e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2007
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to .
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Commission File Number: 0-28402
Aradigm Corporation
(Exact Name of Registrant as
Specified in Its Charter)
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California
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94-3133088
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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3929 Point Eden Way, Hayward, CA 94545
(Address of Principal Executive
Offices)
Registrants telephone number, including area code:
(510) 265-9000
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, no par value
Indicate by check mark whether the registrant is a well-know
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes o No þ
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company þ
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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes o No þ
The aggregate market value of registrants common stock
held by non-affiliates of the registrant, based upon the closing
price of a share of the registrants common stock on
June 29, 2007 was: $73,890,816
The number of shares of the registrants common stock
outstanding as of March 20, 2008 was: 54,776,455
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for the Registrants Annual
Meeting of Shareholders to be held in May 2008 are incorporated
by reference into Part III of this Annual Report on
Form 10-K
Forward
Looking Statements
This Annual Report on
Form 10-K
contains forward-looking statements. When used in this Annual
Report 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: our expectations
regarding our future expenses, sales and operations; our
anticipated cash needs and our estimates regarding our capital
requirements and our need for additional financing; the expected
development path and timing of our product candidates; 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; our ability to obtain and
derive benefits from orphan drug designation; our ability to
anticipate the future needs of our customers; our plans for
future products and enhancements of existing products; our
growth strategy elements; the anticipated trends and challenges
in the markets in which we operate; and 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 these 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 Annual Report 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 Annual Report. 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.
PART I
Overview
We are an emerging specialty pharmaceutical company focused on
the development and commercialization of a selection 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 is particularly suitable for
drugs where highly efficient and precise delivery to the
respiratory tract is advantageous or essential.
Historically, our development activities consisted primarily of
collaborations and product development agreements with third
parties. The most notable collaboration has been with Novo
Nordisk on the AERx insulin diabetes management system (AERx
iDMS) for the treatment of Type I and Type II diabetes.
This program began in 1998 and has included nine Phase 3
clinical trials in Type I and Type diabetes patients. On
January 14, 2008, Novo Nordisk issued a press release
announcing the termination of all pending clinical trials for
fast-acting inhaled insulin delivered via the AERx iDMS. The
press release stated that Novo Nordisk was not terminating the
trials because of any safety concerns. Also on January 14,
2008, we received a
120-day
notice from Novo Nordisk terminating the Second Amended and
Restated License dated July 3, 2006 between us and Novo
Nordisk. We are in discussions with Novo Nordisk to determine
the ongoing rights and obligations of the parties in light of
Novo Nordisks recent decision and to determine what, if
any, future collaborations the parties may pursue.
More recently, our business has focused on product development
for treatment of respiratory disease, including identifying
opportunities that we could develop and commercialize in the
United States without a partner. We currently have five
respiratory product candidates in development: innovative
treatments for cystic fibrosis,
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bronchiectasis, inhalation anthrax, smoking cessation treatment,
and, in collaborations with other companies, pulmonary arterial
hypertension and asthma and other chronic obstructive diseases
of airways. In selecting our development programs, we primarily
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 of administration
to patients. We believe that this strategy will allow us to
reduce cost, development time and risk of failure, when compared
to the discovery and development of new chemical entities. We
intend to commercialize our respiratory product candidates 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 and
well accepted method of administration of a variety of drugs for
the treatment of respiratory diseases. Compared to other routes
of administration, inhalation provides local delivery of the
drug to the respiratory tract, 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 that market data from Business Insights and Wolters
Kluwer PHAST, we believe we could potentially address a market
opportunity that currently is 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 as a result of pulmonary delivery that
could otherwise only be obtained by injection. We believe that
the features of our AERx delivery system make it more attractive
for many systemic drug applications than alternative methods. We
believe particular opportunities exist for the use of our
pulmonary delivery technology for the delivery of biologics,
including proteins, antibodies and peptides, that today must be
delivered by injection, as well as small molecule drugs, where
rapid absorption is desirable. We intend to pursue selected
opportunities for systemic delivery via inhalation by seeking
collaborations 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 been 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. This market has produced over 10%
growth overall in 2005 with higher growth rates in the areas of
innovative products, based on our analysis of market data from
Business Insights, Wolters Kluwer PHAST and DataMonitor. 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
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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 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 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 associates, in the United States. We
expect to begin establishing a sales force as we approach
commercialization of the first of such products. We believe that
by developing a small sales group dedicated to interacting with
disease-specific physicians in the respiratory field, we can
create greater value from our products for our shareholders. For
markets where maximizing sales of the product would depend on
marketing to primary healthcare providers that are only
addressable with a large sales force, we plan to enter into
co-marketing arrangements. We also intend to establish
collaborative relationships to commercialize our products in
cases where we cannot meet these goals with a small sales force
or when we need collaborators with relevant expertise and
capabilities, such as the ability to address international
markets. Through such collaborations, we may also utilize our
collaborators resources and expertise to conduct large
late-stage clinical development.
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Exploit the broad applicability of our delivery technology
through opportunistic product development
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 intend to 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 intend to continue to out-license
technologies and product opportunities that we have already
developed to a certain stage and that are outside of our core
strategic focus. Collaborations and out-licensing may generate
additional revenues while we progress towards the development
and potential launch of our own proprietary products.
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Outsource manufacturing activities. We intend
to outsource the late stage clinical and commercial scale
manufacturing of our products to conserve our capital for
product development. We believe that the 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
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manufacturers whose expertise should allow us to reduce risk and
the costs normally incurred if we were to build, operate and
maintain large-scale production facilities ourselves.
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Product
Candidates
Product candidates in development include both our own
proprietary products and products under development with
collaborators. They consist of approved drugs combined with our
inhalation delivery
and/or
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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Phase 2
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ARD-3150 (Liposomal ciprofloxacin)
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Bronchiectasis
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Phase 1
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ARD-1100 (Liposomal ciprofloxacin)
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Inhalation Anthrax
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Preclinical
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ARD-1600 (Nicotine)
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Tobacco Smoking Cessation
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Phase 1
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Collaborative Programs Under Development
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ARD-1550 (Inhaled treprostinil)(1)
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Pulmonary Arterial Hypertension
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Preclinical
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ARD-1500 (Inhaled liposomal treprostinil)
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Pulmonary Arterial Hypertension
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Preclinical
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ARD-1300 (Hydroxychloroquine)(2)
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Asthma
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Phase 2
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ARD-1700 (combination products)
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Asthma, COPD
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Preclinical
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(1) |
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A bridging clinical study is to be conducted in 2008 to compare
delivery with AERx Essence against the nebulizer used in the
completed Phase 3 TRIUMPH study. |
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A Phase 2a clinical study did not meet pre-specified clinical
endpoints. The program is currently under review by APT, a
privately held biotechnology company. |
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. We periodically conduct feasibility
studies with other parties in an effort to identify formulations
and combinations that may be suitable candidates for additional
development.
Proprietary
Programs Under Development
Liposomal
Ciprofloxacin
Ciprofloxacin has been approved by the FDA as an anti-infective
agent and is widely used for the treatment of a variety of
bacterial infections. Today ciprofloxacin is delivered by oral
or intravenous administration. We believe that delivering this
potent antibiotic directly to the lung may improve its safety
and efficacy in the treatment of pulmonary infections. 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
and ARD 3150 Liposomal Ciprofloxacin for the
Treatment of Infections in Cystic Fibrosis and Non-CF
Bronchiectasis Patients
One of our liposomal ciprofloxacin programs is a proprietary
program using our liposomal formulation of ciprofloxacin for the
treatment and control of respiratory infections common to
patients with cystic fibrosis, or CF. CF is a genetic disease
that causes thick, sticky mucus to form in the lungs, pancreas
and other organs. In the lungs, the mucus tends to block the
airways, causing lung damage and making these patients highly
susceptible to lung infections. According to the Cystic Fibrosis
Foundation, CF affects roughly 30,000 children and adults in the
United States and roughly 70,000 children and adults worldwide.
According to the American Lung Association, the direct medical
care costs for an individual with CF are currently estimated to
be in excess of $40,000 per year.
The inhalation route affords direct administration of the drug
to the infected part of the lung, maximizing the dose to the
affected site and minimizing the wasteful exposure to the rest
of the body where it could cause side effects. Therefore,
treatment of CF-related lung infections by direct administration
of antibiotics to the lung may improve both the safety and
efficacy of treatment compared to systemic administration by
other routes, as well as improving patient convenience as
compared to injections. Oral and injectable forms of
ciprofloxacin are approved for the treatment of Pseudomonas
aeruginosa, a lung infection to which CF patients are
vulnerable. Currently, there is only one inhalation antibiotic
approved for the treatment of this infection. We believe that
local lung delivery via inhalation of ciprofloxacin in a
sustained release formulation could provide a convenient,
effective and safe treatment of the debilitating and often
life-threatening lung infections that afflict patients with CF.
Our liposomal ciprofloxacin CF program represents the first
program in which we intend to retain full ownership and
development rights for the United States. We believe we have the
preclinical development, clinical and regulatory expertise to
advance this product through development in the most efficient
manner. We intend to commercialize this program in the United
States on our own.
Development
We have received orphan drug designations from the FDA for this
product for the management of CF, and for the treatment of
respiratory infections associated with non-CF
bronchiectasis a chronic pulmonary disease with
symptoms similar to cystic fibrosis affecting over
100,000 patients in the United States. 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 we also continued to work on new innovative
formulations for this product with the view to maximize the
safety, efficacy and convenience to patients. In October 2007,
we completed a Phase 1 clinical trial in 20 healthy volunteers
in Australia. This was a safety, tolerability and
pharmacokinetic study that included single dose escalation
followed by dosing for one week. Administration of the liposomal
formulation by inhalation was well tolerated and no serious
adverse reactions were reported. The pharmacokinetic profile
obtained by measurement of blood levels of ciprofloxacin
following the inhalation of the liposomal formulation was
consistent with the profile from sustained release of
ciprofloxacin; the blood levels of ciprofloxacin were much lower
than those that would be observed following administration of
therapeutic doses of ciprofloxacin by injection or via the
gastrointestinal tract. We believe that this is a desirable
pharmacokinetic profile likely to result in reduction of the
incidence and severity of systemic side effects of ciprofloxacin
and to be less likely to lead to evolution of resistant
micro-organisms.
Following the completion of the Phase 1 study, we initiated a
multi-center
14-day
treatment Phase 2a trial in Australia and New Zealand in 24 CF
patients. We will investigate safety, efficacy and
pharmacokinetics in this trial, with the primary efficacy
endpoint being the reduction in the density of the pathogenic
microorganism Pseudomonas aeruginosa. Following the trial
we intend to finalize development plans and budgets for this
program in conjunction with discussions with the FDA. In order
to expedite anticipated time to market and increase market
acceptance, we have elected to deliver our initial formulation
of 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 as well. This program incorporates
formulation and manufacturing processes and safety data
developed for our inhalation anthrax program discussed below. We
also
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intend to explore the utility of liposomal ciprofloxacin for the
treatment of other serious respiratory infections. In
particular, we plan to conduct clinical trials to treat
infections in patients with non-CF bronchiectasis.
ARD-1100
Liposomal Ciprofloxacin for the Treatment of Inhalation
Anthrax
The second of our liposomal ciprofloxacin programs is for the
prevention and treatment of pulmonary anthrax infections.
Anthrax spores are naturally occurring in soil throughout the
world. Anthrax infections are most commonly acquired through
skin contact with infected animals and animal products or, less
frequently, by inhalation or ingestion of spores. With
inhalation anthrax, once symptoms appear, fatality rates are
high even with the initiation of antibiotic and supportive
therapy. Further, a portion of the anthrax spores, once inhaled,
may remain dormant in the lung for several months and germinate.
Anthrax has been identified by the Centers for Disease Control
as a likely potential agent of bioterrorism. In the fall of
2001, when anthrax-contaminated mail was deliberately sent
through the United States Postal Service to government officials
and members of the media, five people died and many more became
sick. These attacks highlighted the concern that inhalation
anthrax as a bioterror agent represents a real and current
threat.
Ciprofloxacin has been approved by the FDA for use orally and
via injection for the treatment of inhalation anthrax
(post-exposure) since 2000. Our ARD-1100 research and
development program has been funded by Defence Research and
Development Canada, or DRDC, a division of the Canadian
Department of National Defence. We believe that our product
candidate may potentially be able to deliver a long-acting
formulation of ciprofloxacin directly into the lung and could
have fewer side effects and be more effective to prevent and
treat inhalation anthrax than currently available therapies.
Development
We began our research into liposomal ciprofloxacin under a
technology demonstration program funded by the DRDC as part of
their interest in developing products to counter bioterrorism.
The DRDC had already demonstrated the feasibility of inhaled
liposomal ciprofloxacin for post-exposure prophylaxis of
Francisella tularensis, a potential bioterrorism agent
similar to anthrax. Mice were exposed to a lethal dose of F.
tularensis and then 24 hours later were exposed via
inhalation to a single dose of free ciprofloxacin, liposomal
ciprofloxacin or saline. All the mice in the control group and
the free ciprofloxacin group were dead within 11 days
post-infection; in contrast, all the mice in the liposomal
ciprofloxacin group were alive 14 days post-infection. The
same results were obtained when the mice received the single
inhaled treatment as late as 48 or 72 hours post-infection.
The DRDC has funded our development efforts to date and
additional development of this program is dependent on
negotiating for and obtaining continued funding from DRDC or on
identifying other collaborators or sources of funding. We plan
to use our preclinical and clinical safety data from our CF
program to supplement the data needed to have this product
candidate considered for approval for use in treating inhalation
anthrax and possibly other inhaled life-threatening bioterrorism
infections.
If we can obtain sufficient additional funding, we would
anticipate developing this drug for approval under FDA
regulations relating to the approval of new drugs or biologics
for potentially fatal diseases where human studies cannot be
conducted ethically or practically. Unlike most drugs, which
require large, well controlled Phase 3 clinical trials in
patients with the disease or condition being targeted, these
regulations allow for a drug to be evaluated and approved by the
FDA on the basis of demonstrated safety in humans combined with
studies in animal models to show effectiveness.
Smoking
Cessation Therapy
ARD-1600
(Nicotine) Tobacco Smoking Cessation Therapy
According to the National Center for Health Statistics
(NCHS), 21% of the U.S. population age 18
and above currently smoke cigarettes. The World Health
Organization estimates that 650 million people worldwide
are smokers, which results in a health cost equivalent to
$200 billion, $75 billion in the U.S. alone.
Further, the NCHS indicates that nicotine dependence is the most
common form of chemical dependence in this country. As a result,
quitting tobacco use is difficult and often requires multiple
attempts, as users often relapse because of withdrawal symptoms.
Our goal is to develop an inhaled nicotine product that would
address effectively the acute craving for
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cigarettes and, through gradual reduction of the peak nicotine
levels, wean-off the patients from cigarette smoking and from
the nicotine addiction.
Development
The initial laboratory work on this program was partly funded
under grants from the National Institute of Health.
We have recently completed the first human clinical trial
delivering aqueous solutions of nicotine using the palm-size
AERx
Essence®
system. Our randomized, open-label, single-site Phase 1 trial
evaluated arterial plasma pharmacokinetics and subjective acute
cigarette craving when one of three nicotine doses was
administered to 18 adult male smokers. Blood levels of
nicotine rose much more rapidly following a single-breath
inhalation compared to published data on other approved nicotine
delivery systems. Cravings for cigarettes were measured on a
scale from 0-10 before and after dosing for up to four hours.
Prior to dosing, mean craving scores were 5.5, 5.5 and 5.0,
respectively, for the three doses. At five minutes following
inhalation of the nicotine solution through the AERx Essence
device, craving scores were reduced to 1.3, 1.7 and 1.3,
respectively, and did not return to pre-dose baseline during the
four hours of monitoring. Nearly all subjects reported an acute
reduction in craving or an absence of craving immediately
following dosing. No serious adverse reactions were reported in
the study.
We believe these results provide the foundation for further
research with the AERx Essence device as a means toward smoking
cessation. We will be seeking collaborations with government and
non-government organizations to further develop this product.
Collaborative
Programs Under Development:
ARD-1550
Treprostinil for the Treatment of Pulmonary Arterial
Hypertension
The ARD-1550 program is a collaboration with Lung Rx, Inc.
(Lung Rx), a wholly-owned subsidiary of United
Therapeutics Corporation, 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. We believe that our ARD-1550 product
candidate potentially could offer a non-invasive, more direct
and patient-friendly approach to treatment to replace or
complement currently available treatments. Actelion
Pharmaceuticals Ltd. markets in the United States another
prostacyclin analogue, iloprost, under the name Ventavis* that
is administered six to nine times per day using a nebulizer,
with each treatment lasting four to ten minutes. We believe
administration of 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. Based on our
previous work with United Therapeutics, we also believe
that in the future 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.
Development
We have conducted two collaborative research projects on inhaled
treprostinil using Aradigms AERx delivery system. The
first project was with an aqueous formulation of treprostinil.
The second project involved development of a slow-acting
liposomal formulation of treprostinil (ARD-1500), with the view
to achieve
once-a-day
dosing. On August 30, 2007, we signed an Exclusive License,
Development and Commercialization Agreement (the Lung Rx
Agreement) with Lung Rx pursuant to which we granted Lung
Rx an exclusive license to develop and commercialize inhaled
treprostinil using our AERx Essence technology for the treatment
of PAH and other potential therapeutic indications. As a part of
this collaboration, we will conduct a bridging study for this
product,
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ARD-1550, in 2008 to compare an aqueous solution of treprostinil
delivered by inhalation using the AERx Essence system to the
nebulizer used in the United Therapeutics recently
completed Phase 3 trial.
ARD-1300
Hydroxychloroquine for the Treatment of Asthma
The ARD-1300 program was investigating a novel aerosolized
formulation of hydroxychloroquine, or HCQ, as a treatment for
asthma under collaboration with APT, a privately held
biotechnology company. Data from studies in which HCQ was orally
administered to humans suggested that HCQ could be effective in
the treatment of asthma. We and APT have 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.
Development
APT has funded all activities in the development of this
program. The ARD-1300 program advanced into Phase 2 clinical
trials following positive preclinical testing and Phase 1
clinical results. 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. APT is
studying the utility of nasally-administered HCQ for the
treatment of allergic rhinitis. We are not involved in the
development of this product.
ARD-1700
(combination products) and Other Potential
Applications
We have demonstrated in human clinical trials to date effective
deposition and, where required, systemic absorption of a wide
variety of drugs, including small molecules, peptides and
proteins, using our AERx delivery system. 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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Cyclodextrin Combination Products for Asthma, Cystic Fibrosis
and other Chronic Obstructive Pulmonary Disease
(COPD). Asthma is a common chronic disorder of
the lungs characterized by airway inflammation, airway
hyper-responsiveness or airway narrowing due to certain stimuli.
Despite several treatment options, asthma remains a major
medical problem associated with high morbidity and large
economic costs to the society. According to the American Lung
Association, asthma accounted for $11.5 billion in direct
healthcare costs annually in the United States, of which the
largest single expenditure, at $5 billion, was prescription
drugs. Primary symptoms of asthma include coughing, wheezing,
shortness of breath and tightness of the chest with symptoms
varying in frequency and degree. According to Datamonitor, in
2005 asthma affected 41.5 million people in developed
countries, with 9.5 million of those affected being
children. The highest prevalence of asthma occurs in the United
States and the United Kingdom. According to the American Lung
Association, non-asthma COPD was the fourth leading cause of
death in America, claiming the lives of 118,171 Americans in
2004. In 2005, an estimated 8.9 million Americans reported
a physician diagnosis of chronic bronchitis, an obstructive
disease of the lung. In August 2007, we and CyDex began to
collaborate on the development and commercialization of products
that utilize our AERx pulmonary delivery technology and
CyDexs solubilization and stabilization technologies to
deliver inhaled corticosteroids, anticholinergics and beta-2
agonists for the treatment of asthma and COPD.
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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 postsurgical patients.
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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
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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 provided 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.
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.
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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
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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 in a matter of
seconds due to its enhanced efficiency compared to nebulization
treatments, which commonly last about 15 minutes. We believe the
ability to make small micron-size droplets from a hand-held
device that incorporates breath control will be the preferred
method of delivery for many medications.
We have demonstrated in the laboratory and in many human
clinical trials that our AERx delivery system enables pulmonary
delivery of a wide range of pharmaceuticals in liquid
formulations for local or systemic effects. Our proprietary
technologies focus principally on delivering liquid medications
through small particle aerosol generation and controlling
patient inhalation technique for efficient and reproducible
delivery of the aerosol drug to the deep lung. We have developed
these proprietary technologies through an integrated approach
that combines expertise in physics, engineering and
pharmaceutical sciences. The key features of the AERx delivery
system include the following:
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Liquid Formulation. Most drugs being
considered by us 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 much of 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 minimize safety concerns.
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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.
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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 adjustable dosing
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feature may provide an advantage in certain 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 intellectual property estate that includes patent claims
directed toward the design, manufacture and testing of the AERx
Strip®
dosage forms and the various AERx pulmonary drug delivery
systems.
The various forms of Aradigms AERx technology have been
extensively tested in the laboratory and in over 50 human
clinical trials with 19 different small molecules, peptides and
proteins. We also conducted our first human clinical trial with
the latest version of our inhalation technology, the AERx
Essence system. This system retains the key features of breath
control and aerosol quality of the previous generations of the
AERx technology, but the patient is provided with a much
smaller, palm-sized device. The device is easy to use and
maintain and it does not require any batteries or external
electrical power.
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 specifically for those drugs
that currently need to be dosed several times a day, or when the
slow release of the drug is likely to improve the efficacy and
safety profile. We believe a liposomal formulation will provide
extended duration of protection and treatment against lung
infection, greater convenience for the patient and reduced
systemic levels of the drug. The formulation may also enable
better interaction of the drug with the disease target,
potentially leading to greater efficacy. We have applied this
technology to ciprofloxacin and treprostinil. We are also
examining other potential applications of this formulation
technology for respiratory therapies.
Intellectual
Property and Other Proprietary Rights
Our success will depend, to a significant extent, on our ability
to obtain, expand and protect our intellectual property estate,
enforce patents, maintain trade secret protection and operate
without infringing the proprietary rights of other parties. As
of February 29, 2008, we had 71 issued United States
patents, with 20 additional United States patent
applications pending. In addition, we had 72 issued foreign
patents and additional 71 foreign patent applications pending.
The bulk of our patents and patent applications contain claims
directed toward our proprietary delivery technologies, including
methods for aerosol generation, devices used to generate
aerosols, breath control, compliance monitoring, certain
pharmaceutical formulations, design of dosage forms and their
manufacturing and testing methods. In addition, we have
purchased three United States patents containing claims that are
relevant to our inhalation technologies. The bulk of our
patents, including fundamental patents directed toward our
proprietary AERx delivery technology, expire between 2013 and
2023. For certain of our formulation technologies we have
in-licensed some technology and will seek to supplement such
intellectual property rights with complementary proprietary
processes, methods and formulation technologies, including
through patent applications and trade secret protection. Because
patent positions can be highly uncertain and frequently involve
complex legal and factual questions, the breadth of claims
obtained in any application or the enforceability of our patents
cannot be predicted.
In December 2004, as part of our research and development
efforts funded by the DRDC for the development of liposomal
ciprofloxacin for the treatment of biological terrorism-related
inhalation anthrax, we obtained worldwide exclusive rights to a
patented liposomal formulation technology for the pulmonary
delivery of ciprofloxacin from Tekmira Pharmaceuticals
Corporation, formerly known as Inex Pharmaceuticals Corporation,
and may have the ability to expand the exclusive license to
other fields.
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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 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.
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Examples of competitive therapies include:
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ARD-3100. Currently marketed products include
TOBI marketed by Novartis, Pulmozyme marketed by Genentech, and
Cipro* marketed by Bayer. CF products under development include
inhaled aztreonam under development by Gilead, inhaled liposomal
amikacin under development by Transave, Doripenem under
development by Johnson & Johnson and inhaled
ciprofloxacin under development by Bayer. Bayer was recently
granted orphan drug designation for an inhaled ciprofloxacin
product for the treatment of cystic fibrosis in Europe.
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ARD-1100. Current anthrax treatment products
include various oral generic and branded antibiotics, such as
Ciprofloxacin marketed by Bayer.
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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-1550. 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, (acquired by Actelion Pharmaceuticals Ltd. in 2007).
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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.
Before one of our drugs may be marketed in the United States, it
must be approved by the FDA. None of our product candidates has
received such approval. We believe that our products currently
in development will be regulated by the FDA as drugs.
The steps required before a drug may be approved for marketing
in the United States generally include:
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preclinical laboratory and animal tests, and formulation studies;
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the submission to the FDA of an Investigational New Drug
application, or IND, for human clinical testing that must become
effective before human clinical trials may begin;
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adequate and well controlled human clinical trials to establish
the safety and efficacy of the product candidate for each
indication for which approval is sought;
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the submission to the FDA of a New Drug Application, or NDA, and
FDAs acceptance of the NDA for filing;
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satisfactory completion of an FDA inspection of the
manufacturing facilities at which the product is to be produced
to assess compliance with the FDAs Good Manufacturing
Practices, or GMP; and
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FDA review and approval of the NDA.
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In September 2007, the President of the United States signed the
Food and Drug Administration Amendments Act of 2007, or FDAAA.
The new legislation grants significant new powers to the FDA,
many of which are aimed at improving the safety of drug products
before and after approval. In particular, the new law authorizes
the FDA to, among other things, require post-approval studies
and clinical trials, mandate changes to drug labeling to reflect
new safety information, and require risk evaluation and
mitigation strategies for certain drugs, including certain
currently approved drugs. In addition, it significantly expands
the federal governments clinical trial registry and
results databank and creates new restrictions on the advertising
and promotion of drug products. Under the FDAAA, companies that
violate these and other provisions of the new law are subject to
substantial civil monetary penalties.
Although we expect these and other provisions of the FDAAA to
have a substantial effect on the pharmaceutical industry, the
extent of that effect is not yet known. As the FDA issues
regulations, guidance and interpretations relating to the new
legislation, the impact on the industry, as well as our
business, will become clearer. The new requirements and other
changes that the FDAAA imposes may make it more difficult, and
likely more costly, to obtain approval of new pharmaceutical
products and to produce, market and distribute existing products.
Preclinical
Testing
The testing and approval process requires substantial time,
effort, and financial resources, and the receipt and timing of
approval, if any, is highly uncertain. Preclinical tests include
laboratory evaluations of product chemistry, toxicity, and
formulation, as well as animal studies. The results of the
preclinical studies, together with manufacturing information and
analytical data, are submitted to the FDA as part of the IND.
The IND automatically becomes effective 30 days after
receipt by the FDA, unless the FDA raises concerns or questions
about the conduct of the proposed clinical trials as outlined in
the IND prior to that time. In such a case, the IND sponsor and
the FDA must resolve any outstanding FDA concerns or questions
before clinical trials can proceed. Submission of an IND may not
result in FDA authorization to commence clinical trials. Once an
IND is in effect, the protocol for each clinical trial to be
conducted under the IND must be submitted to the FDA, which may
or may not allow the trial to proceed.
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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14
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Phase 3. If a drug is found to be potentially
effective and to have an acceptable safety profile in Phase 2
studies, the clinical trial program will be expanded, usually to
further evaluate clinical efficacy and safety by administering
the drug in its final form to an expanded patient population at
geographically dispersed clinical trial sites. Phase 3 studies
usually include several hundred to several thousand patients.
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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.
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)
may be delayed in various circumstances. For example, the holder
of the NDA for the listed drug may be entitled to a period of
market exclusivity, during which the FDA will not approve, and
may not even review a Section 505(b)(2) application from
other sponsors. If the listed drug is claimed by a patent that
the NDA holder has listed with the FDA, the
Section 505(b)(2) applicant must submit a patent
certification. If the 505(b)(2) applicant certifies that the
patent is invalid, unenforceable, or not infringed by the
product that is the subject of the Section 505(b)(2), and
the 505(b)(2) applicant is sued within 45 days of its
notice to the entity that holds the approval for the listed drug
and the patent holder, the FDA will not approve the
Section 505(b)(2) application until the earlier of a court
decision favorable to the Section 505(b)(2) applicant or
the expiration of 30 months. The regulations governing
marketing
15
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 orphan drug designation
subsequently receives the first FDA approval for the indication
for which it has such designation, the drug is entitled to
orphan drug exclusivity, meaning that the FDA may not approve
any other applications to market the same drug for the same
indication for a period of seven years, unless the subsequent
application is able to demonstrate clinical superiority in
efficacy or safety. Orphan drug designation does not prevent
competitors from developing or marketing different drugs for
that indication, or the same drug for other indications.
We have obtained orphan drug designation from the FDA for
inhaled liposomal ciprofloxacin for the management of cystic
fibrosis. 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.
16
Scientific
Advisory Board
We have assembled a scientific advisory board comprised of
scientific and product development advisors who provide
expertise, on a consulting basis from time to time, in the areas
of respiratory diseases, allergy and immunology, pharmaceutical
development and drug delivery, including pulmonary delivery, but
are employed elsewhere on a full-time basis. As a result, they
can only spend a limited amount of time on our affairs. We
access scientific and medical experts in academia, as needed, to
support our scientific advisory board. The scientific advisory
board assists us on issues related to potential product
applications, product development and clinical testing. Its
members, and their affiliations and areas of expertise, include:
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Name
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Affiliation
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Area of Expertise
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Peter R. Byron, Ph.D.
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Medical College of Virginia, Virginia Commonwealth University
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Aerosol Science/Pharmaceutics
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Peter S. Creticos, M.D.
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The Johns Hopkins University School of Medicine
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Allergy/Immunology/Asthma
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Stephen J. Farr, Ph.D.
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Zogenix, Inc.
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Pulmonary Delivery/Pharmaceutics
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Phyllis Gardner, M.D.
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Stanford University
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Clinical Pharmacology/Drug Development
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Michael Konstan, M.D.
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Rainbow Babies and Childrens Hospital
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Pulmonary Disease/Cystic Fibrosis
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Michael Powell, Ph.D.
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Sofinnova Ventures
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Drug Development
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Adam Wanner, M.D.
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University of Miami
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Chronic Obstructive Pulmonary Disease (COPD)
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Martin Wasserman, Ph.D.
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Roche, AtheroGenics (retired)
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Asthma
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In addition to our scientific advisory board, for certain
indications and programs we assemble groups of experts to assist
us on issues specific to such indications and programs.
Employees
As of December 31, 2007, we had 51 employees, 7 of
whom have advanced degrees. Of these, 36 are involved in
research and development, product development and
commercialization; and 15 are involved in business development,
finance and administration. Our employees are not represented by
any collective bargaining agreement.
Corporate
History and Website Information
We were incorporated in California in 1991. Our principal
executive offices are located at 3929 Point Eden Way, Hayward,
California 94545, and our main telephone number is
(510) 265-9000.
Investors can obtain access to this annual report on
Form 10-K,
our quarterly reports on
Form 10-Q,
our current reports on
Form 8-K
and all amendments to these reports, free of charge, on our
website at
http://www.aradigm.com
as soon as reasonably practicable after such filings are
electronically filed with the Securities and Exchange Commission
or SEC. The public may read and copy any material we file with
the SEC at the SECs Public Reference Room at
100 F Street, N.W., Washington, D.C., 20549. The
public may obtain information on the operations of the Public
Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains an Internet site,
http://www.sec.gov
that contains reports, proxy and information statements and
other information regarding issuers that file electronically
with the SEC.
We have adopted a code of ethics, which is part of our Code of
Business Conduct and Ethics that applies to all of our
employees, including our principal executive officer, our
principal financial officer and our principal accounting
officer. This code of ethics is posted on our website.
17
Executive
Officers and Directors
Our directors and executive officers and their ages as of
February 29, 2008 are as follows:
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Name
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Age
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Position
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Igor Gonda, Ph.D.
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60
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President, Chief Executive Officer and Director
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Norman Halleen
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54
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Interim Chief Financial Officer
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Babatunde A. Otulana, M.D.
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51
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Senior Vice President, Development and Chief Medical Officer
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Frank H. Barker(1)(3)
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77
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Director
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Stephen O. Jaeger(1)(2)(4)
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63
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Director
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Timothy P. Lynch(1)(2)
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38
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Director
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John M. Siebert, Ph.D.(2)(3)
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67
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Director
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Virgil D. Thompson(1)(2)(3)
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68
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Chairman of the Board
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(1) |
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Member of the Audit Committee. |
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(2) |
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Member of the Compensation Committee. |
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(3) |
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Member of the Nominating and Corporate Governance Committee. |
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(4) |
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Mr. Jaeger is not standing for reelection at the 2008
annual meeting of shareholders. |
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.
Norman Halleen has served as our Interim Chief Financial
Officer since July 2007. Mr. Halleen previously served as
Aradigms Vice President, Finance and Chief Financial
Officer from December 1999 to April 2001. From October 2004 to
August 2006, Mr. Halleen served as Senior Vice President of
Finance and Chief Financial Officer of InterMune, Inc., a
publicly traded biopharmaceutical company. Prior to joining
InterMune, Mr. Halleen served as Vice President, Finance
and Chief Financial Officer of Syrrx, Inc., a privately held
drug discovery company, from April 2001 to June 2003. Prior to
Syrrx and Aradigm, Mr. Halleen held the same positions at
Collagen Corporation, a publicly traded biomaterials and medical
device company, from January 1997 to October 1999.
Mr. Halleen has also worked in various financial consulting
and executive positions in Hong Kong and the United States,
including a ten-year tenure with Syntex Corporation.
Mr. Halleen holds an A.B. from Stanford University and an
M.B.A. from the Harvard Graduate School of Business.
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
18
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 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 a director of Arlington Tankers, Ltd., a publicly
traded shipping company. Mr. Jaeger is the Chairman of and
the designated audit committee financial expert on
our and Arlington Tankers audit committees.
Timothy P. Lynch was appointed as director effective
January 2, 2008. Since October 2005, Mr. Lynch has
been the President and Chief Executive Officer of NeuroStat
Pharmaceuticals, a
start-up
specialty pharmaceutical company he founded. From June 2005
through September 2005, Mr. Lynch was President and Chief
Executive Officer of Vivo Therapeutics, Inc., a venture-backed
specialty pharmaceuticals
start-up.
From October 2002 through June 2005, Mr. Lynch served as
Chief Financial Officer of Tercica, Inc. From 1999 to June 2002,
Mr. Lynch served as Chief Financial Officer of InterMune,
Inc. He was involved with the initial public offerings of both
biopharmaceutical companies. Previously, Mr. Lynch served
as Director of Strategic Planning and as a pharmaceutical sales
representative at Elan Corporation, plc, a pharmaceutical
company. He started his career as an investment banker at
Goldman, Sachs & Co. and Chase Securities, Inc.
Mr. Lynch is a director of Nabi Biopharmaceuticals and a
director for Allos Therapeutics, Inc. Mr. Lynch received
his B.A. degree in economics from Colgate University and his
M.B.A. from the Harvard Graduate School of Business.
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. From
November 2002 until June 30, 2007, Mr. Thompson served
as President and Chief Executive Officer of Angstrom
Pharmaceuticals, Inc., a privately held pharmaceutical company,
where he continues as a director. From September 2000 to
November 2002, Mr. Thompson was President, Chief Executive
Officer and a director of Chimeric Therapies, Inc., a privately
held biotechnology company. From May 1999 until September 2000,
Mr. Thompson was the President, Chief Operating Officer and
a director of Savient Pharmaceuticals, a publicly traded
specialty pharmaceutical company. From January 1996 to April
1999, Mr. Thompson was the President and Chief Executive
Officer and a director of Cytel Corporation, a publicly traded
biopharmaceutical company that was subsequently acquired by IDM
Pharma, Inc. From 1994 to 1996, Mr. Thompson was President
and Chief Executive Officer of Cibus Pharmaceuticals, Inc., a
privately held drug delivery device company. From 1991 to 1993,
Mr. Thompson was President of Syntex Laboratories, Inc., a
U.S. subsidiary of Syntex Corporation, a publicly traded
pharmaceutical company. Mr. Thompson holds a B.S. in
Pharmacy from Kansas University and a J.D. from The George
Washington University Law School. Mr. Thompson is a
director and chairman of the board of Questcor Pharmaceuticals,
Inc., a publicly traded pharmaceutical company, and a director
of Savient Pharmaceuticals.
19
Except for historical information contained herein, the
discussion in this Annual Report on
Form 10-K
contains forward-looking statements, including, without
limitation, statements regarding timing and results of clinical
trials, the establishment of corporate partnering arrangements,
the anticipated commercial introduction of our products and the
timing of our cash requirements. These forward-looking
statements involve certain risks and uncertainties that could
cause actual results to differ materially from those in such
forward-looking statements. Potential risks and uncertainties
include, without limitation, those mentioned in this report and
in particular the factors described below.
Risks
Related to Our Business
We are
an early-stage company.
You must evaluate us in light of the uncertainties and
complexities present in an early-stage company. All of our
potential products are in an early stage of research or
development. Our potential drug delivery products require
extensive research, development and pre-clinical and clinical
testing. Our potential products also may involve lengthy
regulatory reviews before they can be sold. Because none of our
product candidates has yet received approval by the FDA, we
cannot assure you that our research and development efforts will
be successful, any of our potential products will be proven safe
and effective or regulatory clearance or approval to sell any of
our potential products will be obtained. We cannot assure you
that any of our potential products can be manufactured in
commercial quantities or at an acceptable cost or marketed
successfully. We may abandon the development of some or all of
our product candidates at any time and without prior notice. We
must incur substantial up-front expenses to develop and
commercialize products and failure to achieve commercial
feasibility, demonstrate safety, achieve clinical efficacy,
obtain regulatory approval or successfully manufacture and
market products will negatively impact our business.
We
recently changed our product development strategy, and if we do
not successfully implement this new strategy our business and
reputation will be damaged.
Since our inception in 1991, we have focused on developing drug
delivery technologies to be partnered with other companies. In
May 2006, we began transitioning our business focus from the
development of delivery technologies to the application of our
pulmonary drug delivery technologies and expertise to the
development of novel drug products to treat or prevent
respiratory diseases. As part of this transition we have
implemented workforce reductions in an effort to reduce our
expenses and improve our cash flows. We are in the early stages
of implementing various aspects of our new strategy, and we may
not be successful in implementing our new strategy. Even if we
are able to implement the various aspects of our new strategy,
it may not be successful.
We
will need additional capital, and we may not be able to obtain
it.
Our operations to date have consumed substantial amounts of cash
and have generated no product revenues. While our refocused
development strategy will reduce capital expenditures, we expect
negative operating cash flows to continue for at least the
foreseeable future. Even though we do not plan to engage in drug
discovery, we will nevertheless need to commit substantial funds
to develop our product candidates and we may not be able to
obtain sufficient funds on acceptable terms or at all. Our
future capital requirements will depend on many factors,
including:
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our progress in the application of our delivery and formulation
technologies, which may require further refinement of these
technologies;
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the number of product development programs we pursue and the
pace of each program;
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our progress with formulation development;
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the scope, rate of progress, results and costs of preclinical
testing and clinical trials;
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the time and costs associated with seeking regulatory approvals;
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our ability to outsource the manufacture of our product
candidates and the costs of doing so;
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the time and costs associated with establishing in-house
resources to market and sell certain of our products;
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our ability to establish and maintain collaborative arrangements
with others and the terms of those arrangements;
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the costs of preparing, filing, prosecuting, maintaining and
enforcing patent claims, and
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our need to acquire licenses, or other rights for our product
candidates.
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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 cash, cash equivalents and short term investments at
December 31, 2007 will be sufficient to fund operations at
least through the end of 2008. 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. As of December 31,
2007, we have an accumulated deficit of $312.1 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;
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conduct preclinical testing and clinical trials;
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pursue additional applications for our existing delivery
technologies;
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outsource the commercial-scale production of our
products; and
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establish a sales and marketing force to commercialize certain
of our proprietary products if these products obtain regulatory
approval.
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To achieve and sustain profitability, we must, alone or with
others, successfully develop, obtain regulatory approval for,
manufacture, market and sell our products. We expect to incur
substantial expenses in our efforts to develop and commercialize
products and we may never generate sufficient product or
contract research revenues to become profitable or to sustain
profitability.
Our
dependence on collaborators may delay or terminate certain of
our programs, and any such delay or termination would harm our
business prospects and stock price.
Our commercialization strategy for certain of our product
candidates depends on our ability to enter into agreements with
collaborators to obtain assistance and funding for the
development and potential commercialization of our product
candidates. Collaborations may involve greater uncertainty for
us, as we have less control over certain aspects of our
collaborative programs than we do over our proprietary
development and commercialization programs. We may determine
that continuing a collaboration under the terms provided is not
in our best
21
interest, and we may terminate the collaboration. Our existing
collaborators could delay or terminate their agreements, and our
products subject to collaborative arrangements may never be
successfully commercialized. For example, Novo Nordisk has
control over and responsibility for development and
commercialization of the AERx iDMS program. In January 2008,
Novo Nordisk announced that it was terminating the AERx iDMS
program. 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 our stock price would
suffer.
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.
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,
22
promotion, sale, distribution and export of our potential
products are subject to regulation. Pharmaceutical products that
are marketed abroad are also subject to regulation by foreign
governments. Our products cannot be marketed in the United
States without FDA approval. The process for obtaining FDA
approval for drug products is generally lengthy, expensive and
uncertain. To date, we have not sought or received approval from
the FDA or any corresponding foreign authority for any of our
product candidates.
Even though we intend to apply for approval of most of our
products in the United States under Section 505(b)(2) of
the United States Food, Drug and Cosmetic Act, which applies to
reformulations of approved drugs and that may require smaller
and shorter safety and efficacy testing than that for entirely
new drugs, the approval process will still be costly,
time-consuming and uncertain. We, or our collaborators, may not
be able to obtain necessary regulatory approvals on a timely
basis, if at all, for any of our potential products. Even if
granted, regulatory approvals may include significant
limitations on the uses for which products may be marketed.
Failure to comply with applicable regulatory requirements can,
among other things, result in warning letters, imposition of
civil penalties or other monetary payments, delay in approving
or refusal to approve a product candidate, suspension or
withdrawal of regulatory approval, product recall or seizure,
operating restrictions, interruption of clinical trials or
manufacturing, injunctions and criminal prosecution.
Regulatory
authorities may not approve our product candidates even if the
product candidates meet safety and efficacy endpoints in
clinical trials or the approvals may be too limited for us to
earn sufficient revenues.
The FDA and other foreign regulatory agencies can delay approval
of, or refuse to, approve our product candidates for a variety
of reasons, including failure to meet safety and efficacy
endpoints in our clinical trials. Our product candidates may not
be approved even if they achieve their endpoints in clinical
trials. Regulatory agencies, including the FDA, may disagree
with our trial design and our interpretations of data from
preclinical studies and clinical trials. Even if a product
candidate is approved, it may be approved for fewer or more
limited indications than requested or the approval may be
subject to the performance of significant post-marketing
studies. In addition, regulatory agencies may not approve the
labeling claims that are necessary or desirable for the
successful commercialization of our product candidates. Any
limitation, condition or denial of approval would have an
adverse affect on our business, reputation and results of
operations.
Even
if we are granted initial FDA approval for any of our product
candidates, we may not be able to maintain such approval, which
would reduce our revenues.
Even if we are granted initial regulatory approval for a product
candidate, the FDA and similar foreign regulatory agencies can
limit or withdraw product approvals for a variety of reasons,
including failure to comply with regulatory requirements,
changes in regulatory requirements, problems with manufacturing
facilities or processes or the occurrence of unforeseen
problems, such as the discovery of previously undiscovered side
effects. If we are able to obtain any product approvals, they
may be limited or withdrawn or we may be unable to remain in
compliance with regulatory requirements. Both before and after
approval we, our collaborators and our products are subject to a
number of additional requirements. For example, certain changes
to the approved product, such as adding new indications, certain
manufacturing changes and additional labeling claims are subject
to additional FDA review and approval. Advertising and other
promotional material must comply with FDA requirements and
established requirements applicable to drug samples. We, our
collaborators and our manufacturers will be subject to
continuing review and periodic inspections by the FDA and other
authorities, where applicable, and must comply with ongoing
requirements, including the FDAs Good Manufacturing
Practices, or GMP, requirements. Once the FDA approves a
product, a manufacturer must provide certain updated safety and
efficacy information, submit copies of promotional materials to
the FDA and make certain other required reports. Product
approvals may be withdrawn if regulatory requirements are not
complied with or if problems concerning safety or efficacy 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.
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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, our agreement with an affiliate of Novo Nordisk to
supply devices and dosage forms to us for use in the development
of our products that incorporate our proprietary AERx technology
expired on January 27, 2008. We may not be able to extend
this agreement at satisfactory terms, if at all, and we may not
be able to find a replacement contract manufacturer at
satisfactory terms.
We may decide to invest in additional clinical manufacturing
facilities in order to internally produce critical components of
our product candidates and to handle critical aspects of the
production process, such as assembly of the disposable unit-dose
packets and filling of the unit-dose packets. If we decide to
produce components of any of our product candidates in-house,
rather than use contract manufacturers, it will be costly and we
may not be able to do so in a timely or cost-effective manner or
in compliance with regulatory requirements.
With respect to some of our product development programs
targeted at large markets, either our collaborators or we will
have to invest significant amounts to attempt to provide for the
high-volume manufacturing required to take advantage of these
product markets, and much of this spending may occur before a
product is approved by the FDA for commercialization. Any such
effort will entail many significant risks. For example, the
design requirements of our products may make it too costly or
otherwise infeasible for us to develop them at a commercial
scale, or manufacturing and quality control problems may arise
as we attempt to expand production. Failure to address these
issues could delay or prevent late-stage clinical testing and
commercialization of any products that may receive FDA approval.
Further, we, our contract manufacturers and our collaborators
are required to comply with the FDAs GMP requirements that
relate to product testing, quality assurance, manufacturing and
maintaining records and documentation. We, our contract
manufacturers or our collaborators may not be able to comply
with the applicable GMP and other FDA regulatory requirements
for manufacturing, which could result in an enforcement or other
action, prevent commercialization of our product candidates and
impair our reputation and results of operations.
We
rely on a small number of vendors and contract manufacturers to
supply us with specialized equipment, tools and components; if
they do not perform as we need them to, we will not be able to
develop or commercialize products.
We rely on a small number of vendors and contract manufacturers
to supply us and our collaborators with specialized equipment,
tools and components for use in development and manufacturing
processes. These vendors may not continue to supply such
specialized equipment, tools and components, and we may not be
able to find
24
alternative sources for such specialized equipment and tools.
Any inability to acquire or any delay in our ability to acquire
necessary equipment, tools and components would increase our
expenses and could delay or prevent our development of products.
In
order to market our proprietary products, we are likely to
establish our own sales, marketing and distribution
capabilities. We have no experience in these areas, and if we
have problems establishing these capabilities, the
commercialization of our products would be
impaired.
We intend to establish our own sales, marketing and distribution
capabilities to market products to concentrated, easily
addressable prescriber markets. We have no experience in these
areas, and developing these capabilities will require
significant expenditures on personnel and infrastructure. While
we intend to market products that are aimed at a small patient
population, we may not be able to create an effective sales
force around even a niche market. In addition, some of our
product development programs will require a large sales force to
call on, educate and support physicians and patients. While we
intend to enter into collaborations with one or more
pharmaceutical companies to sell, market and distribute such
products, we may not be able to enter into any such arrangement
on acceptable terms, if at all. Any collaborations we do enter
into may not be effective in generating meaningful product
royalties or other revenues for us.
If any
products that we or our collaborators may develop do not attain
adequate market acceptance by healthcare professionals and
patients, our business prospects and results of operations will
suffer.
Even if we or our collaborators successfully develop one or more
products, such products may not be commercially acceptable to
healthcare professionals and patients, who will have to choose
our products over alternative products for the same disease
indications, and many of these alternative products will be more
established than ours. For our products to be commercially
viable, we will need to demonstrate to healthcare professionals
and patients that our products afford benefits to the patient
that are cost-effective as compared to the benefits of
alternative therapies. Our ability to demonstrate this depends
on a variety of factors, including:
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the demonstration of efficacy and safety in clinical trials;
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the existence, prevalence and severity of any side effects;
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the potential or perceived advantages or disadvantages compared
to alternative treatments;
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the timing of market entry relative to competitive treatments;
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the relative cost, convenience, product dependability and ease
of administration;
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the strength of marketing and distribution support;
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the sufficiency of coverage and reimbursement of our product
candidates by governmental and other third-party payors; and
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the product labeling or product insert required by the FDA or
regulatory authorities in other countries.
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Our product revenues will be adversely affected if, due to these
or other factors, the products we or our collaborators are able
to commercialize do not gain significant market acceptance.
We
depend upon our proprietary technologies, and we may not be able
to protect our potential competitive proprietary
advantage.
Our business and competitive position is dependent upon our and
our collaborators ability to protect our proprietary
technologies related to various aspects of pulmonary drug
delivery and drug formulation. While our intellectual property
rights may not provide a significant commercial advantage for
us, our patents and know-how are intended to provide protection
for important aspects of our technology, including methods for
aerosol generation, devices used to generate aerosols, breath
control, compliance monitoring, 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.
25
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.
Subsequently, Novo Nordisk and Pfizer settled this litigation
out of court. This and other patents assigned to Novo Nordisk
may become the subject of future litigation. 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 on the
proprietary rights of others, we will not earn product revenues.
If we are required to defend ourselves in a lawsuit, we could
incur substantial costs and the lawsuit could divert
managements attention, regardless of the lawsuits
merit or outcome. These legal actions could seek damages and
seek to enjoin testing, manufacturing and marketing of the
accused product or process. In addition to potential liability
for significant damages, we could be required to obtain a
license to continue to manufacture or market the accused product
or process and any license required under any such patent may
not be made available to us on acceptable terms, if at all.
Periodically, we review publicly available information regarding
the development efforts of others in order to determine whether
these efforts may violate our proprietary rights. We may
determine that litigation is necessary to enforce our
proprietary rights against others. Such litigation could result
in substantial expense, regardless of its outcome, and may not
be resolved in our favor.
Furthermore, patents already issued to us or our pending patent
applications may become subject to dispute, and any disputes
could be resolved against us. For example, Eli Lilly and Company
brought an action against us seeking to have one or more
employees of Eli Lilly named as co-inventors on one of our
patents. This case was determined in our favor in 2004, but we
may face other similar claims in the future and we may lose or
settle cases at significant loss to us. In addition, because
patent applications in the United States are currently
maintained in secrecy for a period of time prior to issuance,
patent applications in certain other countries generally are not
published until more than 18 months after they are first
filed, and publication of discoveries in scientific or patent
literature often lags behind actual discoveries, we cannot be
certain that we were the first creator of inventions covered by
our pending patent applications or that we were the first to
file patent applications on such inventions.
26
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 President and Chief Executive
Officer, Dr. Igor Gonda, who plays a central role in our
strategy shift to a specialty pharmaceutical company, could
impair our product development efforts and otherwise harm our
business. Any of our employees may terminate their employment
with us at will.
Acquisition
of complementary businesses or technologies could result in
operating difficulties and harm our results of
operations.
While we have not identified any definitive targets, we may
acquire products, businesses or technologies that we believe are
complementary to our business strategy. The process of
investigating, acquiring and integrating any business or
technology into our business and operations is risky and we may
not be able to accurately predict or derive the benefits of any
such acquisition. The process of acquiring and integrating any
business or technology may create operating difficulties and
unexpected expenditures, such as:
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diversion of our management from the development and
commercialization of our pipeline product candidates;
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difficulty in assimilating and efficiently using the acquired
assets or personnel; and
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inability to retain key personnel.
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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.
27
If we
market our products in other countries, we will be subject to
different laws and we may not be able to adapt to those laws,
which could increase our costs while reducing our
revenues.
If we market any approved products in foreign countries, we will
be subject to different laws, particularly with respect to
intellectual property rights and regulatory approval. To
maintain a proprietary market position in foreign countries, we
may seek to protect some of our proprietary inventions through
foreign counterpart patent applications. Statutory differences
in patentable subject matter may limit the protection we can
obtain on some of our inventions outside of the United States.
The diversity of patent laws may make our expenses associated
with the development and maintenance of intellectual property in
foreign jurisdictions more expensive than we anticipate. We
probably will not obtain the same patent protection in every
market in which we may otherwise be able to potentially generate
revenues. In addition, in order to market our products in
foreign jurisdictions, we and our collaborators must obtain
required regulatory approvals from foreign regulatory agencies
and comply with extensive regulations regarding safety and
quality. We may not be able to obtain regulatory approvals in
such jurisdictions and we may have to incur significant costs in
obtaining or maintaining any foreign regulatory approvals. If
approvals to market our products are delayed, if we fail to
receive these approvals, or if we lose previously received
approvals, our business would be impaired as we could not earn
revenues from sales in those countries.
We may
be exposed to product liability claims, which would hurt our
reputation, market position and operating results.
We face an inherent risk of product liability as a result of the
clinical testing of our product candidates in humans and will
face an even greater risk upon commercialization of any
products. These claims may be made directly by consumers or by
pharmaceutical companies or others selling such products. We may
be held liable if any product we develop causes injury or is
found otherwise unsuitable during product testing, manufacturing
or sale. Regardless of merit or eventual outcome, liability
claims would likely result in negative publicity, decreased
demand for any products that we may develop, injury to our
reputation and suspension or withdrawal of clinical trials. Any
such claim will be very costly to defend and also may result in
substantial monetary awards to clinical trial participants or
customers, loss of revenues and the inability to commercialize
products that we develop. Although we currently have product
liability insurance, we may not be able to maintain such
insurance or obtain additional insurance on acceptable terms, in
amounts sufficient to protect our business, or at all. A
successful claim brought against us in excess of our insurance
coverage would have a material adverse effect on our results of
operations.
If we
cannot arrange for adequate third-party reimbursement for our
products, our revenues will suffer.
In both domestic and foreign markets, sales of our potential
products will depend in substantial part on the availability of
adequate reimbursement from third-party payors such as
government health administration authorities, private health
insurers and other organizations. Third-party payors often
challenge the price and cost-effectiveness of medical products
and services. Significant uncertainty exists as to the adequate
reimbursement status of newly approved health care products. Any
products we are able to successfully develop may not be
reimbursable by third-party payors. In addition, our products
may not be considered cost-effective and adequate third-party
reimbursement may not be available to enable us to maintain
price levels sufficient to realize a profit. Legislation and
regulations affecting the pricing of pharmaceuticals may change
before our products are approved for marketing and any such
changes could further limit reimbursement. If any products we
develop do not receive adequate reimbursement, our revenues will
be severely limited.
Our
use of hazardous materials could subject us to liabilities,
fines and sanctions.
Our laboratory and clinical testing sometimes involve use of
hazardous and toxic materials. We are subject to federal, state
and local laws and regulations governing how we use,
manufacture, handle, store and dispose of these materials.
Although we believe that our safety procedures for handling and
disposing of such materials comply in all material respects with
all federal, state and local regulations and standards, there is
always the risk of accidental contamination or injury from these
materials. In the event of an accident, we could be held liable
for any damages
28
that result and such liability could exceed our financial
resources. Compliance with environmental and other laws may be
expensive and current or future regulations may impair our
development or commercialization efforts.
If we
are unable to effectively implement or maintain a system of
internal control over financial reporting, we may not be able to
accurately or timely report our financial results and our stock
price could be adversely affected.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us
to evaluate the effectiveness of our internal control over
financial reporting as of the end of each fiscal year, and to
include a management report assessing the effectiveness of our
internal control over financial reporting in our annual report
on
Form 10-K
for that fiscal year. Section 404 also currently requires
our independent registered public accounting firm, beginning
with our fiscal year ending December 31, 2008, to attest
to, and report on our internal control over financial reporting.
Our ability to comply with the annual internal control report
requirements will depend on the effectiveness of our financial
reporting and data systems and controls across our company. We
expect these systems and controls to involve significant
expenditures and to become increasingly complex as our business
grows and to the extent that we make and integrate acquisitions.
To effectively manage this complexity, we will need to continue
to improve our operational, financial and management controls
and our reporting systems and procedures. Any failure to
implement required new or improved controls, or difficulties
encountered in the implementation or operation of these
controls, could harm our operating results and cause us to fail
to meet our financial reporting obligations, which could
adversely affect our business and reduce our stock price.
Risks
Related to Our Common Stock
Our
stock price is likely to remain volatile.
The market prices for securities of many companies in the drug
delivery and pharmaceutical industries, including ours, have
historically been highly volatile, and the market from time to
time has experienced significant price and volume fluctuations
unrelated to the operating performance of particular companies.
Prices for our common stock may be influenced by many factors,
including:
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investor perception of us;
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research analyst recommendations and our ability to meet or
exceed quarterly performance expectations of analysts or
investors;
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failure to maintain existing or establish new collaborative
relationships;
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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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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.
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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 that 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.
We
have never paid dividends on our capital stock, and we do not
anticipate paying cash dividends for at least the foreseeable
future.
We have never declared or paid cash dividends on our capital
stock. We do not anticipate paying any cash dividends on our
common stock for at least the foreseeable future. We currently
intend to retain all available funds and future earnings, if
any, to fund the development and growth of our business. As a
result, capital appreciation, if any, of our common stock will
be your sole source of potential gain for at least the
foreseeable future.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
As of December 31, 2007, we leased one building with an
aggregate of 72,000 square feet of office and laboratory
facilities at 3929 Point Eden Way, Hayward, California. The
aggregate lease payment in 2007 was approximately
$1.6 million, net of sublease payments of
$0.2 million. Minimum payments under this lease, net of
sublease payments of $0.9 million, will be approximately
$1.4 million in 2008, and an aggregate of
$16.4 million for the period 2009 through 2016 prior to any
sublease payment offsets. As a result of our recent
restructuring activities, we consolidated our operations to a
portion of the space at our current address and entered into a
sublease agreement with Mendel Biotechnology, Inc., or Mendel,
on July 18, 2007 to sublease approximately
48,000 square feet of our facility. The sublease consists
of approximately 46,000 square feet of office and
laboratory space and an additional rentable space of
2,000 square feet to be vacated by us no later than
March 15, 2008. The sublease expires on July 8, 2016.
Mendel will make monthly base rent payments totaling
$4.5 million through August 2012 that will offset a portion
of our existing
30
building lease obligation. Mendel has the option to terminate
the sublease early on September 1, 2012 for a termination
fee of $225,000. If the option to terminate the sublease is not
exercised by Mendel, we will receive an additional
$4.0 million through the expiration of the sublease in
2016. Mendel will also pay us its share of all pass through
costs such as taxes, operating expenses, and utilities based on
the percentage of the facility space occupied by them. Upon the
subleases execution on July 18, 2007, Mendel paid
$75,000 in cash and provided a letter of credit in the amount of
$150,000 as collateral for a security deposit. The letter of
credit expires on July 3, 2012.
|
|
Item 3.
|
Legal
Proceedings
|
We are not currently a party to any material pending legal
proceedings.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
There were no submissions of matters to a vote of security
holders in the quarter ended December 31, 2007.
PART II
|
|
Item 5.
|
Market
for the Registrants Common Stock Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
|
Market
Information
Since December 21, 2006, our common stock has been quoted
on the OTC Bulletin Board, an electronic quotation service
for securities traded over-the-counter, under the symbol
ARDM. Between June 20, 1996 and May 1,
2006 our common stock was listed on the Nasdaq Global Market
(formerly the Nasdaq National Market). Between May 2, 2006
and November 9, 2006, our common stock was listed on the
Nasdaq Capital Market (formerly the Nasdaq SmallCap Market). As
of November 9, 2006, we were delisted from the Nasdaq
Capital Market. Between November 10, 2006 and
December 20, 2006, our common stock was quoted on the Pink
Sheets and since December 21, 2006 our stock has been
quoted on the OTC Bulletin Board.
The following table sets forth the high and low closing sale
prices of our common stock for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2006
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
5.04
|
|
|
$
|
3.03
|
|
Second Quarter
|
|
|
3.32
|
|
|
|
1.29
|
|
Third Quarter
|
|
|
2.24
|
|
|
|
1.40
|
|
Fourth Quarter
|
|
|
1.69
|
|
|
|
0.81
|
|
2007
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
1.46
|
|
|
$
|
0.90
|
|
Second Quarter
|
|
|
1.69
|
|
|
|
1.18
|
|
Third Quarter
|
|
|
1.40
|
|
|
|
1.12
|
|
Fourth Quarter
|
|
|
1.81
|
|
|
|
1.27
|
|
2008
|
|
|
|
|
|
|
|
|
First Quarter (through March 20, 2008)
|
|
$
|
1.58
|
|
|
$
|
1.17
|
|
On March 20, 2008, there were approximately 207
stockholders of record of our common stock.
Dividend
Policy
We have never declared or paid any cash dividends on our capital
stock and we do not currently intend to pay any cash dividends
on our capital stock for at least the foreseeable future. We
expect to retain future earnings, if any, to fund the
development and growth of our business. Any future determination
to pay dividends on our capital stock will be, subject to
applicable law, at the discretion of our board of directors and
will depend upon, among other factors, our results of
operations, financial condition, capital requirements and
contractual restrictions in loan agreements or other agreements.
31
Stock
Performance Graph
The following graph shows the total shareholder return of an
investment of $100 in cash on December 31, 2002 for
(i) our common stock, (ii) the Nasdaq composite Market
Index (the Nasdaq Index) and (iii) the Nasdaq
Pharmaceutical Index (the Nasdaq-Pharmaceutical).
The total return for our stock and for each index assumes the
reinvestment of dividends, although dividends have never been
declared on our stock, and is based on the returns of the
component companies weighted according to their capitalizations
as of the end of each quarterly period. The Nasdaq Index tracks
the aggregate price performance of equity securities traded on
the Nasdaq. The Nasdaq-Pharmaceutical tracks the aggregate price
performance of equity securities of pharmaceutical companies
traded on the Nasdaq Index. Our common stock is quoted on the
OTC Bulletin Board, an electronic quotation service for
securities traded over-the-counter.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Aradigm Corporation, The NASDAQ Composite Index
And The NASDAQ Pharmaceutical
|
|
|
* |
|
$100 invested on 12/31/02 in stock or index-including
reinvestment of dividends.
Fiscal year ending December 31. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Total Return
|
Index
|
|
12/02
|
|
12/03
|
|
12/04
|
|
12/05
|
|
12/06
|
|
12/07
|
Aradigm Corporation
|
|
|
100.00
|
|
|
|
105.56
|
|
|
|
106.79
|
|
|
|
45.06
|
|
|
|
11.11
|
|
|
|
18.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NASDAQ Composite
|
|
|
100.00
|
|
|
|
149.75
|
|
|
|
164.64
|
|
|
|
168.60
|
|
|
|
187.83
|
|
|
|
205.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NASDAQ Pharmaceutical
|
|
|
100.00
|
|
|
|
144.89
|
|
|
|
160.46
|
|
|
|
160.65
|
|
|
|
163.42
|
|
|
|
154.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
This section is not soliciting material, is not
deemed filed with the SEC, and is not to be
incorporated by reference into any filing of the Company under
the 1933 Act or 1934 Act, whether made before or after
the date hereof and irrespective of any general incorporation
language contained in such filing. |
32
|
|
Item 6.
|
Selected
Financial Data
|
The following selected financial data should be read in
conjunction with the Managements Discussion and
Analysis of Financial Condition and Results of Operations
and the financial statements and notes thereto included in this
Report on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
Statements of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract and license revenues
|
|
$
|
961
|
|
|
$
|
4,814
|
|
|
$
|
10,507
|
|
|
$
|
28,045
|
|
|
$
|
33,857
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
16,770
|
|
|
|
22,198
|
|
|
|
30,174
|
|
|
|
46,477
|
|
|
|
49,636
|
|
General and administrative
|
|
|
8,401
|
|
|
|
10,717
|
|
|
|
10,895
|
|
|
|
11,934
|
|
|
|
10,391
|
|
Restructuring and asset impairment
|
|
|
2,182
|
|
|
|
6,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
27,353
|
|
|
|
38,918
|
|
|
|
41,069
|
|
|
|
58,411
|
|
|
|
60,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(26,392
|
)
|
|
|
(34,104
|
)
|
|
|
(30,562
|
)
|
|
|
(30,366
|
)
|
|
|
(26,170
|
)
|
Gain on sale of patent and royalty interest to related party
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,573
|
|
|
|
1,251
|
|
|
|
1,317
|
|
|
|
194
|
|
|
|
338
|
|
Interest expense
|
|
|
(393
|
)
|
|
|
(197
|
)
|
|
|
(6
|
)
|
|
|
(16
|
)
|
|
|
(138
|
)
|
Other income (expense)
|
|
|
11
|
|
|
|
23
|
|
|
|
36
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(24,201
|
)
|
|
$
|
(13,027
|
)
|
|
$
|
(29,215
|
)
|
|
$
|
(30,189
|
)
|
|
$
|
(25,970
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.48
|
)
|
|
$
|
(0.89
|
)
|
|
$
|
(2.01
|
)
|
|
$
|
(2.37
|
)
|
|
$
|
(2.59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per share
|
|
|
50,721
|
|
|
|
14,642
|
|
|
|
14,513
|
|
|
|
12,741
|
|
|
|
10,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
40,510
|
|
|
$
|
27,514
|
|
|
$
|
27,694
|
|
|
$
|
16,763
|
|
|
$
|
29,770
|
|
Working capital
|
|
|
36,594
|
|
|
|
25,405
|
|
|
|
21,087
|
|
|
|
4,122
|
|
|
|
19,708
|
|
Total assets
|
|
|
45,813
|
|
|
|
32,226
|
|
|
|
39,497
|
|
|
|
79,741
|
|
|
|
95,218
|
|
Note payable and accrued interest to related party
|
|
|
8,071
|
|
|
|
7,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock
|
|
|
|
|
|
|
23,669
|
|
|
|
23,669
|
|
|
|
23,669
|
|
|
|
23,669
|
|
Accumulated deficit
|
|
|
(312,066
|
)
|
|
|
(287,865
|
)
|
|
|
(274,838
|
)
|
|
|
(245,623
|
)
|
|
|
(215,436
|
)
|
Total shareholders equity (deficit)
|
|
|
30,299
|
|
|
|
(3,947
|
)
|
|
|
7,171
|
|
|
|
35,754
|
|
|
|
52,970
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The discussion below contains forward-looking statements that
are based on the beliefs of management, as well as assumptions
made by, and information currently available to, management. Our
future results, performance or achievements could differ
materially from those expressed in, or implied by, any such
forward-looking statements as a result of certain factors,
including, but not limited to, those discussed in this section
as well as in the section entitled Risk Factors and
elsewhere in this report. This discussion should be read in
conjunction with the financial statements and notes to the
financial statements contained in this report.
33
Our business is subject to significant risks including, but
not limited to, our ability to implement our new product
development strategy, our ability to obtain additional
financing, the success of product development efforts, our
dependence on collaborators for certain programs, obtaining and
enforcing patents important to our business, clearing the
lengthy and expensive regulatory approval process and possible
competition from other products. Even if product candidates
appear promising at various stages of development, they may not
reach the market or may not be commercially successful for a
number of reasons. Such reasons include, but are not limited to,
the possibilities that the potential products may be found to be
ineffective during clinical trials, may fail to receive
necessary regulatory approvals, may be difficult to manufacture
on a large scale, are uneconomical to market, may be precluded
from commercialization by proprietary rights of third parties or
may not gain acceptance from health care professionals and
patients.
Overview
We are an emerging specialty pharmaceutical company focused on
the development and commercialization of a portfolio of drugs
delivered by inhalation for the treatment of severe respiratory
diseases by pulmonologists. Over the last decade, we have
invested a large amount of capital to develop drug delivery
technologies, particularly the development of a significant
amount of expertise in pulmonary drug delivery. We have also
invested considerable effort into the generation of a large
volume of laboratory and clinical data demonstrating the
performance of our AERx pulmonary drug delivery platform. We
have not been profitable since inception and expect to incur
additional operating losses over at least the next several years
as we expand product development efforts, preclinical testing
and clinical trial activities and possible sales and marketing
efforts and as we secure production capabilities from outside
contract manufacturers. To date, we have not had any significant
product sales and do not anticipate receiving any revenues from
the sale of products for at least the next several years. As of
December 31, 2007, we had an accumulated deficit of
$312.1 million. Historically, we have funded our operations
primarily through public offerings and private placements of our
capital stock, proceeds from equipment lease financings, license
fees and milestone payments from collaborators, proceeds from
the January 2005 restructuring transaction with Novo Nordisk,
borrowings from Novo Nordisk, and interest earned on
investments. On January 30, 2007, we closed the sale of
37,950,000 shares of common stock in an underwritten public
offering with net proceeds, after underwriting discount and
expenses, of approximately $33.2 million. (See Note 6
of the notes to the financial statements.)
We have performed initial feasibility work and conducted early
stage clinical work on a number of potential products and have
been compensated for expenses incurred while performing this
work in several cases pursuant to feasibility study agreements
and other collaborative arrangements. We will seek to develop
certain potential products ourselves, including those that can
benefit from our experience in pulmonary delivery, 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.
On August 30, 2007, the we signed an Exclusive License,
Development and Commercialization Agreement (the Lung Rx
Agreement) with Lung Rx, Inc. (Lung Rx), a
wholly-owned subsidiary of United Therapeutics Corporation,
pursuant to which we granted Lung Rx an exclusive license to
develop and commercialize inhaled treprostinil using our AERx
Essence technology for the treatment of pulmonary arterial
hypertension (PAH) and other potential therapeutic indications.
Under the terms of the Lung Rx Agreement, we are entitled to an
upfront fee of $440,000 and an additional fee of $440,000 due
four months after the signing date for a feasibility bridging
study. These fees are nonrefundable and were included in
deferred revenue in the accompanying balance sheet at
December 31, 2007. Under the terms of the agreement with
Lung Rx Agreement, we will initiate and be responsible for
conducting and funding a feasibility bridging study that
includes a bridging clinical trial intended to compare AERx
Essence to a nebulizer used in a recently completed Phase 3
registration trial conducted by United Therapeutics. We expect
that the bridging clinical trial will be completed in 2008.
Following the delivery of the final feasibility bridging study
report and Lung Rxs determination that the study was
successful, we expect to receive certain nonrefundable license
fees and milestone payments from Lung Rx.
34
These fees are generally dependent upon Lung Rxs
development of the product, and are expected to be paid within
three years of signing the Lung Rx Agreement. In addition, Lung
Rx will purchase $3.47 million of our common stock at an
average closing price over a certain trailing period within
15 days of Lung Rxs determination that the
feasibility bridging study was successful. Under the terms of
the Lung Rx Agreement, Lung Rx will pay for the remaining
development costs and will also be responsible for
manufacturing. Following commercialization of the product, we
will receive royalties from Lung Rx on a tiered basis of up to
10% of net sales for any licensed products.
In 2004, we executed a development agreement with Defence
Research and Development Canada (DRDC), 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, and for the treatment of respiratory infections
associated with non-CF bronchiectasis a chronic
pulmonary disease with symptoms similar to cystic fibrosis
affecting over 100,000 patients in USA. We initiated
preclinical studies for our ARD-3100 product candidate in 2006
and initiated human clinical studies for the CF indication in
late 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.
Prior to 2004, we began the development of the AERx iDMS, for
the control of blood glucose levels in patients with diabetes
and we subsequently licensed this product to Novo Nordisk for
further development 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, were
also transferred to Novo Nordisk in January 2005. On
January 14, 2008, Novo Nordisk issued a press release
announcing the termination of its phase 3 clinical trials for
fast-acting inhaled insulin delivered via the AERx iDMS. The
press release stated that Novo Nordisk was not terminating the
trials because of any safety concerns and stated that Novo
Nordisk would increase research and development activities
targeted at inhalation systems for long-acting formulations of
insulin and GLP-1. Also on January 14, 2008, we received a
120-day
notice from Novo Nordisk terminating the Second Amended and
Restated License Agreement dated July 3, 2006 between Novo
Nordisk and Aradigm. We filed the Second Amended and Restated
License Agreement dated July 3, 2006 as an exhibit to our
Form 10-Q
filed on August 14, 2006. We are in discussions with Novo
Nordisk to determine the ongoing rights and obligations of the
parties in light of Novo Nordisks recent decision and to
determine what, if any, future collaborations the parties may
pursue.
In 2008, we expect self-initiated research and development
expenses to increase over 2007; 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.
Relationship
with Novo Nordisk
On January 14, 2008, we received a
120-day
notice from Novo Nordisk terminating the Second Amended and
Restated License Agreement dated July 3, 2006 between Novo
Nordisk and Aradigm. Our relationship with Novo Nordisk began in
June 1998 when we 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 was granted exclusive
rights to worldwide sales of the resulting product and marketing
rights for any additional products developed under the terms of
the agreement. Following the development and commercialization
agreement, we entered into a manufacturing and supply agreement
and a patent cooperation agreement dated October 22, 2001.
In September 2004, we effectively terminated the 2001 agreement
by entering into a restructuring agreement with Novo Nordisk and
its subsidiary NNDT.
Upon further restructuring on January 26, 2005, we sold
certain equipment, leasehold improvements and other tangible
assets used in the AERx iDMS program to NNDT for a cash payment
of approximately $55.3 million (before refund of cost
advances made by Novo Nordisk). Our expenses related to this
transaction for legal and other
35
consulting costs were approximately $1.1 million. We also
entered into various related agreements with Novo Nordisk and
NNDT on January 26, 2005 that included the following:
|
|
|
|
|
an amended and restated license agreement amending the
development and license agreement previously in place with Novo
Nordisk, expanding Novo Nordisks development and
manufacturing rights to the AERx iDMS program and providing for
royalties to us on future AERx iDMS net sales in lieu of a
percentage interest in the gross profits from the
commercialization of the AERx iDMS, which royalties run until
the later of last patent expiry or last use of our intellectual
property and which apply to future enhancements or generations
of our AERx delivery technology;
|
|
|
|
a three-year agreement under which NNDT agreed to perform
contract manufacturing of AERx iDMS-identical devices and AERx
Strip 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.
|
On July 3, 2006, we further restructured our relationship
with Novo Nordisk by entering into a Second Amended and Restated
License Agreement to reflect the following:
|
|
|
|
|
our transfer to Novo Nordisk of certain intellectual property,
including all rights, title and interest to the 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 us for
a cash payment to us of $12.0 million, with Aradigm
retaining exclusive, royalty-free control of these patents
outside the field of glucose control.
|
|
|
|
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.
|
|
|
|
our issuance of an eight-year promissory note to Novo Nordisk in
connection with our receipt from Novo Nordisk of a loan in the
principal amount of $7.5 million with interest at 5% per
year that will be payable to Novo Nordisk in three equal annual
payments commencing in July 2012. Our obligations under the note
are secured by royalty payments upon any commercialization of
the AERx iDMS product.
|
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.
From the inception of our collaboration in June 1998 through
December 31, 2007, we have received from Novo Nordisk
approximately $150 million in product development and
milestone payments and $35 million from the purchase of our
common stock by Novo Nordisk and its affiliates. Revenue
recognized related to the Novo Nordisk collaboration for the
years ended December 31, 2007, 2006 and 2005 was $23,000,
$59,000 and $8.0 million, respectively.
Purchase
and Sale of Intraject Technology
In May 2003, we acquired selected assets from the Weston Medical
Group, a company based in the United Kingdom, including the
Intraject needle-free delivery technology, related manufacturing
equipment and intellectual property and associated transfer
costs, for a total of $2.9 million. The purchase price and
additional costs were allocated to the major pieces of purchased
commercial equipment for the production of Intraject and were
recorded in property and equipment as
construction-in-progress.
No costs or expenses were allocated to intellectual property or
in-process research and development given the lack of market
information, early stage of development and the immateriality,
based on the substantial value of the tangible assets acquired,
of any allocation to intellectual property or in-process
research and development.
36
In August 2006, we sold all of our assets related to the
Intraject technology platform and products, including 12 United
States patents along with any foreign counterparts corresponding
to those United States patents to Zogenix, a newly created
private company that had some officers who were former officers
of our company. Zogenix is responsible for further development
and commercialization efforts of Intraject. We recorded a
non-cash impairment charge of $4.0 million in 2006 to write
down our Intraject-related assets, based solely on their net
realizable value without giving effect to any future milestone
or royalty payments. We sold these assets for a
$4.0 million initial payment and we are entitled to a
milestone and royalty payments upon any commercialization of
products that may be developed and sold using the Intraject
technology.
Critical
Accounting Policies and Estimates
We consider certain accounting policies related to revenue
recognition, stock-based compensation, impairment of long-lived
assets, exit/disposal activities and income taxes to be critical
accounting policies that require the use of significant
judgments and estimates relating to matters that are inherently
uncertain and may result in materially different results under
different assumptions and conditions. The preparation of
financial statements in conformity with United States generally
accepted accounting principles requires us to make estimates and
assumptions that affect the amounts reported in the financial
statements and accompanying notes to the financial statements.
These estimates include useful lives for property and equipment
and related depreciation calculations, estimated amortization
periods for payments received from product development and
license agreements as they relate to the revenue recognition and
assumptions for valuing options, warrants and other stock-based
compensation. Our actual results could differ from these
estimates.
Revenue
Recognition
Contract revenues consist of revenues from grants, collaboration
agreements and feasibility studies. We recognize revenue under
the provisions of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 104, Revenue
Recognition (SAB 104) and Emerging Issues
Task Force (EITF) Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables
(EITF 00-21).
Revenue for arrangements not having multiple deliverables, as
outlined in
EITF 00-21,
is recognized once costs are incurred and collectability is
reasonably assured. Under some agreements our collaborators have
the right to withhold reimbursement of costs incurred until the
work performed under the agreement is mutually agreed upon. For
these agreements, we recognize revenue upon acceptance of the
work and confirmation of the amount to be paid by the
collaborator. 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 recognized as revenue either
upon completion of the milestone effort, when payments are
contingent upon completion of the effort, or are based on actual
efforts expended over the remaining term of the agreement when
payments precede the required efforts. Costs of contract
revenues are approximate to or are greater than such revenues,
and are included in research and development expenses. We defer
refundable development and license fee payments until specific
performance criteria are achieved. Refundable development and
license fee payments are generally not refundable once specific
performance criteria are achieved and accepted.
Collaborative license and development agreements that require us
to provide multiple deliverables, such as a license, research
and product steering committee services and other performance
obligations, are accounted for in accordance with
EITF 00-21.
Under
EITF 00-21,
delivered items are evaluated to determine whether such items
have value to our collaborators on a stand-alone basis and
whether objective reliable evidence of fair value of the
undelivered items exist. Deliverables that meet these criteria
are considered a separate unit of accounting. Deliverables that
do not meet these criteria are combined and accounted for as a
single unit of accounting. The appropriate revenue recognition
criteria are identified and applied to each separate unit of
accounting.
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, we review for
impairment whenever events or changes in circumstances indicate
that the carrying amount of property and equipment may not be
recoverable. Determination of
37
recoverability is based on an estimate of undiscounted future
cash flows resulting from the use of the asset and its eventual
disposition. In the event that such cash flows are not expected
to be sufficient to recover the carrying amount of the assets,
we write down the assets to their estimated fair values and
recognize the loss in the statements of operations. We recorded
a non-cash impairment charge of $4.0 million in 2006,
related to our estimate of the net realizable value of the
Intraject-related assets, based on the expected sale of those
assets.
Accounting
for Costs Associated with Exit or Disposal
Activities
In accordance with SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities
(SFAS 146), we recognize a liability
for the cost associated with an exit or disposal activity that
is measured initially at its fair value in the period in which
the liability is incurred, except for a liability for one-time
termination benefits that is incurred over time. According to
SFAS 146, costs to terminate an operating lease or other
contracts are (a) costs to terminate the contract before
the end of its term or (b) costs that will continue to be
incurred under the contract for its remaining term without
economic benefit to the entity. In periods subsequent to initial
measurement, changes to the liability are measured using the
credit-adjusted risk-free rate that was used to measure the
liability initially. We recorded a non-cash charge of
$2.1 million for exit activities related to the subleasing
of a portion of our facility in July 2007.
Research
and Development
Research and development expenses consist of costs incurred for
company-sponsored, collaborative and contracted research and
development activities. These costs include direct and
research-related overhead expenses. Research and development
expenses under collaborative and government grants approximate
the revenue recognized under such agreements. We expense
research and development costs as such costs are incurred.
Income
Taxes
We make certain estimates and judgments in determining income
tax expense for financial statement purposes. These estimates
and judgments occur in the calculation of certain tax assets and
liabilities, which arise from differences in the timing of
recognition of revenue and expense for tax and financial
statement purposes. As part of the process of preparing our
financial statements, we are required to estimate our income
taxes in each of the jurisdictions in which we operate. This
process involves us estimating our current tax exposure under
the most recent tax laws and assessing temporary differences
resulting from differing treatment of items for tax and
accounting purposes.
We assess the likelihood that we will be able to recover our
deferred tax assets. We consider all available evidence, both
positive and negative, including our historical levels of income
and losses, expectations and risks associated with estimates of
future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for a valuation
allowance. If we do not consider it more likely than not that we
will recover our deferred tax assets, we will record a valuation
allowance against the deferred tax assets that we estimate will
not ultimately be recoverable. At December 31, 2007, we
believed that the amount of our deferred income taxes would not
be ultimately recovered. Accordingly, we recorded a full
valuation allowance for deferred tax assets. However, should
there be a change in our ability to recover our deferred tax
assets, we would recognize a benefit to our tax provision in the
period in which we determine that it is more likely than not
that we will recover our deferred tax assets.
Stock-Based
Compensation
Prior to January 1, 2006, we 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
was 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 No. 123, Accounting for Stock-Based
Compensation (SFAS 123), as amended by
SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, we have
38
provided below the pro forma disclosures of the effect on net
loss and loss per share as if SFAS 123 had been applied in
measuring compensation expense (in thousands, except per share
data).
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2005
|
|
|
Net loss as reported
|
|
$
|
(29,215
|
)
|
Add:
|
|
|
|
|
Stock-based employee compensation expense included in reported
net loss
|
|
|
21
|
|
Less:
|
|
|
|
|
Total stock-based employee compensation expense determined under
fair value based method for all awards
|
|
|
(3,066
|
)
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(32,260
|
)
|
|
|
|
|
|
Basic and diluted net loss per common share:
|
|
|
|
|
As reported
|
|
$
|
(2.01
|
)
|
Pro forma
|
|
$
|
(2.22
|
)
|
Valuation
assumptions
Pro forma information regarding net loss and basic and diluted
net loss per common share prepared in accordance with
SFAS 123, as amended, has been determined as if we had
accounted for our 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 weighted average assumptions:
|
|
|
|
|
Year Ended
|
|
|
December 31, 2005
|
|
Employee Stock Options
|
|
|
Dividend yield
|
|
0.0%
|
Volatility factor
|
|
97.6%
|
Risk-free interest rate
|
|
3.8%
|
Expected life (years)
|
|
4.0
|
Weighted-average fair value of options granted during the year
|
|
$4.10
|
We account for options and warrants issued to non-employees
under SFAS 123 and
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 3.8% to 5.1%, using
applicable United States Treasury rates; a dividend yield of
0.0%; an annual volatility factor of 72% to 98%; and an average
expected life based on the terms of the option grant or
contractual term of the warrant of 3 to 10 years. Expense
recognized related to options and warrants issued to
non-employees was $109,000, $130 and $117,000 during the years
ended December 31, 2007, 2006 and 2005, respectively.
Adoption
of SFAS No. 123R
We adopted the fair value recognition provisions of
SFAS No. 123(R) (revised 2004), Share-based
Payment, (SFAS 123(R)) effective
January 1, 2006. Stock-based compensation expense is based
on the fair value of that portion of employee stock options that
are ultimately expected to vest during the period. Stock-based
compensation expense recognized in our statement of operations
during 2007 and 2006 included compensation expense for
stock-based awards granted prior to, but not yet vested, as of
December 31, 2005, based on the grant date fair value
estimated in accordance with the pro forma provisions of
SFAS 123, and share-based payment awards granted subsequent
to December 31, 2005 based on the grant date fair value
estimated in accordance with SFAS 123(R). For stock options
granted after January 1, 2006, the fair value of each award
is amortized using the straight-line single-
39
option method. For share awards granted prior to 2006, the fair
value of each award is amortized using the accelerated
multiple-option valuation method prescribed by SFAS 123.
Stock-based compensation expense is based on awards ultimately
expected to vest, therefore, it has been reduced for estimated
forfeitures. SFAS 123(R) requires forfeitures to be
estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates. We estimated forfeitures based on historical
experience. In the information required under SFAS 123 for
the periods prior to 2006, we accounted for forfeitures as they
occurred.
In November 2005, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position
No. FAS 123(R)-3, Transition Election Related to
Accounting for the Tax Effects of Share-Based Payment
Awards. We have adopted the simplified method to calculate
the beginning balance of the additional
paid-in-capital
(APIC) pool of the excess tax benefit, and to
determine the subsequent impact on the APIC pool and our
statements of cash flows of the tax effects of employee
stock-based compensation awards that were outstanding upon our
adoption of SFAS 123(R).
The following table shows the effect of SFAS 123(R) on
stock-based employee compensation expense included in the
statement of operations for the years ended December 31,
2007 and 2006, respectively (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
664
|
|
|
$
|
882
|
|
General and administrative
|
|
|
718
|
|
|
|
740
|
|
|
|
|
|
|
|
|
|
|
Total stock-based employee compensation expense
|
|
$
|
1,382
|
|
|
$
|
1,622
|
|
|
|
|
|
|
|
|
|
|
Impact on basic and diluted net loss per common share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
The fair value of options was estimated at the date of grant
using the Black-Scholes option pricing model. Expected
volatility is based on the historical volatility of our common
stock. The expected life was estimated using a lattice model to
estimate the expected term as an input into the Black-Scholes
option pricing model. The expected term represents the estimated
period of time that stock options granted are expected to be
outstanding. The risk-free interest rate is based on the
U.S. Treasury yield. The expected dividend yield is zero,
as we do not anticipate paying dividends in the near future. The
weighted average assumptions are as follows:
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
2007
|
|
2006
|
|
Employee Stock Options
|
|
|
|
|
Dividend yield
|
|
0.0%
|
|
0.0%
|
Volatility factor
|
|
76.7%
|
|
86.6%
|
Risk-free interest rate
|
|
4.0%
|
|
4.9%
|
Expected life (years)
|
|
4.0
|
|
4.2
|
Weighted-average fair value of options granted during the periods
|
|
$0.86
|
|
$1.40
|
There was no capitalized stock-based employee compensation cost
as of December 31, 2007. Since we incurred net losses in
2007 and 2006, we recognized no tax benefit as of
December 31, 2007 or 2006 associated with stock-based
compensation expense. As of December 31, 2007, $2,571,000
of total unrecognized compensation costs, net of forfeitures,
related to non-vested awards is expected to be recognized over a
weighted average period of 2.85 years. Total stock-based
compensation expense included restricted stock awards in the
amount of $107,000 and $85,000 for the years ended
December 31, 2007 and 2006, respectively. For restricted
common stock awards, we recognize compensation expense over the
vesting period for the fair market value of the stock awards on
the measurement date. Unvested restricted stock awards subject
to repurchase, at no cost to us, were 771,000 and
70,000 shares as of December 31, 2007 and 2006,
respectively.
40
Results
of Operations
Years
Ended December 31, 2007 and 2006
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Decrease
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related parties
|
|
$
|
23
|
|
|
$
|
59
|
|
|
$
|
(36
|
)
|
|
|
(61
|
)%
|
Unrelated parties
|
|
|
938
|
|
|
|
4,755
|
|
|
|
(3,817
|
)
|
|
|
(80
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
961
|
|
|
$
|
4,814
|
|
|
$
|
(3,853
|
)
|
|
|
(80
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The primary reason for the decreases in revenue was the
conclusion of most of our collaboration agreements in 2006 and
our shift in focus away from collaborations and towards
self-funded product development. Our related party revenue was
the result of our collaboration work with NNDT. Decreased
revenue from NNDT reflects the shift in development work for
AERx iDMS program to NNDT which occurred in 2005. For the year
ended December 31, 2007, we recorded collaborative revenues
of $566,000 related to ARD-1100 funded by DRDC (compared to
$1.4 million in 2006), $161,000 from our transition
agreement with Zogenix (compared to $0.9 million in 2006),
$192,000 from APT (compared to $1.7 million in
2006) and $19,000 from Respironics (compared to
$0.8 million from various contracts with unrelated parties
in 2006).
Research
and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Decrease
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Research and development expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaborative
|
|
$
|
862
|
|
|
$
|
4,440
|
|
|
$
|
(3,578
|
)
|
|
|
(81
|
)%
|
Self-initiated
|
|
|
15,908
|
|
|
|
17,758
|
|
|
|
(1,850
|
)
|
|
|
(10
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses
|
|
$
|
16,770
|
|
|
$
|
22,198
|
|
|
$
|
(5,428
|
)
|
|
|
(24
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses represent proprietary research
expenses and costs related to contract research revenue, which
include salaries, payments to contract manufacturers and
contract research organizations, contractor and consultant fees,
stock-based compensation expense and other support costs
including facilities, depreciation and travel costs. The
decrease of $3.6 million in collaborative program expenses
for the year ended December 31, 2007 was due primarily to
the transition from contract research agreements to focus on the
development of our lead candidate, ARD-3100. Similarly, the
decrease of $1.9 million in research and development
expense for self-initiated projects was due primarily to a
strategic restructuring of our business to focus resources on
advancing our lead product candidate as well as the sale of
Intraject-related assets to Zogenix in August 2006. We expect
that our research and development expenses will increase over
the next few quarters as we continue the development of our lead
candidate, ARD-3100 and other product opportunities, which will
be offset in part by a decrease in facility expense resulting
from the sublease agreement with Mendel (see Note 13 of the
notes to the financial statements). Stock-based compensation
expense charged to research and development was $664,000 and
$882,000 for the years ended December 31, 2007 and 2006,
respectively.
General
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Decrease
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
$
|
8,401
|
|
|
$
|
10,717
|
|
|
$
|
(2,316
|
)
|
|
|
(22
|
)%
|
41
General and administrative expenses represent salaries, legal
fees, insurance, marketing research, contractor and consultant
fees, stock-based compensation expense, and other support costs
including facilities, depreciation and travel costs. The
decrease in general and administrative expenses for the year
ended December 31, 2007 compared to 2006 primarily relates
to the reduction in force announced in May 2006 and October 2006
and the reduction in legal costs, which in 2006 included costs
associated with the 2006 Novo Nordisk restructuring agreement
and the sale of Intraject-related assets to Zogenix. We expect
that our general and administrative expenses will continue to
decrease primarily as a result of our facility sublease
agreement with Mendel (see Note 13 of the notes to the
financial statements). Stock-based compensation expense charged
to general and administrative expenses was $718,000 and $740,000
for the years ended December 31, 2007 and 2006,
respectively.
Restructuring
and Asset Impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Decrease
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Restructuring and impairment expenses
|
|
$
|
2,182
|
|
|
$
|
6,003
|
|
|
$
|
(3,821
|
)
|
|
|
(64
|
)%
|
Restructuring and asset impairment expenses for the year ended
December 31, 2007 were primarily due to the expected loss
of $2.1 million associated with the subleasing of the
office space to Mendel because the monthly payments we expect to
receive from Mendel under the sublease are less than the amounts
we will owe to the lessor for the sublease space (see
Note 13 of the notes to the financial statements). The
balance of the restructuring and asset impairment expenses for
the year ended December 31, 2007 included severance-related
expenses relating to our 2006 restructuring efforts (see
Note 15 of the notes to the financial statements).
Restructuring and asset impairment expenses in the same period
in 2006 were comprised of severance-related expenses including
payroll, health insurance payments, outplacement expenses and
Intraject-related asset impairment expenses. Severance-related
expenses for the year ended December 31, 2006 were
approximately $2.0 million due to the reduction in force
announced in May 2006 and the departure of our former President
and Chief Executive Officer, our former Senior Vice President of
Operations and other officers in August 2006. In addition, we
recorded an asset impairment expense of $4.0 million during
the year ended December 31, 2006 to reflect the write-down
of our Intraject-related assets to their net realizable value
based on the sale of those assets in August 2006.
Gain on
sale of patents and royalty interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Decrease
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Gain on sale of patent and royalty interest
|
|
$
|
|
|
|
$
|
20,000
|
|
|
$
|
(20,000
|
)
|
|
|
(100
|
)%
|
The $20 million gain on sale of patents and royalty
interest recorded during the year ended December 31, 2006
reflected two transactions entered into by us with Novo Nordisk,
a related party; (i) the transfer by us of certain
intellectual property, including all rights, title and interest
to the patents that contained claims that pertained generally to
breath control or specifically to the pulmonary delivery of
monomeric insulin and monomeric insulin analogs, together with
interrelated patents, which were linked via terminal
disclaimers, as well as certain pending patent applications and
continuations thereof by us for a cash payment to us of
$12.0 million, with us 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 us for a cash payment to us of
$8.0 million (see Note 9 of the notes to the financial
statements); and (iii) a loan to us in the principal amount
of $7.5 million, secured by a pledge of the net royalty
stream payable to us by Novo Nordisk pursuant to the License
Agreement. We did not sell any patents or royalty interest
during the year ended December 31, 2007.
42
Interest
Income, Interest Expense and Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase (decrease)
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Interest income, interest expense and other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
2,573
|
|
|
$
|
1,251
|
|
|
$
|
1,322
|
|
|
|
106
|
%
|
Interest expense
|
|
|
(393
|
)
|
|
|
(197
|
)
|
|
|
196
|
|
|
|
99
|
%
|
Other income (expense)
|
|
|
11
|
|
|
|
23
|
|
|
|
(12
|
)
|
|
|
(52
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income, interest expense and other income
(expense)
|
|
$
|
2,191
|
|
|
$
|
1,077
|
|
|
$
|
1,114
|
|
|
|
103
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income for the year ended December 31, 2007
increased $1.3 million over the comparable period in 2006
due to a higher average invested balance. Interest expense
primarily reflects the expense on the $7.5 million note
payable, with an interest rate of 5%, issued to Novo Nordisk in
July 2006. The decrease in other income primarily reflects the
decrease in realized gain from exchange rate transactions with
the Canadian government.
Results
of Operations
Years
Ended December 31, 2006 and 2005
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Increase (decrease)
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related parties
|
|
$
|
59
|
|
|
$
|
8,013
|
|
|
$
|
(7,954
|
)
|
|
|
(99
|
)%
|
Unrelated parties
|
|
|
4,755
|
|
|
|
2,494
|
|
|
|
2,261
|
|
|
|
91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
4,814
|
|
|
$
|
10,507
|
|
|
$
|
(5,693
|
)
|
|
|
(54
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We reported revenue from collaborative contracts of
$4.8 million in 2006 compared to $10.5 million in
2005. The decrease in revenue in 2006 compared to 2005 was
primarily due to decreases in partner-funded project development
revenue from Novo Nordisk, which was $59,000 in 2006 compared to
$8.0 million in 2005. Increases in contract revenue from
other partner-funded programs, however, served to offset a
portion of the revenue drop from Novo Nordisk. Revenue from
other partner programs totaled $4.8 million in 2006 versus
$2.5 million in 2005 and included transition and support to
Zogenix in connection with the Intraject sale in 2006 for
$869,000 and milestone revenue from our ARD-1300 development
program which amounted to $484,000 in 2006 and $162,000 in 2005.
Research
and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Decrease
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Research and development expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaborative
|
|
$
|
4,440
|
|
|
$
|
5,996
|
|
|
$
|
(1,556
|
)
|
|
|
(26
|
)%
|
Self-initiated
|
|
|
17,758
|
|
|
|
24,178
|
|
|
|
(6,420
|
)
|
|
|
(27
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses
|
|
$
|
22,198
|
|
|
$
|
30,174
|
|
|
$
|
(7,976
|
)
|
|
|
(26
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses represent proprietary research
expenses and costs related to contract research revenue, which
include salaries, payments to contract manufacturers and
contract research organizations,
43
contractor and consultant fees, stock-based compensation expense
and other support costs including facilities, depreciation and
travel costs.
Research and development expenses in 2006 decreased by
$8.0 million, or 26%, compared to 2005. The decrease in
research and development expense was due primarily to the
completion of our Intraject clinical batch registration lot
activities being substantially completed at year-end 2005 and
finalized in early 2006. In addition, on May 15, 2006, we
announced the implementation of a strategic restructuring of our
business operations to focus resources on advancing the current
product pipeline and initiated a reduction in force to better
align our cost structure with our new focus. In August 2006, we
sold, for milestone payments and royalties, all of our assets
related to the Intraject technology platform to Zogenix, a newly
created private company that is responsible for further
development and commercialization efforts of Intraject.
Stock based compensation expense charged to research and
development in 2006 was $882,000 compared to none in 2005 due to
the adoption of SFAS No. 123R effective
January 1, 2006.
General
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Decrease
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
$
|
10,717
|
|
|
$
|
10,895
|
|
|
$
|
(178
|
)
|
|
|
(2
|
)%
|
General and administrative expenses were $10.7 million in
2006 compared to $10.9 million in 2005. General and
administrative expenses decreased in 2006 over 2005 by $178,000,
or 2%. The reduction was primarily the result of the reduction
in force brought about by the product realignment restructuring
in mid-2006 offset to a large degree by increases in stock-based
compensation expense of $740,000 due to the adoption of
SFAS No. 123R effective January 1, 2006.
Restructuring
and Asset Impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Increase
|
|
|
|
(In thousands)
|
|
|
|
|
|
Restructuring and impairment expenses
|
|
$
|
6,003
|
|
|
$
|
|
|
|
$
|
6,003
|
|
Restructuring and asset impairment were comprised of
severance-related expenses including payroll, health insurance
payments, outplacement expenses and Intraject-related asset
impairment expenses. Severance-related expenses for the year
ended December 31, 2006 were approximately
$2.0 million due to the reduction in force announced in May
2006 and the departure of our former President and Chief
Executive Officer, our former Senior Vice President of
Operations and other officers in August 2006. In addition, we
recorded an asset impairment expense of $4.0 million during
the year ended December 31, 2006 to reflect the write-down
of our Intraject-related assets to their net realizable value
based on the sale of those assets in August 2006. There were no
restructuring and impairment expenses for the year ended
December 31, 2005.
Gain on
sale of patents and royalty interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Increase
|
|
|
|
(In thousands)
|
|
|
|
|
|
Gain on sale of patent and royalty interest
|
|
$
|
20,000
|
|
|
$
|
|
|
|
$
|
20,000
|
|
On July 3, 2006, we entered into a Second Amended and
Restated License Agreement with Novo Nordisk A/S to reflect:
(i) the transfer by us 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 for a cash
payment to us of
44
$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 us for a cash
payment to us of $8.0 million; and (iii) a loan to us
in the principal amount of $7.5 million, secured by a
pledge of the net royalty stream payable to us by Novo Nordisk
pursuant to the License Agreement (see Note 11 of the notes
to the financial statements).
The $12.0 million and the $8.0 million payments were
included in gain on sale of patent and royalty interest line
item for the year ended December 31, 2006. There was no
similar transaction in 2005.
Interest
Income, Interest Expense and Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Increase (decrease)
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Interest income, interest expense and other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
1,251
|
|
|
$
|
1,317
|
|
|
$
|
(66
|
)
|
|
|
(5
|
)%
|
Interest expense
|
|
|
(197
|
)
|
|
|
(6
|
)
|
|
|
191
|
|
|
|
3,183
|
%
|
Other income (expense)
|
|
|
23
|
|
|
|
36
|
|
|
|
(13
|
)
|
|
|
(36
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income, interest expense and other income
(expense)
|
|
$
|
1,077
|
|
|
$
|
1,347
|
|
|
$
|
(270
|
)
|
|
|
(20
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income was $1.3 million in 2006 and 2005. The
average cash and investment balances in 2006 included the
receipts of proceeds of approximately $20.0 million from
the sale of patents and royalty interest to Novo Nordisk in July
2006, proceeds from a $7.5 million promissory note issued
to Novo Nordisk and the sale of Intraject related assets to
Zogenix for $4.0 million in August 2006. The average cash
and investment balances in 2005 included the receipt of net
proceeds of approximately $11.7 million from a private
placement of common stock in December 2004 and net proceeds of
approximately $51.1 million from the closing of the
restructuring transaction with Novo Nordisk in January 2005.
Interest expense was $197,000 in 2006 as compared to $6,000 in
2005. Interest expense in 2006 primarily reflects the interest
expense on the $7.5 million note issued to Novo Nordisk in
July 2006. The note accrues interest at 5% per annum.
Other income (expense) was approximately $23,000 in 2006
compared to $36,000 in 2005. The decrease in 2006 over 2005 was
largely due to a net loss on sale of assets.
Liquidity
and Capital Resources
As of December 31, 2007, we had cash, cash equivalents and
short-term investments of $40.5 million and total working
capital of $36.6 million. Our principal requirements for
cash are to fund working capital needs, and, to a lesser extent,
capital expenditures for equipment purchases.
Net cash used in operating activities in 2007 was
$19.2 million reflecting our net loss of $24.2 million
offset by non-cash charges including leased facility exit cost,
stock-based compensation expense, depreciation and amortization
expense. Additionally, operating cash was used to pay for
severance related expenses related to the reduction in workforce
offset by advance collections related to a partnered program.
This contrasts to net cash used in operating activities for 2006
of $30.3 million. The decrease in 2007 over 2006 was the
result of a higher net loss in 2006 when adjusted for the
$20 million sale of patents and royalty rights to Novo
Nordisk (the proceeds were classified as an investing activity)
and higher cash payments in 2006 for severance related payouts
and invoices related to the Intraject program. Net cash used in
operating activities in 2005 was $34.6 million. The
$4.3 million decrease in operating cash usage in 2006 from
2005 was primarily the result of cash used to fund collaborative
activities in 2005 that were paid in advance from a prior year.
Net cash used in investing activities was $11.1 million
during 2007. We used $1.1 million for purchases of
equipment and $17.0 million for the purchase of short-term
investments, which was offset by $7.0 million in
45
proceeds from sales of short-term investments. This compares to
net cash provided by investing activities for 2006 of
$21.7 million which consisted primarily of
$4.0 million proceeds from the sale of Intraject assets and
$20.0 million proceeds from sale of patents and royalty
interest to Novo Nordisk. A $1.8 million purchase of fixed
assets relating to our self funded programs and our purchase of
$0.5 million in securities classified as short-term
investments offset the proceeds from investing activities in
2006.
Net cash provided by investing activities in 2005 was
$47.4 million. The lower 2006 amount provided by investing
activities over 2005 was primarily due to sale of assets to NNDT
in connection with the restructuring transaction with Novo
Nordisk that closed in January 2005 in the amount of
$50.3 million as compared to $24.0 million from the
sale of patents and royalty rights to Novo Nordisk and the
Intraject asset sale in 2006. Additionally, the sale of
investments in 2005 of $7.8 million, versus zero in 2006,
also contributed to the lower cash generation in 2006. The
overall decrease in 2006 over 2005 was offset in part by higher
capital expenditures in 2005 of $5.3 million as compared to
$1.8 million in 2006, primarily due to a decrease in our
Intraject clinical batch activities that were finalized in early
2006.
Net cash provided by financing activities was $33.3 million
for 2007 compared to $7.9 million in 2006. The large
increase was due primarily to the net proceeds of
$33.2 million from our public financing completed on
January 30, 2007 as compared to the proceeds from the
$7.5 million promissory note payable issued to Novo Nordisk
in 2006, $160,000 repayment of notes receivable from officers
and $288,000 in net cash provided by purchases under our
employee stock plans. Net cash provided by financing activities
in 2005 was $0.6 million and represented issuance of common
stock upon exercise of stock options and purchase of common
stock under the employee stock purchase plan of
$0.5 million and repayment of notes receivable from
officers and employees of $92,000.
Our research and development efforts have and will continue to
require a commitment of substantial funds to conduct the costly
and time-consuming research and preclinical and clinical testing
activities necessary to develop and refine our technology and
proposed products and to bring any such products to market. Our
future capital requirements will depend on many factors,
including continued progress and the results of the research and
development of our technology and drug delivery systems, our
ability to establish and maintain favorable collaborative
arrangements with others, progress with preclinical studies and
clinical trials and the results thereof, the time and costs
involved in obtaining regulatory approvals, the cost of
development and the rate of
scale-up of
our production technologies, the cost involved in preparing,
filing, prosecuting, maintaining and enforcing patent claims,
and the need to acquire licenses or other rights to new
technology.
Since inception, we have financed our operations primarily
through public offerings and private placements of our capital
stock, proceeds from equipment lease financings, contract
research funding, proceeds from the sale of assets to Novo
Nordisk in connection with restructuring transactions including
sale of patents and royalty interest, borrowings from Novo
Nordisk and interest earned on investments.
We continue to review our planned operations through the end of
2008, and beyond. We particularly focus on capital spending
requirements to ensure that capital outlays are not expended
sooner than necessary. If we make satisfactory progress in our
development programs, we would expect our cash requirements for
capital spending and operations to increase in future periods.
We currently expect our total capital outlays for 2008 to be
approximately $3.0 million. We anticipate the majority of
our total 2008 outlays to be associated with our lead product
candidate, ARD-3100.
We have incurred significant losses and negative cash flows from
operations since our inception. At December 31, 2007, we
had an accumulated deficit of $312.1 million, working
capital of $36.6 million, and shareholders equity of
$30.3 million. We believe that cash, cash equivalents and
short term investments at December 31, 2007 will be
sufficient to enable us to meet our obligations at least through
the end of 2008.
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
46
or any obligation arising out of a material variable interest in
an unconsolidated entity. We do not have any majority-owned
subsidiaries.
Contractual
Obligations
Our contractual obligations and future minimum lease payments
that are non-cancelable at December 31, 2007 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
|
|
$
|
18,830
|
|
|
$
|
2,366
|
|
|
$
|
4,532
|
|
|
$
|
4,060
|
|
|
$
|
7,872
|
|
Promissory note(1)
|
|
|
10,543
|
|
|
|
|
|
|
|
|
|
|
|
3,514
|
|
|
|
7,029
|
|
Unconditional capital purchase obligations
|
|
|
443
|
|
|
|
443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconditional purchase obligations
|
|
|
2,881
|
|
|
|
2,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual commitments
|
|
|
32,697
|
|
|
|
5,690
|
|
|
|
4,532
|
|
|
|
7,574
|
|
|
|
14,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less-sublease payments from Mendel(2)
|
|
|
(4,524
|
)
|
|
|
(866
|
)
|
|
|
(1,828
|
)
|
|
|
(1,830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual commitments, net(2)
|
|
$
|
28,173
|
|
|
$
|
4,824
|
|
|
$
|
2,704
|
|
|
$
|
5,744
|
|
|
$
|
14,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents repayments of principal and interest on the Novo
Nordisk promissory note. The Novo Nordisk promissory note does
contain a number of covenants that include restrictions in the
event of changes to corporate structure, change in control and
certain asset transactions (see Note 11 of the notes to the
financial statements.) |
|
(2) |
|
Included to demonstrate the effect of the sublease with Mendel
entered on July 18, 2007. Mendel has the option to
terminate the sublease early on September 1, 2012 for a
termination fee of $225,000. In the event that the sublease is
not terminated early in 2012, $4.0 million in additional
payments will be received through August 2016 (see Note 5
of the notes to the financial statements). |
Recent
Accounting Pronouncements
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an
interpretation of FAS 109, Accounting for Income Taxes
(FIN 48), to create a single model to
address accounting for uncertainty in tax positions. FIN 48
clarifies the accounting for income taxes, by prescribing a
minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. FIN 48
also provides guidance on de-recognition, measurement,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for
fiscal years beginning after December 15, 2006. We adopted
FIN 48 as of January 1, 2007. See Note 12 of the
notes to our financial statements for further analysis impact of
the adoption of FIN 48 on our financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157).
Among other requirements, SFAS 157 defines fair value and
establishes a framework for measuring fair value and also
expands disclosure about the use of fair value to measure assets
and liabilities. SFAS 157 is effective beginning the first
fiscal year that begins after November 15, 2007. In
February 2008, the FASB issued FASB Staff Position
No. FAS 157-2
Effective Date of FASB Statement No. 157 (FSP
FAS 157-2),
which defers the effective date of SFAS 157 for all
non-financial assets and non-financial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), for fiscal
years beginning after November 15, 2008 and interim periods
within those fiscal years for items within the scope of FSP
FAS 157-2.
We do not expect that the adoption of this new standard will
have a material impact on our financial position and results of
operations.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159). SFAS 159 expands
opportunities to use fair value measurement in financial
reporting and permits entities to choose to measure many
financial instruments and certain other items at fair value.
SFAS 159 is
47
effective for fiscal years beginning after November 15,
2007. We have not yet decided if we will choose to measure any
eligible financial assets and liabilities at fair value.
In June 2007, the FASB issued EITF Issue
No. 07-3,
Accounting for Non-Refundable Advance Payments for Goods or
Services to Be Used in Future Research and Development
Activities
(EITF 07-3).
EITF 07-3
provides guidance on whether non-refundable advance payments for
goods that will be used or services that will be performed in
future research and development activities should be accounted
for as research and development costs or deferred and
capitalized until the goods have been delivered or the related
services have been rendered.
EITF 07-3
is effective for fiscal years beginning after December 15,
2007. We do not expect that the adoption of this new standard
will have a material impact on our financial position and
results of operations.
In November 2007, the EITF issued EITF Issue
No. 07-1
(EITF 07-1),
Accounting for Collaborative Arrangements Related to the
Development and Commercialization of Intellectual Property.
Companies may enter into arrangements with other companies
to jointly develop, manufacture, distribute, and market a
product. Often the activities associated with these arrangements
are conducted by the collaborators without the creation of a
separate legal entity (that is, the arrangement is operated as a
virtual joint venture). The arrangements generally
provide that the collaborators will share, based on
contractually defined calculations, the profits or losses from
the associated activities. Periodically, the collaborators share
financial information related to product revenues generated (if
any) and costs incurred that may trigger a sharing payment for
the combined profits or losses. The consensus requires
collaborators in such an arrangement to present the result of
activities for which they act as the principal on a gross basis
and report any payments received from (made to) other
collaborators based on other applicable GAAP or, in the absence
of other applicable GAAP, based on analogy to authoritative
accounting literature or a reasonable, rational, and
consistently applied accounting policy election.
EITF 07-1
is effective for collaborative arrangements in place at the
beginning of the annual period beginning after December 15,
2008. We do not expect that the adoption
EITF 07-1
will have a material impact on our financial position and
results of operations.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations (SFAS 141(R)),
which replaces FAS 141. SFAS 141(R) establishes
principles and requirements for how an acquirer in a business
combination recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, and
any controlling interest; recognizes and measures the goodwill
acquired in the business combination or a gain from a bargain
purchase; and determines what information to disclose to enable
users of the financial statements to evaluate the nature and
financial effects of the business combination. FAS 141(R)
is to be applied prospectively to business combinations for
which the acquisition date is on or after an entitys
fiscal year that begins after December 15, 2008. We will
assess the impact of SFAS 141(R) if and when a future
acquisition occurs.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS 160). SFAS 160 establishes new
accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the
recognition of a noncontrolling interest (minority interest) as
equity in the consolidated financial statements and separate
from the parents equity. The amount of net income
attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement.
SFAS 160 clarifies that changes in a parents
ownership interest in a subsidiary that do not result in
deconsolidation are equity transactions if the parent retains a
controlling financial interest. In addition, this statement
requires that a parent recognize a gain or loss in net income
when a subsidiary is deconsolidated. Such gain or loss will be
measured using the fair value of the noncontrolling equity
investment on the deconsolidation date. SFAS 160 also
includes expanded disclosure requirements regarding the
interests of the parent and its noncontrolling interest.
SFAS 160 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited. We are
currently evaluating the impact, if any, the adoption of
SFAS 160 will have on our financial statements.
48
|
|
Item 7A.
|
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 December 31, 2007, we had cash, cash equivalents and
short-term investments of $40.5 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.
49
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Aradigm Corporation
We have audited the accompanying balance sheet of Aradigm
Corporation as of December 31, 2007, and the related
statements of operations, convertible preferred stock and
shareholders equity (deficit), and cash flows for the year
then ended. These financial statements are the responsibility of
the Companys management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements audited by us present
fairly, in all material respects, the financial position of
Aradigm Corporation at December 31, 2007, and the results
of its operations and its cash flows for the year then ended, in
conformity with U.S. generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, on
January 1, 2007, the Company adopted Financial Accounting
Standards Board Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an Interpretation of
FAS 109. Also as discussed in Note 1 to the
financial statements, on January 1, 2006, the Company
adopted the provisions of Statement of Financial Accounting
Standards No. 123 (revised), Share-Based Payment,
applying the modified-prospective method.
/s/ Odenberg
Ullakko Muranishi & Co LLP
San Francisco, California
March 24, 2008
50
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Aradigm Corporation
We have audited the accompanying balance sheet of Aradigm
Corporation as of December 31, 2006, and the related
statements of operations, convertible preferred stock and
shareholders equity (deficit), and cash flows for each of
the two years in the period ended December 31, 2006. 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, 2006, and the
results of its operations and its cash flows for each of the two
years in the period ended December 31, 2006, in conformity
with U.S. generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in 2006
Aradigm Corporation changed its method of accounting for
stock based compensation in accordance with guidance
provided in Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment.
Palo Alto, California
March 2, 2007
51
ARADIGM
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
29,964
|
|
|
$
|
27,013
|
|
Short-term investments
|
|
|
10,546
|
|
|
|
501
|
|
Receivables
|
|
|
500
|
|
|
|
643
|
|
Restricted cash
|
|
|
152
|
|
|
|
|
|
Prepaid and other current assets
|
|
|
971
|
|
|
|
1,002
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
42,133
|
|
|
|
29,159
|
|
Property and equipment, net
|
|
|
3,223
|
|
|
|
2,592
|
|
Notes receivable from officers and employees
|
|
|
33
|
|
|
|
31
|
|
Restricted cash
|
|
|
153
|
|
|
|
|
|
Other assets
|
|
|
271
|
|
|
|
444
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
45,813
|
|
|
$
|
32,226
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND
SHAREHOLDERS EQUITY (DEFICIT)
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,658
|
|
|
$
|
1,151
|
|
Accrued clinical and cost of other studies
|
|
|
789
|
|
|
|
278
|
|
Accrued compensation
|
|
|
1,252
|
|
|
|
1,814
|
|
Deferred revenue
|
|
|
880
|
|
|
|
|
|
Facility lease exit obligation
|
|
|
376
|
|
|
|
|
|
Other accrued liabilities
|
|
|
584
|
|
|
|
511
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
5,539
|
|
|
|
3,754
|
|
Deferred rent
|
|
|
283
|
|
|
|
1,035
|
|
Facility lease exit obligation
|
|
|
1,373
|
|
|
|
|
|
Other non-current liabilities
|
|
|
248
|
|
|
|
29
|
|
Note payable and accrued interest to related party
|
|
|
8,071
|
|
|
|
7,686
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Convertible preferred stock, no par value; 2,050,000 shares
authorized; issued and outstanding shares: none outstanding at
December 31, 2007 and 1,544,626 at December 31, 2006;
liquidation preference of $0 at December 31, 2007 and
$41,866 at December 31, 2006
|
|
|
|
|
|
|
23,669
|
|
Shareholders equity (deficit):
|
|
|
|
|
|
|
|
|
Preferred stock, 2,950,000 shares authorized, none
outstanding
|
|
|
|
|
|
|
|
|
Common stock, no par value; authorized shares: 100,000,000 at
December 31, 2007 and 2006; issued and outstanding shares:
54,772,705 at December 31, 2007; 14,765,474 at
December 31, 2006
|
|
|
342,355
|
|
|
|
283,914
|
|
Accumulated other comprehensive income
|
|
|
10
|
|
|
|
4
|
|
Accumulated deficit
|
|
|
(312,066
|
)
|
|
|
(287,865
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity (deficit)
|
|
|
30,299
|
|
|
|
(3,947
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities, convertible preferred stock and
shareholders equity (deficit)
|
|
$
|
45,813
|
|
|
$
|
32,226
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
52
ARADIGM
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Contract and license revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Related parties
|
|
$
|
23
|
|
|
$
|
59
|
|
|
$
|
8,013
|
|
Unrelated parties
|
|
|
938
|
|
|
|
4,755
|
|
|
|
2,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
961
|
|
|
|
4,814
|
|
|
|
10,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
16,770
|
|
|
|
22,198
|
|
|
|
30,174
|
|
General and administrative
|
|
|
8,401
|
|
|
|
10,717
|
|
|
|
10,895
|
|
Restructuring and asset impairment
|
|
|
2,182
|
|
|
|
6,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
27,353
|
|
|
|
38,918
|
|
|
|
41,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(26,392
|
)
|
|
|
(34,104
|
)
|
|
|
(30,562
|
)
|
Gain on sale of patent and royalty interest to related party
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
Interest income
|
|
|
2,573
|
|
|
|
1,251
|
|
|
|
1,317
|
|
Interest expense
|
|
|
(393
|
)
|
|
|
(197
|
)
|
|
|
(6
|
)
|
Other income, net
|
|
|
11
|
|
|
|
23
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(24,201
|
)
|
|
$
|
(13,027
|
)
|
|
$
|
(29,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.48
|
)
|
|
$
|
(0.89
|
)
|
|
$
|
(2.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common
share
|
|
|
50,721
|
|
|
|
14,642
|
|
|
|
14,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
53
ARADIGM
CORPORATION
STATEMENT OF CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Total
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Shareholders
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Compensation
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
|
(In thousands, except share data)
|
|
|
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
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,215
|
)
|
|
|
(29,215
|
)
|
Net change in unrealized gain (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
|
|
|
|
|
|
|
|
|
|
|
111,553
|
|
|
|
286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
286
|
|
Issuance of common stock under the restricted stock award plan
|
|
|
|
|
|
|
|
|
|
|
145,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
645
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Stock-based compensation related to issuance of stock option and
award grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,622
|
|
Reversal of restricted stock award due to forfeiture
|
|
|
|
|
|
|
|
|
|
|
(55,033
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,027
|
)
|
|
|
(13,027
|
)
|
Net change in unrealized gain (loss) on available-for-sale
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006
|
|
|
1,544,626
|
|
|
|
23,669
|
|
|
|
14,765,474
|
|
|
|
283,914
|
|
|
|
|
|
|
|
4
|
|
|
|
(287,865
|
)
|
|
|
(3,947
|
)
|
Issuance of common stock in a public offering, net of issuance
costs
|
|
|
|
|
|
|
|
|
|
|
37,950,000
|
|
|
|
33,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,178
|
|
Issuance of common stock for conversion of preferred stock
related to public offering
|
|
|
(1,544,626
|
)
|
|
|
(23,669
|
)
|
|
|
1,235,699
|
|
|
|
23,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,669
|
|
Issuance of common stock under the employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
100,407
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
|
|
Issuance of common stock under the restricted stock award plan
|
|
|
|
|
|
|
|
|
|
|
726,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation related to issuance of stock option and
award grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,491
|
|
Reversal of restricted stock award due to forfeiture
|
|
|
|
|
|
|
|
|
|
|
(4,875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,201
|
)
|
|
|
(24,201
|
)
|
Net change in unrealized gain (loss) on available-for-sale
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
54,772,705
|
|
|
$
|
342,355
|
|
|
$
|
|
|
|
$
|
10
|
|
|
$
|
(312,066
|
)
|
|
$
|
30,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
54
ARADIGM
CORPORATION
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(24,201
|
)
|
|
$
|
(13,027
|
)
|
|
$
|
(29,215
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash asset impairment on property and equipment
|
|
|
182
|
|
|
|
4,014
|
|
|
|
|
|
Facility lease exit costs
|
|
|
1,443
|
|
|
|
|
|
|
|
|
|
Amortization and accretion of investments
|
|
|
(26
|
)
|
|
|
|
|
|
|
50
|
|
Depreciation and amortization
|
|
|
730
|
|
|
|
934
|
|
|
|
1,412
|
|
Stock-based compensation expense related to employee stock
options and employee stock purchases
|
|
|
1,382
|
|
|
|
1,622
|
|
|
|
|
|
Cost of warrants and common stock options for services
|
|
|
109
|
|
|
|
|
|
|
|
117
|
|
Loss on retirement and sale of property and equipment
|
|
|
33
|
|
|
|
166
|
|
|
|
268
|
|
Gain on sale of patent and royalty interest
|
|
|
|
|
|
|
(20,000
|
)
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
141
|
|
|
|
(243
|
)
|
|
|
(301
|
)
|
Prepaid and other current assets
|
|
|
31
|
|
|
|
(128
|
)
|
|
|
728
|
|
Restricted cash
|
|
|
(305
|
)
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
173
|
|
|
|
19
|
|
|
|
(24
|
)
|
Accounts payable
|
|
|
36
|
|
|
|
(1,883
|
)
|
|
|
565
|
|
Accrued compensation
|
|
|
(562
|
)
|
|
|
(2,000
|
)
|
|
|
830
|
|
Accrued liabilities
|
|
|
1,188
|
|
|
|
129
|
|
|
|
(558
|
)
|
Deferred rent
|
|
|
(132
|
)
|
|
|
321
|
|
|
|
(1,229
|
)
|
Deferred revenue
|
|
|
880
|
|
|
|
(222
|
)
|
|
|
(7,250
|
)
|
Facility lease exit obligation
|
|
|
(314
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(19,212
|
)
|
|
|
(30,298
|
)
|
|
|
(34,607
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(1,115
|
)
|
|
|
(1,829
|
)
|
|
|
(5,311
|
)
|
Sales of property and equipment
|
|
|
10
|
|
|
|
4,000
|
|
|
|
50,292
|
|
Purchases of available-for-sale investments
|
|
|
(17,013
|
)
|
|
|
(502
|
)
|
|
|
(5,330
|
)
|
Proceeds from maturities of available-for-sale investments
|
|
|
7,000
|
|
|
|
|
|
|
|
7,750
|
|
Proceeds from sale of patent and royalty interest
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by investing activities
|
|
|
(11,118
|
)
|
|
|
21,669
|
|
|
|
47,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from public offering of common stock, net
|
|
|
33,178
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
103
|
|
|
|
288
|
|
|
|
500
|
|
Proceeds from the issuance of note payable to related party
|
|
|
|
|
|
|
7,500
|
|
|
|
|
|
Payments received on notes receivable from officers and employees
|
|
|
|
|
|
|
160
|
|
|
|
|
|
Forgiveness of notes receivable from officers and employees
|
|
|
|
|
|
|
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
33,281
|
|
|
|
7,948
|
|
|
|
592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
2,951
|
|
|
|
(681
|
)
|
|
|
13,386
|
|
Cash and cash equivalents at beginning of year
|
|
|
27,013
|
|
|
|
27,694
|
|
|
|
14,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
29,964
|
|
|
$
|
27,013
|
|
|
$
|
27,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
|
|
|
$
|
11
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of convertible preferred stock to common stock
|
|
$
|
23,669
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment in trade accounts payable
|
|
$
|
471
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
55
ARADIGM
CORPORATION
|
|
1.
|
Organization
and Summary of Significant Accounting Policies
|
Organization
Aradigm Corporation (the Company) is a California
corporation focused on the development and commercialization of
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. Management 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 losses and negative cash
flows from operations since its inception. At December 31,
2007, the Company had an accumulated deficit of
$312.1 million, working capital of $36.6 million and
shareholders equity of $30.3 million. Management
believes that cash, cash equivalents and short-term investments
at December 31, 2007 will be sufficient to enable the
Company to meet its obligations at least through the end of
2008. 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, assumptions for valuing options and warrants, and
income taxes. Actual results could differ from these estimates.
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 cash and cash equivalents
in money market funds and commercial paper.
Investments
Management determines the appropriate classification of the
Companys marketable securities, which consist solely of
debt securities, at the time of purchase. All marketable
securities are classified as available-for-sale, carried at
estimated fair value and reported in short-term investments.
Unrealized gains and losses on available-for-sale securities are
excluded from earnings and reported as a separate component in
the statement of convertible preferred stock and
shareholders equity (deficit) 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.
56
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Notes
Receivable
Notes receivable are related to advances granted to employees
for relocation or continuing education and are classified as
current if due within 12 months, or non-current if due
beyond one year in the accompanying balance sheets. One note in
the amount of $33,000 remains outstanding as of
December 31, 2007. All other notes previously issued have
been forgiven
and/or paid
as of December 31, 2007.
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:
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|
|
Machinery and equipment
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|
5 years
|
Furniture and fixtures
|
|
5 to 7 years
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Lab equipment
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|
5 to 7 years
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Computer equipment and software
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|
3 to 5 years
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Leasehold improvements
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|
5 to 17 years
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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 (see
Notes 13, 15 and 16).
Accounting
for Costs Associated with Exit or Disposal
Activities
In accordance with Statement of SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities (SFAS 146), the Company
recognizes a liability for the cost associated with an exit or
disposal activity that is measured initially at its fair value
in the period in which the liability is incurred, except for a
liability for one-time termination benefits that is incurred
over time. According to SFAS 146, costs to terminate an
operating lease or other contracts are (a) costs to
terminate the contract before the end of its term or
(b) costs that will continue to be incurred under the
contract for its remaining term without economic benefit to the
entity. In periods subsequent to initial measurement, changes to
the liability are measured using the credit-adjusted risk-free
rate that was used to measure the liability initially (see
Notes 13 and 15).
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 (SAB 104) and
Emerging Issues Task Force (EITF) Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables
(EITF 00-21).
Revenue for arrangements not having multiple deliverables, as
outlined in
EITF 00-21,
is recognized once costs are incurred and collectability is
57
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
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 acceptance of the work and confirmation of the
amount to be paid by the collaborator. 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
recognized as revenue either upon completion of the milestone
effort, when payments are contingent upon completion of the
effort, or are based on actual efforts expended over the
remaining term of the agreement when payments precede the
required efforts. 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 specific performance criteria are
achieved. Refundable development and license fee payments are
generally not refundable once specific performance criteria are
achieved and accepted.
Collaborative license and development agreements that require
the Company to provide multiple deliverables, such as a license,
research and product steering committee services and other
performance obligations, are accounted for in accordance with
EITF 00-21.
Under
EITF 00-21,
delivered items are evaluated to determine whether such items
have value to the Companys collaborators on a stand-alone
basis and whether objective reliable evidence of fair value of
the undelivered items exist. Deliverables that meet these
criteria are considered a separate unit of accounting.
Deliverables that do not meet these criteria are combined and
accounted for as a single unit of accounting. The appropriate
revenue recognition criteria are identified and applied to each
separate unit of accounting.
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, 2007, 2006 and 2005 were zero, $39,000 and
$265,000, respectively.
58
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
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
was 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 No. 123, Accounting for Stock-Based
Compensation (SFAS 123), as amended by
SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, the
Company has provided below the pro forma disclosures of the
effect on net loss and loss per share as if SFAS 123 had
been applied in measuring compensation expense (in thousands,
except per share data).
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|
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Year Ended
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December 31, 2005
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|
|
Net loss as reported
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|
$
|
(29,215
|
)
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Add:
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|
|
|
|
Stock-based employee compensation expense included in reported
net loss
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|
21
|
|
Less:
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|
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Total stock-based employee compensation expense determined under
fair value based method for all awards
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(3,066
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)
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|
|
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Pro forma net loss
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$
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(32,260
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)
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|
|
|
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Basic and diluted net loss per common share:
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|
|
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As reported
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|
$
|
(2.01
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)
|
Pro forma
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|
$
|
(2.22
|
)
|
Valuation
assumptions
Pro forma information regarding net loss and basic and diluted
net loss per common share prepared in accordance with
SFAS 123, as amended, has been 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 weighted average assumptions:
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|
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Year Ended
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December 31, 2005
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|
Employee Stock Options
|
|
|
Dividend yield
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|
0.0%
|
Volatility factor
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|
97.6%
|
Risk-free interest rate
|
|
3.8%
|
Expected life (years)
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|
4.0
|
Weighted-average fair value of options granted during the year
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|
$4.10
|
The Company accounts for options and warrants issued to
non-employees under SFAS 123 and
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 3.8% to 5.1%, using
applicable United States Treasury rates; a dividend yield of
0.0%; an annual volatility factor of 72% to 98%; and an average
expected life based on the terms of the option grant or
contractual term of the warrant of 3 to 10 years. Expense
recognized related to options and warrants issued to
non-employees was $109,000, $130 and $117,000 during the years
ended December 31, 2007, 2006 and 2005, respectively.
59
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Adoption
of SFAS No. 123R
The Company adopted the fair value recognition provisions of
SFAS No. 123(R) (revised 2004), Share-based
Payment, (SFAS 123(R)) effective
January 1, 2006. Stock-based compensation expense is based
on the fair value of that portion of employee stock options that
are ultimately expected to vest during the period. Stock-based
compensation expense recognized in our statement of operations
during 2007 and 2006 included compensation expense for
stock-based awards granted prior to, but not yet vested, as of
December 31, 2005, based on the grant date fair value
estimated in accordance with the pro forma provisions of
SFAS 123, and share-based payment awards granted subsequent
to December 31, 2005 based on the grant date fair value
estimated in accordance with SFAS 123(R). For stock options
granted after January 1, 2006, the fair value of each award
is amortized using the straight-line single-option method. For
share awards granted prior to 2006, the fair value of each award
is amortized using the accelerated multiple-option valuation
method prescribed by SFAS 123. Stock-based compensation
expense is based on awards ultimately expected to vest,
therefore, it has been reduced for estimated forfeitures.
SFAS 123(R) requires forfeitures to be estimated at the
time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. The Company
estimated forfeitures based on historical experience. In the
information required under SFAS 123 for the periods prior
to 2006, the Company accounted for forfeitures as they occurred.
In November 2005, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position
No. FAS 123(R)-3, Transition Election Related to
Accounting for the Tax Effects of Share-Based Payment
Awards. The Company has adopted the simplified method to
calculate the beginning balance of the additional
paid-in-capital
(APIC) pool of the excess tax benefit, and to
determine the subsequent impact on the APIC pool and its
statements of cash flows of the tax effects of employee
stock-based compensation awards that were outstanding upon our
adoption of SFAS 123(R).
The following table shows the effect of SFAS 123(R) on
stock-based employee compensation expense included in the
statement of operations for the years ended December 31,
2007 and 2006, respectively (in thousands, except per share
amounts):
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|
|
|
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|
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Years Ended December 31,
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2007
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|
|
2006
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|
|
Costs and expenses:
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|
|
|
|
|
|
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|
Research and development
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|
$
|
664
|
|
|
$
|
882
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|
General and administrative
|
|
|
718
|
|
|
|
740
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|
|
|
|
|
|
|
|
|
|
Total stock-based employee compensation expense
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|
$
|
1,382
|
|
|
$
|
1,622
|
|
|
|
|
|
|
|
|
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Impact on basic and diluted net loss per common share
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$
|
(0.03
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)
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$
|
(0.11
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)
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|
|
|
|
|
|
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|
The fair value of options was estimated at the date of grant
using the Black-Scholes option pricing model. Expected
volatility is based on the historical volatility of the
Companys common stock. The expected life was estimated
using a lattice model to estimate the expected term as an input
into the Black-Scholes option pricing model. The expected term
represents the estimated period of time that stock options
granted are expected to be outstanding. The risk-free interest
rate is based on the U.S. Treasury yield. The expected
dividend yield is zero, as
60
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
the Company does not anticipate paying dividends in the near
future. The weighted average assumptions are as follows:
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Years Ended December 31
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2007
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|
2006
|
|
Employee Stock Options
|
|
|
|
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Dividend yield
|
|
0.0%
|
|
0.0%
|
Volatility factor
|
|
76.7%
|
|
86.6%
|
Risk-free interest rate
|
|
4.0%
|
|
4.9%
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Expected life (years)
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4.0
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|
4.2
|
Weighted-average fair value of options granted during the periods
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|
$0.86
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|
$1.40
|
There was no capitalized stock-based employee compensation cost
as of December 31, 2007. Since the Company incurred net
losses in 2007 and 2006, there was no recognized tax benefit as
of December 31, 2007 or 2006 associated with stock-based
compensation expense. As of December 31, 2007, $2,571,000
of total unrecognized compensation costs, net of forfeitures,
related to non-vested awards is expected to be recognized over a
weighted average period of 2.85 years. Total stock-based
compensation expense included restricted stock awards in the
amount of $107,000 and $85,000 for the years ended
December 31, 2007 and 2006, respectively. For restricted
common stock awards, the Company recognizes compensation expense
over the vesting period for the fair market value of the stock
awards on the measurement date. Unvested restricted stock awards
subject to repurchase, at no cost to the Company, were 771,000
and 70,000 shares as of December 31, 2007 and 2006,
respectively.
Income
Taxes
The Company uses the asset and liability method to account for
income taxes as required by SFAS No. 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 as well as net operating loss and
tax credit carryforwards. Valuation allowances are established,
when necessary, to reduce the deferred tax assets to amounts
more likely than not to be realized.
In July 2006, the FASB issued FASB Interpretation No. 48
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48), to clarify certain aspects of
accounting for uncertain tax positions, including issues related
to the recognition and measurement of those tax positions.
FIN 48 prescribes a recognition threshold and measurement
attribute for financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognizing,
measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition. This
interpretation is effective for fiscal years beginning after
December 15, 2006. The Company adopted FIN 48 on
January 1, 2007 (see Note 12).
Net
Loss Per Common Share
Basic net loss per common 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. Unvested restricted stock awards subject
to repurchase totaled 771,000 shares, 70,000 shares
and none for the years ended December 31, 2007, 2006 and
2005, respectively. Potentially dilutive securities were not
included in the net loss per share calculation for the years
ended December 31, 2007, 2006 and 2005 because the
inclusion of such shares would have had an anti-dilutive effect.
61
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Potentially dilutive securities include the following (in
thousands):
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|
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Years Ended December 31,
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|
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2007
|
|
|
2006
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|
|
2005
|
|
|
Outstanding stock options
|
|
|
3,493
|
|
|
|
3,064
|
|
|
|
1,730
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|
Unvested restricted stock
|
|
|
771
|
|
|
|
70
|
|
|
|
|
|
Performance bonus stock award
|
|
|
100
|
|
|
|
100
|
|
|
|
|
|
Warrants to purchase common stock
|
|
|
427
|
|
|
|
1,255
|
|
|
|
2,120
|
|
Convertible preferred stock
|
|
|
|
|
|
|
1,236
|
|
|
|
1,236
|
|
Significant
Concentrations
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash
equivalents and short-term investments. Risks associated with
these instruments are mitigated by banking with and only
purchasing commercial paper and corporate notes from
creditworthy institutions. The maximum amount of loss due to
credit risk associated with these financial instruments is their
respective fair values as stated in the accompanying balance
sheets.
The Company has development arrangements with various
collaborators. For the year ended December 31, 2005, the
Novo Nordisk AERx iDMS program contributed approximately 76% of
total contract revenues. Since 2005, however, the revenue from
the collaboration dropped significantly to $23,000 and $59,000
in 2007 and 2006, respectively, as a result of various
agreements and restructurings of the AERx iDMS program under
which Novo Nordisk had assumed responsibility for the completion
of development, manufacturing and commercialization of the AERx
iDMS insulin product. In early 2008, Novo Nordisk issued a press
release announcing the termination of its phase 3 clinical
trials for fast-acting inhaled insulin delivered via the AERx
iDMS (see Notes 9 and 20).
Comprehensive
Income (Loss)
SFAS No. 130, Reporting Comprehensive Income
requires unrealized gains or losses on the Companys
available-for-sale securities to be recorded in other
comprehensive income (loss). Total comprehensive loss has been
disclosed on the statement of convertible preferred stock and
shareholders equity (deficit).
Recently
Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157).
Among other requirements, SFAS 157 defines fair value and
establishes a framework for measuring fair value and also
expands disclosure about the use of fair value to measure assets
and liabilities. SFAS 157 is effective beginning the first
fiscal year that begins after November 15, 2007. In
February 2008, the FASB issued FASB Staff Position
No. FAS 157-2
Effective Date of FASB Statement No. 157 (FSP
FAS 157-2),
which defers the effective date of SFAS 157 for all
non-financial assets and non-financial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), for fiscal
years beginning after November 15, 2008 and interim periods
within those fiscal years for items within the scope of FSP
FAS 157-2.
Management does not expect that the adoption of this new
standard will have a material impact on the Companys
financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159). SFAS 159 expands
opportunities to use fair value measurement in financial
reporting and permits entities to choose to measure many
financial instruments and certain other items at fair value.
SFAS 159 is effective for fiscal years beginning after
November 15, 2007. Management has not yet decided if the
Company will choose to measure any eligible financial assets and
liabilities at fair value.
62
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
In June 2007, the FASB issued EITF Issue
No. 07-3,
Accounting for Non-Refundable Advance Payments for Goods or
Services to Be Used in Future Research and Development
Activities
(EITF 07-3).
EITF 07-3
provides guidance on whether non-refundable advance payments for
goods that will be used or services that will be performed in
future research and development activities should be accounted
for as research and development costs or deferred and
capitalized until the goods have been delivered or the related
services have been rendered.
EITF 07-3
is effective for fiscal years beginning after December 15,
2007. Management does not expect that the adoption of this new
standard will have a material impact on the Companys
financial position and results of operations.
In November 2007, the EITF issued EITF Issue
No. 07-1
(EITF 07-1),
Accounting for Collaborative Arrangements Related to the
Development and Commercialization of Intellectual Property.
Companies may enter into arrangements with other companies
to jointly develop, manufacture, distribute, and market a
product. Often the activities associated with these arrangements
are conducted by the collaborators without the creation of a
separate legal entity (that is, the arrangement is operated as a
virtual joint venture). The arrangements generally
provide that the collaborators will share, based on
contractually defined calculations, the profits or losses from
the associated activities. Periodically, the collaborators share
financial information related to product revenues generated (if
any) and costs incurred that may trigger a sharing payment for
the combined profits or losses. The consensus requires
collaborators in such an arrangement to present the result of
activities for which they act as the principal on a gross basis
and report any payments received from (made to) other
collaborators based on other applicable GAAP or, in the absence
of other applicable GAAP, based on analogy to authoritative
accounting literature or a reasonable, rational, and
consistently applied accounting policy election.
EITF 07-1
is effective for collaborative arrangements in place at the
beginning of the annual period beginning after December 15,
2008. Management does not expect that the adoption
EITF 07-1
will have a material impact on the Companys financial
position and results of operations.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations (SFAS 141(R)),
which replaces FAS No. 141. SFAS 141(R)
establishes principles and requirements for how an acquirer in a
business combination recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities
assumed, and any controlling interest; recognizes and measures
the goodwill acquired in the business combination or a gain from
a bargain purchase; and determines what information to disclose
to enable users of the financial statements to evaluate the
nature and financial effects of the business combination.
FAS 141(R) is to be applied prospectively to business
combinations for which the acquisition date is on or after an
entitys fiscal year that begins after December 15,
2008. Management will assess the impact of SFAS 141(R) if
and when a future acquisition occurs.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS 160). SFAS 160 establishes new
accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the
recognition of a noncontrolling interest (minority interest) as
equity in the consolidated financial statements and separate
from the parents equity. The amount of net income
attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement.
SFAS 160 clarifies that changes in a parents
ownership interest in a subsidiary that do not result in
deconsolidation are equity transactions if the parent retains a
controlling financial interest. In addition, this statement
requires that a parent recognize a gain or loss in net income
when a subsidiary is deconsolidated. Such gain or loss will be
measured using the fair value of the noncontrolling equity
investment on the deconsolidation date. SFAS 160 also
includes expanded disclosure requirements regarding the
interests of the parent and its noncontrolling interest.
SFAS 160 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited.
Management is currently evaluating the impact, if any, the
adoption of SFAS 160 will have on the Companys
financial statements.
63
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
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|
2.
|
Cash and
Cash Equivalents and
Short-term
Investments
|
The following summarizes the fair value of cash and cash
equivalents and
short-term
investments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Money market fund
|
|
$
|
1,345
|
|
|
$
|
1,248
|
|
Commercial paper
|
|
|
28,619
|
|
|
|
25,765
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,964
|
|
|
$
|
27,013
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
Corporate and government notes
|
|
$
|
10,546
|
|
|
$
|
501
|
|
|
|
|
|
|
|
|
|
|
All short-term investments at December 31, 2007 and 2006
mature in less than one year. Unrealized holding gains and
losses on securities classified as available-for-sale are
recorded in accumulated other comprehensive income. As of
December 31, 2007 and 2006 the difference between the fair
value and amortized cost of available-for-sale securities were
gains of $10,000 and $4,000, respectively. The individual gross
unrealized gains and individual gross unrealized losses for 2007
and 2006 were not material.
|
|
3.
|
Property
and Equipment
|
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Machinery and equipment
|
|
$
|
4,049
|
|
|
$
|
3,905
|
|
Furniture and fixtures
|
|
|
993
|
|
|
|
1,142
|
|
Lab equipment
|
|
|
2,472
|
|
|
|
2,658
|
|
Computer equipment and software
|
|
|
3,876
|
|
|
|
3,798
|
|
Leasehold improvements
|
|
|
577
|
|
|
|
1,068
|
|
|
|
|
|
|
|
|
|
|
Property and equipment at cost
|
|
|
11,967
|
|
|
|
12,571
|
|
Less accumulated depreciation and amortization
|
|
|
(10,033
|
)
|
|
|
(10,204
|
)
|
|
|
|
|
|
|
|
|
|
Net depreciable assets
|
|
|
1,934
|
|
|
|
2,367
|
|
Construction in progress
|
|
|
1,289
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
3,223
|
|
|
$
|
2,592
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $730,000, $934,000 and
$1.4 million for the years ended December 31, 2007,
2006 and 2005, respectively.
64
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Other liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Other accrued liabilities:
|
|
|
|
|
|
|
|
|
Accrued expense for services
|
|
$
|
308
|
|
|
$
|
415
|
|
Payroll withholding liabilities
|
|
|
120
|
|
|
|
89
|
|
Deposits
|
|
|
147
|
|
|
|
|
|
Other short term obligations
|
|
|
9
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Total other accrued liabilities
|
|
$
|
584
|
|
|
$
|
511
|
|
|
|
|
|
|
|
|
|
|
Other non-current liabilities:
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
228
|
|
|
$
|
|
|
Other long term obligations
|
|
|
20
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
Total other non-current liabilities
|
|
$
|
248
|
|
|
$
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Leases,
Commitments and Contingencies
|
The Company has a lease for a building containing office,
laboratory and manufacturing facilities, which expires in 2016.
A portion of this lease obligation was offset by a sublease to
Mendel Biotechnology, Inc. (Mendel). Future minimum
non-cancelable lease payments at December 31, 2007 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Mendel
|
|
|
Net Operating
|
|
|
|
Leases
|
|
|
Sub-Lease
|
|
|
Lease Payments
|
|
|
Year ending December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
2,366
|
|
|
$
|
(866
|
)
|
|
$
|
1,500
|
|
2009
|
|
|
2,312
|
|
|
|
(900
|
)
|
|
|
1,412
|
|
2010
|
|
|
2,220
|
|
|
|
(928
|
)
|
|
|
1,292
|
|
2011
|
|
|
1,992
|
|
|
|
(955
|
)
|
|
|
1,037
|
|
2012
|
|
|
2,068
|
|
|
|
(875
|
)
|
|
|
1,193
|
|
2013 and thereafter
|
|
|
7,872
|
|
|
|
|
|
|
|
7,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
18,830
|
|
|
$
|
(4,524
|
)
|
|
$
|
14,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On July 18, 2007, the Company entered into a sublease
agreement with Mendel to lease approximately 48,000 square
feet of the 72,000 square foot facility located at 3929
Point Eden Way, Hayward, CA. The sublease consists of
approximately 46,000 square feet of office and laboratory
space and an additional rentable space of 2,000 square feet
to be vacated by the Company no later than March 15, 2008.
The Company leases the space pursuant to a lease agreement dated
January 28, 1998, as amended with Hayward Point Eden I
Limited Partnership.
The sublease commenced on July 18, 2007 and expires on
July 8, 2016. Under the sublease, Mendel will make monthly
base rent payments totaling $4.5 million through August
2012 that will offset a portion of the Companys existing
building lease obligation. Mendel has the option to terminate
the sublease early on September 1, 2012 for a termination
fee of $225,000. If the option to terminate the sublease is not
exercised by Mendel, the Company will receive an additional
$4.0 million through the expiration of the sublease in
2016. Mendel will also pay the Company for its share of all pass
through costs such as taxes, operating expenses, and utilities
based on the percentage of the facility space occupied by them.
On July 18, 2007, Mendel paid $75,000 in cash and provided
a letter of credit in the amount of $150,000 as collateral for a
security deposit. The letter of credit expires on July 3,
2012.
65
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
The Companys building lease has a rent escalation clause
and, accordingly, the Company recognizes rent expense on a
straight-line basis. At December 31, 2007 and 2006, the
Company had $0.3 million and $1.0 million of deferred
rent, respectively. During 2007, a portion of the deferred rent
liability associated with the subleased space to Mendel was
reversed in the amount of $0.6 million (see Note 13).
For the years ended December 31, 2007, 2006 and 2005,
building rent expense, net of sublease income, under operating
leases totaled $1.6 million, $1.9 million and
$1.3 million, respectively.
At December 31, 2007, the Company had contractual
non-cancelable purchase commitments for capital equipment of
$443,000 and for services of $2.9 million.
Indemnification
The Company from time to time enters into contracts that
contingently require the Company to indemnify parties against
third party claims. These contracts primarily relate to:
(i) real estate leases, under which the Company may be
required to indemnify property owners for environmental and
other liabilities, and other claims arising from the
Companys use of the applicable premises, and
(ii) agreements with the Companys officers, directors
and employees, under which the Company may be required to
indemnify such persons from certain liabilities arising out of
such persons relationships with the Company. To date, the
Company has made no payments related to such indemnifications
and no liabilities have been recorded for these obligations on
the balance sheets at December 31, 2007 or 2006.
Legal
Matters
From time to time, the Company is involved in litigation arising
out of the ordinary course of its business. Currently there are
no known claims or pending litigation expected to have a
material effect on the Companys overall financial
position, results of operations, or liquidity.
|
|
6.
|
Shareholders
Equity (Deficit)
|
On January 30, 2007, the Company received
$33.9 million from the closing of its public offering of
37,950,000 shares of common stock in an underwritten public
offering with net proceeds, after underwriting discount and
expenses, of approximately $33.2 million. This public
offering triggered the automatic conversion of all outstanding
shares of Series A convertible preferred stock to common
stock and eliminated the Series A liquidation preference of
$41.9 million, equal to the original issue price plus all
accrued and unpaid dividends (as adjusted for any stock
dividends, combinations, splits, recapitalizations and other
similar events). Following the offering, the
1,544,626 shares of Series A convertible preferred
stock were converted to 1,235,699 shares of common stock,
and no liquidation preference or other preferential rights
remain.
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.
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. As of December 31, 2007, 416,669 warrant shares
were exercisable and will expire in December 2008.
66
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
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 were 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 have expired as of
December 31, 2007 and none of the warrants were exercised.
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 were 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. As of December 31, 2007, warrants to
purchase 435,758 shares of common stock had been exercised
and the remaining warrants had expired.
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, 2007, the Company had 3,493,154 shares
reserved for issuance upon exercise of options under all stock
option plans and 426,669 shares of common stock reserved
for issuance upon exercise of common stock warrants. In
addition, the Company had 1,837,161 shares of our common
stock reserved for issuance of new option grants,
100,000 shares reserved for issuance upon vesting of our
CEOs performance bonus stock award and 240,440 shares
available for future issuances under the Employee Stock Purchase
Plan.
Shareholder
Rights Plan
In August 1998, the Company adopted a shareholder rights plan
pursuant to which it distributes rights to purchase shares of
Series A Junior Participating Preferred Stock as a dividend
at the rate of one right for each share of common stock
outstanding. The rights are designed to guard against partial
tender offers and other abusive and coercive tactics that might
be used in an attempt to gain control of the Company or to
deprive its shareholders of their interest in the Companys
long-term value. The shareholder rights plan seeks to achieve
these goals by encouraging a potential acquirer to negotiate
with the Companys board of directors to redeem the rights
and allow the potential acquirer to acquire its shares without
suffering significant dilution.
67
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
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 the Companys 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 the Companys board of directors
prior to such time as any person or entity acquires beneficial
ownership of 15% or more of the Companys 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 the
Companys outstanding common stock, the earlier of such
dates being called the distribution date, the rights trade with,
and are not separable from, the Companys common stock and
are not exercisable.
In the event that any person or group of affiliated or
associated persons becomes a beneficial owner of 15% or more of
the Companys 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 the Companys common stock having a market value
of two times the exercise price of the right. In the event that
the Company is 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 the
Companys outstanding common stock or
(ii) September 8, 2008, the Companys board of
directors may redeem the rights in whole, but not in part, at a
price of $0.001 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 the Companys
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.
Other
Common Stock 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. As of December 31,
2007, 10,000 warrant shares were exercisable and will expire by
the end of August 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
were exercisable at $9.95 per share, 5,000 shares of which
were exercisable at $11.95 per share and 5,000 shares of
which were exercisable at $13.95 per share. At the execution of
the agreement 3,000 shares immediately vested and the
remaining shares vested 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%,
68
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
no dividend yield, and an expected life of four years. The fair
value of these warrants was re-measured as the underlying
warrants vested and was expensed over the vesting period of the
warrants. As of December 31, 2007, all of these warrants
had expired and none of these warrants were exercised.
Stock
Option Plans: 1996 Equity Incentive Plan, 2005 Equity Incentive
Plan and 1996 Non-Employee Directors Plan
The 1996 Equity Incentive Plan (the 1996 Plan) and
the 2005 Equity Incentive Plan (the 2005 Plan),
which amended, restated and retitled the 1996 Plan, were adopted
to provide a means by which officers, non-employee directors,
scientific advisory board members and employees of and
consultants to the Company and its affiliates could be given an
opportunity to acquire an equity interest in the Company. All
officers, non-employee directors, scientific advisory board
members and employees of and consultants to the Company are
eligible to participate in the 2005 Plan.
In April 1996, the Companys Board of Directors adopted and
the Companys shareholders approved the 1996 Plan, which
amended and restated an earlier stock option plan. The 1996 Plan
reserved 960,000 shares for future grants. During May 2001,
the Companys shareholders approved an amendment to the
Plan to include an evergreen provision. In 2003, the 1996 Plan
was amended to increase the maximum number of shares available
for issuance under the evergreen feature of the 1996 Plan by
400,000 shares to 2,000,000 shares. The evergreen
provision automatically increased the number of shares reserved
under the 1996 Plan, subject to certain limitations, by 6% of
the issued and outstanding shares of common stock of the Company
or such lesser number of shares as determined by the board of
directors on the date of the annual meeting of shareholders of
each fiscal year beginning 2001 and ending 2005.
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 vested over a period of four years
from the date of grant. The 1996 Plan also provided for a
transition from employee to consultant status without
termination of the vesting period as a result of such
transition. Any unvested stock issued was subject to repurchase
agreements whereby the Company had 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 had 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. As
of December 31, 2007, the Company had 558,909 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 expired options) covering an
aggregate of 1,999,252 shares of the Companys common
stock had been granted under the 1996 Plan, and
919,386 shares became available for future grant under the
2005 Plan. In March 2006, the Companys board of directors
amended, and in May 2006 the Companys shareholders
approved, the amendment to the 2005 Plan, increasing the shares
of common stock authorized for issuance by 2,000,000. In April
2007, the Companys board of directors amended, and in June
2007, the Companys shareholders approved the amendment to
the 2005 Plan, increasing the shares of common stock authorized
for issuance by 1,600,000 shares. As of December 31,
2007, 1,837,161 shares were available for future grants.
Options granted under the 2005 Plan expire no later than
10 years from the date of grant. Options granted under the
2005 Plan may be either incentive or non-statutory stock
options. For incentive and non-statutory stock option grants,
the option price shall be at least 100% and 85%, respectively,
of the fair value on the date of grant, as
69
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
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, 2007 and
2006, there were no outstanding notes receivable from
shareholders. Any unvested stock issued is subject to repurchase
agreements whereby the Company has the option to repurchase
unvested shares upon termination of employment at the original
issue price. The common stock subject to repurchase has voting
rights, but cannot be resold prior to vesting. No grants with
early exercise provisions have been made under the 2005 Plan and
no shares have been repurchased. The Company granted options to
purchase 1,414,750 shares and 2,498,000 shares during
the years ended December 31, 2007 and 2006, respectively,
under the 2005 Plan, which included option grants to the
Companys
non-employee
directors in the amount of 95,000 shares and
105,000 shares during 2007 and 2006, respectively. The 2005
Plan had 2,919,602 option shares outstanding as of
December 31, 2007.
The 1996 Non-Employee Directors Stock Option Plan (the
Directors Plan) had 45,000 shares of
common stock authorized for issuance. Options granted under the
Directors Plan expire no later than 10 years from
date of grant. The option price shall be at 100% of the fair
value on the date of grant as determined by the board of
directors. The options generally vest quarterly over a period of
one year. During 2000, the board of directors approved the
termination of the Directors Plan. No more options can be
granted under the plan after its termination. The termination of
the Directors Plan had no effect on the options already
outstanding. There were 6,543 share cancellations due to
option expirations for the year ended December 31, 2007 and
the was no plan activity during 2006. As of December 31,
2007, 14,643 outstanding options with exercise prices ranging
from $41.25 $120.63 remained with no additional
shares available for grant.
70
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
The following is a summary of activity under the 1996 Plan, the
2005 Plan and the Directors Plan as of December 31,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Shares Available
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
for Grant of
|
|
|
Number of
|
|
|
|
|
|
Exercise
|
|
|
|
Option or Award
|
|
|
Shares
|
|
|
Price per Share
|
|
|
Price
|
|
|
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
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(2,498,000
|
)
|
|
|
2,498,000
|
|
|
$
|
1.02
|
|
|
|
|
|
|
$
|
3.77
|
|
|
$
|
2.11
|
|
Options exercised
|
|
|
|
|
|
|
(645
|
)
|
|
$
|
2.83
|
|
|
|
|
|
|
$
|
2.83
|
|
|
$
|
2.83
|
|
Restricted stock awards granted
|
|
|
(145,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance bonus stock award granted
|
|
|
(100,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
1,163,083
|
|
|
|
(1,163,083
|
)
|
|
$
|
1.64
|
|
|
|
|
|
|
$
|
115.00
|
|
|
$
|
10.03
|
|
Restricted share awards cancelled
|
|
|
55,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
1,394,002
|
|
|
|
3,063,981
|
|
|
$
|
1.02
|
|
|
|
|
|
|
$
|
120.63
|
|
|
$
|
8.90
|
|
Options authorized
|
|
|
1,600,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(1,414,750
|
)
|
|
|
1,414,750
|
|
|
$
|
1.23
|
|
|
|
|
|
|
$
|
1.60
|
|
|
$
|
1.44
|
|
Restricted stock awards granted
|
|
|
(726,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
985,577
|
|
|
|
(985,577
|
)
|
|
$
|
1.15
|
|
|
|
|
|
|
$
|
120.63
|
|
|
$
|
10.71
|
|
Restricted share awards cancelled
|
|
|
4,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan shares expired and not reauthorized
|
|
|
(6,543
|
)
|
|
|
|
|
|
$
|
41.25
|
|
|
|
|
|
|
$
|
120.63
|
|
|
$
|
93.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
1,837,161
|
|
|
|
3,493,154
|
|
|
$
|
1.02
|
|
|
|
|
|
|
$
|
120.63
|
|
|
$
|
5.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
The following table summarizes information about stock options
outstanding and exercisable as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
Exercise Price Range
|
|
Shares
|
|
|
Life (In Years)
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
$ 1.02 - $ 1.33
|
|
|
362,887
|
|
|
|
9.01
|
|
|
$
|
1.22
|
|
|
|
123,791
|
|
|
$
|
1.18
|
|
$ 1.37 - $ 1.37
|
|
|
370,200
|
|
|
|
9.47
|
|
|
|
1.37
|
|
|
|
74,400
|
|
|
|
1.37
|
|
$ 1.41 - $ 1.52
|
|
|
33,500
|
|
|
|
9.07
|
|
|
|
1.48
|
|
|
|
16,343
|
|
|
|
1.52
|
|
$ 1.60 - $ 1.60
|
|
|
646,500
|
|
|
|
9.93
|
|
|
|
1.60
|
|
|
|
|
|
|
|
|
|
$ 1.64 - $ 1.70
|
|
|
369,000
|
|
|
|
8.50
|
|
|
|
1.69
|
|
|
|
179,562
|
|
|
|
1.68
|
|
$ 1.80 - $ 1.80
|
|
|
540,475
|
|
|
|
8.63
|
|
|
|
1.80
|
|
|
|
405,660
|
|
|
|
1.80
|
|
$ 1.87 - $ 1.87
|
|
|
500,000
|
|
|
|
8.61
|
|
|
|
1.87
|
|
|
|
166,666
|
|
|
|
1.87
|
|
$ 3.14 - $ 9.30
|
|
|
354,040
|
|
|
|
6.84
|
|
|
|
5.34
|
|
|
|
284,079
|
|
|
|
5.55
|
|
$ 9.40 - $115.00
|
|
|
312,416
|
|
|
|
3.55
|
|
|
|
37.80
|
|
|
|
309,664
|
|
|
|
38.03
|
|
$120.63 - $120.63
|
|
|
4,136
|
|
|
|
2.11
|
|
|
|
120.63
|
|
|
|
4,136
|
|
|
|
120.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,493,154
|
|
|
|
8.34
|
|
|
$
|
5.37
|
|
|
|
1 ,564,301
|
|
|
$
|
9.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value is the sum of the amounts by which the
quoted market price of the Companys stock exceeded the
exercise price of the stock options at December 31, 2007
and 2006 for those stock options for which the quoted market
price was in excess of the exercise price (in-the-money
options). As of December 31, 2007 and 2006, the
aggregate intrinsic value of options outstanding was $167,000
and zero, respectively. As of December 31, 2007, options to
purchase 1,564,301 shares of common stock were exercisable
and had an aggregate intrinsic value of $54,000. The total
intrinsic value of stock options exercised was $900 and $10,000
for the years ended December 31, 2006 and 2005,
respectively; there were no exercises of stock options during
2007. As of December 31, 2006 and 2005, options to purchase
1,180,388 shares and 1,092,840 shares, respectively,
of common stock were exercisable.
A summary of the Companys unvested restricted stock and
performance bonus stock award activities as of December 31,
2007 is presented below representing the maximum number of
shares that could be earned or vested under the 2005 Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Grant Date Fair
|
|
|
|
Shares
|
|
|
Value
|
|
|
Balance at December 31, 2005
|
|
|
|
|
|
|
|
|
Restricted stock awards granted
|
|
|
145,500
|
|
|
$
|
3.55
|
|
Performance bonus stock award granted
|
|
|
100,000
|
|
|
|
1.64
|
|
Restricted share awards vested
|
|
|
(20,618
|
)
|
|
|
1.61
|
|
Restricted share awards cancelled
|
|
|
(55,033
|
)
|
|
|
3.63
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
169,849
|
|
|
|
2.40
|
|
Restricted stock awards granted
|
|
|
726,000
|
|
|
|
1.54
|
|
Restricted share awards vested
|
|
|
(20,250
|
)
|
|
|
1.36
|
|
Restricted share awards cancelled
|
|
|
(4,875
|
)
|
|
|
1.80
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
870,724
|
|
|
$
|
1.66
|
|
|
|
|
|
|
|
|
|
|
72
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
The Companys restricted stock awards included
450,000 shares granted in 2007 with vesting provisions
based solely on the achievement of performance-based milestones.
None of the restricted performance-based milestone awards and
none of the Companys CEOs performance bonus stock
awards had vested as of December 31, 2007. The total fair
value of restricted stock awards that did vest during the years
ended December 31, 2007 and 2006 was $28,000 and $33,000,
respectively. The Company retained purchase rights to 771,000
and 70,000 shares of unvested restricted stock awards
issued pursuant to stock purchase agreements at no cost per
share as of December 31, 2007 and 2006, respectively.
Performance
Bonus Stock Award
In October 2006, as provided in his employment offer letter, the
Company agreed to pay to Dr. Gonda, its President and Chief
Executive Officer, a stock bonus of up to 100,000 shares of
its common stock to be earned based on the common stock price
reaching certain price targets after each of the first two years
of his employment. The Company valued Dr. Gondas
stock bonus on a Monte-Carlo simulation due to the
path-dependency of the award. The Company believes that the
Monte-Carlo simulation provides a more precise estimate for the
grant date fair value of a market-based equity award as the
simulation allows for vesting throughout the vesting period. The
fair value of the performance bonus stock award is $94,000 and
none of the shares have vested as of December 31, 2007.
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 December 31, 2007, a total of 809,560 shares had
been issued under the Purchase Plan, leaving a balance of
240,440 available authorized shares. Compensation expense was
$112,000 and $111,000 for the years ended December 31, 2007
and 2006, respectively, and pro forma compensation expense for
the year ended December 31, 2005 was $485,000. Under
SFAS No. 123(R), stock-based compensation cost is
reported for the fair value of the employees purchase
rights, which was estimated using the Black-Scholes model and
the following weighted average assumptions under the Employee
Stock Purchase Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
|
Employee Stock Purchase Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Volatility factor
|
|
|
78.1
|
%
|
|
|
86.4
|
%
|
|
|
87.1
|
%
|
Risk-free interest rate
|
|
|
4.6
|
%
|
|
|
4.9
|
%
|
|
|
3.6
|
%
|
Expected life (years)
|
|
|
1.18
|
|
|
|
0.49
|
|
|
|
1.15
|
|
Weighted-average fair value of purchase rights granted during
the period
|
|
$
|
0.59
|
|
|
$
|
0.60
|
|
|
$
|
2.90
|
|
|
|
7.
|
Convertible
Preferred Stock and Common Stock Warrants
|
Pursuant to the completion of the Companys public offering
on January 30, 2007, the outstanding shares of the
convertible preferred stock were automatically converted to
shares of common stock at a conversion ratio of 0.8 shares
of common stock for each share of preferred stock. Prior to the
public offering, the Company completed a $48.4 million
preferred stock financing in December 2001. Under the terms of
the financing, the Company sold to a
73
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
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, was
convertible at the option of the holder into 0.8 shares of
common stock. An automatic conversion feature was triggered
under the preferred stock financing upon either a public
offering with gross proceeds to the Company exceeding
$25 million (before underwriting discounts, commissions and
fees), which occurred in January 2007, or the date on which the
common stock closing bid price was above $52.9375 per share for
at least 20 consecutive trading days. There were no dividends
declared on the convertible preferred stock.
The Company also issued warrants to the investors in connection
with the December 2001 financing 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 convertible preferred stock financing. Warrants to
purchase 865,173 shares of common stock expired unexercised
and the remaining warrants were exercised.
|
|
8.
|
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 $15,500 annually on a pretax basis as of
December 31, 2007. Subject to a maximum dollar match
contribution of $7,750 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 $120,000, $194,000 and $283,000 in 2007, 2006
and 2005, respectively.
CyDex
On August 31, 2007, the Company and CyDex Pharmaceuticals,
Inc. (CyDex) entered into a Collaboration Agreement
(the CyDex Agreement), which contemplates that the
parties will collaborate on the development and
commercialization of products that utilize our AERx pulmonary
delivery technology and CyDexs solubilization and
stabilization technologies to deliver combinations of inhaled
corticosteroids, anticholinergics and beta-2 agonists for the
treatment of asthma and chronic obstructive pulmonary diseases
(COPD). John Siebert, a member of our Board of Directors, is the
Chief Executive Officer of CyDex. The Company and CyDex may
develop combination inhalation products for certain respiratory
diseases. Single agent steroid products and combination products
containing steroids for asthma are part of the license CyDex
granted to AstraZeneca. The agreement CyDex has with AstraZeneca
entitles the latter with the right of first negotiation for
combination products for the treatment of asthma containing
corticosteroids.
Under the terms of the CyDex Agreement, the parties will share
in the revenue from sales and licensing of such products to a
third party for further development and commercialization.
Details of each collaboration project will be determined by a
joint steering committee consisting of members appointed by each
of the parties. Costs of each collaboration project will be
borne 60% by the Company and 40% by CyDex. Revenues from each
collaboration project will be shared in the same ratio. The
CyDex Agreement commenced on August 31, 2007, and unless
terminated earlier, will extend for a minimum period of two
years. Either party may terminate the Agreement upon advance
notice to the other party, and the non-terminating party will
retain an option to continue the development and
commercialization of any terminated product, subject to payment
of a royalty to the terminating party. The Company did not
recognize any revenue and incurred expenses of $8,000 relating
to the CyDex Agreement during the year ended December 31,
2007.
Novo
Nordisk
Prior to the Companys public offering completed on
January 30, 2007 (see Note 6), Novo Nordisk and its
affiliate, Novo Nordisk Pharmaceuticals, Inc. were considered
related parties. At December 31, 2006, Novo
74
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Nordisk effectively owned 1,573,674 shares of the
Companys common stock, representing 10.6% of the
Companys total outstanding common stock (9.8% on an
as-converted basis). As a result of the Companys public
offering on January 30, 2007, Novo Nordisks ownership
was reduced to approximately 3.0% of the Companys stock on
an as-converted basis, and as of December 31, 2007, Novo
Nordisk owned less than 1% of the Companys common stock.
In June 1998, the Company executed a Development and
Commercialization Agreement with Novo Nordisk to jointly develop
a pulmonary delivery system for administering insulation by
inhalation. Under the terms of the agreement, Novo Nordisk was
granted exclusive rights to worldwide sales and marketing rights
for any products development under the terms of the agreement.
On July 3, 2006, the Company and Novo Nordisk entered into
the Second Amended and Restated License Agreement (the
July 3, 2006 License Agreement). On
January 14, 2008, the Company received a
120-day
notice from Novo Nordisk terminating the July 3, 2006
License Agreement. The Company is in discussions with Novo
Nordisk to determine the ongoing rights and obligations of the
parties in light of Novo Nordisks recent decision and to
determine what, if any, future collaborations the parties may
pursue (see Note 20).
The July 3, 2006 License Agreement reflected: (i) the
transfer by the Company of certain intellectual property,
including all rights, title and interest to the 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 of $12.0 million, with the
Company retaining exclusive, royalty-free control of these
patents outside the field of glucose control; (ii) the
receipt of a royalty prepayment of $8.0 million in exchange
for a one percent reduction on the average royalty rate for the
commercialized AERx iDMS product and; (iii) a loan to the
Company in the principal amount of $7.5 million (see
Note 11). The $12.0 million and the $8.0 million
were included in gain on sale of patent and royalty interest
line item in the accompanying statements of operations for the
year ended December 31, 2006.
Prior to the July 3, 2006 License Agreement, the Company
completed a restructuring of its AERx iDMS program on
January 26, 2005, pursuant to a restructuring agreement
entered into with Novo Nordisk and NNDT, a newly created wholly
owned subsidiary of Novo Nordisk (the January 26,
2005 Agreement). Under the terms of the January 26,
2005 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. 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 that will rise to an average of five percent or higher
by the fifth year after commercialization 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.
|
Prior to the 2005 restructuring, the Company entered into
various stock purchase agreements and related amendments in
1998, 2001 and 2002 with Novo Nordisk and raised
$35.0 million. As a result of the restructuring, Novo
Nordisk was not required to make any further purchases of the
Companys stock and the restrictions upon their sale of the
Companys common stock were modified. In addition, as a
result of the restructuring transactions in 2006 and 2005,
contract revenue from the Companys development agreement
with Novo Nordisk deceased significantly. From 1998 through
December 31, 2007, the Company received approximately
$150 million in
75
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
product development and milestone payments from Novo Nordisk,
and of this amount, the Company had recognized all of these
funds as contract revenues. For the years ended
December 31, 2007, 2006 and 2005, the Company recognized
revenue in the amount of $23,000, $59,000 and $8 million,
respectively, related to product development and milestone
payments.
|
|
10.
|
Revenue
and Deferred Revenue:
|
Significant payments from and amounts billed to collaborators,
contract and milestone revenues and deferred revenue are as
follows (thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Deferred revenue beginning balance
|
|
$
|
|
|
|
$
|
222
|
|
|
$
|
11,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments/Amounts Billed:
|
|
|
|
|
|
|
|
|
|
|
|
|
Novo Nordisk
|
|
|
23
|
|
|
|
59
|
|
|
|
727
|
|
Other collaborator-funded programs
|
|
|
1,818
|
|
|
|
4,533
|
|
|
|
2,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,841
|
|
|
|
4,592
|
|
|
|
3,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenues recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
Novo Nordisk
|
|
|
23
|
|
|
|
59
|
|
|
|
8,013
|
|
Other collaborator-funded programs
|
|
|
938
|
|
|
|
4,755
|
|
|
|
2,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
961
|
|
|
|
4,814
|
|
|
|
10,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
880
|
|
|
|
|
|
|
|
222
|
|
Less: non-current portion of deferred revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of deferred revenue
|
|
$
|
880
|
|
|
$
|
|
|
|
$
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, Novo Nordisk, pursuant to the July 3,
2006 License Agreement (see Note 9), loaned the Company a
principal amount of $7.5 million under a Promissory Note
and Security Agreement (Promissory Note). The
Promissory Note bears interest accruing at 5% per annum and the
principal, along with the accrued interest, is payable in three
equal payments of $3.5 million at July 2, 2012,
July 1, 2013 and June 30, 2014. The amount outstanding
under the Promissory Note, including accrued interest, was
$8.1 million and $7.7 million as of December 31,
2007 and 2006, respectively. The Promissory Note does contain a
number of covenants that include restrictions in the event of
changes to corporate structure, change in control and certain
asset transactions. The Promissory Note was also secured by a
pledge of the net royalty stream payable to the Company by Novo
Nordisk pursuant to the July 3, 2006 License Agreement.
The Company subsequently received a notice of termination of the
July 3, 2006 License Agreement by Novo Nordisk in January
2008 (see Note 20). The termination of the July 3,
2006 License Agreement does not accelerate any of the payment
provisions under the Promissory Note. As of March 24, 2008,
there were no covenant violations or any event of default.
76
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
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 as well as net operating loss
and tax credit carryforwards.
Significant components of the Companys deferred tax assets
and liabilities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Net operating loss carryforwards
|
|
$
|
102,700
|
|
|
$
|
94,300
|
|
Research and development credits
|
|
|
20,300
|
|
|
|
19,600
|
|
Capitalized research and development
|
|
|
3,100
|
|
|
|
3,900
|
|
Other
|
|
|
1,400
|
|
|
|
1,100
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
127,500
|
|
|
|
118,900
|
|
Valuation allowance
|
|
|
(127,500
|
)
|
|
|
(118,900
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The difference between the income tax benefit and the amount
computed by applying the federal statutory income tax rate to
loss before income taxes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Income tax benefit at federal statutory rate
|
|
$
|
(8,471
|
)
|
|
$
|
(4,566
|
)
|
|
$
|
(10,225
|
)
|
Expired net operating losses
|
|
|
1,407
|
|
|
|
|
|
|
|
|
|
State taxes (net of federal)
|
|
|
(1,339
|
)
|
|
|
(917
|
)
|
|
|
(1,676
|
)
|
Credits
|
|
|
(951
|
)
|
|
|
(4,884
|
)
|
|
|
(888
|
)
|
Prior year adjustment
|
|
|
|
|
|
|
|
|
|
|
3,948
|
|
Other
|
|
|
748
|
|
|
|
436
|
|
|
|
(59
|
)
|
Change in valuation allowance
|
|
|
8,606
|
|
|
|
9,931
|
|
|
|
8,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company makes certain estimates and judgments in determining
income tax expense for financial statement purposes. These
estimates and judgments occur in the calculation of certain tax
assets and liabilities, which arise from differences in the
timing of recognition of revenue and expense for tax and
financial statement purposes.
As part of the process of preparing its financial statements,
the Company is required to estimate its income taxes in each of
the jurisdictions in which it operates. This process involves
the Company estimating its current tax exposure under the most
recent tax laws and assessing temporary differences resulting
from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and
liabilities, which are included in the Companys balance
sheets.
The Company assesses the likelihood that it will be able to
recover its deferred tax assets. The Company considers all
available evidence, both positive and negative, including
historical levels of income and loss, expectations and risks
associated with estimates of future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the
need for a valuation allowance. If the Company does not consider
it more likely than not that it will recover its deferred tax
assets, the Company will record a valuation allowance against
the
77
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
deferred tax assets that it estimates will not ultimately be
recoverable. As a result of the Companys analysis of all
available evidence, both positive and negative, as of
December 31, 2007 and 2006, the Company did not consider it
was more likely than not that the Company would recover its
deferred tax assets. Accordingly, a full valuation allowance was
recorded for deferred tax assets. The valuation allowance
increased by $8.6 million, $9.9 million, and
$8.9 million during the years ended December 31, 2007,
2006 and 2005, respectively. In accordance with
SFAS 123(R), the Company has excluded from deferred tax
assets tax benefits attributable to employee stock option
exercises.
As of December 31, 2007, the Company had federal net
operating loss carryforwards of approximately
$270.4 million and federal research and development tax
credit carryforwards of approximately $13.9 million, which
expire in the years 2008 through 2027. The Company also had
California net operating loss carryforwards of approximately
$161.3 million, which expire in the years 2010 through
2017, and California research and development tax credit
carryforwards of approximately $9.3 million, which do not
expire, and California Manufacturers Investment Credit
carryforwards of approximately $543,000, which expire in the
years 2008 through 2013. Approximately $3.0 million of the
federal and state net operating loss carryforwards represent
stock option deductions arising from activity under the
Companys stock option plan, the benefit of which will
increase additional paid in capital when realized.
The Company files income tax returns in the U.S. federal
jurisdiction and various state and foreign jurisdictions. The
Company is subject to U.S. federal and state income tax
examinations by tax authorities for tax years 1993 through 2007
due to net operating losses that are being carried forward for
tax purposes.
The Company adopted the provisions of FIN 48 on
January 1, 2007. The Company did not have any unrecognized
tax benefits at January 1, 2007, and does not have any
unrecognized tax benefits at December 31, 2007 and, as a
result, there was no effect on the Companys financial
condition or results of operations as a result of implementing
FIN 48.
The Companys policy is to recognize interest and penalties
accrued on any unrecognized tax benefits as a component of
income tax expense. As of the date of adoption of FIN 48,
the Company did not have any accrued interest or penalties
associated with any unrecognized tax benefits, nor was any
interest expense recognized for the year ended December 31,
2007.
The Internal Revenue Code of 1986, as amended (IRC),
and similar state statutes, contain provisions that may limit
the net operating loss and credit carryforwards for use in any
given period upon the occurrence of certain events, including a
significant change in ownership. The Company recently completed
a study of its net operating loss and credit carryforwards to
determine whether such amounts are limited under IRC
Section 382 and similar state statutes. Based on the study
the Company concluded that, as of December 31, 2007,
certain fully reserved federal credit carryforwards would not be
available prior to their expiration. Deferred tax assets for
such credit carryforwards and the related valuation allowance
have been reversed. The Company also concluded that its federal
and state net operating loss carryforwards would be available
during the carryforward period, but are subject to annual
limitations. Utilization of the Companys net operating
loss and credit carryforwards may still be subject to additional
substantial annual limitations for ownership changes after
December 31, 2007. Such additional annual limitations could
result in the expiration of the net operating loss and credit
carryforwards available as of December 31, 2007 prior to
their utilization.
|
|
13.
|
Sublease
Agreement and Lease Exit Liability:
|
On July 18, 2007, the Company entered into a sublease
agreement with Mendel to lease approximately 48,000 square
feet of the 72,000 square foot facility located at 3929
Point Eden Way, Hayward, CA (see Note 5).
During the year ended December 31, 2007, the Company
recorded a $2.1 million lease exit liability and related
expense for the expected loss on the sublease, in accordance
with SFAS 146, because the monthly payments the Company
expects to receive under the sublease are less than the amounts
that the Company will owe the lessor for
78
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
the sublease space. The fair value of the lease exit liability
was determined using a credit-adjusted risk-free rate to
discount the estimated future net cash flows, consisting of the
minimum lease payments to the lessor for the sublease space and
payments the Company will receive under the sublease. The
sublease loss and ongoing accretion expense required to record
the lease exit liability at its fair value using the interest
method have been recorded as part of restructuring and asset
impairment expense in the statement of operations. The lease
exit liability activity from inception in July 2007 through
December 31, 2007 is as follows (in thousands):
|
|
|
|
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
Loss on sublease upon subleasing to Mendel in July 2007
|
|
$
|
2,063
|
|
Accretion of imputed interest expense
|
|
|
39
|
|
Lease payments
|
|
|
(353
|
)
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
1,749
|
|
|
|
|
|
|
The Company recorded $376,000 of the $1,749,000 lease exit
liability in current liabilities and the remaining $1,373,000 in
non-current liabilities in the accompanying balance sheet at
December 31, 2007. In addition to recording the lease exit
liability and related loss, the Company reversed the deferred
rent liability, and wrote off leasehold improvements, related to
the sublease space. These amounts have been recorded in
restructuring and asset impairment expense in the statement of
operations and are summarized as follows (in thousands):
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
Loss on sublease upon subleasing to Mendel in July 2007
|
|
$
|
2,063
|
|
Lease commission
|
|
|
420
|
|
Accretion expense
|
|
|
39
|
|
Reversal of deferred rent liability related to sublease space
|
|
|
(620
|
)
|
Write-off of leasehold improvements and equipment related to
sublease space, net
|
|
|
182
|
|
|
|
|
|
|
Total
|
|
$
|
2,084
|
|
|
|
|
|
|
In accordance with the terms of the Companys sublease
agreement with Mendel dated July 18, 2007 (see
Note 13), the Company is maintaining a certificate of
deposit in the amount of $300,000 as collateral against a letter
of credit to secure the refund to Mendel of any unapplied
portion of the $300,000 in prepaid rent paid by Mendel. The
prepaid rent, along with accrued interest of $5,000, was
classified as $152,000 and $153,000 in current and non-current
assets, respectively, in the accompanying balance sheet at
December 31, 2007. The restriction will be lifted as rent
is paid by Mendel on the 12th, 18th, 24th and 27th month of the
sublease. The letter of credit expires on November 18, 2009.
|
|
15.
|
2006
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 recorded an initial charge of $1.3 million. The
Company accounted for the restructuring activity in accordance
with SFAS 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. On August 25, 2006, the Company
recorded an additional restructuring charge of $566,000 in
severance expense related to the termination of
79
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
employment of V. Bryan Lawlis, the Companys former
President and Chief Executive Officer, and Bobba Venkatadri, the
Companys former Senior Vice President of Operations,
offset by a reduction of previously recognized severance costs
of $233,000 related to the departure of officers and employees
in connection with the sale of Intraject-related assets to
Zogenix. On October 20, 2006, the Company identified
additional redundant positions affecting five employees and
recorded severance costs of $268,000. The Company recorded net
restructuring charges of $1.9 million and $98,000 for the
years ended December 31, 2006 and 2007, respectively. These
charges are included in the restructuring and asset impairment
expense line item on the accompanying statements of operations.
The Company paid the severance-related expenses in full by the
end of 2007 resulting from the 2006 restructuring. The accrual
for employee related restructuring expenses was included in
accrued compensation in the accompanying balance sheet as of
December 31, 2006.
During the year ended December 31, 2006, the Company
recorded a non-cash impairment charge of $4.0 million which
was 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 in 2006 for an initial
payment of $4.0 million and recorded an additional
impairment charge of $14,000 (see Note 16).
The following table summarizes the Companys restructuring
and asset impairment expenses related to the 2006 Restructuring
for the years ended December 31, 2006 and 2007,
respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
Non-Cash
|
|
|
Restructuring
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Restructuring
|
|
|
|
|
|
December 31,
|
|
Type of Liability
|
|
Impairment
|
|
|
Charges
|
|
|
Adjustments
|
|
|
Payments
|
|
|
2006
|
|
|
Charges
|
|
|
Payments
|
|
|
2007
|
|
|
Severance and related benefits
|
|
$
|
|
|
|
$
|
2,134
|
|
|
$
|
(233
|
)
|
|
$
|
(1,185
|
)
|
|
$
|
716
|
|
|
$
|
98
|
|
|
$
|
(814
|
)
|
|
$
|
|
|
Out-placement services
|
|
|
|
|
|
|
88
|
|
|
|
|
|
|
|
(52
|
)
|
|
|
36
|
|
|
|
|
|
|
|
(36
|
)
|
|
|
|
|
Impairment on Intraject-related assets
|
|
|
4,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,014
|
|
|
$
|
2,222
|
|
|
$
|
(233
|
)
|
|
$
|
(1,237
|
)
|
|
$
|
752
|
|
|
$
|
98
|
|
|
$
|
(850
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.
|
Sale of
Intraject-Related Assets
|
In August 2006, the Company sold all of its assets related to
the Intraject technology platform and products, including 12
United States patents along with any foreign counterparts
corresponding to those United States patents, to Zogenix, Inc.,
a newly created private company. Certain Zogenix officers and
employees, including certain Zogenix founders, were officers and
employees of the Company. Zogenix is responsible for further
development and commercialization efforts of Intraject. The
Company recorded a non-cash impairment charge of
$4.0 million in 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, most of which was completed by December 31, 2006.
The Company was reimbursed for the provision of consulting
services, information technology and document control support
and office facilities. The Company recorded revenues of $161,000
and $869,000 from Zogenix in 2007 and 2006, respectively.
80
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
17.
|
Exclusive
License, Development and Commercialization Agreement with Lung
Rx, Inc.
|
On August 30, 2007, the Company signed an Exclusive
License, Development and Commercialization Agreement (the
Lung Rx Agreement) with Lung Rx, Inc. (Lung
Rx), a wholly-owned subsidiary of United Therapeutics
Corporation, pursuant to which the Company granted Lung Rx an
exclusive license to develop and commercialize inhaled
treprostinil using the Companys AERx Essence technology
for the treatment of pulmonary arterial hypertension (PAH) and
other potential therapeutic indications.
Under the terms of the Lung Rx Agreement, the Company is
entitled to an upfront fee of $440,000 and an additional fee of
$440,000 due four months after the signing date for a
feasibility bridging study. These fees are nonrefundable and
were included in deferred revenue in the accompanying balance
sheet at December 31, 2007. Under the terms of the Lung Rx
Agreement, the Company will initiate and be responsible for
conducting and funding a feasibility bridging study that
includes a bridging clinical trial intended to compare the AERx
Essence technology to a nebulizer used in a recently completed
Phase 3 registration trial conducted by United Therapeutics. The
Company expects that the bridging clinical trial will be
completed in 2008.
Following the delivery of the final feasibility bridging study
report, and Lung Rxs determination that the study was
successful, the Company expects to receive certain nonrefundable
license fees and milestone payments from Lung Rx. These fees are
generally dependent upon Lung Rxs development of the
product, and are expected to be paid within three years of
signing the Lung Rx Agreement. In addition, Lung Rx will
purchase $3.47 million of the Companys common stock
at an average closing price over a certain trailing period
within 15 days of Lung Rxs determination that the
feasibility bridging study was successful. Under the terms of
the Lung Rx Agreement, Lung Rx will pay for the remaining
development costs and will also be responsible for manufacturing
inhaled treprostinil with AERx Essence technology. Following
commercialization of the product, the Company will receive
royalties from Lung Rx on a tiered basis of up to 10% of net
sales for any licensed products. The Lung Rx Agreement is to
continue until the expiration of the underlying patents and
approval of a generic product, on a
country-by-country
basis, unless terminated earlier by Lung Rx in accordance with
its terms.
In addition to conducting and funding the feasibility bridging
study, the Company will be obligated, upon Lung Rxs
initiation of the development phase, to provide multiple
deliverables under the Lung Rx Agreement, including the delivery
of the license to the AERx technology and any future
improvements thereto during the term of the Lung Rx Agreement,
performing reimbursable research and development services, and
participation on a product steering committee during the term of
the Lung Rx Agreement. All of the deliverables under the Lung Rx
Agreement are treated as a single unit of accounting under
EITF 00-21
as the fair value of the undelivered performance obligations
associated with these activities could not be objectively
determined and the activities are not economically independent
of each other. Since the deliverables are treated as a single
unit of accounting, the upfront fees for the feasibility
bridging study will be deferred until completion of the study
and, if the development phase is initiated by Lung Rx, will be
recognized as revenue ratably using a time-based model over the
term of the last deliverables, which in this case are the
license to improvements and the participation on the product
steering committee, or the estimated remaining term of the Lung
Rx Agreement. Any future license fees and milestone and royalty
payments received under the Lung Rx Agreement will also be
recognized as revenue ratably using a time-based model over the
remaining estimated term of the Lung Rx Agreement.
|
|
18.
|
Manufacturing
and Supply Agreement
|
On August 8, 2007, the Company entered into a Manufacturing
and Supply Agreement (the Enzon Agreement) with
Enzon Pharmaceuticals, Inc. (Enzon) related to our
ARD-3100 program, an inhaled formulation of Liposomal
Ciprofloxacin for the treatment and control of respiratory
infections common to patients with cystic fibrosis. Under the
Enzon Agreement, Enzon will manufacture and supply the Company
with Ciprofloxacin, Liposomal Ciprofloxacin, and other products
that may be identified by management. For manufacturing the
initial two products, the Company will pay Enzon costs and fees
totaling $3,294,500 in addition to costs and fees for stability
studies or other services that may be agreed by both parties.
The agreement commenced on August 8, 2007,
81
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
and will extend for a period of five years, unless terminated
earlier by either party. During the year ended December 31,
2007, the Company incurred $2.8 million in costs under the
Enzon Agreement.
|
|
19.
|
Quarterly
Results of Operations (unaudited)
|
Following is a summary of the quarterly results of operations
for the years ended December 31, 2007 and 2006 (amounts in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
Contract and license revenues
|
|
$
|
416
|
|
|
$
|
297
|
|
|
$
|
230
|
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
3,407
|
|
|
|
3,841
|
|
|
|
3,899
|
|
|
|
5,623
|
|
General and administrative
|
|
|
1,987
|
|
|
|
2,628
|
|
|
|
1,757
|
|
|
|
2,029
|
|
Restructuring and asset impairment
|
|
|
98
|
|
|
|
|
|
|
|
2,059
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
5,492
|
|
|
|
6,469
|
|
|
|
7,715
|
|
|
|
7,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(5,076
|
)
|
|
|
(6,172
|
)
|
|
|
(7,485
|
)
|
|
|
(7,659
|
)
|
Interest income
|
|
|
637
|
|
|
|
699
|
|
|
|
684
|
|
|
|
553
|
|
Interest expense
|
|
|
(96
|
)
|
|
|
(96
|
)
|
|
|
(101
|
)
|
|
|
(100
|
)
|
Other income (expense)
|
|
|
(31
|
)
|
|
|
46
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,566
|
)
|
|
$
|
(5,523
|
)
|
|
$
|
(6,902
|
)
|
|
$
|
(7,210
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.11
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common
share
|
|
|
40,820
|
|
|
|
53,942
|
|
|
|
53,948
|
|
|
|
53,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
Contract and license revenues
|
|
$
|
1,073
|
|
|
$
|
1,807
|
|
|
$
|
1,126
|
|
|
$
|
808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
6,740
|
|
|
|
6,357
|
|
|
|
4,547
|
|
|
|
4,554
|
|
General and administrative
|
|
|
2,853
|
|
|
|
2,685
|
|
|
|
3,514
|
|
|
|
1,665
|
|
Restructuring and asset impairment
|
|
|
|
|
|
|
5,370
|
|
|
|
347
|
|
|
|
286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
9,593
|
|
|
|
14,412
|
|
|
|
8,408
|
|
|
|
6,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(8,520
|
)
|
|
|
(12,605
|
)
|
|
|
(7,282
|
)
|
|
|
(5,697
|
)
|
Gain on sale of patent and royalty interest to related party
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
Interest income
|
|
|
245
|
|
|
|
135
|
|
|
|
459
|
|
|
|
412
|
|
Interest expense
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
(95
|
)
|
|
|
(96
|
)
|
Other income (expense)
|
|
|
(7
|
)
|
|
|
40
|
|
|
|
(7
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,285
|
)
|
|
$
|
(12,433
|
)
|
|
$
|
13,075
|
|
|
$
|
(5,384
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share
|
|
$
|
(0.57
|
)
|
|
$
|
(0.85
|
)
|
|
$
|
0.89
|
|
|
$
|
(0.37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share
|
|
$
|
(0.57
|
)
|
|
$
|
(0.85
|
)
|
|
$
|
0.82
|
|
|
$
|
(0.37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic net income (loss) per common share
|
|
|
14,563
|
|
|
|
14,656
|
|
|
|
14,660
|
|
|
|
14,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted net income (loss) per common
share
|
|
|
14,563
|
|
|
|
14,656
|
|
|
|
15,982
|
|
|
|
14,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 14, 2008, Novo Nordisk issued a press release
announcing the termination of its phase 3 clinical trials for
fast-acting inhaled insulin delivered via the AERx iDMS. The
press release stated that Novo Nordisk was not terminating the
trials because of any safety concerns and stated that Novo
Nordisk would increase research and development activities
targeted at inhalation systems for long-acting formulations of
insulin and GLP-1.
Also on January 14, 2008, the Company received a
120-day
notice from Novo Nordisk terminating the July 3, 2006
License Agreement between the Company and Novo Nordisk. The
Company is in discussions with Novo Nordisk to determine the
ongoing rights and obligations of the parties in light of Novo
Nordisks recent decision and to determine what, if any,
future collaborations the parties may pursue.
On December 21, 2007, the Company filed a
Form S-3
shelf registration statement
(No. 333-148263)
for $60 million of common stock at no par value per share.
The registration statement became effective on January 25,
2008.
83
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
On February 13, 2008, the Company signed an amendment to
its license agreement from December 2004 with Tekmira
Pharmaceuticals Corporation (Tekmira), formerly
known as Inex Pharmaceuticals Corporation. Under the amended
agreement, the Company has been granted a license to certain
technology relating to the delivery of liposomal ciprofloxacin.
The Company paid Tekmira $250,000 upon execution of the
amendment. Should the Company utilize the technology licensed
from Tekmira, the Company may be required to make milestone
payments of up to $4.75 million in the aggregate for each
disease indication, up to a maximum of two indications, pursued
by the Company for liposomal ciprofloxacin. Should the Company
commercialize products incorporating the licensed technology,
Tekmira will have the right to additional royalty payments.
In March 2008, the Company entered into an agreement with an
undisclosed party to conduct a feasibility study. The purpose of
the study is to evaluate in the laboratory the delivery of
certain compounds using the AERx system. The agreement has an
initial one year term with potential successive one year
renewals. The Company will be fully reimbursed for its costs
under the agreement.
84
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
Not applicable.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
Based on their evaluation as of the end of the period covered by
this report, the Companys chief executive officer and
chief financial officer have concluded that the Companys
disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act were effective as of the end of the
period covered by this report to ensure that information that
the Company is required to disclose in reports that management
files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC
rules and forms.
The Companys disclosure controls and procedures are
designed to provide reasonable assurance of achieving their
objectives, and the Companys chief executive officer and
chief financial officer have concluded that these controls and
procedures are effective at the reasonable assurance
level. The Company believes that a control system, no matter how
well designed and operated, cannot provide absolute assurance
that the objectives of the control system are met, and no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company
have been detected.
Managements
Annual Report on Internal Control Over Financial
Reporting
The Companys management is responsible for establishing
and maintaining adequate internal control over financial
reporting. A companys internal control over financial
reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
There are inherent limitations in the effectiveness of any
system of internal control, including the possibility of human
error and the circumvention or overriding of controls.
Accordingly, even effective internal controls can provide only
reasonable assurances with respect to financial statement
preparation. Further, because of changes in conditions, the
effectiveness of internal control may vary over time.
The Companys management assessed the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2007. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations (COSO) of the Treadway Commission in Internal
Control Integrated Framework. Based on its
assessment using the COSO criteria, management concluded that,
as of December 31, 2007, the Companys internal
control over financial reporting is effective.
This annual report does not include an attestation report of the
Companys independent registered public accounting firm
regarding internal control over financial reporting. The
Companys internal control over financial reporting was not
subject to attestation by the Companys independent
registered public accounting firm pursuant to temporary rules of
the SEC that permit the Company to provide only
managements report in this annual report.
Changes
in Internal Control Over Financial Reporting
There were no changes in our internal control over financial
reporting that occurred during our most recent fiscal quarter
that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over
financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
85
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by this Item concerning
(i) identification and business experience the
Companys directors, as well as legal proceedings involving
such directors and any family relationships between directors
and executive officers of the Company, (ii) the
identification of the members of the Companys audit
committee, (iii) the identification of the Audit Committee
Financial Expert and (iv) the Companys Code of Ethics
is incorporated by reference from the section captioned
Proposal 1: Election of Directors contained in
the Companys Definitive Proxy Statement related to the
Annual Meeting of Shareholders to be held May 15, 2008, to
be filed by the Company with the SEC (the Proxy
Statement).
Identification
of Executive Officers
The information required by this Item concerning our executive
officers is set forth in Part I of this Report.
Section 16(a)
Compliance
The information regarding compliance with Section 16(a) of
the Securities Exchange Act of 1934, as amended, required by
this Item is incorporated by reference from the section
captioned Section 16(a) Beneficial Ownership
Reporting Compliance in the Proxy Statement.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this Item is incorporated by
reference from the sections captioned Compensation of
Executive Officers, Compensation of Directors,
Compensation Committee Interlocks and Insider
Participation, and the Report of the Compensation
Committee contained in the Proxy Statement.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this Item is incorporated by
reference from the section captioned Security Ownership of
Certain Beneficial Owners and Management and Equity
Compensation Plan Information contained in the Proxy
Statement.
|
|
Item 13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
The information required by this Item is incorporated by
reference from the sections captioned Certain
Transactions and Compensation of Executive
Officers contained in the Proxy Statement.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required by this item is incorporated by
reference from the section captioned Proposal 4:
Ratification of Selection of Independent Auditors in the
Proxy Statement.
86
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a)(1) Financial Statements.
Included in Part II of this Report:
|
|
|
|
|
|
|
Page in
|
|
|
Form 10-K
|
|
|
|
|
50
|
|
|
|
|
52
|
|
|
|
|
53
|
|
|
|
|
54
|
|
|
|
|
55
|
|
|
|
|
56
|
|
(2) Financial Statement Schedules.
All financial statement schedules are omitted because they are
not applicable or not required or because the required
information is included in the financial statements or notes
thereto.
(3) Exhibits.
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
3
|
.1(1)
|
|
Amended and Restated Articles of Incorporation of the Company.
|
|
3
|
.2(2)
|
|
Bylaws of the Company, as amended.
|
|
3
|
.3(3)
|
|
Certificate of Determination of Series A Junior
Participating Preferred Stock.
|
|
3
|
.4(4)
|
|
Amended and Restated Certificate of Determination of Preferences
of Series A Convertible Preferred Stock.
|
|
3
|
.5(3)
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company.
|
|
3
|
.6(3)
|
|
Certificate of Amendment of Certificate of Determination of
Series A Junior Participating Preferred Stock.
|
|
3
|
.7(5)
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company.
|
|
3
|
.8(5)
|
|
Certificate of Amendment of Certificate of Determination of
Series A Junior Participating Preferred Stock.
|
|
3
|
.9(6)
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company.
|
|
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.
|
|
10
|
.1(1)+
|
|
Form of Indemnity Agreement between the Registrant and each of
its directors and officers.
|
|
10
|
.2(7)+
|
|
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(7)+
|
|
Employee Stock Purchase Plan, as amended.
|
|
10
|
.8(1)+
|
|
Form of the Companys Employee Stock Purchase Plan Offering
Document.
|
|
10
|
.9(8)
|
|
Lease Agreement for the property located in Phase V of the
Britannia Point Eden Business Park in Hayward, California, dated
January 28, 1998, between the Company and Britannia Point
Eden, LLC.
|
87
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.10(9)
|
|
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
|
.10c(10)
|
|
Amendment No. 3 to Rights Agreement, dated as of
January 24, 2007, by and between the Company and
Computershare Trust Company, N.A.
|
|
10
|
.11(11)
|
|
Securities Purchase Agreement, dated as of November 7,
2003, by and among the Company and the purchasers named therein.
|
|
10
|
.12(12)
|
|
Securities Purchase Agreement, dated as of November 14,
2003, by and among the Company and the purchaser named therein.
|
|
10
|
.13(13)#
|
|
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(14)
|
|
Securities Purchase Agreement, dated as of December 17,
2004, by and among the Company and the purchasers named therein.
|
|
10
|
.15(7)
|
|
Amended and Restated Stock Purchase Agreement, dated as of
January 26, 2005, by and among the Company, Novo Nordisk
A/S and Novo Nordisk Pharmaceuticals, Inc.
|
|
10
|
.16(7)+
|
|
Form of Change of Control Agreement entered into between the
Company and certain of the Companys senior officers.
|
|
10
|
.17(15)+
|
|
Executive Officer Severance Benefit Plan.
|
|
10
|
.18(6)+
|
|
Form of the Companys Restricted Stock Bonus Agreement
under the 2005 Equity Incentive Plan.
|
|
10
|
.19(16)#
|
|
Second Amended and Restated License Agreement, dated as of
July 3, 2006, by and between the Company and Novo Nordisk
A/S.
|
|
10
|
.20(7)
|
|
Promissory Note and Security Agreement, dated July 3, 2006,
by and between the Company and Novo Nordisk A/S.
|
|
10
|
.21(7)#
|
|
Asset Purchase Agreement, dated as of August 25, 2006, by
and between the Company and Zogenix, Inc.
|
|
10
|
.22(7)+
|
|
Employment Agreement, dated as of August 10, 2006, with
Dr. Igor Gonda.
|
|
10
|
.23 (17)+
|
|
2005 Equity Incentive Plan, as amended
|
|
10
|
.24(18)
|
|
Consulting Agreement effective as of July 2, 2007 by and
between the Company and Norman Halleen.
|
|
10
|
.25(19)
|
|
Sublease between the Company and Mendel Biotechnology, Inc.,
dated July 11, 2007, under the Lease Agreement by and
between the Company and Hayward Point Eden I Limited
Partnership, a Delaware limited partnership, as
successor-in-interest
to Britannia Point Eden, LLC, as amended, for 3929 Point Eden
Way, Hayward, California.
|
|
10
|
.26(20)
|
|
Manufacturing Agreement between the Company and Enzon
Pharmaceuticals, Inc. dated August 8, 2007.
|
|
10
|
.27(21)#
|
|
Exclusive License, Development and Commercialization Agreement,
dated as of August 30, 2007, by and between the Company and
Lung Rx, Inc.
|
|
10
|
.28(22)#
|
|
Collaboration Agreement, dated as of August 31, 2007, by
and between the Company and CyDex, Inc.
|
|
23
|
.1
|
|
Consent of Odenberg Ullakko Muranishi & Co LLP
|
|
23
|
.2
|
|
Consent of Ernst & Young LLP, Independent Registered
Public Accounting Firm.
|
|
24
|
.1
|
|
Power of Attorney. Reference is made to the signature page.
|
|
31
|
.1
|
|
Section 302 Certification of the Chief Executive Officer.
|
|
31
|
.2
|
|
Section 302 Certification of the Chief Financial Officer.
|
|
32
|
.1
|
|
Section 906 Certification of the Chief Executive Officer
and the Chief Financial Officer.
|
88
|
|
|
+ |
|
Represents a management contract or compensatory plan or
arrangement. |
|
# |
|
The Commission has granted the Companys request for
confidential treatment with respect to portions of this exhibit. |
|
(1) |
|
Incorporated by reference to the Companys
Form S-1
(No. 333-4236)
filed on April 30, 1996, as amended. |
|
(2) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on August 14, 1998. |
|
(3) |
|
Incorporated by reference to the Companys
Form 10-K
filed on March 29, 2002. |
|
(4) |
|
Incorporated by reference to the Companys
Form S-3
(No. 333-76584)
filed on January 11, 2002, as amended. |
|
(5) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on August 13, 2004. |
|
(6) |
|
Incorporated by reference to the Companys
Form 10-K
filed on March 31, 2006. |
|
(7) |
|
Incorporated by reference to the Companys
Form S-1
(No. 333-138169)
filed on October 24, 2006, as amended. |
|
(8) |
|
Incorporated by reference to the Companys
Form 10-K
filed on March 24, 1998, as amended. |
|
(9) |
|
Incorporated by reference to the Companys
Form 8-K
filed on September 2, 1998. |
|
(10) |
|
Incorporated by reference to the Companys
Form 8-K
filed on January 30, 2007. |
|
(11) |
|
Incorporated by reference to the Companys
Form 8-K
filed on November 12, 2003. |
|
(12) |
|
Incorporated by reference to the Companys
Form 8-K
filed on November 20, 2003. |
|
(13) |
|
Incorporated by reference to the Companys
Form 8-K
filed on December 23, 2004. |
|
(14) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on August 14, 2006. |
|
(15) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on November 15, 2004. |
|
(16) |
|
Incorporated by reference to the Companys
Form 8-K
filed on October 13, 2005. |
|
(17) |
|
Incorporated by reference to the Registrants definitive
proxy statement filed on May 2, 2007 |
|
(18) |
|
Incorporated by reference to the Companys
Form 8-K
filed on July 11, 2007. |
|
(19) |
|
Incorporated by reference to the Companys
Form 8-K
filed on July 24, 2007. |
|
(20) |
|
Incorporated by reference to the Companys
Form 8-K
filed on August 14, 2007. |
|
(21) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on November 14, 2007. |
|
(22) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on November 14, 2007. |
(b) Index to Exhibits.
See Exhibits listed under Item 15(a) (3).
(c) Financial Statement Schedules.
All financial statement schedules are omitted because they are
not applicable or not required or because the required
information is included in the financial statements or notes
thereto.
Aradigm, AERx, AERx Essence and AERx Strip are registered
trademarks of Aradigm Corporation.
|
|
|
|
*
|
Other names and brands may be claimed as the property of others.
|
89
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Hayward, State of
California, on the 26th day of March 2008.
ARADIGM CORPORATION
Igor Gonda
President and Chief Executive Officer
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints, jointly and
severally, Igor Gonda and Norman Halleen, and each one of them,
attorneys-in-fact for the undersigned, each with power of
substitution, for the undersigned in any and all capacities, to
sign any and all amendments to this Report on
Form 10-K,
and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of
said attorneys-in-fact, or their substitutes, may do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this
Power of Attorney as of the date indicated opposite his name.
Pursuant to the requirements of the Securities and Exchange Act
of 1934, this Report has been signed below by the following
persons on behalf of the Registrant and 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)
|
|
March 26, 2008
|
|
|
|
|
|
/s/ Norman
Halleen
Norman
Halleen
|
|
Interim Chief Financial Officer (Principal Financial and
Accounting Officer)
|
|
March 26, 2008
|
|
|
|
|
|
/s/ Virgil
D. Thompson
Virgil
D. Thompson
|
|
Chairman of the Board and Director
|
|
March 26, 2008
|
|
|
|
|
|
/s/ Frank
H. Barker
Frank
H. Barker
|
|
Director
|
|
March 26, 2008
|
|
|
|
|
|
/s/ Stephen
O. Jaeger
Stephen
O. Jaeger
|
|
Director
|
|
March 26, 2008
|
|
|
|
|
|
/s/ John
M. Siebert
John
M. Siebert
|
|
Director
|
|
March 26, 2008
|
|
|
|
|
|
/s/ Timothy
P. Lynch
Timothy
P. Lynch
|
|
Director
|
|
March 26, 2008
|
90
EXHIBIT INDEX
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
3
|
.1(1)
|
|
Amended and Restated Articles of Incorporation of the Company.
|
|
3
|
.2(2)
|
|
Bylaws of the Company, as amended.
|
|
3
|
.3(3)
|
|
Certificate of Determination of Series A Junior
Participating Preferred Stock.
|
|
3
|
.4(4)
|
|
Amended and Restated Certificate of Determination of Preferences
of Series A Convertible Preferred Stock.
|
|
3
|
.5(3)
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company.
|
|
3
|
.6(3)
|
|
Certificate of Amendment of Certificate of Determination of
Series A Junior Participating Preferred Stock.
|
|
3
|
.7(5)
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company.
|
|
3
|
.8(5)
|
|
Certificate of Amendment of Certificate of Determination of
Series A Junior Participating Preferred Stock.
|
|
3
|
.9(6)
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company.
|
|
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.
|
|
10
|
.1(1)+
|
|
Form of Indemnity Agreement between the Registrant and each of
its directors and officers.
|
|
10
|
.2(7)+
|
|
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(7)+
|
|
Employee Stock Purchase Plan, as amended.
|
|
10
|
.8(1)+
|
|
Form of the Companys Employee Stock Purchase Plan Offering
Document.
|
|
10
|
.9(8)
|
|
Lease Agreement for the property located in Phase V of the
Britannia Point Eden Business Park in Hayward, California, dated
January 28, 1998, between the Company and Britannia Point
Eden, LLC.
|
|
10
|
.10(9)
|
|
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
|
.10c(10)
|
|
Amendment No. 3 to Rights Agreement, dated as of
January 24, 2007, by and between the Company and
Computershare Trust Company, N.A.
|
|
10
|
.11(11)
|
|
Securities Purchase Agreement, dated as of November 7,
2003, by and among the Company and the purchasers named therein.
|
|
10
|
.12(12)
|
|
Securities Purchase Agreement, dated as of November 14,
2003, by and among the Company and the purchaser named therein.
|
|
10
|
.13(13)#
|
|
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(14)
|
|
Securities Purchase Agreement, dated as of December 17,
2004, by and among the Company and the purchasers named therein.
|
|
10
|
.15(7)
|
|
Amended and Restated Stock Purchase Agreement, dated as of
January 26, 2005, by and among the Company, Novo Nordisk
A/S and Novo Nordisk Pharmaceuticals, Inc.
|
|
10
|
.16(7)+
|
|
Form of Change of Control Agreement entered into between the
Company and certain of the Companys senior officers.
|
|
10
|
.17(15)+
|
|
Executive Officer Severance Benefit Plan.
|
91
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.18(6)+
|
|
Form of the Companys Restricted Stock Bonus Agreement
under the 2005 Equity Incentive Plan.
|
|
10
|
.19(16)#
|
|
Second Amended and Restated License Agreement, dated as of
July 3, 2006, by and between the Company and Novo Nordisk
A/S.
|
|
10
|
.20(7)
|
|
Promissory Note and Security Agreement, dated July 3, 2006,
by and between the Company and Novo Nordisk A/S.
|
|
10
|
.21(7)#
|
|
Asset Purchase Agreement, dated as of August 25, 2006, by
and between the Company and Zogenix, Inc.
|
|
10
|
.22(7)+
|
|
Employment Agreement, dated as of August 10, 2006, with
Dr. Igor Gonda.
|
|
10
|
.23 (17)+
|
|
2005 Equity Incentive Plan, as amended
|
|
10
|
.24(18)
|
|
Consulting Agreement effective as of July 2, 2007 by and
between the Company and Norman Halleen.
|
|
10
|
.25(19)
|
|
Sublease between the Company and Mendel Biotechnology, Inc.,
dated July 11, 2007, under the Lease Agreement by and
between the Company and Hayward Point Eden I Limited
Partnership, a Delaware limited partnership, as
successor-in-interest
to Britannia Point Eden, LLC, as amended, for 3929 Point Eden
Way, Hayward, California.
|
|
10
|
.26(20)
|
|
Manufacturing Agreement between the Company and Enzon
Pharmaceuticals, Inc. dated August 8, 2007.
|
|
10
|
.27(21)#
|
|
Exclusive License, Development and Commercialization Agreement,
dated as of August 30, 2007, by and between the Company and
Lung Rx, Inc.
|
|
10
|
.28(22)#
|
|
Collaboration Agreement, dated as of August 31, 2007, by
and between the Company and CyDex, Inc.
|
|
23
|
.1
|
|
Consent of Odenberg Ullakko Muranishi & Co LLP
|
|
23
|
.2
|
|
Consent of Ernst & Young LLP, Independent Registered
Public Accounting Firm.
|
|
24
|
.1
|
|
Power of Attorney. Reference is made to the signature page.
|
|
31
|
.1
|
|
Section 302 Certification of the Chief Executive Officer.
|
|
31
|
.2
|
|
Section 302 Certification of the Chief Financial Officer.
|
|
32
|
.1
|
|
Section 906 Certification of the Chief Executive Officer
and the Chief Financial Officer.
|
|
|
|
+ |
|
Represents a management contract or compensatory plan or
arrangement. |
|
# |
|
The Commission has granted the Companys request for
confidential treatment with respect to portions of this exhibit. |
|
(1) |
|
Incorporated by reference to the Companys
Form S-1
(No. 333-4236)
filed on April 30, 1996, as amended. |
|
(2) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on August 14, 1998. |
|
(3) |
|
Incorporated by reference to the Companys
Form 10-K
filed on March 29, 2002. |
|
(4) |
|
Incorporated by reference to the Companys
Form S-3
(No. 333-76584)
filed on January 11, 2002, as amended. |
|
(5) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on August 13, 2004. |
|
(6) |
|
Incorporated by reference to the Companys
Form 10-K
filed on March 31, 2006. |
|
(7) |
|
Incorporated by reference to the Companys
Form S-1
(No. 333-138169)
filed on October 24, 2006, as amended. |
|
(8) |
|
Incorporated by reference to the Companys
Form 10-K
filed on March 24, 1998, as amended. |
|
(9) |
|
Incorporated by reference to the Companys
Form 8-K
filed on September 2, 1998. |
|
(10) |
|
Incorporated by reference to the Companys
Form 8-K
filed on January 30, 2007. |
|
(11) |
|
Incorporated by reference to the Companys
Form 8-K
filed on November 12, 2003. |
|
(12) |
|
Incorporated by reference to the Companys
Form 8-K
filed on November 20, 2003. |
|
(13) |
|
Incorporated by reference to the Companys
Form 8-K
filed on December 23, 2004. |
92
|
|
|
(14) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on August 14, 2006. |
|
(15) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on November 15, 2004. |
|
(16) |
|
Incorporated by reference to the Companys
Form 8-K
filed on October 13, 2005. |
|
(17) |
|
Incorporated by reference to the Registrants definitive
proxy statement filed on May 2, 2007 |
|
(18) |
|
Incorporated by reference to the Companys
Form 8-K
filed on July 11, 2007. |
|
(19) |
|
Incorporated by reference to the Companys
Form 8-K
filed on July 24, 2007. |
|
(20) |
|
Incorporated by reference to the Companys
Form 8-K
filed on August 14, 2007. |
|
(21) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on November 14, 2007. |
|
(22) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on November 14, 2007. |
93