk-free interest
rate of 2.5%, no dividend yield, and an expected life of four
years, and recorded approximately $2.6 million as issuance
costs related to the private placement. These warrants are
exercisable through November 2007.
In March 2003, the Company issued 3,798,478 shares of
common stock at $3.95 per share and warrants to purchase
854,654 shares of common stock at $5.35 per share to
certain investors for an aggregate purchase price of
approximately $15.0 million in a private placement. The
warrants are exercisable at the election of the warrant holders
for a four-year term. The Company valued the warrants as of
March 2003, the date of financing, using the Black-Scholes
option pricing model using the following assumptions: estimated
volatility of 84%, risk-free interest rate of 2.5%, no dividend
yield, and an expected life of four years, and recorded
approximately $1.9 million as issuance costs related to the
private placement. In addition, in connection with this private
placement and as an inducement for investors to purchase shares
of common stock, the Company issued warrants (replacement
warrants) to purchase an aggregate of 803,205 shares
of its common stock at $5.60 per share to certain of the
investors in the private placement in exchange for the
cancellation of an equal number of warrants to purchase shares
of the common stock at $34.85 per share, held by the same
investors. The Company valued the replacement warrants as of
March 2003, the date of the replacement, using the Black-Scholes
option pricing model using the following assumptions: estimated
volatility of 84%, risk-free interest rate of 2.5%, no dividend
yield, and an expected life of 3.8 years, and recorded an
additional $1.1 million as issuance costs related to the
private placement. These warrants are exercisable through
March 2007.
F-17
In June 2004, the Company filed a Certificate of Amendment
to the Companys Amended and Restated Articles of
Incorporation with the Secretary of State of the State of
California to increase the Companys authorized number of
shares of common stock from 100,000,000 to
150,000,000 shares. The additional shares of common stock
authorized by the amendment have rights identical to the common
stock of the Company outstanding immediately before the filing
of the amendment. Issuances of common stock from the additional
authorized shares do not affect the rights of the holders of the
Companys common stock and preferred stock outstanding
immediately before the filing of the amendment, except for
effects that may be incidental to increasing the number of
shares of the Companys common stock outstanding, such as
dilution of any earnings per share and voting rights of holders
of other common stock.
In January 2006, the Company filed a Certificate of
Amendment to the Companys Amended and Restated Articles of
Incorporation with the Secretary of State of the State of
California to decrease the Companys authorized number of
shares of common stock from 150,000,000 to
100,000,000 shares.
Reverse Stock Split
On January 4, 2006, the Company filed a Certificate of
Amendment to the Companys Amended and Restated Articles of
Incorporation with the Secretary of State of the State of
California effecting a
1-for-5 reverse split
of the Companys common stock. All share and per share
amounts have been retroactively restated in the financial
statements and these accompanying notes for all periods
presented.
Reserved Shares
At December 31, 2005, the Company had 2,119,766 shares
of its common stock reserved for issuance upon exercise of
common stock warrants, 2,649,095 shares reserved for
issuance upon exercise of options under all plans,
1,235,701 shares reserved for issuance upon conversion of
preferred stock and 452,400 available authorized shares under
the Employee Stock Purchase Plan.
Other Common Stock Warrants
During 2004 the Company received net proceeds of approximately
$304,000 and issued an aggregate of 74,200 shares of common
stock in connection with the exercise of warrants.
In January 2004, the Company amended the payment terms of
the operating lease for its primary offices. In consideration
for the amended lease agreement, Aradigm replaced common stock
warrants to purchase 27,000 shares of common stock at
$50.80 $108.60 per share with new common stock
warrants with an exercise price equal to $8.55 per share.
The $88,000 incremental fair value of the replacement warrants,
as defined as the fair value of the new warrant less the fair
value of the old warrant on date of replacement, is being
amortized to operating expenses on a straight-line basis over
the remaining life of the lease. The fair value of the warrants
was measured as of January 2004, the date of the amendment,
using the Black-Scholes option pricing model with the following
assumptions: risk-free interest rates between 1.3% and 2.4%; a
dividend yield of 0.0%; annual volatility factor of 88%; and a
weighted average expected life based on the contractual term of
the warrants from 1 to 3.5 years.
During 2003 the Company received net proceeds of approximately
$2.5 million and issued an aggregate of 482,810 shares
of common stock in connection with the exercise of warrants.
In March 2003, the Company issued warrants in connection
with a financial relations service agreement that entitle the
holder to purchase 5,000 shares of common stock, which are
exercisable at $6.55 per share and vest over the
48-month service
period, of which 938 shares vested during the year ended
December 31, 2003. In 2004, the Company terminated the
financial relations service relationship and accelerated the
vesting schedule for all remaining 4,062 shares. The
Company valued the warrants as of March 2003, the date of
agreement, using the Black-Scholes option pricing model using
the following assumptions: estimated volatility of 88%,
risk-free interest rate of 2.0%, no dividend yield, and an
expected life of four years. The fair value of these warrants is
re-measured as the underlying warrants vest and is being
expensed over the vesting
F-18
period of the warrants. For the year ended December 31,
2004 the Company recorded $22,000 of expense in connection with
these warrants. These warrants are exercisable through March
2008.
In October 2002, the Company issued warrants in connection
with a financial relations service agreement that entitles the
holder to purchase 15,000 shares of common stock, 5,000 of
which are exercisable at $9.95 per share, 5,000 shares
of which are exercisable at $11.95 per share and
5,000 shares of which are exercisable at $13.95 per
share. At the execution of the agreement 3,000 shares
immediately vested and the remaining shares shall vest based on
the achievement of various performance benchmarks set forth in
the agreement: all benchmarks were achieved as of
March 2004. The Company valued the warrants as of
October 2002, the date of agreement, using the
Black-Scholes option pricing model using the following
assumptions: estimated volatility of 88%, risk-free interest
rate of 2.0%, no dividend yield, and an expected life of four
years. The fair value of these warrants is re-measured as the
underlying warrants vest and is being expensed over the vesting
period of the warrants. For the year ended December 31,
2003 the Company recognized $77,000 of expense associated with
these warrants. In the year ended December 31, 2004, due to
all benchmarks being achieved during the year, the Company
reversed previously recognized expense of $48,000. The warrants
are exercisable through October 2007.
1996 Equity Incentive Plan, 2005 Equity Incentive Plan and
1996 Non-Employee Directors Plan
The 1996 Equity Incentive Plan (the 1996 Plan) and
the 2005 Equity Incentive Plan (the 2005 Plan),
which amended, restated and retitled the 1996 Plan, were adopted
to provide a means by which officers, non-employee directors,
scientific advisory board members and employees of and
consultants to the Company and its affiliates could be given an
opportunity to acquire an equity interest in the Company. All
officers, non-employee directors, scientific advisory board
members and employees of and consultants to the Company are
eligible to participate in the 2005 Plan.
In April 1996, the Companys Board of Directors
adopted and the Companys shareholders approved the 1996
Plan, which amended and restated an earlier stock option plan.
The 1996 Plan reserved 960,000 shares for future grants.
During May 2001, the Companys shareholders approved
an amendment to the Plan to include an evergreen provision. In
2003, the 1996 Plan was amended, to increase the maximum number
of shares available for issuance under the evergreen feature of
the 1996 Plan by 400,000 shares to 2,000,000 shares.
The evergreen provision automatically increased the number of
shares reserved under the 1996 Plan, subject to certain
limitations, by 6% of the issued and outstanding shares of
common stock of the Company or such lesser number of shares as
determined by the board of directors on the date of the annual
meeting of shareholders of each fiscal year beginning 2001 and
ending 2005.
Options granted under the 1996 Plan may be immediately
exercisable if permitted in the specific grant approved by the
Companys board of directors and, if exercised early, the
issued shares may be subject to repurchase provisions. The
shares acquired generally vest over a period of four years from
the date of grant. The 1996 Plan also provides for a transition
from employee to consultant status without termination of the
vesting period as a result of such transition. Any unvested
stock issued is subject to repurchase agreements whereby the
Company has the option to repurchase unvested shares upon
termination of employment at the original issue price. The
common stock subject to repurchase has voting rights but does
not have resale rights prior to vesting. The Company has
repurchased a total of 7,658 shares in accordance with
these agreements through December 31, 1998. Subsequently,
no grants with early exercise provisions have been made under
the 1996 Plan and no shares have been repurchased. During 2005,
the Company granted options to purchase 279,420 shares of
common stock under the 1996 Plan. As of December 31, 2005,
the Company had 1,662,883 options outstanding 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
F-19
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.
As of September 30, 2006, 1,293,151 shares remained
available for future grant.
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, 2005 there
were no outstanding notes receivable from shareholders. Any
unvested stock issued is subject to repurchase agreements
whereby the Company has the option to repurchase unvested shares
upon termination of employment at the original issue price. The
common stock subject to repurchase has voting rights but cannot
be resold prior to vesting. No grants with early exercise
provisions have been made under the 2005 Plan and no shares have
been repurchased. During 2005, the Company granted options to
purchase 46,040 shares of common stock under the 2005 Plan.
The 1996 Non-Employee Directors Stock Option Plan (the
Directors Plan) had 45,000 shares of
common stock authorized for issuance. Options granted under the
Directors Plan expire no later than 10 years from
date of grant. The option price shall be at 100% of the fair
value on the date of grant as determined by the board of
directors. The options generally vest quarterly over a period of
one year. During 2000, the board of directors approved the
termination of the Directors Plan. No more options can be
granted under the plan after its termination. The termination of
the Directors Plan had no effect on the options already
outstanding. There was no activity in the Directors Plan
during the year ended December 31, 2005 and, as of
December 31, 2005, 21,186 outstanding options with exercise
prices ranging from $41.25 $120.63 remained with no
additional shares available for grant.
F-20
The following is a summary of activity under the 1996 Plan, the
2005 Plan and the Directors Plan as of September 30,
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding | |
|
|
| |
|
|
|
|
Weighted | |
|
|
Shares available | |
|
|
|
average | |
|
|
for grant of | |
|
Number of | |
|
|
|
exercise | |
|
|
option | |
|
shares | |
|
Price per share | |
|
price | |
|
|
| |
|
| |
|
| |
|
| |
Balance at December 31, 2002
|
|
|
117,619 |
|
|
|
1,175,752 |
|
|
$ |
1.65 $120.65 |
|
|
$ |
40.25 |
|
|
Options authorized
|
|
|
608,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(362,550 |
) |
|
|
362,550 |
|
|
$ |
4.55 $ 10.80 |
|
|
$ |
6.45 |
|
|
Options exercised
|
|
|
|
|
|
|
(5,426 |
) |
|
$ |
1.65 $ 4.75 |
|
|
$ |
2.10 |
|
|
Options cancelled
|
|
|
236,111 |
|
|
|
(236,111 |
) |
|
$ |
4.75 $116.90 |
|
|
$ |
39.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
599,704 |
|
|
|
1,296,765 |
|
|
$ |
1.85 $120.65 |
|
|
$ |
31.15 |
|
|
Options authorized
|
|
|
762,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(697,760 |
) |
|
|
697,760 |
|
|
$ |
3.80 $ 12.00 |
|
|
$ |
7.75 |
|
|
Options exercised
|
|
|
|
|
|
|
(81 |
) |
|
$ |
4.75 $ 7.10 |
|
|
$ |
6.20 |
|
|
Options cancelled
|
|
|
111,274 |
|
|
|
(111,274 |
) |
|
$ |
1.85 $117.85 |
|
|
$ |
31.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
775,992 |
|
|
|
1,883,170 |
|
|
$ |
2.15 $120.65 |
|
|
$ |
22.20 |
|
|
Options authorized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(325,460 |
) |
|
|
325,460 |
|
|
$ |
4.30 $ 7.95 |
|
|
$ |
5.97 |
|
|
Options exercised
|
|
|
|
|
|
|
(10,077 |
) |
|
$ |
2.17 $ 4.75 |
|
|
$ |
4.39 |
|
|
Adjustment for rounding for reverse stock split
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
468,854 |
|
|
|
(468,854 |
) |
|
$ |
2.83 $120.63 |
|
|
$ |
21.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
919,386 |
|
|
|
1,729,709 |
|
|
$ |
2.83 $120.63 |
|
|
$ |
19.47 |
|
|
Options authorized (unaudited)
|
|
|
2,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted (unaudited)
|
|
|
(2,361,000 |
) |
|
|
2,361,000 |
|
|
$ |
1.29 $ 3.77 |
|
|
$ |
2.15 |
|
|
Options exercised (unaudited)
|
|
|
|
|
|
|
(645 |
) |
|
|
$ 2.83 |
|
|
$ |
2.83 |
|
|
Restricted stock awards granted, net (unaudited)
|
|
|
(101,405 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Options cancelled (unaudited)
|
|
|
836,170 |
|
|
|
(836,170 |
) |
|
$ |
1.80 $115.00 |
|
|
$ |
10.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006 (unaudited)
|
|
|
1,293,151 |
|
|
|
3,253,894 |
|
|
$ |
1.29 $120.63 |
|
|
$ |
9.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options
outstanding and exercisable as of September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding |
|
Options exercisable |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
average |
|
Weighted |
|
|
|
Weighted |
|
|
Number |
|
remaining |
|
average |
|
|
|
average |
|
|
of |
|
contractual |
|
exercise |
|
Number of |
|
exercise |
Exercise price range |
|
shares |
|
life (in years) |
|
price |
|
shares |
|
price |
|
|
|
|
|
|
|
|
|
|
|
$1.29 $1.70
|
|
|
616,000 |
|
|
|
9.71 |
|
|
$ |
1.50 |
|
|
|
97,749 |
|
|
$ |
1.38 |
|
$1.80 $1.80
|
|
|
685,475 |
|
|
|
9.91 |
|
|
|
1.80 |
|
|
|
90,848 |
|
|
|
1.80 |
|
$1.87 $1.87
|
|
|
500,000 |
|
|
|
9.86 |
|
|
|
1.87 |
|
|
|
|
|
|
|
|
|
$3.14 $5.20
|
|
|
329,925 |
|
|
|
8.54 |
|
|
|
3.93 |
|
|
|
102,967 |
|
|
|
4.61 |
|
$5.30 $5.95
|
|
|
329,795 |
|
|
|
8.05 |
|
|
|
5.65 |
|
|
|
238,067 |
|
|
|
5.64 |
|
$6.25 $17.20
|
|
|
334,573 |
|
|
|
6.78 |
|
|
|
11.76 |
|
|
|
305,879 |
|
|
|
11.78 |
|
$17.25 $60.00
|
|
|
330,986 |
|
|
|
4.56 |
|
|
|
28.44 |
|
|
|
330,986 |
|
|
|
28.44 |
|
$60.31 $112.50
|
|
|
119,968 |
|
|
|
2.67 |
|
|
|
81.49 |
|
|
|
119,968 |
|
|
|
81.49 |
|
$115.00 $115.00
|
|
|
400 |
|
|
|
4.08 |
|
|
|
115.00 |
|
|
|
400 |
|
|
|
115.00 |
|
$120.63 $120.63
|
|
|
6,772 |
|
|
|
3.36 |
|
|
|
120.63 |
|
|
|
6,772 |
|
|
|
120.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,253,894 |
|
|
|
8.39 |
|
|
$ |
9.29 |
|
|
|
1,293,636 |
|
|
$ |
19.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
The Company recorded deferred compensation of approximately
$21,000 for the difference between the grant price and the fair
value of certain of the Companys common stock options
granted in 2005. Deferred compensation was fully amortized as of
December 31, 2005.
Employee Stock Purchase Plan
Employees generally are eligible to participate in the Employee
Stock Purchase Plan (the Purchase Plan) if they have
been continuously employed by the Company for at least
10 days prior to the first day of the offering period and
are customarily employed at least 20 hours per week and at
least five months per calendar year and are not a 5% or greater
shareholder. Shares may be purchased under the Purchase Plan at
85% of the lesser of the fair market value of the common stock
on the grant date or purchase date. Employee contributions,
through payroll deductions, are limited to the lesser of 15% of
earnings or $25,000.
As of September 30, 2006 a total of 709,153 shares
have been issued under the Purchase Plan, leaving a balance of
340,847 available authorized shares. Compensation expense for
the nine months ended September 30, 2006 was $96,000. Under
SFAS No. 123, pro forma compensation cost is reported
for the fair value of the employees purchase rights, which
was estimated using the Black-Scholes model and the following
assumptions for 2005: expected volatility of 87.1%; risk-free
interest rates of 3.57%; an average expected life of
1.16 years and a dividend yield of 0.0%. The
weighted-average fair value of the purchase rights granted was
$2.90 per share in 2005 and in 2004 and $2.80 in 2003. Pro
forma compensation expense was $485,000, $623,000, and $245,000
for the years ended December 31, 2005, 2004, and 2003,
respectively, under the Employee Stock Purchase Plan.
|
|
7. |
Employee Benefit Plans |
The Company has a 401(k) Plan which stipulates that all
full-time employees with at least 30 days of employment can
elect to contribute to the 401(k) Plan, subject to certain
limitations, up to $14,000 annually on a pretax basis. Subject
to a maximum dollar match contribution of $7,000 per year,
the Company will match 50% of the first 6% of the
employees contribution on a pretax basis. The Company
expensed total employer matching contributions of $283,000,
$461,000, and $483,000 in 2005, 2004 and 2003, respectively. For
the nine months ended September 30, 2005 and 2006, the
Company expensed employer matching contributions of $204,000 and
$205,000, respectively.
|
|
8. |
Related Party Transactions |
Novo Nordisk and its affiliate, Novo Nordisk Pharmaceuticals,
Inc., are considered related parties and at September 30,
2006 own 1,573,674 shares of the Companys common
stock, representing 10.8% of the Companys total
outstanding common stock (9.9% on an as-converted basis).
Development and License Agreement
In June 1998, the Company executed a development and
commercialization agreement with Novo Nordisk to jointly develop
a pulmonary delivery system for administering insulin by
inhalation. Under the terms of the agreement, Novo Nordisk has
been granted exclusive rights to worldwide sales and marketing
rights for any products developed under the terms of the
agreement. Through December 31, 2005, the Company received
from Novo Nordisk $150.1 million in product development and
milestone payments and, of this amount, the Company has
recognized all of these funds as contract revenues. Under the
terms of the development agreement in effect at
December 31, 2005 between the Company and Novo Nordisk,
prior to completion of the restructuring transaction noted
below, Novo Nordisk was to fund all product development costs
incurred by the Company under the terms of the agreement, and
the Company was to be the initial manufacturer of the product
and was to receive a share of the overall gross profits
resulting from Novo Nordisks sales of the product while
Novo Nordisk and the Company agreed to co-fund final development
of the AERx device.
F-22
January 2005 Restructuring
On January 26, 2005, the Company completed a restructuring
of its AERx iDMS program, pursuant to a restructuring agreement
entered into with Novo Nordisk and NNDT, a newly created wholly
owned subsidiary of Novo Nordisk. Under the terms of the
restructuring agreement the Company sold certain equipment,
leasehold improvements and other tangible assets currently
utilized in the AERx iDMS program to NNDT for
$55.3 million, of which the Company received net proceeds
of $51.3 million after applying a refund of cost advances
of $4.0 million previously made by Novo Nordisk. In
addition, NNDT hired 126 Aradigm employees at the closing of the
restructuring transaction. The Companys expenses related
to this transaction for legal and other consulting costs were
$1.1 million. In connection with the restructuring
transaction, the Company entered into various related agreements
with Novo Nordisk and NNDT, effective January 26, 2005,
including the following:
|
|
|
|
|
an amended and restated license agreement amending the
Development and License Agreement previously in place with Novo
Nordisk, expanding Novo Nordisks development and
manufacturing rights to the AERx iDMS program and providing for
royalties to the Company on future AERx iDMS net sales; and |
|
|
|
a three-year agreement under which NNDT agreed to perform
contract manufacturing of AERx iDMS-identical devices and dosage
forms filled with compounds provided by the Company in support
of preclinical and initial clinical development by the Company
of other AERx products. |
As a result of this transaction the Company was no longer
obligated to continue work related to a nonrefundable milestone
payment from Novo Nordisk related to the commercialization of
AERx. Upon consummation of the restructuring, the Company
recorded as revenue the outstanding deferred milestone revenue
held on the balance sheet at December 31, 2004 of
$5.2 million. Additionally, the Company was released from
its contractual obligation relating to future operating leases
payments for the two leases assigned to NNDT and accordingly
reversed to current period rent expense the deferred rent
expense related to the two buildings of $1.4 million. As a
result of the restructuring transaction, contract revenue from
the Companys development agreement with Novo Nordisk
ceased in January 2005. For the years ended December 31,
2005, 2004 and 2003, the Company recognized contract revenues of
$8.0 million, $27.0 million, and $33.5 million,
respectively.
Receivables in the amount of $126,000 were due to the Company
from Novo Nordisk at December 31, 2005. Payables in the
amount of $237,000 were due to Novo Nordisk from the Company at
December 31, 2005. No amounts were due to the Company from
Novo Nordisk at December 31, 2004. For the nine months
ended September 30, 2006 the Company received $59,000
related to its iDMS consulting arrangement with Novo Nordisk.
F-23
Significant payments from collaborators, contract and milestone
revenues and deferred revenue are as follows (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
|
|
| |
|
September 30, | |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
Deferred revenue beginning balance
|
|
$ |
16,852 |
|
|
$ |
12,931 |
|
|
$ |
11,491 |
|
|
$ |
222 |
|
Payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Novo Nordisk
|
|
|
29,625 |
|
|
|
25,373 |
|
|
|
727 |
|
|
|
58 |
|
Other collaborator-funded programs
|
|
|
311 |
|
|
|
1,232 |
|
|
|
2,530 |
|
|
|
3,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total payments
|
|
|
29,936 |
|
|
|
26,605 |
|
|
|
3,257 |
|
|
|
3,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenues recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Novo Nordisk
|
|
|
33,546 |
|
|
|
26,999 |
|
|
|
8,013 |
|
|
|
60 |
|
Other collaborator-funded programs
|
|
|
311 |
|
|
|
1,046 |
|
|
|
2,494 |
|
|
|
3,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contract revenues recognized
|
|
|
33,857 |
|
|
|
28,045 |
|
|
|
10,507 |
|
|
|
4,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue at December 31, 2004 recognized on
January 26, 2005 as payment for assets pursuant to the
restructuring agreement with Novo Nordisk
|
|
|
|
|
|
|
|
|
|
|
4,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue ending balance
|
|
|
12,931 |
|
|
|
11,491 |
|
|
|
222 |
|
|
|
104 |
|
Less: noncurrent portion of deferred revenue
|
|
|
(5,040 |
) |
|
|
(3,966 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of deferred revenue
|
|
$ |
7,891 |
|
|
$ |
7,525 |
|
|
$ |
222 |
|
|
$ |
104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of this restructuring transaction, the
Companys contract revenues from its development agreement
with Novo Nordisk ceased in 2005. Of the amount recorded in
deferred revenue at December 31, 2004, the Company recorded
$11.3 million in the first quarter of 2005 as follows:
project development revenues of $2.1 million, deferred
milestone revenues of $5.2, and $4.0 million partial
payment for the sale of the insulin development program assets
in accordance with the restructuring agreement. The Company
receives revenues from other collaborator-funded programs. These
programs are generally early-stage feasibility programs and may
not necessarily develop into long-term development agreements
with the collaborators.
On July 3, 2006, the Company and Novo Nordisk A/ S entered
into a Second Amended and Restated License Agreement (the
License Agreement) to reflect: (i) the transfer
by the Company of certain intellectual property, including all
right, title and interest to its patents that contain claims
that pertain generally to breath control or specifically to the
pulmonary delivery of monomeric insulin and monomeric insulin
analogs, together with interrelated patents, which are linked
via terminal disclaimers, as well as certain pending patent
applications and continuations thereof by the Company for a cash
payment to the Company of $12.0 million, with the Company
retaining exclusive, royalty-free control of these patents
outside the field of glucose control; (ii) a reduction by
100 basis points of each royalty rate payable by Novo Nordisk to
the Company for a cash payment to the Company of
$8.0 million; and (iii) a loan to the Company in the
principal amount of $7.5 million.
The $12.0 million and the $8.0 million are included in
gain on sale of patent and royalty interest line item in the
accompanying statements of operations for the nine months ended
September 30, 2006. The loan bears interest accruing at 5%
per annum and the principal along with the accrued interest is
payable in three equal payments of $3.5 million at
July 2, 2012, July 1, 2013 and June 30, 2014. The
loan is secured by a pledge of the net royalty stream payable to
the Company by Novo Nordisk pursuant to the License Agreement.
F-24
Securities Purchase Agreements
In 1998, the Company raised $5.0 million through the sale
of common stock to Novo Nordisk at a 25% premium to the market
price. In June 2001, the Company raised an additional
$5.0 million through the sale of common stock to Novo
Nordisk at the market price. In October 2001, the Company
entered into a new common stock purchase agreement with Novo
Nordisk Pharmaceuticals. Under the new agreement, Novo Nordisk
Pharmaceuticals committed to purchase up to $45.0 million
of the Companys common stock at fair market value
specified in the agreement, of which $20.0 million was
invested initially. In July 2002, the Company raised
$5.0 million through the sale of common stock to Novo
Nordisk Pharmaceuticals under the terms of the agreement. Since
the inception of the collaboration in June 1998 through
December 31, 2005, the Company raised $35.0 million
through the sale of common stock to Novo Nordisk. In connection
with the restructuring transaction, the Company entered into an
amendment of the common stock purchase agreement in place with
Novo Nordisk, deleting the provisions whereby the Company can
require Novo Nordisk to purchase certain amounts of common stock
and imposing certain restriction on the ability of Novo Nordisk
to sell shares of the Companys common stock that it holds.
There is no provision for income taxes because the Company has
incurred operating losses. 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.
Significant components of the Companys deferred tax assets
are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
Net operating loss carry forward
|
|
$ |
73,900 |
|
|
$ |
91,800 |
|
Deferred revenue
|
|
|
4,600 |
|
|
|
100 |
|
Research and development credits
|
|
|
14,400 |
|
|
|
14,400 |
|
Capitalized research and development
|
|
|
7,100 |
|
|
|
3,100 |
|
Other
|
|
|
1,800 |
|
|
|
1,300 |
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
101,800 |
|
|
|
110,700 |
|
Valuation allowance
|
|
|
(101,800 |
) |
|
|
(110,700 |
) |
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Management believes that, based on a number of factors, it is
more likely than not that the deferred tax asset will not be
realized. Accordingly, a full valuation allowance has been
recorded for all deferred tax assets at December 31, 2005
and 2004. The valuation allowance increased for each of the
years ended December 31 by $8.9 million for 2005,
$13.2 million for 2004, and $14.6 million for 2003.
As of December 31, 2005, the Company had federal net
operating loss carry forwards of approximately
$238.0 million and federal research and development tax
credits of approximately $9.8 million, which expire in the
years 2006 through 2025.
As of December 31, 2005, the Company had California net
operating loss carry forwards of approximately
$148.2 million, which expire in the years 2006 through
2015, and California research and development tax credits of
approximately $6.3 million, which do not expire, and
California Manufacturers Investment Credit of
approximately $700,000, which expire in the years 2006 through
2013.
The Tax Reform Act of 1986 limits the annual use of net
operating loss and tax credit carry forwards in certain
situations where changes occur in stock ownership of a company.
In the event the Company has a change in ownership, as defined,
the annual utilization of such carry forwards could be limited.
F-25
|
|
10. |
Quarterly Results of Operations (unaudited) |
Following is a summary of the quarterly results of operations
for the years ended December 31, 2005 and 2004 (amounts in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
|
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Contract and license revenues
|
|
$ |
7,714 |
|
|
$ |
1,212 |
|
|
$ |
719 |
|
|
$ |
862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
7,070 |
|
|
|
7,317 |
|
|
|
6,471 |
|
|
|
9,316 |
|
|
General and administrative
|
|
|
3,235 |
|
|
|
2,713 |
|
|
|
2,326 |
|
|
|
2,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
10,305 |
|
|
|
10,030 |
|
|
|
8,797 |
|
|
|
11,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,591 |
) |
|
|
(8,818 |
) |
|
|
(8,078 |
) |
|
|
(11,075 |
) |
Interest income
|
|
|
288 |
|
|
|
350 |
|
|
|
342 |
|
|
|
337 |
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6 |
) |
Other income (expense)
|
|
|
(37 |
) |
|
|
(8 |
) |
|
|
8 |
|
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(2,340 |
) |
|
$ |
(8,476 |
) |
|
$ |
(7,728 |
) |
|
$ |
(10,671 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$ |
(0.16 |
) |
|
$ |
(0.58 |
) |
|
$ |
(0.53 |
) |
|
$ |
(0.73 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common
share
|
|
|
14,459 |
|
|
|
14,512 |
|
|
|
14,518 |
|
|
|
14,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
|
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Contract and license revenues
|
|
$ |
6,643 |
|
|
$ |
7,078 |
|
|
$ |
6,352 |
|
|
$ |
7,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
11,887 |
|
|
|
11,412 |
|
|
|
11,407 |
|
|
|
11,771 |
|
|
General and administrative
|
|
|
2,536 |
|
|
|
3,167 |
|
|
|
3,217 |
|
|
|
3,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
14,423 |
|
|
|
14,579 |
|
|
|
14,624 |
|
|
|
14,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(7,780 |
) |
|
|
(7,501 |
) |
|
|
(8,272 |
) |
|
|
(6,813 |
) |
Interest income
|
|
|
66 |
|
|
|
49 |
|
|
|
45 |
|
|
|
34 |
|
Interest expense
|
|
|
(10 |
) |
|
|
(5 |
) |
|
|
(1 |
) |
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(7,724 |
) |
|
$ |
(7,457 |
) |
|
$ |
(8,230 |
) |
|
$ |
(6,778 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$ |
(0.61 |
) |
|
$ |
(0.59 |
) |
|
$ |
(0.65 |
) |
|
$ |
(0.52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common
share
|
|
|
12,588 |
|
|
|
12,706 |
|
|
|
12,713 |
|
|
|
12,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. |
Restructuring and Asset Impairment |
On May 15, 2006 the Company announced the implementation of
a strategic restructuring of its business operations to focus
resources on advancing the current product pipeline and
developing products focused on respiratory disease, leveraging
the Companys core expertise and intellectual property. The
Company accounted for the restructuring activity in accordance
with FAS No. 146, Accounting for Costs Associated with
Exit or Disposal. The restructuring included a reduction in
force of 36 employees, the majority of which were research
personnel. For the nine months ended September 30, 2006,
the Company recorded a net restructuring charge of
$1.7 million, primarily related to the reduction in its
workforce. This expense is included in the restructuring and
asset impairment expense line item on the statement of
operations. On August 25, 2006, the Company recorded an
additional restructuring charge of $566,000 in severance expense
related to the resignation of V. Bryan Lawlis, the
Companys former President and Chief Executive Officer,
F-26
and Bobba Venkatadri, the Companys former Senior Vice
President of Operations, offset by a reduction of previously
recognized severance costs of $233,000 related to the departure
of employees in connection with the sale of Intraject-related
assets to Zogenix. The Company expects to pay the
severance-related expenses in full by the end of 2007. The
accrual for the employee related expenses is included in accrued
compensation in the accompanying balance sheet as of
September 30, 2006.
The Company recorded non-cash impairment charges of
$4.0 million during the nine months ended
September 30, 2006, which were incurred to write down its
Intraject-related assets to their net realizable value. The net
realizable value did not include any potential future contingent
milestones or royalties. The Company sold these assets to
Zogenix during the nine months ended September 30, 2006 for
an initial payment of $4.0 million and recorded an
additional impairment charge of $14,000 (See note 12). The
following table summarizes the adjustments to the Companys
restructuring and asset impairment expenses during the nine
months ended September 30, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at | |
|
|
Restructuring | |
|
Non-cash | |
|
|
|
|
|
September 30, | |
Type of liability |
|
charges | |
|
impairment | |
|
Adjustments | |
|
Payments | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Nine months ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and related benefits
|
|
$ |
1,866 |
(1) |
|
$ |
|
|
|
$ |
(233 |
)(2) |
|
$ |
(948 |
) |
|
$ |
685 |
|
Out-placement services
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
(42 |
) |
|
|
28 |
|
Impairment on Intraject-related assets
|
|
|
|
|
|
|
4,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,936 |
|
|
$ |
4,014 |
|
|
$ |
(233 |
) |
|
$ |
(990 |
) |
|
$ |
713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Initial restructuring charges of $1.3 million and an
increase of $566,000 in severance charges related to the
resignations of V. Bryan Lawlis, the Companys former
President and Chief Executive Officer, and
Bobba Venkatadri, the Companys former Senior Vice
President of Operations. |
|
|
|
(2) |
Reduction of $233,000 related to former employees transferred to
Zogenix as part of the sale of Intraject-related assets. |
|
|
|
12. |
Sale of Intraject-Related Assets |
On August 25, 2006, the Company sold all of its assets
related to the Intraject technology platform and products,
including 12 United States patents along with any foreign
counterparts corresponding to those United States patents, to
Zogenix, Inc., a newly created private company that has some
officers who were former officers of Aradigm. Zogenix is
responsible for further development and commercialization
efforts of Intraject. The Company recorded a non-cash impairment
charge of $4.0 million during the nine months ended
September 30, 2006, which was incurred to write down its
Intraject-related assets to their net realizable value. The
Company sold these assets for a $4.0 million initial
payment and will be entitled to a milestone payment upon initial
commercialization and royalty payments upon any
commercialization of products that may be developed and sold
using the Intraject technology. The net book value of these
assets at the time of sale was $4.0 million. The net
realizable value did not include any potential future contingent
milestones or royalties.
In connection with the sale of its Intraject platform, the
Company entered into an agreement with Zogenix for transitional
support through December 31, 2006. The Company is to be
reimbursed for the provision of consulting services, information
technology and document control support and office facilities.
For the nine months ended September 30, 2006, the Company
recorded revenues of $360,000 from Zogenix.
F-27
|
|
13. |
Subsequent Events (unaudited) |
On October 24, 2006, the Company announced that it had
filed a registration statement on
Form S-1 with the
Securities and Exchange Commission for a proposed public
offering. The Company expects the net proceeds from the offering
will be used primarily to fund the Companys ARD-3100
(liposomal ciprofloxacin) program, to complete the development
of its Essence delivery platform and for general corporate and
working capital purposes. Upon completion of the proposed public
offering, the Company expects that all outstanding shares of its
convertible preferred stock will be converted to common stock
and the associated liquidation preference will be eliminated.
On November 9, 2006, the Company announced that the Nasdaq
Listing Qualifications Panel had determined to delist the
Companys common stock from the Nasdaq Capital Market,
effective with the commencement of trading on Friday,
November 10, 2006. The Companys common stock
currently is currently quoted on the OTC Bulletin Board, an
electronic quotation service for securities traded
over-the-counter, under the symbol ARDM.
F-28
30,000,000 Shares
ARADIGM CORPORATION
Common Stock
PROSPECTUS
,
2007
|
|
PUNK, ZIEGEL & COMPANY |
MERRIMAN CURHAN FORD & CO. |
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
|
|
Item 13. |
Other Expenses of Issuance and Distribution |
The following table sets forth the fees and expenses, other than
the underwriting discount, payable in connection with the
registration of the common stock hereunder. All amounts are
estimates.
|
|
|
|
|
|
SEC Registration Fee
|
|
$ |
3,500 |
|
NASD Filing Fee
|
|
|
4,000 |
|
Legal Fees and Expenses
|
|
|
300,000 |
|
Accounting Fees and Expenses
|
|
|
200,000 |
|
Printing and Engraving Expenses
|
|
|
30,000 |
|
Blue Sky Fees and Expenses
|
|
|
14,000 |
|
Transfer Agent and Registrar Fees
|
|
|
10,000 |
|
Miscellaneous Expenses
|
|
|
48,500 |
|
|
|
|
|
|
|
Total
|
|
$ |
610,000 |
|
|
|
|
|
|
|
|
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 have entered into indemnity agreements with certain officers
and 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 officers and directors may
be required to pay in actions, suits or proceedings which they
are or may be made a party by reason of their position as a
director, officer or other agent of us, and otherwise to the
full extent permitted under California law and our bylaws.
We maintain insurance on behalf of any person who is or was a
director or officer against any loss arising from any claim
asserted against him or her and incurred by him or her in that
capacity, subject to certain exclusions and limits to the amount
of coverage.
|
|
Item 15. |
Recent Sales of Unregistered Securities |
In December 2004, we issued 1,666,679 shares of common
stock in a private placement at a price of $7.50 per share
and warrants to purchase approximately 416,669 shares of
our common stock at $10.50 per share for an aggregate
consideration of approximately $12.5 million. The warrants
are exercisable at the election of the security holders on or
prior to the fourth anniversary of the date of issuance. These
securities were not registered when sold and were issued in
reliance upon Regulation D of the Securities Act of 1933,
as amended.
II-1
|
|
Item 16. |
Exhibits and Financial Statement Schedules |
|
|
|
|
|
Exhibit |
|
Description |
|
|
|
|
1 |
.1 |
|
Form of Underwriting Agreement. |
|
3 |
.1(1) |
|
Amended and Restated Articles of Incorporation of the Company. |
|
3 |
.2(2) |
|
Bylaws of the Company, as amended. |
|
3 |
.3(3) |
|
Certificate of Determination of Series A Junior
Participating Preferred Stock. |
|
3 |
.4(4) |
|
Amended and Restated Certificate of Determination of Preferences
of Series A Convertible Preferred Stock. |
|
3 |
.5(3) |
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company. |
|
3 |
.6(3) |
|
Certificate of Amendment of Certificate of Determination of
Series A Junior Participating Preferred Stock. |
|
3 |
.7(5) |
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company. |
|
3 |
.8(5) |
|
Certificate of Amendment of Certificate of Determination of
Series A Junior Participating Preferred Stock. |
|
3 |
.9(6) |
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company. |
|
4 |
.1 |
|
Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5, 3.6,
3.7, 3.8 and 3.9. |
|
4 |
.2(1) |
|
Specimen common stock certificate. |
|
5 |
.1 |
|
Opinion of Cooley Godward Kronish
llp.
|
|
10 |
.1(1)+ |
|
Form of Indemnity Agreement between the Registrant and each of
its directors and officers. |
|
10 |
.2* + |
|
2005 Equity Incentive Plan, as amended. |
|
10 |
.3(1)+ |
|
Form of the Companys Incentive Stock Option Agreement
under the 2005 Equity Incentive Plan. |
|
10 |
.4(1)+ |
|
Form of the Companys Non-statutory Stock Option Agreement
under the 2005 Equity Incentive Plan. |
|
10 |
.5(1)+ |
|
1996 Non-Employee Directors Stock Option Plan. |
|
10 |
.6(1)+ |
|
Form of the Companys Non-statutory Stock Option Agreement
under the 1996 Non-Employee Directors Stock Option Plan. |
|
10 |
.7* + |
|
Employee Stock Purchase Plan, as amended. |
|
10 |
.8(1)+ |
|
Form of the Companys Employee Stock Purchase Plan Offering
Document. |
|
10 |
.9(7) |
|
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 |
.10(8) |
|
Rights Agreement, dated as of August 31, 1998, between the
Company and ComputerShare Trust Company, N.A. |
|
10 |
.10a(3) |
|
Amendment to Rights Agreement, dated as of October 22,
2001, by and between the Company and ComputerShare Trust
Company, N.A. |
|
10 |
.10b(3) |
|
Amendment to Rights Agreement, dated as of December 6,
2001, by and between the Company and ComputerShare Trust
Company, N.A. |
|
10 |
.11(9) |
|
Securities Purchase Agreement, dated as of November 7,
2003, by and among the Company and the purchasers named therein. |
|
10 |
.12(10) |
|
Securities Purchase Agreement, dated as of November 14,
2003, by and among the Company and the purchaser named therein. |
|
10 |
.13(11)# |
|
Restructuring Agreement, dated as of September 28, 2004, by
and among the Company, Novo Nordisk A/ S and Novo Nordisk
Delivery Technologies, Inc. |
II-2
|
|
|
|
|
Exhibit |
|
Description |
|
|
|
|
10 |
.14(12) |
|
Securities Purchase Agreement, dated as of December 17,
2004, by and among the Company and the purchasers named therein. |
|
10 |
.15* |
|
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 |
.16+ |
|
Form of Change of Control Agreement entered into between the
Company and certain of the Companys senior officers. |
|
10 |
.17(13)+ |
|
Executive Officer Severance Benefit Plan. |
|
10 |
.18(6)+ |
|
Form of the Companys Restricted Stock Bonus Agreement
under the 2005 Equity Incentive Plan. |
|
10 |
.19(14)# |
|
Second Amended and Restated License Agreement, dated as of
July 3, 2006, by and between the Company and Novo Nordisk
A/ S. |
|
10 |
.20* |
|
Promissory Note and Security Agreement, dated July 3, 2006,
by and between the Company and Novo Nordisk A/ S. |
|
10 |
.21* @ |
|
Asset Purchase Agreement, dated as of August 25, 2006, by
and between the Company and Zogenix, Inc. |
|
10 |
.22* + |
|
Employment Agreement, dated as of August 10, 2006, with
Dr. Igor Gonda. |
|
23 |
.1 |
|
Consent of Independent Registered Public Accounting Firm. |
|
23 |
.2 |
|
Consent of Counsel (included in Exhibit 5.1). |
|
24 |
.1* |
|
Power of Attorney. |
|
24 |
.2 |
|
Power of Attorney of John M. Siebert. |
|
|
@ |
The Company has sought confidential treatment for portions of
the referenced exhibit. |
|
+ |
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. |
|
|
* |
Previously filed. |
|
|
|
(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 10-K filed on
March 24, 1998, as amended. |
|
(8) |
Incorporated by reference to the Companys
Form 8-K filed on
September 2, 1998. |
|
(9) |
Incorporated by reference to the Companys
Form 8-K filed on
November 12, 2003. |
|
|
(10) |
Incorporated by reference to the Companys
Form 8-K filed on
November 20, 2003. |
|
(11) |
Incorporated by reference to the Companys
Form 10-Q filed on
November 15, 2004. |
|
(12) |
Incorporated by reference to the Companys
Form 8-K filed on
December 23, 2004. |
|
(13) |
Incorporated by reference to the Companys
Form 8-K filed on
October 13, 2005. |
|
(14) |
Incorporated by reference to the Companys
Form 10-Q filed on
August 14, 2006. |
|
|
|
|
(b) |
Financial Statement Schedules |
None.
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
II-3
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.
The undersigned registrant hereby undertakes that:
|
|
|
|
(a) |
For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by
the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be
part of this registration statement as of the time it was
declared effective. |
|
|
(b) |
For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus 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. |
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, Aradigm Corporation has duly caused this Registration
Statement on
Form S-1 to be
signed on its behalf by the undersigned, thereunto duly
authorized, in Hayward, California on the 3rd day of
January, 2007.
|
|
|
|
|
Dr. Igor Gonda, President and Chief Executive Officer |
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement on
Form S-1 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) |
|
January 3, 2007 |
|
/s/ Thomas C.
Chesterman
Thomas
C. Chesterman |
|
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
January 3, 2007 |
|
*
Virgil
D. Thompson |
|
Director |
|
January 3, 2007 |
|
*
Frank
H. Barker |
|
Director |
|
January 3, 2007 |
|
*
Stephen
O. Jaeger |
|
Director |
|
January 3, 2007 |
|
*
John
M. Siebert |
|
Director |
|
January 3, 2007 |
|
By: |
|
/s/ Thomas C.
Chesterman
Thomas
C. Chesterman
Pursuant to power of attorney |
|
|
|
|
II-5
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
Description |
|
|
|
|
1 |
.1 |
|
Form of Underwriting Agreement. |
|
3 |
.1(1) |
|
Amended and Restated Articles of Incorporation of the Company. |
|
3 |
.2(2) |
|
Bylaws of the Company, as amended. |
|
3 |
.3(3) |
|
Certificate of Determination of Series A Junior
Participating Preferred Stock. |
|
3 |
.4(4) |
|
Amended and Restated Certificate of Determination of Preferences
of Series A Convertible Preferred Stock. |
|
3 |
.5(3) |
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company. |
|
3 |
.6(3) |
|
Certificate of Amendment of Certificate of Determination of
Series A Junior Participating Preferred Stock. |
|
3 |
.7(5) |
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company. |
|
3 |
.8(5) |
|
Certificate of Amendment of Certificate of Determination of
Series A Junior Participating Preferred Stock. |
|
3 |
.9(6) |
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company. |
|
4 |
.1 |
|
Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5, 3.6,
3.7, 3.8 and 3.9. |
|
4 |
.2(1) |
|
Specimen common stock certificate. |
|
5 |
.1 |
|
Opinion of Cooley Godward Kronish
llp.
|
|
10 |
.1(1)+ |
|
Form of Indemnity Agreement between the Registrant and each of
its directors and officers. |
|
10 |
.2* + |
|
2005 Equity Incentive Plan, as amended. |
|
10 |
.3(1)+ |
|
Form of the Companys Incentive Stock Option Agreement
under the 2005 Equity Incentive Plan. |
|
10 |
.4(1)+ |
|
Form of the Companys Non-statutory Stock Option Agreement
under the 2005 Equity Incentive Plan. |
|
10 |
.5(1)+ |
|
1996 Non-Employee Directors Stock Option Plan. |
|
10 |
.6(1)+ |
|
Form of the Companys Non-statutory Stock Option Agreement
under the 1996 Non-Employee Directors Stock Option Plan. |
|
10 |
.7* + |
|
Employee Stock Purchase Plan, as amended. |
|
10 |
.8(1)+ |
|
Form of the Companys Employee Stock Purchase Plan Offering
Document. |
|
10 |
.9(7) |
|
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 |
.10(8) |
|
Rights Agreement, dated as of August 31, 1998, between the
Company and ComputerShare Trust Company, N.A. |
|
10 |
.10a(3) |
|
Amendment to Rights Agreement, dated as of October 22,
2001, by and between the Company and ComputerShare Trust
Company, N.A. |
|
10 |
.10b(3) |
|
Amendment to Rights Agreement, dated as of December 6,
2001, by and between the Company and ComputerShare Trust
Company, N.A. |
|
10 |
.11(9) |
|
Securities Purchase Agreement, dated as of November 7,
2003, by and among the Company and the purchasers named therein. |
|
10 |
.12(10) |
|
Securities Purchase Agreement, dated as of November 14,
2003, by and among the Company and the purchaser named therein. |
|
10 |
.13(11)# |
|
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(12) |
|
Securities Purchase Agreement, dated as of December 17,
2004, by and among the Company and the purchasers named therein. |
|
|
|
|
|
Exhibit |
|
Description |
|
|
|
|
10 |
.15* |
|
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 |
.16+ |
|
Form of Change of Control Agreement entered into between the
Company and certain of the Companys senior officers. |
|
10 |
.17(13)+ |
|
Executive Officer Severance Benefit Plan. |
|
10 |
.18(6)+ |
|
Form of the Companys Restricted Stock Bonus Agreement
under the 2005 Equity Incentive Plan. |
|
10 |
.19(14)# |
|
Second Amended and Restated License Agreement, dated as of
July 3, 2006, by and between the Company and Novo Nordisk
A/ S. |
|
10 |
.20* |
|
Promissory Note and Security Agreement, dated July 3, 2006,
by and between the Company and Novo Nordisk A/ S. |
|
10 |
.21* @ |
|
Asset Purchase Agreement, dated as of August 25, 2006, by
and between the Company and Zogenix, Inc. |
|
10 |
.22* + |
|
Employment Agreement, dated as of August 10, 2006, with
Dr. Igor Gonda. |
|
23 |
.1 |
|
Consent of Independent Registered Public Accounting Firm. |
|
23 |
.2 |
|
Consent of Counsel (included in Exhibit 5.1). |
|
24 |
.1* |
|
Power of Attorney. |
|
24 |
.2 |
|
Power of Attorney of John M. Siebert. |
|
|
@ |
The Company has sought confidential treatment for portions of
the referenced exhibit. |
|
+ |
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. |
|
|
* |
Previously filed. |
|
|
|
(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 10-K filed on
March 24, 1998, as amended. |
|
(8) |
Incorporated by reference to the Companys
Form 8-K filed on
September 2, 1998. |
|
(9) |
Incorporated by reference to the Companys
Form 8-K filed on
November 12, 2003. |
|
|
(10) |
Incorporated by reference to the Companys
Form 8-K filed on
November 20, 2003. |
|
(11) |
Incorporated by reference to the Companys
Form 10-Q filed on
November 15, 2004. |
|
(12) |
Incorporated by reference to the Companys
Form 8-K filed on
December 23, 2004. |
|
(13) |
Incorporated by reference to the Companys
Form 8-K filed on
October 13, 2005. |
|
(14) |
Incorporated by reference to the Companys
Form 10-Q filed on
August 14, 2006. |