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, 2008
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or
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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-known
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 þ No o
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 o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company þ
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(Do not check if a smaller reporting company)
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 30, 2008 was: $41,192,879.
The number of shares of the registrants common stock
outstanding as of February 27, 2009 was: 99,968,455
DOCUMENTS
INCORPORATED BY REFERENCE
Parts of the Proxy Statement for the Registrants Annual
Meeting of Shareholders to be held in May 2009 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 drugs delivered by
inhalation for the treatment of severe respiratory diseases by
pulmonologists. Over the last decade, we invested a large amount
of capital to develop drug delivery technologies, particularly
the development of a significant amount of expertise in
pulmonary drug delivery. We also invested considerable effort
into the generation of a large volume of laboratory and clinical
data demonstrating the performance of our
AERx®
pulmonary drug delivery platform. We have not been profitable
since inception and expect to incur additional operating losses
over at least the next several years as we expand product
development efforts, preclinical testing, clinical trial
activities, and possible sales and marketing efforts, and as we
secure production capabilities from outside contract
manufacturers. To date, we have not had any significant product
sales and do not anticipate receiving any revenues from the sale
of products in the near term. As of December 31, 2008, we
had an accumulated deficit of $334.7 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,
sale of Intraject related assets and interest earned on
investments. In February 2009, we closed the sale of
44,663,071 shares of common stock in a registered direct
offering with net proceeds, after expenses, of $4.1 million.
Over the last three years, our business has focused on
opportunities for product development for treatment of severe
respiratory diseases that we could develop and commercialize in
the United States without a partner, or be able to retain
co-marketing rights in the United States for such products. In
selecting our proprietary development programs, we primarily
seek drugs approved by the United States Food and Drug
Administration (FDA) that can be reformulated for
both existing and new indications in respiratory disease. Our
intent is to use our pulmonary
1
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. It is our
longer term strategy to commercialize our respiratory product
candidates with our own focused sales and marketing force
addressing pulmonary specialty doctors in the United States,
where we believe that a proprietary sales force will enhance the
return to our shareholders. Where our products can benefit a
broader population of patients in the United States or in other
countries, we may enter into co-development, co-promotion or
other marketing arrangements with collaborators, thereby
reducing costs and increasing revenues through license fees,
milestone payments and royalties. Our lead development candidate
in Phase 2 clinical trials is a proprietary liposomal
formulation of the antibiotic ciprofloxacin that is delivered by
inhalation for the treatment of infections associated with the
severe respiratory diseases cystic fibrosis and bronchiectasis.
The same formulation could also be potentially used for the
prevention and treatment of inhaled anthrax. In the near term
given our financial resources, our focus will be on completing a
Phase 2b clinical trial of liposomal ciprofloxacin in a
single indication.
Historically, our development activities consisted primarily of
collaborations and product development agreements with third
parties. The most notable collaboration was with Novo Nordisk on
the
AERx®
insulin Diabetes Management System (iDMS) for the
treatment of Type I and Type II diabetes. This program
began in 1998 and included nine Phase 3 clinical trials in Type
I and Type II diabetes patients. From 1998 through
December 31, 2007, we received approximately
$150 million in product development and milestone payments
from Novo Nordisk. On April 30, 2008, Novo Nordisk
announced that following recent reports of lung cancer in
Type II diabetes patients treated with Exubera*, an inhaled
insulin product from Pfizer, the likelihood of achieving a
positive benefit/risk ratio for future pulmonary diabetes
projects had become more uncertain, and as a result, Novo
Nordisk had decided to stop all research and development
activities in the field. In May 2008, the July 3, 2006
License Agreement between us and Novo Nordisk was terminated.
Pursuant to the License Agreement, on September 25, 2008,
Novo Nordisk assigned, at no charge to us, the inhaled
insulin-related patents, which Novo Nordisk purchased from us in
July 2006, as well as certain related patents that originate
from Novo Nordisk. The portfolio includes both U.S. and
foreign patents. We assume the responsibility for the
maintenance of this portfolio. Novo Nordisk is also providing us
with the data from the preclinical and clinical research
generated during the collaboration. We do not intend to complete
the development of AERx iDMS on our own. We are attempting to
out-license or sell the assets associated with inhaled insulin.
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.
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 opportunities in the respiratory disease market
as well as other pharmaceutical markets that would benefit from
the efficient, non-invasive inhalation delivery of drugs.
2
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. 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 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.
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Accelerate the regulatory approval process. We
believe our management teams expertise in pharmaceutical
inhalation products, new indications and reformulations of
existing drugs will enable us to pursue the most appropriate
regulatory pathway for our product candidates. Because most of
our current 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. It is our longer term strategy to
develop our own targeted sales and marketing force for those of
our products prescribed primarily by the approximately 11,000
pulmonologists, or their subspecialty associates, in the United
States. We expect to begin establishing a sales force as we
approach commercialization of the first of such products. We
believe that by developing a small sales group dedicated to
interacting with disease-specific physicians in the respiratory
field, we can create greater value from our products for our
shareholders. For markets where maximizing sales of the product
would depend on marketing to primary healthcare providers that
are only addressable with a large sales force, we plan to enter
into co-marketing arrangements. We also intend to establish
collaborative relationships to commercialize our products in
cases where we cannot meet these goals with a small sales force
or when we need collaborators with relevant expertise and
capabilities, such as the ability to address international
markets. Through such collaborations, we may also utilize our
collaborators resources and expertise to conduct large
late-stage clinical development.
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Exploit the broad applicability of our delivery technology
through product development collaborations. We
continue to believe that companies can benefit by collaborating
with us when our proprietary delivery technologies create new
pharmaceutical and biologics products. We intend to continue to
exploit the broad applicability of our delivery technologies for
systemic applications of our validated technologies in
collaborations with companies 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 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 2
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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)
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Pulmonary Arterial Hypertension
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Phase 1
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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-1700 (combination products)
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Asthma, COPD
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Preclinical
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We periodically conduct feasibility studies with other parties
in an effort to utilize our expertise and intellectual property
for product candidates that could potentially bring us revenues
from partners.
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 provide high and prolonged
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 gradually 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 post
dosing. We also believe that for certain respiratory disease
indications it may be possible that a liposomal formulation
enables better interaction of the drug with the disease target,
leading to improved effectiveness over other therapies. We have
at present under development three disease indications for this
formulation that share much of the laboratory and production
development efforts, as well as a common safety data base.
4
ARD-3100
Liposomal Ciprofloxacin for the Treatment of Infections in
Cystic Fibrosis (CF) 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 which is given
twice a day by nebulization. We believe that local lung delivery
via inhalation of ciprofloxacin in a sustained release
formulation could provide a convenient, effective and safe
treatment of the debilitating and often life-threatening lung
infections that afflict patients with CF. We think that once a
day dosing of inhaled liposomal ciprofloxacin could also be a
welcome reduction in the burden of therapy for this patient
population. We have received orphan drug designations from the
FDA for this product for the management of CF.
We believe we have the preclinical development, clinical and
regulatory expertise to advance this product through
development. We intend to retain marketing or co-marketing
rights for the inhaled liposomal ciprofloxacin formulations in
the United States.
Development
We initiated preclinical studies for liposomal ciprofloxacin in
2006 and we also continued to work on new innovative
formulations for this product with the view to maximize the
safety, efficacy and convenience to patients. In October 2007,
we completed a Phase 1 clinical trial in 20 healthy volunteers
in Australia. This was a safety, tolerability and
pharmacokinetic study that included single dose escalation
followed by dosing for one week. Administration of the liposomal
formulation by inhalation was well tolerated and no serious
adverse reactions were reported. The pharmacokinetic profile
obtained by measurement of blood levels of ciprofloxacin
following the inhalation of the liposomal formulation was
consistent with the profile from sustained release of
ciprofloxacin from liposomes, supporting once daily dosings; 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 systemic emergence of resistant micro-organisms.
Further, we believe that once a day dosing of this product could
provide a significant reduction in the burden of therapy for CF
patients and their healthcare providers.
In June 2008, we completed a multi-center
14-day
treatment Phase 2a trial in Australia and New Zealand in 21 CF
patients to investigate safety, efficacy and pharmacokinetics of
once daily inhaled liposomal ciprofloxacin. The primary efficacy
endpoint in this Phase 2a study was the change from baseline in
the sputum Pseudomonas aeruginosa colony forming units (CFU), an
objective measure of the reduction in pulmonary bacterial load.
Data analysis in 21 patients who completed the study
demonstrated that the CFUs decreased by a mean 1.43 log over the
14-day
treatment period (p<0.0001). Evaluation one week after
study treatment was discontinued showed that the Pseudomonas
bacterial density in the lung was still reduced from the
baseline without additional antibiotic use. Pulmonary function
testing as measured by the forced expiratory volume in one
second (FEV1) showed a significant mean increase of 6.86% from
baseline after 14 days of treatment (p=0.04). The study
drug was well tolerated, and there were no serious adverse
events reported during the trial.
5
In order to expedite anticipated time to market and increase
market acceptance, we have elected to deliver our formulation
via nebulizer, as most CF patients already own a nebulizer and
are familiar with this method of drug delivery. We intend to
examine the potential for delivery of ciprofloxacin via our AERx
delivery system as well.
ARD
3150 Liposomal Ciprofloxacin for the Treatment of
Infections in Non-Cystic Fibrosis Bronchiectasis (BE)
Patients
Bronchiectasis is a chronic condition characterized by abnormal
dilatation of the bronchi and bronchioles associated with
chronic infection. It is frequently observed in patients with
CF. However, it is a condition that affects about
110,000 people without CF in the United States and many
more in other countries, and results from a cycle of
inflammation, recurrent infection, and bronchial wall damage.
There is currently no drug specifically approved for the
treatment of non-CF bronchiectasis in the US. We were granted
orphan-drug designation in the US for the management of this
condition with inhaled liposomal ciprofloxacin. We believe we
have the preclinical development, clinical and regulatory
expertise to advance this product through development. We intend
to retain marketing or co-marketing rights for the inhaled
liposomal ciprofloxacin formulations in the United States.
Development
Pre-clinical and Phase 1 clinical activities described above for
ARD-3100 are also utilized by the ARD-3150 program.
In December 2008, we completed an open-label, four week
treatment study of efficacy, safety and tolerability of once
daily inhaled liposomal ciprofloxacin in patients with non-CF
bronchiectasis. The study was conducted at eight leading centers
in the United Kingdom and enrolled a total of 36 patients.
The patients were randomized into two equal size groups, one
receiving 3 mL of inhaled liposomal ciprofloxacin and the other
receiving 6 mL of inhaled liposomal ciprofloxacin,
once-a-day
for the four-week treatment period. The primary efficacy
endpoint was the change from baseline in the sputum
Pseudomonas aeruginosa CFU, the standard objective
measure of the reduction in pulmonary bacterial load. The 3 mL
and 6 mL doses of inhaled liposomal ciprofloxacin in the
evaluable patient population demonstrated significant mean
decreases against baseline in the Pseudomonas aeruginosa
CFUs over the
28-day
treatment period of 3.5 log (p<0.001) and 4.0 log
(p<0.001) units, respectively.
With regard to safety, there were no statistically significant
changes in lung function for the evaluable patient population at
the end of treatment as measured by the normalized forced
expiratory volume in one second (FEV1% predicted). Inhaled
liposomal ciprofloxacin was well tolerated: no bronchodilator
use was mandated or needed before administration of the study
drug. In the 3 mL group, respiratory drug-related adverse
reactions were only mild. Three serious adverse events (SAEs)
were observed in each dose group, with only one of the six
classified as possibly drug-related in the 6 mL group. This
particular patient suffered from a recurrent episode of a viral
infection (shingles) early in the treatment period that might
have been a confounding factor leading ultimately to a
respiratory exacerbation requiring hospitalization.
In order to expedite anticipated time to market and increase
market acceptance, we have elected to deliver our formulation
via nebulizer. We intend to examine the potential for delivery
of ciprofloxacin via our AERx delivery system as well.
The CF and BE programs incorporate formulation and manufacturing
processes and the early preclinical safety data developed for
our inhalation anthrax program discussed below. We believe our
inhaled liposomal ciprofloxacin could be explored also for the
treatment of other serious respiratory infections, such as those
occurring in severe COPD patients.
We intend to finalize development plans and budgets for the CF
and BE programs in conjunction with discussions with the FDA. We
are seeking partnerships for these programs in order to reduce
the overall cost to us of development and to bring additional
expertise for the global development and commercialization of
inhaled liposomal ciprofloxacin for multiple indications.
6
ARD-1100
Liposomal Ciprofloxacin for the Treatment of Inhalation
Anthrax
The third of our liposomal ciprofloxacin programs is for the
prevention and treatment of pulmonary anthrax infections.
Anthrax spores are naturally occurring in soil throughout the
world. Anthrax infections are most commonly acquired through
skin contact with infected animals and animal products or, less
frequently, by inhalation or ingestion of spores. With
inhalation anthrax, once symptoms appear, fatality rates are
high even with the initiation of antibiotic and supportive
therapy. Further, a portion of the anthrax spores, once inhaled,
may remain dormant in the lung for several months and 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 and similar types of inhaled bacterial (e.g. tularemia)
bioterror agents represents a real and current threat.
Ciprofloxacin has been approved by the FDA for use orally and
via injection for the treatment of inhalation anthrax
(post-exposure) since 2000. Our ARD-1100 research and
development program 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 for the
treatment of inhalation anthrax under a technology demonstration
program funded by the DRDC as part of their interest in
developing products to counter bioterrorism. The DRDC had
already demonstrated the feasibility of inhaled liposomal
ciprofloxacin for post-exposure prophylaxis of Francisella
tularensis, a potential bioterrorism agent similar to
anthrax. Mice were exposed to a lethal dose of 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 additional 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
Organizations (WHO) recent report states that tobacco
smoking is the single most preventable cause of death in the
world today. Already tobacco kills more than five million people
per year more than tuberculosis, HIV/AIDS and
malaria combined. WHO warns that by 2030, the death toll could
exceed eight million a year. Unless urgent action is taken,
tobacco could kill one billion people during this century.
According to the National Institute on Drug Abuse, more than
$75 billion of total U.S. healthcare costs each year
is attributable directly to smoking. However, this cost is well
below the total cost to society because it does not include burn
care from smoking-related fires, perinatal care for low
birth-weight infants of mothers who smoke, and medical care
costs associated with disease caused by secondhand smoke. In
addition to healthcare costs, the costs of
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lost productivity due to smoking effects are estimated at
$82 billion per year, bringing a conservative estimate of
the economic burden of smoking to more than $150 billion
per year.
NCHS indicates that nicotine dependence is the most common form
of chemical dependence in this country. Quitting tobacco use is
difficult and often requires multiple attempts, as users often
relapse because of withdrawal symptoms. Our goal is to develop
an inhaled nicotine product that would address effectively the
acute craving for cigarettes and, through gradual reduction of
the peak nicotine levels, wean-off the patients from cigarette
smoking and from the nicotine addiction.
Development
The initial laboratory work on this program was partly funded
under grants from the National Institutes of Health.
We have encouraging data from our first human clinical trial
delivering aqueous solutions of nicotine using the palm-size
AERx Essence system. Our randomized, open-label, single-site
Phase 1 trial evaluated arterial plasma pharmacokinetics and
subjective acute cigarette craving when one of three nicotine
doses was administered to 18 adult male smokers. Blood levels of
nicotine rose much more rapidly following a single-breath
inhalation compared to published data on other approved nicotine
delivery systems. Cravings for cigarettes were measured on a
scale from 0-10 before and after dosing for up to four hours.
Prior to dosing, mean craving scores were 5.5, 5.5 and 5.0,
respectively, for the three doses. At five minutes following
inhalation of the nicotine solution through the AERx Essence
device, craving scores were reduced to 1.3, 1.7 and 1.3,
respectively, and did not return to pre-dose baseline during the
four hours of monitoring. Nearly all subjects reported an acute
reduction in craving or an absence of craving immediately
following dosing. No serious adverse reactions were reported in
the study.
We believe these results provide the foundation for further
research with the AERx Essence device as a means toward smoking
cessation. We are seeking collaborations with government and
non-government organizations to further develop this product.
Collaborative
Programs Under Development:
ARD-1550
and 1500 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 (United Therapeutics), and
is investigating an inhaled aqueous formulation of a
prostacyclin analogue, treprostinil, 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 Datamonitor,
in 2005 the more than 146,000 people worldwide affected by
PAH purchased over $800 million of PAH-related medical
treatments, and sales are expected to reach $2.0 billion
per year by 2015.
Prostacyclin analogues are an important class of drugs used for
the treatment of PAH. 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. Remodulin accounted for approximately
$270 million of United Therapeutics revenue in 2008.
We believe that the ARD-1550 product candidate could offer a
non-invasive, more direct and patient-friendly approach compared
to 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 convenient palm-sized 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 (ARD-1500) may lead
to a reduction in the number of daily administrations that are
needed to be effective when compared to existing inhaled
therapies.
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Development
We conducted two collaborative research projects with United
Therapeutics on inhaled treprostinil using our AERx Essence
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 with Lung Rx
(Lung Rx License Agreement) pursuant to which we
granted Lung Rx a license, which could become exclusive upon the
payment of specified sums, 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 initiated with Lung Rx in April 2008 a
clinical trial to evaluate lung distribution, pharmacokinetics
and safety of inhaled treprostinil delivered by the AERx Essence
system versus delivery with the Nebu-Tec OPTINEB(1)-ir
nebulizer. Lung Rx used the latter device in its Phase 3 TRIUMPH
(TReprostinil Sodium Inhalation Used in the
Management of Pulmonary Arterial
Hypertension) study of inhaled treprostinil in patients
with PAH.
In November 2008, we announced data from the clinical trial,
which showed that the AERx Essence delivery system efficiently
delivered aerosolized treprostinil deeper into the lung than
delivery by the OPTINEB nebulizer. Inhaled treprostinil was well
tolerated from both delivery systems, and no serious adverse
events were reported in the study. The AERx Essence delivery
system is expected to deliver medication to the patient in 2 to
4 breaths, significantly reducing the burden of therapy for PAH
patients.
We are now in discussions with Lung Rx regarding the next steps
required on the clinical, manufacturing and regulatory paths
toward the approval and launch of this product. Lung Rx will be
responsible for funding the remainder of the development of
treprostinil in the AERx delivery system through registration
and commercial launch.
Under the terms of the Lung Rx License Agreement, we received an
upfront fee of $440,000 and an additional fee of $440,000 four
months after the signing date. These fees are nonrefundable and
were included in deferred revenue in the balance sheet at
December 31, 2007. Under the terms of the Lung Rx License
Agreement, we were responsible for conducting and funding the
feasibility study. In November 2008, we announced the results of
the study and the receipt of $2.75 million from Lung Rx
which included the first milestone of $2 million and
development costs. We could receive additional milestone
payments of up to $7 million. Following commercialization
of the product, we would receive royalties from Lung Rx on a
tiered basis of up to 10% of net sales for any licensed products
that deliver treprostinil using our AERx technology.
Lung Rx was to pay a $650,000 license fee for an exclusive
license and had the right under the Lung Rx Agreement to
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 study was
successful. Lung Rx determined that while the results of the
clinical trial warranted continuation of the development of AERx
Essence technology with treprostinil, the performance of the
AERx Essence inhaler in the clinical study was different from
the nebulizer. As such, they did not pay the license fee or
purchase our stock.
ARD-1700
(Combination Products) and Other Prior and 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.
In August 2006, we sold all of our assets related to the
Intraject needle-free injector technology platform and products,
including 12 United States patents along with foreign
counterparts, to Zogenix, Inc., a private company. Zogenix is
responsible for further development and commercialization
efforts of Intraject (now rebranded under the
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name DoseProTM). We received a $4 million initial payment
from Zogenix, and we will be entitled to a milestone payment
upon initial commercialization, and royalty payments upon any
commercialization of products in the US and other countries,
including the European Union, that may be developed and sold
using the DosePro technology. In December 2007, Zogenix
submitted a New Drug Application (NDA) with the
U.S. Food and Drug Administration (FDA) for the
migraine drug sumatriptan using the needle-free injector DosePro
(Sumaveltm
DosePro). Zogenix stated that it is their intention to
launch Sumavel DosePro following FDA approval in the second half
of 2009.
The following are descriptions of two potential opportunities:
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Cyclodextrin Combination Products for Asthma, Cystic Fibrosis
and 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 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
Pharmaceuticals, Inc. (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 regularly examining our previously conducted preclinical
and clinical programs to identify product candidates that may be
suitable for further development consistent with our current
business strategy. We previously demonstrated the feasibility of
delivering a variety of small molecules, peptides, proteins and
gene therapies via our proprietary AERx delivery system but we
have not been able to continue their development due to a
variety of reasons, most notably the lack of funding provided
from collaborators. We seek to identify partners who may wish to
license or buy these assets.
Pulmonary
Drug Delivery Background
Pulmonary delivery describes the delivery of drugs by inhalation
and is a common method of treatment of many respiratory
diseases, including asthma, chronic bronchitis cystic fibrosis
and bronchiectasis. The current global market for inhalation
products includes delivery through metered-dose inhalers, dry
powder inhalers and nebulizers. The advantage of inhalation
delivery for the diagnosis, prevention and treatment of lung
disease is that the active agent is delivered in high
concentration directly to the desired targets in the respiratory
tract while keeping the bodys exposure to the rest of the
drug, and resulting side effects, at a minimum. Over the last
two decades, there has also been increased interest in the use
of the inhalation route for systemic delivery of drugs
throughout the body, either for the purpose of rapid onset of
action or to enable noninvasive delivery of drugs that are not
orally bioavailable.
10
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 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.
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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 for
parenteral delivery. 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. The liquid drug formulations used in
the AERx delivery system are expected to have the similar
stability profile as the currently marketed parenteral 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 inhalation delivery devices employ
breath control methods and technologies to guide the patient
into the proper breathing maneuver. As a result, a high degree
of consistency of the dose of medication delivered each time to
the patient was demonstrated in several clinical trials. 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 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 our AERx technology have been extensively
tested in the laboratory and in over 50 human clinical trials
with 19 different small molecules, peptides and proteins. We
also conducted two human clinical trials (with treprostinil and
with nicotine) with the latest version of our inhalation
technology, the AERx Essence system. This system retains the key
features of breath control and aerosol quality of the previous
generations of the AERx technology, but the patient is provided
with a much smaller, palm-sized device. The device is easy to
use and maintain and it does not require any batteries or
external electrical power.
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Formulation
Technologies
We have a number of formulation technologies for drugs delivered
by inhalation. We have proprietary knowledge and trade secrets
relating to the formulation of drugs to achieve products with
adequate stability and safety, and for the manufacture and
testing of inhaled drug formulations. We have been exploring the
use of liposomal formulations of drugs that may be used for the
prevention and treatment of respiratory diseases. Liposomes are
lipid-based nanoparticles dispersed in water that encapsulate
the drug during storage, and release the drug slowly upon
contact with fluid covering the airways and the lung. We 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 28, 2009, we had 98 issued United States
patents, with 36 additional United States patent applications
pending. In addition, we had 128 issued foreign patents and
additional 63 foreign patent applications pending. The bulk of
our patents and patent applications contain claims directed
toward our proprietary delivery technologies, including methods
for aerosol generation, devices used to generate aerosols,
breath control, compliance monitoring, certain pharmaceutical
formulations, design of dosage forms and their manufacturing and
testing methods. In addition, we have purchased three United
States patents containing claims that are relevant to our
inhalation technologies. The bulk of our patents, including
fundamental patents directed toward our proprietary AERx
delivery technology, expire between 2013 and 2023. For certain
of our formulation technologies we have in-licensed some
technology and will seek to supplement such intellectual
property rights with complementary proprietary processes,
methods and formulation technologies, including through patent
applications and trade secret protection. Because patent
positions can be highly uncertain and frequently involve complex
legal and factual questions, the breadth of claims obtained in
any application or the enforceability of our patents cannot be
predicted.
In December 2004, as part of our research and development
efforts funded by the DRDC for the development of liposomal
ciprofloxacin for the treatment of biological terrorism-related
inhalation anthrax, we obtained worldwide exclusive rights to a
patented liposomal formulation technology for the pulmonary
delivery of ciprofloxacin from Tekmira Pharmaceuticals
Corporation, formerly known as Inex Pharmaceuticals Corporation,
and may have the ability to expand the exclusive license to
other fields. We do not use Tekmiras liposomal formulation
technology and developed our own proprietary technology for our
liposomal ciprofloxacin program.
We seek to protect our proprietary position by protecting
inventions that we determine are or may be important to our
business. We do this, when we are able, through the filing of
patent applications with claims directed toward the devices,
methods and technologies we develop. Our ability to compete
effectively will depend to a significant extent on our ability
and the ability of our collaborators to obtain and enforce
patents and maintain trade secret protection over our
proprietary technologies. The coverage claimed in a patent
application typically is significantly reduced before a patent
is issued, either in the United States or abroad. Consequently,
any of our pending or future patent applications may not result
in the issuance of patents or, to the extent patents have been
issued or will be issued, these patents may be subjected to
further proceedings limiting their scope and may in any event
not contain claims broad enough to provide meaningful
protection. Patents that are issued to us or our collaborators
may not provide significant proprietary protection or
competitive advantage, and may be circumvented or invalidated.
We also rely on our trade secrets and the know-how of our
officers, employees, consultants and other service providers.
Our policy is to require our officers, employees, consultants
and advisors to execute proprietary information and invention
assignment agreements upon commencement of their relationships
with us. These agreements provide that all confidential
information developed or made known to the individual during the
course of the relationship shall be kept confidential except in
specified circumstances. These agreements also provide that
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all inventions developed by the individual on behalf of us shall
be assigned to us and that the individual will cooperate with us
in connection with securing patent protection for the invention
if we wish to pursue such protection. These agreements may not
provide meaningful protection for our inventions, trade secrets
or other proprietary information in the event of unauthorized
use or disclosure of such information.
We also execute confidentiality agreements with outside
collaborators and consultants. However, disputes may arise as to
the ownership of proprietary rights to the extent that outside
collaborators or consultants apply technological information
developed independently by them or others to our projects, or
apply our technology or proprietary information to other
projects, and any such disputes may not be resolved in our
favor. Even if resolved in our favor, such disputes could result
in substantial expense and diversion of management attention.
In addition to protecting our own intellectual property rights,
we must be able to develop products without infringing the
proprietary rights of other parties. Because the markets in
which we operate involve established competitors with
significant patent portfolios, including patents relating to
compositions of matter, methods of use, methods of delivery and
products in those markets, it may be difficult for us to develop
products without infringing the proprietary rights of others.
We would incur substantial costs if we are required to defend
ourselves in suits, regardless of their merit. These legal
actions could seek damages and seek to enjoin development,
testing, manufacturing and marketing of the allegedly infringing
product. In addition to potential liability for significant
damages, we could be required to obtain a license to continue to
manufacture or market the allegedly infringing product and any
license required under any such patent may not be available to
us on acceptable terms, if at all.
We may determine that litigation is necessary to enforce our
proprietary rights against others. Such litigation could result
in substantial expense and diversion of management attention,
regardless of its outcome and any litigation may not be resolved
in our favor.
Competition
We are in a highly competitive industry. We are in competition
with pharmaceutical and biotechnology companies, hospitals,
research organizations, individual scientists and nonprofit
organizations engaged in the development of drugs and other
therapies for the respiratory disease indications we are
targeting. Our competitors may succeed, and many have already
succeeded, in developing competing products, obtaining FDA
approval for products or gaining patient and physician
acceptance of products before us for the same markets and
indications that we are targeting. Many of these companies, and
large pharmaceutical companies in particular, have greater
research and development, regulatory, manufacturing, marketing,
financial and managerial resources and experience than we have
and many of these companies may have products and product
candidates that are in a more advanced stage of development than
our product candidates. If we are not first to
market for a particular indication, it may be more
difficult for us or our collaborators to enter markets unless we
can demonstrate our products are clearly superior to existing
therapies.
Examples of competitive therapies include:
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ARD-3100. Currently marketed products include
TOBI* marketed by Novartis, Pulmozyme* marketed by Genentech,
Levaquin* marketed by Ortho-McNeil-Janssen Pharmaceuticals,
Doribax* marketed by Johnson & Johnson and Cipro*
marketed by Bayer. Products under development to treat
respiratory infections in diseases such as CF and non-CF BE
include inhaled aztreonam* under development by Gilead, inhaled
liposomal amikacin under development by Transave, inhaled
levofloxacin by Mpex Pharmaceuticalsand inhaled ciprofloxacin
under development by Bayer. Bayer was 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, Symbicort* marketed by
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AstraZeneca, Alvesco* marketed by Sepracor, Asmanex* marketed by
Schering-Plough and Pulmicort* marketed by AstraZeneca
International.
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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,, MAP, Mannkind or
Alexza Pharmaceuticals, or other competitors with alternative
drug delivery methods, may negatively impact our potential
competitive position.
We believe that our respiratory expertise and pulmonary delivery
and formulation technologies provide us with an important
competitive advantage for our potential products. We intend to
compete by developing products that are safer, more efficacious,
more convenient, less costly, earlier to market, marketed with
smaller sales forces or cheaper to develop than existing
products, or any combination of the foregoing.
Government
Regulation
United
States
The research, development, testing, manufacturing, labeling,
advertising, promotion, distribution, marketing and export,
among other things, of any products we develop are subject to
extensive regulation by governmental authorities in the United
States and other countries. The FDA regulates drugs in the
United States under the FDCA and implementing regulations
thereunder.
If we, 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
15
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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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,
16
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 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.
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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 and non-cystic fibrosis bronchiectasis. We may seek
orphan drug designation for other eligible product candidates we
develop. However, our liposomal ciprofloxacin may not receive
orphan drug marketing exclusivity. Also, it is possible that our
competitors could obtain approval, and attendant orphan drug
designation or exclusivity, for products that would preclude us
from marketing our liposomal ciprofloxacin for this indication
for some time.
International
Regulation
We are also subject to foreign regulatory requirements governing
clinical trials, product manufacturing, marketing and product
sales. Our ability to market and sell our products in countries
outside the United States will depend upon receiving marketing
authorization(s) from appropriate regulatory authorities. We
will only be permitted to commercialize our products in a
foreign country if the appropriate regulatory authority is
satisfied that we have presented adequate evidence of safety,
quality and efficacy. Whether or not FDA approval has been
obtained, approval of a product by the comparable regulatory
authorities of foreign countries must be obtained prior to the
commencement of marketing of the product in those countries.
Approval of a product by the FDA does not assure approval by
foreign regulators. Regulatory requirements, and the approval
process, vary widely from country to country, and the time, cost
and data needed to secure approval may be longer or shorter than
that required for FDA approval. The regulatory approval and
oversight process in other countries includes all of the risks
associated with the FDA process described above.
Scientific
Advisory Board
We have assembled a scientific advisory board comprised of
scientific and product development advisors who provide
expertise, on a consulting basis from time to time, in the areas
of respiratory diseases, allergy and immunology, pharmaceutical
development and drug delivery, including pulmonary delivery, but
are employed elsewhere on a full-time basis. As a result, they
can only spend a limited amount of time on our affairs. We
access scientific and medical experts in academia, as needed, to
support our scientific advisory board. The scientific
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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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Michael Konstan, M.D.
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Rainbow Babies and Childrens Hospital
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Pulmonary Diseases/Cystic Fibrosis
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Babatunde Otulana, M.D.
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Aerovance, Inc.
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Pulmonary Diseases/Cystic Fibrosis/Regulatory
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Adam Wanner, M.D.
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University of Miami
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Chronic Obstructive Pulmonary Diseases (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, 2008, we had 38 full-time and
part-time employees, 6 of whom have advanced degrees. Of these,
28 are involved in research and development, product development
and commercialization; and 10 are involved in 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. If we
amend or waive a provision of our Code of Business Conduct and
Ethics, we would post such amendment or waiver on our website,
as required by applicable rules.
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Executive
Officers and Directors
Our directors and executive officers and their ages as of
February 28, 2009 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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61
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President, Chief Executive Officer and Director
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Nancy E. Pecota
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49
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Vice President, Finance and Chief Financial Officer
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D. Jeffery Grimes
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45
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Vice President, Legal Affairs, General Counsel
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Frank H. Barker(1)(2)(3)
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78
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Director
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John M. Siebert, Ph.D.(1)(2)(3)
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68
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Director
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Virgil D. Thompson(1)(2)(3)
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69
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Chairman of the Board and Director
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Member of the Audit Committee. |
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Member of the Compensation Committee. |
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Member of the Nominating and Corporate Governance Committee. |
Igor Gonda, Ph.D. has served as our President and
Chief Executive Officer since August 2006, and as a director
since September 2001. From December 2001 to August 2006,
Dr. Gonda was the Chief Executive Officer and Managing
Director of Acrux Limited, a publicly traded specialty
pharmaceutical company located in Melbourne, Australia. From
July 2001 to December 2001, Dr. Gonda was our Chief
Scientific Officer and, from October 1995 to July 2001, was our
Vice President, Research and Development. From February 1992 to
September 1995, Dr. Gonda was a Senior Scientist and Group
Leader at Genentech, Inc. His key responsibilities at Genentech
were the development of the inhalation delivery of rhDNase
(Pulmozyme) for the treatment of cystic fibrosis and
non-parenteral methods of delivery of biologics. Prior to that,
Dr. Gonda held academic positions at the University of
Aston in Birmingham, United Kingdom, and the University of
Sydney, Australia. Dr. Gonda holds a B.Sc. in Chemistry and
a Ph.D. in Physical Chemistry from Leeds University, United
Kingdom. Dr. Gonda was the Chairman of our Scientific
Advisory Board until August 2006.
Nancy E. Pecota has served as our Vice President, Finance
and Chief Financial Officer since September 2008. From October
2005 to July 2008, Ms. Pecota was the Chief Financial
Officer for NuGEN Technologies, Inc., a privately held life
sciences tools company. From August 2003 to September 2005 ,
Ms. Pecota was a consultant for early to mid-stage
biopharmaceutical companies assisting them in developing
fundable business models and assessing and improving internal
financial preparation and reporting processes. From March 2001
to April 2003, she was Vice President, Finance and
Administration at Signature BioScience, Inc., a privately held
biopharmaceutical company. Prior to that, she was Director,
Finance and Accounting for ACLARA BioSciences, Inc., a publicly
traded biotechnology company. Ms. Pecota holds a B.S. in
Economics from San Jose State University.
D. Jeffery Grimes has served as our Vice President,
Legal Affairs, General Counsel and Secretary since June 2007.
From May 2005 to June 2007, Mr. Grimes was an attorney in
the Trademark & Brands department at Intel. From May
2002 to January 2005, Mr. Grimes was Assistant General
Counsel at Connetics Corporation, a publicly-traded specialty
pharmaceutical company focused on dermatology . From February
2000 to April, 2002, he was Vice President, Corporate
Counsel & Secretary of GN ReSound, Inc. and Beltone
Electronics Corporation, both subsidiaries of a Danish-based
multinational leading medical device company for hearing
devices. Prior to becoming in-house counsel, Mr. Grimes was
a commercial litigator for seven years. Mr. Grimes holds
J.D./M.B.A.
degrees and a B.S. in Finance from University of Colorado,
Boulder. Mr. Grimes is a member of the Biotechnology
Industry Organization General Counsel Committee.
Frank H. Barker has been a director since May 1999. From
January 1980 to January 1994, Mr. Barker served as a
company group chairman of Johnson & Johnson, Inc., a
diversified health care company, and was Corporate Vice
President from January 1989 to January 1996. Mr. Barker
retired from Johnson & Johnson, Inc. in January 1996.
Mr. Barker holds a B.A. in Business Administration from
Rollins College, Winter Park, Florida. Mr. Barker is a
director of Jenex Corporation, a Canadian medical devices
company.
John M. Siebert, Ph.D. has been a director since
November 2006. From May 2003 to October 2008, Dr. Siebert
was the Chairman and Chief Executive Officer of CyDex, Inc., a
privately held specialty pharmaceutical company.
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From September 1995 to April 2003, he was President and Chief
Executive Officer of CIMA Labs Inc., a publicly traded drug
delivery company, and from July 1995 to September 1995 he was
President and Chief Operating Officer of CIMA Labs. From 1992 to
1995, Dr. Siebert was Vice President, Technical Affairs at
Dey Laboratories, Inc., a privately held pharmaceutical company.
From 1988 to 1992, he worked at Bayer Corporation. Prior to
that, Dr. Siebert was employed by E.R. Squibb &
Sons, Inc., G.D. Searle & Co. and The
Procter & Gamble Company. Dr Siebert holds a B.S. in
Chemistry from Illinois Benedictine University, an M.S. in
Organic Chemistry from Wichita State University and a Ph.D. in
Organic Chemistry from the University of Missouri.
Dr. Siebert is the Chairman of our audit committee and the
designated audit committee financial expert.
Virgil D. Thompson has been a director since June 1995
and has been Chairman of the Board since January 2005. From
November 2002 until June 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.
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.
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We
changed our product development strategy, and if we do not
successfully implement this 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
development of delivery technologies to the application of our
pulmonary drug delivery technologies and expertise to
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 continue to implement
various aspects of our strategy, and we may not be successful in
implementing our strategy. Even if we are able to implement the
various aspects of our strategy, it may not be successful.
We
will need additional capital, and we may not be able to obtain
it.
We will need to commit substantial funds to develop our product
candidates and we may not be able to obtain sufficient funds on
acceptable terms or at all. Our operations to date have consumed
substantial amounts of cash and have generated no product
revenues. We expect negative operating cash flows to continue
for at least the foreseeable future. Our future capital
requirements will depend on many factors, including:
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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 and cash equivalents at December 31, 2008
combined with the proceeds of our February 2009 offering will be
sufficient to fund operations at least through the first quarter
of 2010. We will need to obtain substantial additional funds
before we would be able to bring any of our product candidates
to market. Our estimates of future capital use are uncertain,
and changing circumstances, including those related to
implementation of, or further changes to, our development
strategy, could cause us to consume capital significantly faster
than currently expected, and our expected sources of funding may
not be sufficient. If adequate funds are not available, we will
be required to delay, reduce the scope of, or eliminate one or
more of our product development programs and reduce
personnel-related costs, or to obtain funds through arrangements
with collaborators or other sources that may require us to
relinquish rights to or sell certain of our technologies or
products that we would not otherwise relinquish or sell. If we
are able to obtain funds through the issuance of debt securities
or borrowing, the terms may significantly restrict our
operations. If we are able to obtain funds through the issuance
of equity securities, our shareholders may suffer significant
dilution and our stock price may drop.
We
have a history of losses, we expect to incur losses for at least
the foreseeable future, and we may never attain or maintain
profitability.
We have never been profitable and have incurred significant
losses in each year since our inception. As of December 31,
2008, we have an accumulated deficit of $334.7 million. We
have not had any product sales and do
22
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 and other contracting parties may
delay or terminate certain of our programs, and any such delay
or termination would harm our business prospects and stock
price.
Our commercialization strategy for certain of our product
candidates depends on our ability to enter into agreements with
collaborators to obtain assistance and funding for the
development and potential commercialization of our product
candidates. Collaborations may involve greater uncertainty for
us, as we have less control over certain aspects of our
collaborative programs than we do over our proprietary
development and commercialization programs. We may determine
that continuing a collaboration under the terms provided is not
in our best interest, and we may terminate the collaboration.
Our existing collaborators could delay or terminate their
agreements, and our products subject to collaborative
arrangements may never be successfully commercialized. For
example, Novo Nordisk had control over and responsibility for
development and commercialization of the AERx insulin Diabetes
Management System (iDMS) inhaled meal-time insulin
program. In January 2008, Novo Nordisk announced that it was
terminating the AERx iDMS program and gave us a
120-day
notice terminating the July 3, 2006 License Agreement
between the companies. In May 2008, this termination became
effective, ending our collaboration with Novo Nordisk for the
AERx iDMS program. Identifying new collaborators for the further
development and potential commercialization of the AERx iDMS
program may take a significant amount of time and resources and
ultimately may not be successful. Lung Rx, Inc. (Lung
Rx) may also elect to terminate our collaboration
agreement. Further, some portion of the money we received from
Lung Rx for development costs is pre-payment for future costs.
If Lung Rx terminates our agreement we may have to remit to Lung
Rx a portion of that pre-payment. If, due to delays or
otherwise, we do not receive development funds or achieve
milestones set forth in the agreements governing our
collaborations, if we cannot timely find replacement
collaborators, 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. For example, Zogenix
may not receive approval or launch their migraine drug
sumatriptan using the DosePro needle-free delivery system, in
which case we may not receive a milestone payment
and/or
receive royalty payments. Any delay in, or failure to receive,
milestone payments or royalties could also adversely affect our
financial position and we may not be able to find another source
of cash to continue our operations.
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.
23
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 are encouraging, the results of
initial preclinical testing and clinical trials do not
necessarily predict the results that we will get from subsequent
or more extensive preclinical testing and clinical trials.
Clinical trials of our product candidates may not demonstrate
that they are safe and effective to the extent necessary to
obtain regulatory approvals. Many companies in the
biopharmaceutical industry have suffered significant setbacks in
advanced clinical trials, even after receiving promising results
in earlier trials. If we cannot adequately demonstrate through
the clinical trial process that a therapeutic product we are
developing is safe and effective, regulatory approval of that
product would be delayed or prevented, which would impair our
reputation, increase our costs and prevent us from earning
revenues. For example, while our Phase 2a clinical trials with
inhaled liposomal ciprofloxacin showed promising initial
efficacy and safety results both in patients with cystic
fibrosis and non-cystic fibrosis bronchiectasis, there is no
guarantee that longer term studies in larger patient populations
will confirm these results or that we will satisfy all efficacy
and safety endpoints required by the regulatory authorities.
If our
clinical trials are delayed because of patient enrollment or
other problems, we would incur additional costs and postpone the
potential receipt of revenues.
Before we or our collaborators can file for regulatory approval
for the commercial sale of our potential products, the FDA will
require extensive preclinical safety testing and clinical trials
to demonstrate their safety and efficacy. Completing clinical
trials in a timely manner depends on, among other factors, the
timely enrollment of patients. Our collaborators and our
ability to recruit patients depends on a number of factors,
including the size of the patient population, the proximity of
patients to clinical sites, the eligibility criteria for the
study and the existence of competing clinical trials. Delays in
planned patient enrollment in our current or future clinical
trials may result in increased costs, program delays, or both,
and the loss of potential revenues.
We are
subject to extensive regulation, including the requirement of
approval before any of our product candidates can be marketed.
We may not obtain regulatory approval for our product candidates
on a timely basis, or at all.
We, our collaborators and our products are subject to extensive
and rigorous regulation by the federal government, principally
the FDA, and by state and local government agencies. Both before
and after regulatory approval, the development, testing,
manufacture, quality control, labeling, storage, approval,
advertising, promotion, sale, distribution and export of our
potential products are subject to regulation. Pharmaceutical
products that are marketed abroad are also subject to regulation
by foreign governments. Our products cannot be marketed in the
United States without FDA approval. The process for obtaining
FDA approval for drug products is generally lengthy, expensive
and uncertain. To date, we have not sought or received approval
from the FDA or any corresponding foreign authority for any of
our product candidates.
Even though we intend to apply for approval of most of our
products in the United States under Section 505(b)(2) of
the United States Food, Drug and Cosmetic Act, which applies to
reformulations of approved drugs and which may require smaller
and shorter safety and efficacy testing than that for entirely
new drugs, the approval process will still be costly,
time-consuming and uncertain. We, or our collaborators, may not
be able to obtain necessary regulatory approvals on a timely
basis, if at all, for any of our potential products. Even if
granted, regulatory approvals may include significant
limitations on the uses for which products may be marketed.
Failure to comply with applicable regulatory requirements can,
among other things, result in warning letters, imposition of
civil penalties or other monetary payments, delay in approving
or refusal to approve a product candidate, suspension
24
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.
Because
our proprietary liposomal ciprofloxacin programs rely on the
FDAs grant of orphan drug designation for potential market
exclusivity, the product may not be able to obtain market
exclusivity and could be barred from the market for up to seven
years.
The FDA has granted orphan drug designation for our proprietary
liposomal ciprofloxacin for the management of cystic fibrosis
and bronchiectasis. Orphan drug designation is intended to
encourage research and development of new therapies for diseases
that affect fewer than 200,000 patients in the United
States. The designation provides the opportunity to obtain
market exclusivity for seven years from the date of the
FDAs approval of a new drug application, or NDA. However,
the market exclusivity is granted only to the first chemical
entity to be approved by the FDA for a given indication.
Therefore, if another inhaled ciprofloxacin product were to be
approved by the FDA for a cystic fibrosis or bronchiectasis
indication before our product, then we may be blocked from
launching our product in the United States for seven years,
unless we are able to demonstrate to the FDA clinical
superiority of our product on the basis of safety or efficacy.
For example, Bayer HealthCare is developing an inhaled powder
formulation of ciprofloxacin for the treatment of respiratory
infections in cystic fibrosis. We may seek to develop additional
products that incorporate drugs that have received orphan drug
designations for specific indications. In
25
each case, if our product is not the first to be approved by the
FDA for a given indication, we may not be able 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.
For example, our agreement with Enzon Pharmaceuticals, Inc. to
manufacture liposomal ciprofloxacin and AERx
Strip®
dosage forms may be terminated for unforeseen reasons, or we may
not be able to reach mutually satisfactory agreements with Enzon
to manufacture these at a commercial scale. There may be a
significant delay before we find an alternative contract
manufacturer or we may not find an alternative contract
manufacturer at all.
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 unfeasible for us to develop them at a commercial
scale, or manufacturing and quality control problems may arise
as we attempt to expand production. Failure to address these
issues could delay or prevent late-stage clinical testing and
commercialization of any products that may receive FDA approval.
Further, we, our contract manufacturers and our collaborators
are required to comply with the FDAs GMP requirements that
relate to product testing, quality assurance, manufacturing and
maintaining records and documentation. We, our contract
manufacturers or our collaborators may not be able to comply
with the applicable GMP and other FDA regulatory requirements
for manufacturing, which could result in an enforcement or other
action, prevent commercialization of our product candidates and
impair our reputation and results of operations.
We
rely on a small number of vendors and contract manufacturers to
supply us with specialized equipment, tools and components; if
they do not perform as we need them to, we will not be able to
develop or commercialize products.
We rely on a small number of vendors and contract manufacturers
to supply us and our collaborators with specialized equipment,
tools and components for use in development and manufacturing
processes. These vendors may not continue to supply such
specialized equipment, tools and components, and we may not be
able to find alternative sources for such specialized equipment
and tools. Any inability to acquire or any delay in our ability
to acquire necessary equipment, tools and components would
increase our expenses and could delay or prevent our development
of products.
In
order to market our proprietary products, we are likely to
establish our own sales, marketing and distribution
capabilities. We have no experience in these areas, and if we
have problems establishing these capabilities, the
commercialization of our products would be
impaired.
We intend to establish our own sales, marketing and distribution
capabilities to market products to concentrated, easily
addressable prescriber markets. We have no experience in these
areas, and developing these capabilities will require
significant expenditures on personnel and infrastructure. While
we intend to market products that are aimed at a small patient
population, we may not be able to create an effective sales
force around even a niche market. In addition, some of our
product development programs will require a large sales force to
call
26
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.
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 and provide only a short period of protection, if any,
following commercialization of products.
27
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. In September 2008, Novo Nordisk informed us that
they do not wish to maintain the assigned patents, and they
assigned these patents back to us, at no charge to us. These
patents may become the subject of future litigation. The patents
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 will no longer be able to rely upon
Novo Nordisk to defend or enforce our rights related to the
patents. If we are required to defend an action based on these
patents or seek to enforce our rights under these patents, we
could incur substantial costs and the action could divert
managements attention, regardless of the lawsuits
merit or outcome.
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. If
any of our collaboration partners terminate an agreement with
us, we may face increased risk
and/or costs
associated with defense of intellectual property that was
associated with the collaboration.
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.
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
28
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, Genentech, Gilead
Sciences, GlaxoSmith Kline, 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 management,
manufacturing, engineering and development personnel. There is a
shortage of skilled personnel in our industry, we face
competition in our recruiting activities, and we may not be able
to attract or retain qualified personnel. Losing any of our key
employees, particularly our President and Chief Executive
Officer, Dr. Igor Gonda, who plays a central role in our
strategy shift to a specialty pharmaceutical company, could
impair our product development efforts and otherwise harm our
business. Any of our employees may terminate their employment
with us at will.
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.
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
29
development and maintenance of intellectual property in foreign
jurisdictions more expensive than we anticipate. We probably
will not obtain the same patent protection in every market in
which we may otherwise be able to potentially generate revenues.
In addition, in order to market our products in foreign
jurisdictions, we and our collaborators must obtain required
regulatory approvals from foreign regulatory agencies and comply
with extensive regulations regarding safety and quality. We may
not be able to obtain regulatory approvals in such jurisdictions
and we may have to incur significant costs in obtaining or
maintaining any foreign regulatory approvals. If approvals to
market our products are delayed, if we fail to receive these
approvals, or if we lose previously received approvals, our
business would be impaired as we could not earn revenues from
sales in those countries.
We may
be exposed to product liability claims, which would hurt our
reputation, market position and operating results.
We face an inherent risk of product liability as a result of the
clinical testing of our product candidates in humans and will
face an even greater risk upon commercialization of any
products. These claims may be made directly by consumers or by
pharmaceutical companies or others selling such products. We may
be held liable if any product we develop causes injury or is
found otherwise unsuitable during product testing, manufacturing
or sale. Regardless of merit or eventual outcome, liability
claims would likely result in negative publicity, decreased
demand for any products that we may develop, injury to our
reputation and suspension or withdrawal of clinical trials. Any
such claim will be very costly to defend and also may result in
substantial monetary awards to clinical trial participants or
customers, loss of revenues and the inability to commercialize
products that we develop. Although we currently have product
liability insurance, we may not be able to maintain such
insurance or obtain additional insurance on acceptable terms, in
amounts sufficient to protect our business, or at all. A
successful claim brought against us in excess of our insurance
coverage would have a material adverse effect on our results of
operations.
If we
cannot arrange for adequate third-party reimbursement for our
products, our revenues will suffer.
In both domestic and foreign markets, sales of our potential
products will depend in substantial part on the availability of
adequate reimbursement from third-party payors such as
government health administration authorities, private health
insurers and other organizations. Third-party payors often
challenge the price and cost-effectiveness of medical products
and services. Significant uncertainty exists as to the adequate
reimbursement status of newly approved health care products. Any
products we are able to successfully develop may not be
reimbursable by third-party payors. In addition, our products
may not be considered cost-effective and adequate third-party
reimbursement may not be available to enable us to maintain
price levels sufficient to realize a profit. Legislation and
regulations affecting the pricing of pharmaceuticals may change
before our products are approved for marketing and any such
changes could further limit reimbursement. If any products we
develop do not receive adequate reimbursement, our revenues will
be severely limited.
Our
use of hazardous materials could subject us to liabilities,
fines and sanctions.
Our laboratory and clinical testing sometimes involve use of
hazardous and toxic materials. We are subject to federal, state
and local laws and regulations governing how we use,
manufacture, handle, store and dispose of these materials.
Although we believe that our safety procedures for handling and
disposing of such materials comply in all material respects with
all federal, state and local regulations and standards, there is
always the risk of accidental contamination or injury from these
materials. In the event of an accident, we could be held liable
for any damages that result and such liability could exceed our
financial resources. Compliance with environmental and other
laws may be expensive and current or future regulations may
impair our development or commercialization efforts.
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
30
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, 2009, 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:
|
|
|
|
|
investor perception of us;
|
|
|
|
market conditions relating to our segment of the industry or the
securities markets in general;
|
|
|
|
sales of our stock by certain large institutional shareholders
to meet liquidity concerns during the current economic climate;
|
|
|
|
research analyst recommendations and our ability to meet or
exceed quarterly performance expectations of analysts or
investors;
|
|
|
|
failure to maintain existing or establish new collaborative
relationships;
|
|
|
|
fluctuations in our operating results;
|
|
|
|
announcements of technological innovations or new commercial
products by us or our competitors;
|
|
|
|
publicity regarding actual or potential developments relating to
products under development by us or our competitors;
|
|
|
|
developments or disputes concerning patents or proprietary
rights;
|
|
|
|
delays in the development or approval of our product candidates;
|
|
|
|
regulatory developments in both the United States and foreign
countries;
|
|
|
|
concern of the public or the medical community as to the safety
or efficacy of our products, or products deemed to have similar
safety risk factors or other similar characteristics to our
products;
|
|
|
|
future sales or expected sales of substantial amounts of common
stock by shareholders;
|
|
|
|
our ability to raise financing; and
|
|
|
|
economic and other external factors.
|
In the past, class action securities litigation has often been
instituted against companies promptly following volatility in
the market price of their securities. Any such litigation
instigated against us would, regardless of its merit, result in
substantial costs and a diversion of managements attention
and resources.
31
Our
common stock is quoted on the OTC Bulletin Board, which may
provide less liquidity for our shareholders than the national
exchanges.
On November 10, 2006, our common stock was delisted from
the Nasdaq Capital Market due to non-compliance with
Nasdaqs continued listing standards. Our common stock is
currently quoted on the OTC Bulletin Board. As compared to
being listed on a national exchange, being quoted on the OTC
Bulletin Board may result in reduced liquidity for our
shareholders, may cause investors not to trade in our stock and
may result in a lower stock price. In addition, investors may
find it more difficult to obtain accurate quotations of the
share price of our common stock.
We
have implemented certain anti-takeover provisions, which may
make an acquisition less likely or might result in costly
litigation or proxy battles.
Certain provisions of our articles of incorporation and the
California Corporations Code could discourage a party from
acquiring, or make it more difficult for a party to acquire,
control of our company without approval of our board of
directors. These provisions could also limit the price that
certain investors might be willing to pay in the future for
shares of our common stock. Certain provisions allow our board
of directors to authorize the issuance, without shareholder
approval, of preferred stock with rights superior to those of
the common stock. We are also subject to the provisions of
Section 1203 of the California Corporations Code, which
requires us to provide a fairness opinion to our shareholders in
connection with their consideration of any proposed
interested party reorganization transaction.
We have adopted a shareholder rights plan, commonly known as a
poison pill. We have also adopted an Executive
Officer Severance Plan and a Form of Change of Control
Agreement, both of which may provide for the payment of benefits
to our officers in connection with an acquisition. The
provisions of our articles of incorporation, our poison pill,
our severance plan and our change of control agreements, and
provisions of the California Corporations Code may discourage,
delay or prevent another party from acquiring us or reduce the
price that a buyer is willing to pay for our common stock.
One of our shareholders may choose to pursue a lawsuit or engage
in a proxy battle with management to limit our use of one or
more of these anti-takeover protections. Any such lawsuit or
proxy battle would, regardless of its merit or outcome, result
in substantial costs and a diversion of managements
attention and resources.
We
have never paid dividends on our capital stock, and we do not
anticipate paying cash dividends for at least the foreseeable
future.
We have never declared or paid cash dividends on our capital
stock. We do not anticipate paying any cash dividends on our
common stock for at least the foreseeable future. We currently
intend to retain all available funds and future earnings, if
any, to fund the development and growth of our business. 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, 2008, we leased one building with an
aggregate of 72,000 square feet of office and laboratory
facilities at 3929 Point Eden Way, Hayward, California. This
building serves as our Corporate office and our research and
development facility with a lease expiration of July 2016. In
2007, we entered into a long-term sublease with Mendel
Biotechnology, Inc. (Mendel). The sublease with
Mendel is for 48,000 square feet and expires concurrently
with our lease. Mendel may terminated the sublease early on
September 1, 2012 for a termination fee of $225,000. The
sublease with Mendel substantially reduced our net outstanding
lease commitment (see Note 6 to the financial statements
included in this
Form 10-K).
Our current building is expected to meet our facility
requirements for the foreseeable future.
32
|
|
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, 2008.
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.
The following table sets forth the high and low closing sale
prices of our common stock for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
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
|
|
$
|
1.58
|
|
|
$
|
1.11
|
|
Second Quarter
|
|
|
1.09
|
|
|
|
0.62
|
|
Third Quarter
|
|
|
0.80
|
|
|
|
0.39
|
|
Fourth Quarter
|
|
|
0.40
|
|
|
|
0.20
|
|
2009
|
|
|
|
|
|
|
|
|
First Quarter (through February 27, 2009)
|
|
$
|
0.29
|
|
|
$
|
0.11
|
|
On February 27, 2009, there were approximately 196
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.
33
|
|
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,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except share data)
|
|
|
Statements of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract and license revenues
|
|
$
|
251
|
|
|
$
|
961
|
|
|
$
|
4,814
|
|
|
$
|
10,507
|
|
|
$
|
28,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
16,499
|
|
|
|
16,770
|
|
|
|
22,198
|
|
|
|
30,174
|
|
|
|
46,477
|
|
General and administrative
|
|
|
6,679
|
|
|
|
8,401
|
|
|
|
10,717
|
|
|
|
10,895
|
|
|
|
11,934
|
|
Restructuring and asset impairment
|
|
|
79
|
|
|
|
2,182
|
|
|
|
6,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
23,257
|
|
|
|
27,353
|
|
|
|
38,918
|
|
|
|
41,069
|
|
|
|
58,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(23,006
|
)
|
|
|
(26,392
|
)
|
|
|
(34,104
|
)
|
|
|
(30,562
|
)
|
|
|
(30,366
|
)
|
Gain on sale of patent and royalty interest to related party
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
781
|
|
|
|
2,573
|
|
|
|
1,251
|
|
|
|
1,317
|
|
|
|
194
|
|
Interest expense
|
|
|
(408
|
)
|
|
|
(393
|
)
|
|
|
(197
|
)
|
|
|
(6
|
)
|
|
|
(16
|
)
|
Other income (expense)
|
|
|
|
|
|
|
11
|
|
|
|
23
|
|
|
|
36
|
|
|
|
(1
|
)
|
Income tax benefit
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(22,608
|
)
|
|
$
|
(24,201
|
)
|
|
$
|
(13,027
|
)
|
|
$
|
(29,215
|
)
|
|
$
|
(30,189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.42
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
(0.89
|
)
|
|
$
|
(2.01
|
)
|
|
$
|
(2.37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per share
|
|
|
54,162
|
|
|
|
50,721
|
|
|
|
14,642
|
|
|
|
14,513
|
|
|
|
12,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
19,140
|
|
|
$
|
40,510
|
|
|
$
|
27,514
|
|
|
$
|
27,694
|
|
|
$
|
16,763
|
|
Working capital
|
|
|
17,313
|
|
|
|
36,594
|
|
|
|
25,405
|
|
|
|
21,087
|
|
|
|
4,122
|
|
Total assets
|
|
|
25,519
|
|
|
|
45,813
|
|
|
|
32,226
|
|
|
|
39,497
|
|
|
|
79,741
|
|
Note payable and accrued interest to former related party
|
|
|
8,472
|
|
|
|
8,071
|
|
|
|
7,686
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
23,669
|
|
|
|
23,669
|
|
|
|
23,669
|
|
Accumulated deficit
|
|
|
(334,674
|
)
|
|
|
(312,066
|
)
|
|
|
(287,865
|
)
|
|
|
(274,838
|
)
|
|
|
(245,623
|
)
|
Total shareholders equity (deficit)
|
|
|
8,756
|
|
|
|
30,299
|
|
|
|
(3,947
|
)
|
|
|
7,171
|
|
|
|
35,754
|
|
34
|
|
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 our filings with the Securities and Exchange
Commission.
Our business is subject to significant risks including, but
not limited to, our ability to obtain additional financing, our
ability to implement our product development strategy, the
success of product development efforts, 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. Further,
even if our product candidates appear promising at various
stages of development, our share price may decrease such that we
are unable to raise additional capital without dilution that may
be unacceptable to our shareholders.
Investors are cautioned not to place undue reliance on the
forward-looking statements contained herein. We undertake no
obligation to update these forward-looking statements in light
of events or circumstances occurring after the date hereof or to
reflect the occurrence of unanticipated events.
Overview
We are an emerging specialty pharmaceutical company focused on
the development and commercialization of drugs delivered by
inhalation for the treatment of severe respiratory diseases by
pulmonologists. Over the last decade, we invested a large amount
of capital to develop drug delivery technologies, particularly
the development of a significant amount of expertise in
pulmonary drug delivery. We also invested considerable effort
into the generation of a large volume of laboratory and clinical
data demonstrating the performance of our AERx pulmonary drug
delivery platform. 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 in the near
term. As of December 31, 2008, we had an accumulated
deficit of $334.7 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,
sale of Intraject related assets and interest earned on
investments. In February 2009, we closed the sale of
44,663,071 shares of common stock in a registered direct
offering with net proceeds, after expenses, of $4.1 million.
Historically, our development activities consisted primarily of
collaborations and product development agreements with third
parties. The most notable collaboration was with Novo Nordisk on
the AERx iDMS for the treatment of Type I and Type II
diabetes. This program began in 1998 and included nine Phase 3
clinical trials in Type I and Type II diabetes patients. On
April 30, 2008, Novo Nordisk announced that following
recent reports of lung cancer in Type II diabetes patients
treated with Exubera*, an inhaled insulin product from Pfizer,
the likelihood of achieving a positive benefit/risk ratio for
future pulmonary diabetes projects had become more uncertain,
and as a result, Novo Nordisk had decided to stop all research
and development activities in the field. In May 2008, the
July 3, 2006 License Agreement between us and Novo Nordisk
was terminated. Pursuant to the License Agreement, on
September 25, 2008, Novo Nordisk assigned, at no charge to
us, the inhaled insulin-related patents, which Novo purchased
from us in July 2006, as well as certain related patents that
originate from Novo Nordisk. The portfolio includes both
U.S. and foreign patents. We assume the responsibility for
the maintenance of this portfolio. Novo
35
Nordisk is also providing us with the data from the preclinical
and clinical research generated during the collaboration. We do
not intend to complete the development of AERx iDMS on our own.
We are attempting to out-license or sell the assets associated
with inhaled insulin.
Over the last three years, our business has focused on
opportunities for product development for treatment of severe
respiratory disease that we could develop and commercialize in
the United States without a partner. In selecting our
proprietary development programs, we primarily seek drugs
approved by the United States Food and Drug Administration
(FDA) that can be reformulated for both existing and
new indications in respiratory disease. Our intent is to use our
pulmonary delivery methods and formulations to improve their
safety, efficacy and convenience of administration to patients.
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. It is our
longer term strategy to commercialize our respiratory product
candidates with our own focused sales and marketing force
addressing pulmonary specialty doctors in the United States,
where we believe that a proprietary sales force will enhance the
return to our shareholders. Where our products can benefit a
broader population of patients in the United States or in other
countries, we may enter into co-development, co-promotion or
other marketing arrangements with collaborators, thereby
reducing costs and increasing revenues through license fees,
milestone payments and royalties. Our lead development candidate
is a proprietary liposomal formulation of the antibiotic
ciprofloxacin that is delivered by inhalation for the treatment
of infections associated with the severe respiratory diseases
cystic fibrosis and non-cystic fibrosis bronchiectasis. We
received orphan drug designations for both of these indications
in the U.S.. We have recently reported the results of two
successful Phase 2a trials with this product candidate in cystic
fibrosis (CF) and non-cystic fibrosis
bronchiectasis, respectively, as described below. In the near
term given our financial resources, our focus will be on
completing a Phase 2b clinical trial of liposomal ciprofloxacin
in a single indication.
In June 2008, we completed a multi-center
14-day
treatment Phase 2a trial in Australia and New Zealand in 21 CF
patients to investigate safety, efficacy and pharmacokinetics of
once daily inhaled liposomal ciprofloxacin. The primary efficacy
endpoint in this Phase 2a study was the change from baseline in
the sputum Pseudomonas aeruginosa colony forming units
(CFU), an objective measure of the reduction in pulmonary
bacterial load. Data analysis in 21 patients who completed
the study demonstrated that the CFUs decreased by a mean 1.43
log over the
14-day
treatment period (p<0.0001). Evaluation one week after
study treatment was discontinued showed that the Pseudomonas
bacterial density in the lung was still reduced from the
baseline without additional antibiotic use. Pulmonary function
testing as measured by the forced expiratory volume in one
second (FEV1) showed a significant mean increase of 6.86% from
baseline after 14 days of treatment (p=0.04). The study
drug was well tolerated, and there were no serious adverse
events reported during the trial.
In December 2008, we completed an open-label, four week
treatment study of efficacy, safety and tolerability of once
daily inhaled liposomal ciprofloxacin in patients with non-CF
bronchiectasis. The study was conducted at eight leading centers
in the United Kingdom and enrolled a total of 36 patients.
The patients were randomized into two equal size groups, one
receiving 3 mL of inhaled liposomal ciprofloxacin and the other
receiving 6 mL of inhaled liposomal ciprofloxacin ,
once-a-day
for the four-week treatment period. The primary efficacy
endpoint was the change from baseline in the sputum
Pseudomonas aeruginosa CFU, the standard objective
measure of the reduction in pulmonary bacterial load. The 3 mL
and 6 mL doses of inhaled liposomal ciprofloxacin in the
evaluable patient population demonstrated significant mean
decreases against baseline in the CFUs over the
28-day
treatment period of 3.5 log (p<0.001) and 4.0 log
(p<0.001) units, respectively.
In 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, using the same
formulation that we are exploring for the studies of the
treatment of respiratory infections associated with cystic
fibrosis and with non-cystic fibrosis bronchiectasis. If we
apply in the future for approval of this product candidate for
the prevention and treatment of inhalation anthrax and possibly
other inhaled life-threatening bioterrorism infections, we
anticipate using safety data from these studies to support our
application.
Our current programs include a collaboration with Lung Rx, a
wholly owned subsidiary of United Therapeutics, for the
development of inhalation treatments for pulmonary arterial
hypertension. We conducted two
36
collaborative research projects on inhaled treprostinil using
our AERx delivery system with United Therapeutics. The first
project was with an aqueous formulation of treprostinil. The
second project involved development of a slow-acting liposomal
formulation of treprostinil,, with the view to achieve
once-a-day
dosing. On August 30, 2007, we signed an Exclusive License,
Development and Commercialization Agreement with Lung Rx
pursuant to which we granted Lung Rx a license, which becomes
exclusive upon the payment of specified sums, to develop and
commercialize inhaled treprostinil using our AERx Essence
technology for the treatment of PAH and other potential
therapeutic indications. Under the terms of the Lung Rx
Agreement, we received an upfront fee of $440,000 and an
additional fee of $440,000 four months after the signing date.
These fees are nonrefundable and were included in deferred
revenue in the balance sheet at December 31, 2007. Under
the terms of the agreement with Lung Rx, we were responsible for
conducting and funding the feasibility study that included a
clinical trial to compare AERx Essence to a nebulizer used in a
completed Phase 3 registration trial conducted by United
Therapeutics. We began this study in April 2008 and announced
results in November 2008. At the same time, we announced receipt
of $2.75 million from Lung Rx which included the first
milestone of $2 million and development costs. We are now
in discussions with Lung Rx regarding the next steps required on
the clinical, manufacturing and regulatory paths toward the
approval and launch of this product. Lung Rx will be responsible
for funding the remainder of the development of treprostinil in
the AERx delivery system through registration and commercial
launch. We could receive additional milestone payments of up to
$7 million. Following commercialization of the product, we
would receive royalties from Lung Rx on a tiered basis of up to
10% of net sales for any licensed products.
Lung Rx was to pay a $650,000 license fee for an exclusive
license and had the right under the Lung Rx Agreement to
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 study was
successful. Lung Rx determined that, while the results of the
clinical trial warranted continuation of the development of AERx
Essence technology with treprostinil, the performance of the
AERx Essence inhaler in the clinical study was different from
the nebulizer. As such, they did not pay the license fee or
purchase our stock.
We have conducted in vitro and market research in a
collaboration with CyDex for inhalation treatments for asthma
and chronic obstructive pulmonary disease in which we have
shared the cost of this work.
We have a proprietary program for smoking cessation treatment
for which we are currently seeking a partner. We have
encouraging data from our first human clinical trial delivering
aqueous solutions of nicotine using the palm-sized AERx Essence
system. Our randomized, open-label, single-site Phase 1 trial
evaluated arterial plasma pharmacokinetics and subjective acute
cigarette craving when one of three nicotine doses was
administered to 18 adult male smokers. Blood levels of nicotine
rose much more rapidly following a single-breath inhalation
compared to published data on other approved nicotine delivery
systems. Cravings for cigarettes were measured on a scale from
0-10 before and after dosing for up to four hours. Prior to
dosing, mean craving scores were 5.5, 5.5 and 5.0, respectively,
for the three doses. At five minutes following inhalation of the
nicotine solution through the AERx Essence device, craving
scores were reduced to 1.3, 1.7 and 1.3, respectively, and did
not return to pre-dose baseline during the four hours of
monitoring. Nearly all subjects reported an acute reduction in
craving or an absence of craving immediately following dosing.
No serious adverse reactions were reported in the study.
We believe these results provide the foundation for further
research with the AERx Essence device as a means toward smoking
cessation. We are seeking collaborations with government,
non-government and commercial organizations to further develop
this product
In August 2006, we sold all of our assets related to the
Intraject needle-free injector technology platform and products,
including 12 United States patents along with foreign
counterparts, to Zogenix, Inc., a private company. Zogenix is
responsible for further development and commercialization
efforts of Intraject (now rebranded under the name
DoseProtm).
We received a $4 million initial payment from Zogenix, and
we will be entitled to a milestone payment upon initial
commercialization, and royalty payments upon any
commercialization of products in the U.S. and other
countries, including the European Union, that may be developed
and sold using the DosePro technology. In December 2007, Zogenix
submitted a New Drug Application (NDA) with the
U.S. Food and Drug Administration (FDA) for the
migraine drug sumatriptan using the needle-free injector DosePro
(Sumaveltm
DosePro). The NDA was accepted for filing by the FDA in
March 2008.. The same month, Zogenix entered into a
37
license agreement to grant exclusive rights in the European
Union to Desitin Pharmaceuticals, GmbH to develop and
commercialize Sumavel DosePro in the European Union. On
October 31, 2008 Zogenix received a Complete Response
Letter from the FDA on its NDA. On February 18, 2009,
Zogenix disclosed that the Complete Response letter from the FDA
cited the need for a single additional in vitro test to be
conducted and that Zogenix recently submitted this information
to the FDA. The FDA accepted this resubmission as a complete
response, providing the new Prescription Drug User Fee Act
(PDUFA) review date of July 15, 2009. Zogenix stated that
it is their intention to launch Sumavel DosePro following FDA
approval in the second half of 2009.
Critical
Accounting Policies and Estimates
We consider certain accounting policies related to revenue
recognition, impairment of long-lived assets, exit/disposal
activities, research and development, income taxes and
stock-based compensation to be critical accounting policies that
require the use of significant judgments and estimates relating
to matters that are inherently uncertain and may result in
materially different results under different assumptions and
conditions. The preparation of 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 Topic 13, Revenue Recognition
(SAB Topic 13) and Emerging Issues Task
Force 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 includes the portion of all refundable and
nonrefundable research billings and payments that have been
received, but 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 often require
us to provide multiple deliverables, such as a license, research
and development, product steering committee services and other
performance obligations. These agreements 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. For example, at December 31, 2008, we have
$4.1 million in deferred revenue on our balance sheet,
representing up-front fees for the feasibility study, milestone
payments and development payments received from Lung Rx. We are
obligated to provide multiple deliverables under the Lung Rx
Agreement, including transfer of the AERx technology and any
future improvements thereto during the term of the Lung Rx
Agreement 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
38
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 study and the milestone and development
payments, together with any and future license fee and milestone
and royalty payments will be recognized as revenue ratably over
the estimated term of the Lung Rx Agreement, using a time-based
model. Revenue recognition will commence with the delivery of
the last deliverable, which is the license to the AERx
technology and improvements thereto.
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 recoverability is based on an
estimate of undiscounted future cash flows resulting from the
use of the asset and its eventual disposition. In the event that
such cash flows are not expected to be sufficient to recover the
carrying amount of the assets, we write down the assets to their
estimated fair values and recognize the loss in the statements
of operations.
Accounting
for Costs Associated with Exit or Disposal
Activities
In accordance with 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. These differences result in deferred tax
assets and liabilities, which are included in our balance sheets.
We assess the likelihood that we will be able to recover our
deferred tax assets. We consider all available evidence, both
positive and negative, including our historical levels of income
and losses, expectations and risks associated with estimates of
future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for a valuation
allowance. If we do not consider it more likely than not that we
will recover our deferred tax assets, we will record a valuation
allowance against the deferred tax assets that we estimate will
not ultimately be recoverable. At December 31, 2008 and
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
39
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.
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.. We adopted FIN 48 as
of January 1, 2007. See Note 13 of the notes to our
financial statements included in this
Form 10-K
for further analysis on the impact of the adoption of
FIN 48 on our financial statements.
Stock
Based Compensation
We follow the fair value method of accounting for stock-based
compensation arrangements in accordance with Financial
Accounting Standards Board Statement of Financial Accounting
Standards, or SFAS 123(R), Share-Based Payment
(SFAS 123(R)). We adopted SFAS 123(R)
effective January 1, 2006 using the modified prospective
method of transition. Under SFAS 123(R), the estimated fair
value of share-based compensation, including stock options and
restricted stock awards and purchases of common stock by our
employees under the Employee Stock Purchase Plan is recognized
as compensation expense.
We recorded $811,000 and $1,382,000 of employee stock-based
compensation expense for the years ended December 31, 2008
and 2007, respectively. Stock-based compensation expense is
allocated to research and development and general and
administrative expenses based on the function of the related
employee. This charge had no impact on our cash flows for the
periods presented.
We used the Black-Scholes option-pricing model to estimate the
fair value of share-based awards as of the grant date. The
Black-Sholes model, by its design, is highly complex, and
dependent upon key data inputs estimated by management. The
primary data inputs with the greatest degree of judgments are
the estimated lives of the stock based awards and the estimated
volatility of our stock price. The Black-Scholes model is highly
sensitive to changes in these two inputs. The expected term of
the options represents the period of time that options granted
are expected to be outstanding. We use a lattice model to
estimate the expected term as an input into the Black-Scholes
option pricing model. We determine expected volatility using the
historical method, which is based on the daily historical daily
trading data of our common stock over the expected term of the
option. For more information about SFAS 123(R), see
Note 7 to the financial statements included in this
Form 10-K.
Recent
Accounting Pronouncements
See Note 1 to the financial statements included in this
Form 10-K
for information on recent accounting pronouncements.
Results
of Operations
Years
Ended December 31, 2008 and 2007
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Decrease
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related parties
|
|
$
|
|
|
|
$
|
23
|
|
|
$
|
(23
|
)
|
|
|
|
|
Unrelated parties
|
|
|
251
|
|
|
|
938
|
|
|
|
(687
|
)
|
|
|
(73
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
251
|
|
|
$
|
961
|
|
|
$
|
(710
|
)
|
|
|
(74
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
We recorded no related party revenue in 2008, and recorded
related party revenue from Novo Nordisk of $23,000 for 2007. The
reason for the decrease in 2008 was the conclusion of the
restructuring agreement with Novo Nordisk. We recorded revenues
from unrelated parties of $251,000 in 2008 primarily related to
a feasibility study evaluating the delivery of certain compounds
using the AERx system. For the year ended 2007, we recorded
revenue of $566,000 related to ARD-1100, $192,000 for our final
payment from APT related to ARD-1300, $161,000 from our
transition agreement with Zogenix and $19,000 from Respironics.
The reason for the decrease in revenue in 2008 compared to 2007
was primarily due to the fact that revenue from milestone and
development payments received from the Lung Rx collaboration
cannot be recognized under the current revenue recognition
rules. These rules require us to record amounts received as
deferred revenue and to recognize the deferred revenue over the
term of the Lung Rx Agreement, using a time-based model. The
revenue recognition will commence with the delivery of the last
deliverable in the Agreement, which is the delivery of the AERx
technology license and future improvements thereto.
Research
and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Increase /
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Research and development expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaborative
|
|
$
|
2,111
|
|
|
$
|
862
|
|
|
$
|
1,249
|
|
|
|
145
|
%
|
Self-initiated
|
|
|
14,388
|
|
|
|
15,908
|
|
|
|
(1,520
|
)
|
|
|
(10
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses
|
|
$
|
16,499
|
|
|
$
|
16,770
|
|
|
$
|
(271
|
)
|
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses represent proprietary research
expenses and costs related to contract research revenue,
including 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. The
$1.2 million increase in collaborative program expenses in
2008 as compared with 2007, was primarily due to activities
related to the ARD-1550 bridging study and development of the
ARD-1550 manufacturing process. In addition, we conducted a
small AERx technology feasibility study with a third party. The
$1.5 million decrease in research and development expense
for self-initiated program expenses was primarily due to lower
spending on the AERx nicotine program and lower ARD-3100
manufacturing activities. Overall, research and development
costs decreased slightly in 2008 as compared with the prior
year. We expect research and development expenses to increase
slightly over the next few quarters as we continue the
development of ARD-3100 and manufacture supplies for the next
ARD-1550 clinical trial. Expenses related to ARD-1550 activities
will be reimbursed by Lung Rx.
General
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Decrease
|
|
|
(In thousands)
|
|
|
|
|
|
General and administrative expenses
|
|
$
|
6,679
|
|
|
$
|
8,401
|
|
|
$
|
(1,722
|
)
|
|
|
(20
|
)%
|
General and administrative expenses are comprised of salaries,
legal fees including patent related costs, insurance, marketing
research, contractor and consultant fees, stock-based
compensation expense and other support costs including
facilities, depreciation and travel. General and administrative
expenses decreased from 2007 primarily due to a reduction in
headcount, as well as a reduction in building rent stemming from
the subleasing of a portion of our office space to Mendel
Biotechnology, Inc. (Mendel) in July 2007. In
addition, employee stock-based compensation expense included in
general and administrative expenses was lower in 2008 as
compared with 2007. We expect that our general and
administrative expenses will remain relatively constant over the
next few quarters.
41
Restructuring
and Asset Impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Decrease
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Restructuring and impairment expenses
|
|
$
|
79
|
|
|
$
|
2,182
|
|
|
$
|
(2,103
|
)
|
|
|
(96
|
)%
|
|
|
|
|
Restructuring and impairment expenses in 2008 represent the
accretion expense associated with the 2007 facility lease exit
obligation. In 2007, restructuring and impairment expenses
represents lease exit activities expense which consisted of the
$2.1 million loss recorded concurrent with the Mendel
sublease loss and related expense accretion, as well as $98,000
of severance-related costs relating to our 2006 restructuring
efforts.
Interest
Income, Interest Expense and Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Increase
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Interest income, interest expense and other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
781
|
|
|
$
|
2,573
|
|
|
$
|
(1,792
|
)
|
|
|
(70
|
)%
|
Interest expense
|
|
|
(408
|
)
|
|
|
(393
|
)
|
|
|
(15
|
)
|
|
|
( 4
|
)%
|
Other income (expense)
|
|
|
|
|
|
|
11
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income, interest expense and other income
(expense)
|
|
$
|
373
|
|
|
$
|
2,191
|
|
|
$
|
(1,818
|
)
|
|
|
(83
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income in 2008 decreased from 2007 due to lower average
invested balances and lower effective interest rates earned.
Substantially all of the interest expense for 2008 and 2007
relates to the Promissory Note from Novo Nordisk. See
Note 12 to the financial statements included in this
Form 10-K.
Liquidity
and Capital Resources
As of December 31, 2008, we had cash, cash equivalents and
short-term investments of $19.1 million and total working
capital of $17.3 million. Our principal requirements for
cash are to fund operations, research activities and capital
expenditures. We assess our liquidity primarily by the amount of
our cash and cash equivalents and short term investments less
our liabilities. In this assessment, we exclude deferred revenue
from our liabilities as we do not believe this item will require
the future use of cash.
Net cash used in operating activities in 2008 was
$19.0 million reflecting our net loss of
$22.6 million. Net cash used in operating activities was
less than our net loss due to the recurring non cash expenses
for depreciation and stock based compensation and a significant
increase in deferred revenue. In 2008, the change in deferred
revenue provided $3.2 million in cash. The increase in
deferred revenue was from milestone and expense reimbursement
payments received from a partner under a collaboration
agreement, but not recognized as revenue due to our revenue
recognition policy. In 2007, net cash used in operating
activities 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, and
depreciation and amortization expense.
Net cash provided by investing activities was $5.6. million
during 2008. Cash was provided by the maturity of short-term
investments net of purchases, partially offset by capital
expenditures of $2.5 million. Net cash used in investing
activities was $11.1 million during 2007. We used
$1.1 million for purchases of equipment and
$10.0 million for the net purchase of short-term
investments.
Cash provided by financing activities was $0.2 million in
2008 as compared with $33.3 million in 2007. In 2008, we
did not generate cash from any equity financing offerings while
in 2007, we had net proceeds of $33.2 million from a public
equity financing completed on January 30, 2007.
Our research and development efforts have required 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
42
technology and proposed products and to bring any such products
to market. Our long term 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. In the near term given our financial resources, our
focus will be on completing a Phase 2b clinical trial of
liposomal ciprofloxacin in a single indication.
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
2009, and beyond. We focus on capital spending requirements to
ensure that capital outlays are not expended sooner than
necessary. We currently expect our total capital expenditures
for 2009 to be approximately $0.3 million. We anticipate
the majority of our total 2009 outlays to be associated with our
lead product candidate, inhaled liposomal ciprofloxacin.
We have incurred significant losses and negative cash flows from
operations since our inception. At December 31, 2008, we
had an accumulated deficit of $334.7 million, working
capital of $17.3 million, and shareholders equity of
$8.8 million. We believe that cash, cash equivalents and
short term investments at December 31, 2008, together with
the proceeds from our common stock offering in February 2009,
will be sufficient to enable us to meet our obligations at least
through the end of the first quarter of 2010.
Off-Balance
Sheet Financings and Liabilities
Other than contractual obligations incurred in the normal course
of business, we do not have any off-balance sheet financing
arrangements or liabilities, guarantee contracts, retained or
contingent interests in transferred assets or any obligation
arising out of a material variable interest in an unconsolidated
entity. We have one inactive, wholly-owned subsidiary domiciled
in the United Kingdom.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosure About Market Risk
|
The disclosures in this section are not required since the
Company qualifies as a smaller reporting company.
43
|
|
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 sheets of Aradigm
Corporation as of December 31, 2008 and 2007, and the
related statements of operations, convertible preferred stock
and shareholders equity (deficit), and cash flows for the
years then ended. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements audited by us present
fairly, in all material respects, the financial position of
Aradigm Corporation at December 31, 2008 and 2007, and the
results of its operations and its cash flows for the years then
ended, in conformity with U.S. generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, on
January 1, 2008 the Company adopted Statement of Financial
Accounting Standard No. 157, Fair Value Measurement.
Also 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.
/s/ Odenberg Ullakko Muranishi & Co LLP
San Francisco, California
March 25, 2009
44
ARADIGM
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except
|
|
|
|
share data)
|
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,741
|
|
|
$
|
29,964
|
|
Short-term investments
|
|
|
2,399
|
|
|
|
10,546
|
|
Receivables
|
|
|
393
|
|
|
|
500
|
|
Restricted cash
|
|
|
225
|
|
|
|
152
|
|
Prepaid and other current assets
|
|
|
387
|
|
|
|
971
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
20,145
|
|
|
|
42,133
|
|
Property and equipment, net
|
|
|
5,093
|
|
|
|
3,223
|
|
Notes receivable
|
|
|
34
|
|
|
|
33
|
|
Restricted cash
|
|
|
|
|
|
|
153
|
|
Other assets
|
|
|
247
|
|
|
|
271
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
25,519
|
|
|
$
|
45,813
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
739
|
|
|
$
|
1,658
|
|
Accrued clinical and cost of other studies
|
|
|
94
|
|
|
|
789
|
|
Accrued compensation
|
|
|
1,051
|
|
|
|
1,252
|
|
Deferred revenue
|
|
|
|
|
|
|
880
|
|
Facility lease exit obligation
|
|
|
318
|
|
|
|
376
|
|
Other accrued liabilities
|
|
|
630
|
|
|
|
584
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,832
|
|
|
|
5,539
|
|
Deferred rent, non-current
|
|
|
199
|
|
|
|
283
|
|
Facility lease exit obligation, non-current
|
|
|
1,056
|
|
|
|
1,373
|
|
Deferred revenue, non-current
|
|
|
4,122
|
|
|
|
|
|
Other non-current liabilities
|
|
|
82
|
|
|
|
248
|
|
Note payable and accrued interest
|
|
|
8,472
|
|
|
|
8,071
|
|
Commitments and contingencies Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, 2,950,000 shares authorized, none
outstanding Common stock, no par value; authorized shares:
150,000,000 at December 31, 2008 and 100,000,000 at
December 31, 2007; issued and outstanding shares:
55,029,384 at December 31, 2008; 54,772,705 at
December 31, 2007
|
|
|
343,426
|
|
|
|
342,355
|
|
Accumulated other comprehensive income
|
|
|
4
|
|
|
|
10
|
|
Accumulated deficit
|
|
|
(334,674
|
)
|
|
|
(312,066
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
8,756
|
|
|
|
30,299
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
25,519
|
|
|
$
|
45,813
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
45
ARADIGM
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except
|
|
|
|
share data)
|
|
|
Contract and license revenues:
|
|
|
|
|
|
|
|
|
Related parties
|
|
$
|
|
|
|
$
|
23
|
|
Unrelated parties
|
|
|
251
|
|
|
|
938
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
251
|
|
|
|
961
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
16,499
|
|
|
|
16,770
|
|
General and administrative
|
|
|
6,679
|
|
|
|
8,401
|
|
Restructuring and asset impairment
|
|
|
79
|
|
|
|
2,182
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
23,257
|
|
|
|
27,353
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(23,006
|
)
|
|
|
(26,392
|
)
|
Interest income
|
|
|
781
|
|
|
|
2,573
|
|
Interest expense
|
|
|
(408
|
)
|
|
|
(393
|
)
|
Other income, net
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(22,633
|
)
|
|
|
(24,201
|
)
|
Income tax benefit
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(22,608
|
)
|
|
$
|
(24,201
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.42
|
)
|
|
$
|
(0.48
|
)
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common
share
|
|
|
54,162
|
|
|
|
50,721
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
46
ARADIGM
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Total
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Shareholders
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
|
(In thousands, except share data)
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,491
|
|
|
|
|
|
|
|
|
|
|
|
1,491
|
|
Reversal of restricted stock award due to forfeiture
|
|
|
|
|
|
|
|
|
|
|
(4,875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,201
|
)
|
|
|
(24,201
|
)
|
Unrealized gain 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
|
|
Issuance of common stock under the employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
300,524
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
190
|
|
Issuance of common stock upon exercise of common stock options
|
|
|
|
|
|
|
|
|
|
|
3,750
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
877
|
|
|
|
|
|
|
|
|
|
|
|
877
|
|
Reversal of restricted stock award due to forfeiture
|
|
|
|
|
|
|
|
|
|
|
(47,595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,608
|
)
|
|
|
(22,608
|
)
|
Unrealized (loss) on available-for-sale investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008
|
|
|
|
|
|
$
|
|
|
|
|
55,029,384
|
|
|
$
|
343,426
|
|
|
$
|
4
|
|
|
$
|
(334,674
|
)
|
|
$
|
8,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
47
ARADIGM
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(22,608
|
)
|
|
$
|
(24,201
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Non-cash asset impairment on property and equipment
|
|
|
|
|
|
|
182
|
|
Facility lease exit costs
|
|
|
|
|
|
|
1,443
|
|
Amortization and accretion of investments
|
|
|
26
|
|
|
|
(26
|
)
|
Depreciation and amortization
|
|
|
871
|
|
|
|
730
|
|
Stock-based compensation expense
|
|
|
877
|
|
|
|
1,491
|
|
Loss on disposition of property and equipment
|
|
|
1
|
|
|
|
33
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
106
|
|
|
|
141
|
|
Prepaid and other current assets
|
|
|
584
|
|
|
|
31
|
|
Restricted cash
|
|
|
80
|
|
|
|
(305
|
)
|
Other assets
|
|
|
24
|
|
|
|
173
|
|
Accounts payable
|
|
|
(1,113
|
)
|
|
|
36
|
|
Accrued compensation
|
|
|
(201
|
)
|
|
|
(562
|
)
|
Accrued liabilities
|
|
|
(414
|
)
|
|
|
1,188
|
|
Deferred rent
|
|
|
(84
|
)
|
|
|
(132
|
)
|
Deferred revenue
|
|
|
3,242
|
|
|
|
880
|
|
Facility lease exit obligation
|
|
|
(375
|
)
|
|
|
(314
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(18,984
|
)
|
|
|
(19,212
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(2,548
|
)
|
|
|
(1,115
|
)
|
Disposition of property and equipment
|
|
|
|
|
|
|
10
|
|
Purchases of available-for-sale investments
|
|
|
(3,629
|
)
|
|
|
(17,013
|
)
|
Proceeds from maturities of available-for-sale investments
|
|
|
11,744
|
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by investing activities
|
|
|
5,567
|
|
|
|
(11,118
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from public offering of common stock, net
|
|
|
|
|
|
|
33,178
|
|
Proceeds from issuance of common stock to Employee Stock
Purchase Plan
|
|
|
190
|
|
|
|
103
|
|
Proceeds from exercise of common stock options
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
194
|
|
|
|
33,281
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(13,223
|
)
|
|
|
2,951
|
|
Cash and cash equivalents at beginning of year
|
|
|
29,964
|
|
|
|
27,013
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
16,741
|
|
|
$
|
29,964
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
7
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
194
|
|
|
$
|
471
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
48
ARADIGM
CORPORATION
|
|
1.
|
Organization
and Summary of Significant Accounting Policies
|
Organization
Aradigm Corporation (the Company) is a California
corporation focused on the development and commercialization of
drugs delivered by inhalation for the treatment of severe
respiratory diseases. The Companys principal activities to
date have included conducting research and development and
developing collaborations. Management does not anticipate
receiving any revenues from the sale of 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,
2008, the Company had an accumulated deficit of
$334.7 million, working capital of $17.3 million and
shareholders equity of $8.8 million. Management
believes that cash, cash equivalents and short-term investments
at December 31, 2008, along with its subsequent equity
financing (see Note 20) will be sufficient to enable
the Company to meet its obligations at least through the first
quarter of 2010. Management plans to continue to fund the
Companys operations with cash 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 to be cash equivalents.
The Company invests cash and cash equivalents not needed for
operations in money market funds and commercial paper in
accordance with its investment policy.
Investments
Management determines the appropriate classification of the
Companys marketable securities, which consist solely of
debt securities, at the time of purchase. All marketable
securities are classified as available-for-sale, carried at
estimated fair value and reported in short-term investments.
Unrealized gains and losses on available-for-sale securities are
excluded from earnings and losses and are reported as a separate
component in the statement of 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.
49
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 $34,000 remains outstanding as of
December 31, 2008.
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:
|
|
|
Computer equipment and software
|
|
3 to 5 years
|
Furniture and fixtures
|
|
5 to 7 years
|
Lab equipment
|
|
5 to 7 years
|
Machinery and equipment
|
|
5 years
|
Leasehold improvements
|
|
5 to 17 years
|
Impairment
of Long-Lived Assets
In accordance with Statement of 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 14 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. 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 14 and 16).
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 Topic 13,
Revenue Recognition (SAB Topic 13) and
Emerging Issues Task Force 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 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,
50
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
revenue is recognized upon acceptance of the work and
confirmation of the amount to be paid by the collaborator.
Deferred revenue includes 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, 2008 and 2007 were $7,000 and zero.
Stock-Based
Compensation
The Company accounts for share-based payment arrangements in
accordance with Statement of Financial Accounting Standards
123(R), Share-Based Payment, or SFAS 123(R), which
requires the recognition of compensation expense, using a
fair-value based method, for all costs related to share-based
payments including stock options and restricted stock awards and
stock issued under the employee stock purchase plan.
SFAS 123(R) requires companies to estimate the fair value
of share-based payment awards on the date of the grant using an
option-pricing model. The Company has adopted the simplified
method to calculate the beginning balance of the additional
paid-in capital, or APIC, pool of excess tax benefits, and to
determine the subsequent effect on the APIC pool and statement
of cash flows of the tax effects of stock-based compensation
awards. See Note 7 for further discussion of the
Companys stock-based compensation plan.
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
51
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
accounting purposes. These differences result in deferred tax
assets and liabilities, which are included in our balance sheets.
We assess the likelihood that we will be able to recover our
deferred tax assets. We consider all available evidence, both
positive and negative, including our historical levels of income
and losses, expectations and risks associated with estimates of
future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for a valuation
allowance. If we do not consider it more likely than not that we
will recover our deferred tax assets, we will record a valuation
allowance against the deferred tax assets that we estimate will
not ultimately be recoverable. At December 31, 2008 and
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.
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 13).
Net
Loss Per Common Share
Basic net loss per common share is computed using the
weighted-average number of shares of common stock outstanding
less the weighted-average number of shares subject to
repurchase. Unvested restricted stock awards subject to
repurchase totaled 704,000 shares and 771,000 shares
for the years ended December 31, 2008 and 2007,
respectively. Potentially dilutive securities were not included
in the net loss per share calculation for the years ended
December 31, 2008 and 2007 because the inclusion of such
shares would have had an anti-dilutive effect.
Potentially dilutive securities include the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Outstanding stock options
|
|
|
4,185
|
|
|
|
3,493
|
|
Unvested restricted stock
|
|
|
704
|
|
|
|
771
|
|
Performance bonus stock award
|
|
|
|
|
|
|
100
|
|
Warrants to purchase common stock
|
|
|
|
|
|
|
427
|
|
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.
52
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
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 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 FSP
FAS 157-2
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. We will assess the impact of SFAS 141(R) if and when
a future acquisition occurs.
In November 2007, the EITF issued EITF Issue
No. 07-1,
Accounting for Collaborative Arrangements Related to the
Development and Commercialization of Intellectual Property
(EITF 07-1).
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 of
EITF 07-1
will have a material impact on the Companys financial
position and results of operations.
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. Adoption of
EITF 07-3
did not 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. The Company has not elected to measure
any
53
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
eligible financial instruments of other items at fair value,
except for its short-term investments which had been previously
measured at fair value.
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. We adopted
this standard on January 1, 2008 and adoption has not had a
material impact on the Companys financial position and
results of operations.
|
|
2.
|
Cash and
Cash Equivalents and Short-term Investments
|
A summary of cash and cash equivalents and short-term
investments, classified as available-for-sale and carried at
fair value is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gain
|
|
|
(Loss)
|
|
|
Fair Value
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,741
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
16,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
2,395
|
|
|
$
|
4
|
|
|
$
|
|
|
|
$
|
2,399
|
|
U.S. Treasury and agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,395
|
|
|
$
|
4
|
|
|
$
|
|
|
|
$
|
2,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
29,960
|
|
|
$
|
4
|
|
|
$
|
|
|
|
$
|
29,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
1,496
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,496
|
|
Corporate bonds
|
|
|
8,213
|
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
8,216
|
|
U.S. Treasury and agencies
|
|
|
831
|
|
|
|
3
|
|
|
|
|
|
|
|
834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,540
|
|
|
$
|
7
|
|
|
$
|
(1
|
)
|
|
$
|
10,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All short-term investments at December 31, 2008 and 2007
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, 2008 and 2007 the difference between the fair
value and amortized cost of available-for-sale securities were
gains of $4,000 and $10,000, respectively.
|
|
3.
|
Fair
Value Measurements
|
Effective January 1, 2008, we adopted SFAS 157,
Fair Value Measurements. SFAS 157 clarifies the
definition of fair value, prescribes methods for measuring fair
value, establishes a fair value hierarchy based on the inputs
used to measure fair value and expands disclosures about the use
of fair value measurements. The fair value hierarchy has three
levels based on the reliability of the inputs used to determine
fair value. Level 1 values are based on quoted prices in
active markets. Level 2 values are based on significant
other observable inputs. Level 3 values are based on
significant unobservable inputs. The following table presents
the fair value level for our cash and cash equivalents
54
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
and short-term investments which represents our assets that are
measured at fair value on a recurring basis and are categorized
using the fair value hierarchy. We do not have any liabilities
that are measured at fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
2008
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
16 ,741
|
|
|
$
|
13,542
|
|
|
$
|
3,199
|
|
|
$
|
|
|
Short-term investments
|
|
|
2,399
|
|
|
|
|
|
|
|
2,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,140
|
|
|
$
|
13,542
|
|
|
$
|
5,598
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys cash and cash equivalents at
December 31, 2008 consist of cash, money market funds and
commercial paper. Money market funds are valued using quoted
market prices. The Companys short-term investments at
December 31, 2008 consists of commercial paper. The Company
uses an independent third party pricing service to value our
commercial paper investments. The pricing service uses
observable inputs such as new issue money market rates,
adjustment spreads, corporate actions and other factors and
applies a series of matrices pricing model.
|
|
4.
|
Property
and Equipment
|
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Machinery and equipment
|
|
$
|
5,282
|
|
|
$
|
4,049
|
|
Furniture and fixtures
|
|
|
1,142
|
|
|
|
993
|
|
Lab equipment
|
|
|
2,488
|
|
|
|
2,472
|
|
Computer equipment and software
|
|
|
2,636
|
|
|
|
3,876
|
|
Leasehold improvements
|
|
|
1,901
|
|
|
|
577
|
|
|
|
|
|
|
|
|
|
|
Property and equipment at cost
|
|
|
13,449
|
|
|
|
11,967
|
|
Less accumulated depreciation and amortization
|
|
|
(9,512
|
)
|
|
|
(10,033
|
)
|
|
|
|
|
|
|
|
|
|
Net depreciable assets
|
|
|
3,937
|
|
|
|
1,934
|
|
Construction in progress
|
|
|
1,156
|
|
|
|
1,289
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
5,093
|
|
|
$
|
3,223
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $871,000 and $730,000 for the years
ended December 31, 2008 and, 2007 respectively.
55
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Other liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Other accrued liabilities:
|
|
|
|
|
|
|
|
|
Accrued expense for services
|
|
$
|
389
|
|
|
$
|
308
|
|
Payroll withholding liabilities
|
|
|
76
|
|
|
|
120
|
|
Deposits
|
|
|
153
|
|
|
|
147
|
|
Other short term obligations
|
|
|
12
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Total other accrued liabilities
|
|
$
|
630
|
|
|
$
|
584
|
|
|
|
|
|
|
|
|
|
|
Other non-current liabilities:
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
75
|
|
|
$
|
228
|
|
Other long term obligations
|
|
|
7
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
Total other non-current liabilities
|
|
$
|
82
|
|
|
$
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Leases,
Commitments and Contingencies
|
The Company has a lease for a building containing office and
laboratory and manufacturing facilities, which expires in 2016.
A portion of this lease obligation was offset by a sublease to
Mendel Biotechnology, Inc. (Mendel). Future minimum
non-cancelable lease payments at December 31, 2008 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Mendel
|
|
|
Net Operating
|
|
|
|
Leases
|
|
|
Sub-Lease
|
|
|
Lease Payments
|
|
|
Year ending December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
2,148
|
|
|
|
|
|
|
|
2,148
|
|
2014 and thereafter
|
|
|
5,724
|
|
|
|
|
|
|
|
5,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
16,464
|
|
|
$
|
(3,658
|
)
|
|
$
|
12,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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 $3.4 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.
56
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, 2008 and 2007, the
Company had $0.2 million and $0.3 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 14).
For the years ended December 31, 2008 and 2007, building
rent expense under operating leases totaled $0.7 million
and $1.6 million, respectively.
Property
Tax Assessment
In March 2008, the Company received assessments of $508,000 from
the Alameda County Tax Collector for personal property taxes for
the period July 2004 through June 2007, for which the Company
recorded an expense of $194,000 in the second quarter of 2008.
Of the $508,000 total assessment, $194,000 relates to property
owned and used by the Company during the assessment periods, and
$314,000 relates to property the Company sold to Novo Nordisk as
part of a January 26, 2005 restructuring agreement (the
January 26, 2005 Agreement) and owned by Novo
Nordisk during the tax assessment period. Under the terms of the
January 26, 2005 Agreement, Novo Nordisk is responsible for
tax assessments on property it owned during the assessment
period, and therefore the Company believes the likelihood that
the Company will ultimately bear the cost of the related
$314,000 assessment is remote. Accordingly, no accrual was
recorded for this portion of the assessment. Management has
filed an appeal with the Alameda County Tax Collector to dispute
portions of the total assessment, and believes there is at least
a reasonable possibility that the Companys $194,000
liability ultimately will be reduced upon resolution of the
appeal. However, at this time management cannot estimate the
ultimate outcome of the appeal. Accordingly, managements
current best estimate of the Companys ultimate liability
for the property tax assessment is $194,000.
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, 2008 or 2007.
Legal
Matters
From time to time, the Company is involved in litigation arising
out of the ordinary course of its business. Currently there are
no known claims or pending litigation expected to have a
material effect on the Companys overall financial
position, results of operations, or liquidity.
On 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.
57
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
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. As
of December 31, 2008, all of these warrants had expired and
none of these warrants were exercised.
Reserved
Shares
At December 31, 2008, the Company had 4,185,061 shares
reserved for issuance upon exercise of options under all stock
option plans. In addition, the Company had 3,987,599 shares
of our common stock reserved for issuance of new option grants
and 939,916 shares available for future issuances under the
Employee Stock Purchase Plan.
Shareholder
Rights Plan
In September 2008, the Company adopted an amended and restated
shareholder rights plan, which replaced the rights plan
originally adopted in August 1998. Pursuant to the rights plan,
as amended and restated, the Company distributes rights to
purchase shares of Series A Junior Participating Preferred
Stock as a dividend at the rate of one right for each share of
common stock outstanding. Until the rights are distributed, the
rights trade with, and are not separable from, the
Companys common stock and are not exercisable. The rights
are designed to guard against partial tender offers and other
abusive and coercive tactics that might be used in an attempt to
gain control of the Company or to deprive the Companys
shareholders of their interest in the Companys long-term
value. The shareholder rights plan seeks to achieve these goals
by encouraging a potential acquirer to negotiate with the
Companys board of directors. The rights will expire at the
close of business on September 8, 2018.
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, the Company 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. As of December 31, 2008, 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
58
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
by the board of directors on the date of the annual meeting of
shareholders of each fiscal year beginning 2001 and ending 2005.
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, 2008, the Company had 519,021 options
outstanding and 39,888 shares were available for future
grants under the 1996 Plan.
In March 2005, the Companys board of directors adopted and
in May 2005 the Companys shareholders approved the 2005
Plan, which amended, restated and retitled the 1996 Plan. All
outstanding awards granted under the 1996 Plan remain subject to
the terms of the 1996 Plan. All stock awards granted on or after
the adoption date are subject to the terms of the 2005 Plan. No
shares were added to the share reserve under the 2005 Plan other
than the shares available for future issuance under the 1996
Plan. Pursuant to the 2005 Plan, the Company had
2,918,638 shares of common stock authorized for issuance.
Options (net of canceled or expired options) covering an
aggregate of 1,999,252 shares of the Companys common
stock had been granted under the 1996 Plan, and
919,386 shares became available for future grant under the
2005 Plan. In March 2006, the Companys board of directors
amended, and in May 2006 the Companys shareholders
approved, the amendment to the 2005 Plan, increasing the shares
of common stock authorized for issuance by 2,000,000. In April
2007, the Companys board of directors amended, and in June
2007, the Companys shareholders approved the amendment to
the 2005 Plan, increasing the shares of common stock authorized
for issuance by 1,600,000 shares. In March 2008, the
Companys board of directors amended, and in May 2008 the
Company shareholders approved, the amendment to the 2005
Plan, increasing the shares of common stock authorized by
2,700,000. As of December 31, 2008, 3,947,711 shares
were available for future grants.
Options granted under the 2005 Plan expire no later than
10 years from the date of grant. Options granted under the
2005 Plan may be either incentive or non-statutory stock
options. For incentive and non-statutory stock option grants,
the option price shall be at least 100% and 85%, respectively,
of the fair value on the date of grant, as determined by the
Companys board of directors. If at any time the Company
grants an option, and the optionee directly or by attribution
owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company, the option price
shall be at least 110% of the fair value and shall not be
exercisable more than five years after the date of grant.
Options granted under the 2005 Plan may be immediately
exercisable if permitted in the specific grant approved by the
board of directors and, if exercised early may be subject to
repurchase provisions. The shares acquired generally vest over a
period of four years from the date of grant. The 2005 Plan also
provides for a transition from employee to consultant status
without termination of the vesting period as a result of such
transition. Under the 2005 Plan, employees may exercise options
in exchange for a note payable to the Company, if permitted
under the applicable grant. As of December 31, 2008 and
2007, 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 898,000 shares and 1,414,750 shares during
the years ended December 31, 2008 and 2007, respectively,
under the 2005 Plan, which included option grants to the
Companys non-employee directors in the
59
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
amount of 125,000 shares and 95,000 shares during 2008
and 2007, respectively. The 2005 Plan had 3,652,897 option
shares outstanding as of December 31, 2008.
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 1,500 and 6,543 share cancellations
due to option expirations for the years ended December 31,
2008 and 2007, respectively. As of December 31, 2008,
13,143 outstanding options with exercise prices ranging from
$41.25 $120.63 remained with no additional shares
available for grant.
The following is a summary of activity under the 1996 Plan, the
2005 Plan and the Directors Plan as of December 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Shares Available
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
for Grant of
|
|
|
Number of
|
|
|
|
|
|
Exercise
|
|
|
|
Option or Award
|
|
|
Shares
|
|
|
Price per Share
|
|
|
Price
|
|
|
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 cancelled 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
|
|
Options authorized
|
|
|
2,700,000
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(898,000
|
)
|
|
|
898,000
|
|
|
$
|
.39
|
|
|
|
-
|
|
|
$
|
1.57
|
|
|
$
|
.80
|
|
Options exercised
|
|
|
|
|
|
|
(3,750
|
)
|
|
$
|
1.15
|
|
|
|
|
|
|
$
|
1.15
|
|
|
$
|
1.15
|
|
Options cancelled
|
|
|
202,343
|
|
|
|
(202,343
|
)
|
|
$
|
1.23
|
|
|
|
-
|
|
|
$
|
71.25
|
|
|
$
|
10.65
|
|
Restricted share awards cancelled
|
|
|
147,595
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Plan shares cancelled and not reauthorized
|
|
|
(1,500
|
)
|
|
|
|
|
|
$
|
71.25
|
|
|
|
-
|
|
|
$
|
71.25
|
|
|
$
|
71.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
3,987,599
|
|
|
|
4,185,061
|
|
|
$
|
.39
|
|
|
|
-
|
|
|
$
|
120.63
|
|
|
$
|
6.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
The following table summarizes information about stock options
outstanding and exercisable as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
Exercise Price Range
|
|
Shares
|
|
|
Life (In Years)
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
$.39 - $1.02
|
|
|
747,500
|
|
|
|
9.54
|
|
|
$
|
.63
|
|
|
|
101,967
|
|
|
$
|
.87
|
|
$1.03 - $1.52
|
|
|
669,510
|
|
|
|
7.85
|
|
|
|
1.32
|
|
|
|
400,604
|
|
|
|
1.31
|
|
$1.53 - $1.70
|
|
|
1,150,500
|
|
|
|
8.38
|
|
|
|
1.62
|
|
|
|
428,937
|
|
|
|
1.65
|
|
$1.71 - $4.20
|
|
|
1,067,760
|
|
|
|
6.94
|
|
|
|
1.97
|
|
|
|
837,810
|
|
|
|
1.95
|
|
$4.21 - $5.95
|
|
|
231,302
|
|
|
|
4.87
|
|
|
|
5.48
|
|
|
|
226,712
|
|
|
|
5.47
|
|
$5.96 - $10.80
|
|
|
41,500
|
|
|
|
4.68
|
|
|
|
8.18
|
|
|
|
41,500
|
|
|
|
8.18
|
|
$10.81 - $20.05
|
|
|
110,994
|
|
|
|
3.66
|
|
|
|
15.33
|
|
|
|
110,994
|
|
|
|
15.33
|
|
$20.06 - $98.13
|
|
|
138,260
|
|
|
|
2.10
|
|
|
|
40.32
|
|
|
|
138,260
|
|
|
|
40.32
|
|
$98.14 - $120.63
|
|
|
27,735
|
|
|
|
1.30
|
|
|
|
112.48
|
|
|
|
27,735
|
|
|
|
112.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,185,061
|
|
|
|
7.52
|
|
|
$
|
4.14
|
|
|
|
2,314,519
|
|
|
$
|
6.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value is the sum of the amounts by which the
quoted market price of the Companys stock exceeded the
exercise price of the stock options at December 31, 2008
and 2007 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, 2008 and 2007, the
aggregate intrinsic value of options outstanding was zero and
$167,000, respectively. As of December 31, 2008, options to
purchase 2,314,519 shares of common stock were exercisable
and had an aggregate intrinsic value of zero. The total
intrinsic value of stock options exercised was $200 for the year
ended December 31, 2008. No stock options were exercised in
2007.
A summary of the Companys unvested restricted stock and
performance bonus stock award activities as of December 31,
2008 is presented below representing the maximum number of
shares that could be earned or vested under the 2005 Plan:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Grant Date Fair Value
|
|
|
Balance at December 31, 2006
|
|
|
169,849
|
|
|
$
|
2.40
|
|
Restricted stock awards granted
|
|
|
726,000
|
|
|
|
1.54
|
|
Restricted share awards vested
|
|
|
(20,250
|
)
|
|
|
3.60
|
|
Restricted share awards cancelled
|
|
|
(4,875
|
)
|
|
|
1.80
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
870,724
|
|
|
|
1.66
|
|
Restricted share awards vested
|
|
|
(19,594
|
)
|
|
|
3.63
|
|
Restricted share awards cancelled
|
|
|
(47,595
|
)
|
|
|
1.70
|
|
Performance bonus award cancelled
|
|
|
(100,000
|
)
|
|
|
1.64
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
703,535
|
|
|
|
1.60
|
|
|
|
|
|
|
|
|
|
|
For restricted stock awards, the Company recognizes compensation
expense over the vesting period for the fair value of the stock
award on the measurement date. The Companys 2007
restricted stock awards granted included 450,000 shares
with vesting provisions based solely on the achievement of
performance-based milestones. None of the restricted
performance-based milestone awards have yet been achieved. In
addition, the performance stock bonus award for up to
100,000 shares award did not vest prior by its expiration
date and was subsequently cancelled
61
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
in 2008. The total fair value of restricted stock awards that
did vest during the years ended December 31, 2008 and 2007
was $16,000 and $28,000, respectively. The Company retained
purchase rights to 704,000 and 771,000 shares of unvested
restricted stock awards issued pursuant to stock purchase
agreements at no cost per share as of December 31, 2008 and
2007, respectively. Total employee-stock based compensation
expense for restricted stock awards was $206,000 and $107,000
for the years ended December 31, 2008 and 2007,
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 was $94,000. The
performance targets were not met by the expiration date and the
award was cancelled in 2008.
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, 2008, a total of 1,110,084 shares
had been issued under the Purchase Plan. In April 2008, the
Companys board of directors amended, and in May 2008 the
Company shareholders approved, the amendment to the 2005
Plan, increasing the shares of common stock authorized by
1,000,000. As of December 31, 2008, there was a balance of
939,916 available authorized shares. Compensation expense was
$42,000 and $112,000 for the years ended December 31, 2008
and 2007, respectively. The fair value of employee stock
purchase rights under the Purchase Plan is determined using the
Black-Scholes option pricing model and the following weighted
average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Employee Stock Purchase Plan
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Volatility factor
|
|
|
64.8
|
%
|
|
|
78.1
|
%
|
Risk-free interest rate
|
|
|
1.7
|
%
|
|
|
4.6
|
%
|
Expected life (years)
|
|
|
0.52
|
|
|
|
1.18
|
|
Weighted-average fair value of purchase rights granted during
the period
|
|
$
|
0.15
|
|
|
$
|
0.59
|
|
Share-Based
Compensation Expense
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 2008 and 2007 included compensation expense for
stock-based awards granted prior to, but not yet vested, as of
December 31, 2005, based on the grant
62
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
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. The Company estimated forfeitures based on
historical experience.
The following table shows share-based employee compensation
expense included in the statement of operations for the years
ended December 31, 2008 and 2007, respectively (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
530
|
|
|
$
|
664
|
|
General and administrative
|
|
|
281
|
|
|
|
718
|
|
|
|
|
|
|
|
|
|
|
Total stock-based employee compensation expense
|
|
$
|
811
|
|
|
$
|
1,382
|
|
|
|
|
|
|
|
|
|
|
Impact on basic and diluted net loss per common share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
There was no capitalized stock-based employee compensation cost
as of December 31, 2008. Since the Company has cumulative
net losses through December 31, 2008, there was no tax
benefit associated with stock-based compensation expense. As of
December 31, 2008, $843,000 of total unrecognized
compensation costs, net of forfeitures, related to non-vested
awards is expected to be recognized over a weighted average
period of 2.56 years.
Valuation
Assumptions
The fair value of options was estimated at the date of grant
using the Black-Scholes option pricing model. Expected
volatility is based on the historical volatility of the
Companys common stock. 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 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 the Company does not anticipate paying dividends in the
near future. The weighted average assumptions are as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
Employee Stock Options
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Volatility factor
|
|
|
67.7
|
%
|
|
|
76.7
|
%
|
Risk-free interest rate
|
|
|
2.8
|
%
|
|
|
4.0
|
%
|
Expected life (years)
|
|
|
3.8
|
|
|
|
4.0
|
|
Weighted-average fair value of options granted during the periods
|
|
$
|
0.33
|
|
|
$
|
0.86
|
|
Stock-Based
Compensation for Non-Employees
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. Share-based
compensation expense related to options and warrants issued to
non-employees was $66,000 and $109,000 during the years ended
December 31, 2008 and 2007, respectively.
63
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
8.
|
Convertible
Preferred Stock
|
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 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.
|
|
9.
|
Employee
Benefit Plans
|
The Company has a 401(k) Plan which provides 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 in 2008. 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 $108,000 and $120,000 in 2008
and 2007, respectively.
CyDex
On August 31, 2007, the Company and 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 the
Companys 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, was the Chief Executive
Officer and a member of the Board of CyDex until October 2008.
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 $131,000 and
$8,000 relating to the CyDex Agreement during the years ended
December 31, 2008 and 2007, respectively.
Novo
Nordisk
In May 2008, the Second Amended and Restated License Agreement
between Novo Nordisk and the Company (the July 3,
2006 License Agreement) was terminated, ending a business
collaboration between the two
64
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
companies to develop a pulmonary delivery system for
administering insulin by inhalation using the AERx iDMS. There
are various consequences for the Company as a result of the
termination by Novo Nordisk of the July 3, 2006 License
Agreement, including the following:
All rights to the inhaled insulin
program. Novo Nordisk must enable the Company to
continue to pursue commercialization of inhaled insulin. In
order to do this, Novo Nordisk is required to:
|
|
|
|
|
Supply the Company with insulin for use in continuing
development of inhaled insulin.
|
|
|
|
Identify in writing the patent claims that describe the insulin
formulation used by Novo Nordisk in its development of inhaled
insulin so that the Company can make such formulation (and
permitted alternatives).
|
|
|
|
Provide the Company full access to the data generated in the
development of inhaled insulin, including data from all the
clinical trials, as well as relevant sections of applicable
regulating filings.
|
Transfer of technology. Novo Nordisk
transferred the AERx iDMS technology documentation to the
Company. The technology transfer also included certain AERx
iDMS-related development and production equipment at its fair
market value.
Intellectual Property transfer. In September
2008, Novo Nordisk transferred to the Company, at no charge, a
portfolio of U.S. and foreign patents related to inhaled
insulin. The Company assumes responsibility for the maintenance
of this portfolio.
Prior to the Companys public offering completed on
January 30, 2007 (see Note 7), Novo Nordisk and its
affiliate, Novo Nordisk Pharmaceuticals, Inc. were considered
related parties. At December 31, 2006, Novo 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, 2008, 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 insulin by
inhalation. Under the terms of the agreement, Novo Nordisk was
granted exclusive rights to worldwide sales and marketing rights
for any products developed 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. Additionally, 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.
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 12).
From 1998 through December 31, 2007, the Company received
approximately $150 million in product development and
milestone payments from Novo Nordisk, and the Company has
recognized all of these funds as contract revenues. For the
years ended December 31, 2008 and 2007, the Company
recognized revenue in the amount of zero and $23,000,
respectively, related to product development and milestone
payments.
65
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
11.
|
Revenue
and Deferred Revenue:
|
Payments from and amounts billed to collaborators, revenue
recognized and deferred revenue for the years ended
December 31, 2008 and 2007 are as follows (thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred revenue at beginning of the year
|
|
$
|
880
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Amounts billed or received from collaborator funded programs:
|
|
|
|
|
|
|
|
|
Lung Rx
|
|
|
3,242
|
|
|
|
880
|
|
Other collaborator-funded programs
|
|
|
251
|
|
|
|
961
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,493
|
|
|
|
1,841
|
|
|
|
|
|
|
|
|
|
|
Contract revenues recognized:
|
|
|
|
|
|
|
|
|
Lung Rx
|
|
|
|
|
|
|
|
|
Other collaborator-funded programs
|
|
|
251
|
|
|
|
961
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
251
|
|
|
|
961
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue at end of the year
|
|
|
4,122
|
|
|
|
880
|
|
Less: non-current portion of deferred revenue
|
|
|
4,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of deferred revenue
|
|
$
|
|
|
|
$
|
880
|
|
|
|
|
|
|
|
|
|
|
The Company receives revenues from other collaborator-funded
programs. These programs include early-stage feasibility
programs which 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 10), 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
$8.5 million and $8.1 million as of December 31,
2008 and 2007, 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. The termination of the July 3, 2006 License Agreement
does not accelerate any of the payment provisions under the
Promissory Note. As of March 25, 2009, there were no
covenant violations or any event of default.
In 2008 the Company recorded a $25,000 income tax benefit
resulting from a refundable research and development credit. In
2007, the Company had no income tax provision. 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.
66
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Significant components of the Companys deferred tax assets
and liabilities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Net operating loss carryforwards
|
|
$
|
2,600
|
|
|
$
|
102,700
|
|
Research and development credits
|
|
|
6,300
|
|
|
|
20,300
|
|
Capitalized research and development
|
|
|
|
|
|
|
3,100
|
|
Other
|
|
|
3,000
|
|
|
|
1,400
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
11,900
|
|
|
|
127,500
|
|
Valuation allowance
|
|
|
(11,900
|
)
|
|
|
(127,500
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The Company considers all available evidence, both positive and
negative, including historical levels of taxable income,
expectations and risks associated with estimates of future
taxable income, and ongoing prudent and feasible tax planning
strategies in assessing the need for a valuation allowance. At
December 31, 2008 and 2007, based on the Companys
analysis of all available evidence, both positive and negative,
it was considered more likely than not that the Companys
deferred tax assets would not be realized, and as a result, the
Company recorded a valuation allowance for its deferred tax
assets. The valuation allowance decreased by $115.6 million
during the year ended 2008 and increased by $8.6 million
during the year ended December 31, 2007. The reduction in
the valuation allowance for the year ended December 31,
2008 includes the reversal of fully reserved deferred tax assets
related to net operating loss and credit carryforwards that may
not be available prior to their expiration as a result of
federal and state ownership change limitations. In accordance
with SFAS 123R, the Company has excluded from deferred tax
assets tax benefits attributable to employee stock option
exercises.
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,
|
|
|
|
2008
|
|
|
2007
|
|
|
Income tax benefit at federal statutory rate
|
|
$
|
(7,921
|
)
|
|
$
|
(8,471
|
)
|
Expired net operating losses
|
|
|
554
|
|
|
|
1,407
|
|
State taxes (net of federal)
|
|
|
(1,461
|
)
|
|
|
(1,339
|
)
|
Credits
|
|
|
(289
|
)
|
|
|
( 951
|
)
|
Other
|
|
|
|
|
|
|
748
|
|
Reduction in deferred tax assets due to Section 382
limitations
|
|
|
124,743
|
|
|
|
|
|
Change in valuation allowance
|
|
|
(115,651
|
)
|
|
|
8,606
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(25
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, the Company had federal net
operating loss carryforwards of approximately $6.7 million
and federal research and development tax credit carryforwards of
approximately $.1 million, which expire in the years 2009
through 2028. The Company also had California net operating loss
carryforwards of approximately $4.5 million, which expire
in the years 2010 through 2028, and California research and
development tax credit carryforwards of approximately
$9.5 million, which do not expire. None of the federal and
state net operating loss carryforwards represent stock option
deductions arising from activity under the Companys stock
option plan.
The Company files income tax returns in the U.S. federal
jurisdiction and various state jurisdictions. The Company is
subject to U.S. federal and state income tax examinations
by tax authorities for tax years 1994 through 2008 due to net
operating losses that are being carried forward for tax purposes.
67
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
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, 2008 and, as a
result, there was no effect on the Companys financial
condition or results of operations as a result of implementing
FIN 48.
The Companys policy is to recognize interest and penalties
accrued on any unrecognized tax benefits as a component of
income tax expense. As of the date of adoption of FIN 48,
the Company did not have any accrued interest or penalties
associated with any unrecognized tax benefits, nor was any
interest expense recognized for the years ended
December 31, 2008 and 2007.
Federal and state laws limit the use of net operating loss and
credit carryforwards in certain situations where changes occur
in the stock ownership of a company. The Company conducted a
preliminary analysis of its stock ownership changes under
Internal Revenue Code Section 382 as of December 31,
2008 and has reported its deferred tax assets related to net
operating loss and credit carryforwards after recognizing change
of control limitations that may have occurred in 2008. The
reduction in deferred tax assets was offset by a reduction in
the valuation allowance. 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, 2008. Such additional annual limitations
could result in the expiration of the net operating loss and
credit carryforwards available as of December 31, 2008
before their utilization.
|
|
14.
|
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 6).
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 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, 2008 is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Balance at beginning of year
|
|
$
|
1,749
|
|
|
$
|
|
|
Loss on sublease upon subleasing to Mendel in July 2007
|
|
|
|
|
|
|
2,063
|
|
Accretion expense
|
|
|
79
|
|
|
|
39
|
|
Lease payments
|
|
|
(454
|
)
|
|
|
(353
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of the year
|
|
$
|
1,374
|
|
|
$
|
1,749
|
|
|
|
|
|
|
|
|
|
|
The Company recorded $318,000 of the $1,374,000 lease exit
liability in current liabilities and the remaining $1,056,000 in
non-current liabilities in the accompanying balance sheet at
December 31, 2008. In addition to recording the lease exit
liability and related loss, the Company reversed the deferred
rent liability, and wrote off
68
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
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,
|
|
|
|
2008
|
|
|
2007
|
|
|
Loss on sublease upon subleasing to Mendel in July 2007
|
|
$
|
|
|
|
$
|
2,063
|
|
Lease commission
|
|
|
|
|
|
|
420
|
|
Accretion expense
|
|
|
79
|
|
|
|
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 expense
|
|
$
|
79
|
|
|
$
|
2,084
|
|
|
|
|
|
|
|
|
|
|
In accordance with the terms of the Companys sublease
agreement with Mendel dated July 18, 2007 (see
Note 14), the Company is maintaining a certificate of
deposit as collateral against a letter of credit to secure the
refund to Mendel of any unapplied portion of the prepaid rent
paid by Mendel. The restriction on the Companys cash 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.
|
|
16.
|
2006
Restructuring and Asset Impairment
|
The following table summarizes the Companys restructuring
and asset impairment expenses related to the 2006 Restructuring
for the year ended December 31, 2007 (in thousands). The
$98,000 additional restructuring charge was recorded to
restructuring and asset impairment expense in 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
Restructuring
|
|
|
|
|
|
December 31,
|
|
Type of Liability
|
|
2006
|
|
|
Charges
|
|
|
Payments
|
|
|
2007
|
|
|
Severance and related benefits
|
|
$
|
716
|
|
|
$
|
98
|
|
|
$
|
(814
|
)
|
|
$
|
|
|
Out-placement services
|
|
|
36
|
|
|
|
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
752
|
|
|
$
|
98
|
|
|
$
|
(850
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.
|
Collaborations
and Licensing Agreements
|
Lung
Rx
On August 30, 2007, the Company signed an Exclusive
License, Development and Commercialization Agreement (the
Lung Rx Agreement) with Lung Rx, Inc., (Lung
Rx), a wholly-owned subsidiary of United Therapeutics,
pursuant to which the Company granted Lung Rx, upon the payment
of certain fees, 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 received
an upfront fee of $440,000 and an additional fee of $440,000
four months after the signing date. 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 was responsible for conducting
and funding a feasibility bridging study that included a
clinical trial to compare the AERx Essence inhaler to a
nebulizer used in a completed Phase 3 registration trial
conducted by United Therapeutics. We began the clinical portion
of the study in April 2008 and announced results in November
2008. At the same time, we announced receipt of
$2.75 million from Lung Rx, which included the first
69
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
milestone of $2 million and development costs. Lung Rx will
be responsible for funding the remainder of the development of
treprostinil in the AERx delivery system through registration
and commercial launch. We could receive additional milestone
payments of up to $7 million. These payments 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. 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. The Lung Rx
Agreement remains effective 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.
Lung Rx was to pay a $650,000 license fee for an exclusive
license and had the right under the Lung Rx Agreement to
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 study was successful. Lung Rx determined that, while
the results of the clinical trial warranted continuation of the
development of AERx Essence technology with treprostinil, the
performance of the AERx Essence inhaler in the clinical study
was different from the nebulizer. As such, they did not pay the
license fee or purchase the Companys common stock.
The Company is obligated to provide multiple deliverables under
the Lung Rx Agreement, including transfer of the AERx technology
and any future improvements thereto during the term of the Lung
Rx Agreement 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 study,
and the milestone and development payments, together with any
future license fee and milestone and royalty payments, will be
recognized as revenue ratably over the term of the Lung Rx
Agreement, using a time-based model. The revenue recognition
will commence with the delivery of the last deliverable, which
is the license to the AERx technology and any future
improvements thereto.
Zogenix
In August 2006, we sold all of our assets related to the
Intraject needle-free injector technology platform and products,
including 12 United States patents along with foreign
counterparts, to Zogenix, Inc., a private company. Zogenix is
responsible for further development and commercialization
efforts of Intraject (now rebranded under the name
DoseProtm).
We received a $4 million initial payment from Zogenix, and
we will be entitled to a milestone payment upon initial
commercialization, and royalty payments upon any
commercialization of products.
|
|
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 its
ARD-3100 program, an inhaled formulation of liposomal
ciprofloxacin. 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 $3.3 million
in addition to costs and fees for stability studies or other
services that may be agreed by both parties. Thereafter, the
agreement specifies that purchases are made on a purchase order
basis without any committed order level. The agreement commenced
on August 8, 2007, and will extend for a period of five
years, unless terminated earlier by either party. During the
year ended December 31, 2008, and 2007, respectively, the
Company paid $2.9 million and $2.8 million,
respectively, under the Enzon Agreement.
70
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
19.
|
Quarterly
Results of Operations (unaudited)
|
Following is a summary of the quarterly results of operations
for the years ended December 31, 2008 and 2007 (amounts in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
Contract and license revenues
|
|
$
|
|
|
|
$
|
54
|
|
|
$
|
197
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
4,329
|
|
|
|
5,364
|
|
|
|
3,199
|
|
|
|
3,607
|
|
General and administrative
|
|
|
1,549
|
|
|
|
1,825
|
|
|
|
1,615
|
|
|
|
1,690
|
|
Restructuring and asset impairment
|
|
|
22
|
|
|
|
20
|
|
|
|
19
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
5,900
|
|
|
|
7,209
|
|
|
|
4,833
|
|
|
|
5,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(5,900
|
)
|
|
|
(7,155
|
)
|
|
|
(4,636
|
)
|
|
|
(5,315
|
)
|
Interest income
|
|
|
361
|
|
|
|
202
|
|
|
|
146
|
|
|
|
72
|
|
Interest expense
|
|
|
(98
|
)
|
|
|
(100
|
)
|
|
|
(105
|
)
|
|
|
(105
|
)
|
Other income (expense)
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(5,638
|
)
|
|
|
(7,052
|
)
|
|
|
(4,596
|
)
|
|
|
(5,347
|
)
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,638
|
)
|
|
$
|
(7,052
|
)
|
|
$
|
(4,596
|
)
|
|
$
|
(5,322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.10
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common
share
|
|
|
54,007
|
|
|
|
54,159
|
|
|
|
54,165
|
|
|
|
54,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On February 23 and February 25, 2009, we entered into
definitive agreements with investors to sell up to approximately
44.7 million shares of our common stock for gross proceeds
of approximately $4.5 million ($4.1 million net of
expenses) in a registered direct offering. The investors agreed
to purchase the shares of common stock at a negotiated purchase
price of $0.10 per share. The transaction closed on
February 26, 2009.
71
|
|
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, 2008. 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, 2008, 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.
72
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by this Item concerning
(i) identification and business experience of 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, 2009, 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 section captioned Compensation
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 section captioned Certain
Transactions 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 3:
Ratification of Selection of Independent Registered Public
Accounting Firm in the Proxy Statement.
73
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
|
|
|
|
|
44
|
|
|
|
|
45
|
|
|
|
|
46
|
|
|
|
|
47
|
|
|
|
|
48
|
|
|
|
|
49
|
|
(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.
|
|
3
|
.10(17)
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company.
|
|
4
|
.1
|
|
Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5, 3.6,
3.7, 3.8, 3.9 and 3.10.
|
|
4
|
.2(1)
|
|
Specimen common stock certificate.
|
|
10
|
.1(1)+
|
|
Form of Indemnity Agreement between the Registrant and each of
its directors and officers.
|
|
10
|
.2(1)+
|
|
Form of the Companys Incentive Stock Option Agreement
under the 2005 Equity Incentive Plan.
|
|
10
|
.3(1)+
|
|
Form of the Companys Non-statutory Stock Option Agreement
under the 2005 Equity Incentive Plan.
|
|
10
|
.4(1)+
|
|
1996 Non-Employee Directors Stock Option Plan.
|
|
10
|
.5(1)+
|
|
Form of the Companys Non-statutory Stock Option Agreement
under the 1996 Non-Employee Directors Stock Option Plan.
|
|
10
|
.6(1)+
|
|
Form of the Companys Employee Stock Purchase Plan Offering
Document.
|
|
10
|
.7(6)+
|
|
Form of the Companys Restricted Stock Bonus Agreement
under the 2005 Equity Incentive Plan.
|
|
10
|
.8(7)
|
|
Promissory Note and Security Agreement, dated July 3, 2006,
by and between the Company and Novo Nordisk A/S.
|
74
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
10
|
.9(7)
|
|
Amended and Restated Stock Purchase Agreement, dated as of
January 26, 2005, by and among the Company, Novo Nordisk
A/S and Novo Nordisk Pharmaceuticals, Inc.
|
|
10
|
.10(7)#
|
|
Asset Purchase Agreement, dated as of August 25, 2006, by
and between the Company and Zogenix, Inc.
|
|
10
|
.11(7)+
|
|
Employment Agreement, dated as of August 10, 2006, with
Dr. Igor Gonda.
|
|
10
|
.12(8)
|
|
Lease Agreement for the property located in Phase V of the
Britannia Point Eden Business Park in Hayward, California, dated
January 28, 1998, between the Company and Britannia Point
Eden, LLC.
|
|
10
|
.13(9)#
|
|
Restructuring Agreement, dated as of September 28, 2004, by
and among the Company, Novo Nordisk A/S and Novo Nordisk
Delivery Technologies, Inc.
|
|
10
|
.14(10)
|
|
Securities Purchase Agreement, dated as of December 17,
2004, by and among the Company and the purchasers named therein.
|
|
10
|
.15(11)#
|
|
Second Amended and Restated License Agreement, dated as of
July 3, 2006, by and between the Company and Novo Nordisk
A/S.
|
|
10
|
.16(12)
|
|
Consulting Agreement effective as of July 2, 2007 by and
between the Company and Norman Halleen.
|
|
10
|
.17(13)
|
|
Sublease between the Company and Mendel Biotechnology, Inc.,
dated July 11, 2007, under the Lease Agreement by and
between the Company and Hayward Point Eden I Limited
Partnership, a Delaware limited partnership, as
successor-in-interest
to Britannia Point Eden, LLC, as amended, for 3929 Point Eden
Way, Hayward, California.
|
|
10
|
.18(14)
|
|
Manufacturing Agreement between the Company and Enzon
Pharmaceuticals, Inc. dated August 8, 2007.
|
|
10
|
.19(15)#
|
|
Exclusive License, Development and Commercialization Agreement,
dated as of August 30, 2007, by and between the Company and
Lung Rx, Inc.
|
|
10
|
.20(15)#
|
|
Collaboration Agreement, dated as of August 31, 2007, by
and between the Company and CyDex, Inc.
|
|
10
|
.21(16)+
|
|
2005 Equity Incentive Plan, as amended
|
|
10
|
.22(17)+
|
|
Employee Stock Purchase Plan, as amended.
|
|
10
|
.23(18)
|
|
Amended and Restated Rights Agreement, dated as of
September 5, 2008 by and between the Company and
ComputerShare Trust Company, N.A.
|
|
10
|
.24(19)
|
|
Separation Agreement between the Company and Dr. Babatunde
Otulana, dated as of December 12, 2008.
|
|
10
|
.25(19)
|
|
Consulting Agreement for Independent Contractors between the
Company and Dr. Babatunde Otulana, effective as of
January 1, 2009.
|
|
10
|
.26(19)
|
|
International Scientific Advisory Agreement between the Company
and Dr. Babatunde Otulana, effective as of January 1,
2009.
|
|
10
|
.27(20)+
|
|
Amended and Restated form of Change of Control Agreement entered
into between the Company and certain of the Companys
senior officers.
|
|
10
|
.28(20)+
|
|
Amended and Restated Executive Officer Severance Benefit Plan.
|
|
23
|
.1
|
|
Consent of Odenberg Ullakko Muranishi & Co 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.
|
|
|
|
+ |
|
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. |
75
|
|
|
(2) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on August 14, 1998. |
|
(3) |
|
Incorporated by reference to the Companys
Form 10-K
filed on March 29, 2002. |
|
(4) |
|
Incorporated by reference to the Companys
Form S-3
(No. 333-76584)
filed on January 11, 2002, as amended. |
|
(5) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on August 13, 2004. |
|
(6) |
|
Incorporated by reference to the Companys
Form 10-K
filed on March 31, 2006. |
|
(7) |
|
Incorporated by reference to the Companys
Form S-1
(No. 333-138169)
filed on October 24, 2006, as amended. |
|
(8) |
|
Incorporated by reference to the Companys
Form 10-K
filed on March 24, 1998, as amended. |
|
(9) |
|
Incorporated by reference to the Companys
Form 8-K
filed on December 23, 2004. |
|
(10) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on August 14, 2006. |
|
(11) |
|
Incorporated by reference to the Companys
Form 8-K
filed on October 13, 2005. |
|
(12) |
|
Incorporated by reference to the Companys
Form 8-K
filed on July 11, 2007. |
|
(13) |
|
Incorporated by reference to the Companys
Form 8-K
filed on July 24, 2007. |
|
(14) |
|
Incorporated by reference to the Companys
Form 8-K
filed on August 14, 2007. |
|
(15) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on November 14, 2007. |
|
(16) |
|
Incorporated by reference to the Companys definitive proxy
statement filed on April 7, 2008. |
|
(17) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on August 8, 2008. |
|
(18) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on November 12, 2008. |
|
(19) |
|
Incorporated by reference to the Companys
Form 8-K
filed on December 19, 2008. |
|
(20) |
|
Incorporated by reference to the Companys
Form 8-K
filed on January 8, 2009. |
(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.
76
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 2009.
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 Nancy E. Pecota, 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.
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Signature
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Title
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Date
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/s/ Igor
Gonda
Igor
Gonda
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President, Chief Executive Officer and Director (Principal
Executive Officer)
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March 26, 2009
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/s/ Nancy
E. Pecota
Nancy
E. Pecota
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Vice President, Finance and Chief Financial Officer (Principal
Financial and Accounting Officer)
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March 26, 2009
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/s/ Virgil
D. Thompson
Virgil
D. Thompson
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Chairman of the Board and Director
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March 26, 2009
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/s/ Frank
H. Barker
Frank
H. Barker
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Director
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March 26, 2009
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/s/ John
M. Siebert
John
M. Siebert
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Director
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March 26, 2009
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77
EXHIBIT INDEX
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Exhibit
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No.
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Description
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3
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.1(1)
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Amended and Restated Articles of Incorporation of the Company.
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3
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.2(2)
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Bylaws of the Company, as amended.
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3
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.3(3)
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Certificate of Determination of Series A Junior
Participating Preferred Stock.
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3
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.4(4)
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Amended and Restated Certificate of Determination of Preferences
of Series A Convertible Preferred Stock.
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3
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.5(3)
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Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company.
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3
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.6(3)
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Certificate of Amendment of Certificate of Determination of
Series A Junior Participating Preferred Stock.
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3
|
.7(5)
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Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company.
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3
|
.8(5)
|
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Certificate of Amendment of Certificate of Determination of
Series A Junior Participating Preferred Stock.
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3
|
.9(6)
|
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Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company.
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3
|
.10(17)
|
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Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company.
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4
|
.1
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Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5, 3.6,
3.7, 3.8, 3.9 and 3.10.
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4
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.2(1)
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Specimen common stock certificate.
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10
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.1(1)+
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Form of Indemnity Agreement between the Registrant and each of
its directors and officers.
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10
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.2(1)+
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Form of the Companys Incentive Stock Option Agreement
under the 2005 Equity Incentive Plan.
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10
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.3(1)+
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Form of the Companys Non-statutory Stock Option Agreement
under the 2005 Equity Incentive Plan.
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10
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.4(1)+
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1996 Non-Employee Directors Stock Option Plan.
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10
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.5(1)+
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Form of the Companys Non-statutory Stock Option Agreement
under the 1996 Non-Employee Directors Stock Option Plan.
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10
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.6(1)+
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Form of the Companys Employee Stock Purchase Plan Offering
Document.
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10
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.7(6)+
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Form of the Companys Restricted Stock Bonus Agreement
under the 2005 Equity Incentive Plan.
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10
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.8(7)
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Promissory Note and Security Agreement, dated July 3, 2006,
by and between the Company and Novo Nordisk AS
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10
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.9(7)
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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.
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10
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.10(7)#
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Asset Purchase Agreement, dated as of August 25, 2006, by
and between the Company and Zogenix, Inc.
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10
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.11(7)+
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Employment Agreement, dated as of August 10, 2006, with
Dr. Igor Gonda.
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10
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.12(8)
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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.
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10
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.13(9)#
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Restructuring Agreement, dated as of September 28, 2004, by
and among the Company, Novo Nordisk A/S and Novo Nordisk
Delivery Technologies, Inc.
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10
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.14(10)
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Securities Purchase Agreement, dated as of December 17,
2004, by and among the Company and the purchasers named therein.
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10
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.15(11)#
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Second Amended and Restated License Agreement, dated as of
July 3, 2006, by and between the Company and Novo Nordisk
A/S.
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10
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.16(12)
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Consulting Agreement effective as of July 2, 2007 by and
between the Company and Norman Halleen.
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10
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.17(13)
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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.
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10
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.18(14)
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Manufacturing Agreement between the Company and Enzon
Pharmaceuticals, Inc. dated August 8, 2007.
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10
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.19(15)#
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Exclusive License, Development and Commercialization Agreement,
dated as of August 30, 2007, by and between the Company and
Lung Rx, Inc.
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10
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.20(15)#
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Collaboration Agreement, dated as of August 31, 2007, by
and between the Company and CyDex, Inc.
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10
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.21 (16)+
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2005 Equity Incentive Plan, as amended
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78
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Exhibit
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No.
|
|
Description
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10
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.22(16)+
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Employee Stock Purchase Plan, as amended.
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10
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.23(18)
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Amended and Restated Rights Agreement, dated as of
September 5, 2008 by and between the Company and
ComputerShare Trust Company, N.A.
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10
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.24(19)
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Separation Agreement between the Company and Dr. Babatunde
Otulana, dated as of December 12, 2008.
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10
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.25(19)
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Consulting Agreement for Independent Contractors between the
Company and Dr. Babatunde Otulana, effective as of
January 1, 2009.
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10
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.26(19)
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International Scientific Advisory Agreement between the Company
and Dr. Babatunde Otulana, effective as of January 1,
2009.
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10
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.27(20)+
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Amended and Restated form of Change of Control Agreement entered
into between the Company and certain of the Companys
senior officers.
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10
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.28(20)+
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Amended and Restated Executive Officer Severance Benefit Plan.
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23
|
.1
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Consent of Odenberg Ullakko Muranishi & Co LLP,
Independent Registered Public Accounting Firm.
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24
|
.1
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Power of Attorney. Reference is made to the signature page.
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31
|
.1
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Section 302 Certification of the Chief Executive Officer.
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31
|
.2
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Section 302 Certification of the Chief Financial Officer.
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32
|
.1
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Section 906 Certification of the Chief Executive Officer
and the Chief Financial Officer.
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+ |
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Represents a management contract or compensatory plan or
arrangement. |
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# |
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The Commission has granted the Companys request for
confidential treatment with respect to portions of this exhibit. |
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(1) |
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Incorporated by reference to the Companys
Form S-1
(No. 333-4236)
filed on April 30, 1996, as amended. |
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(2) |
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Incorporated by reference to the Companys
Form 10-Q
filed on August 14, 1998. |
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(3) |
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Incorporated by reference to the Companys
Form 10-K
filed on March 29, 2002. |
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(4) |
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Incorporated by reference to the Companys
Form S-3
(No. 333-76584)
filed on January 11, 2002, as amended. |
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(5) |
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Incorporated by reference to the Companys
Form 10-Q
filed on August 13, 2004. |
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(6) |
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Incorporated by reference to the Companys
Form 10-K
filed on March 31, 2006. |
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(7) |
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Incorporated by reference to the Companys
Form S-1
(No. 333-138169)
filed on October 24, 2006, as amended. |
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(8) |
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Incorporated by reference to the Companys
Form 10-K
filed on March 24, 1998, as amended. |
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(9) |
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Incorporated by reference to the Companys
Form 8-K
filed on December 23, 2004. |
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(10) |
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Incorporated by reference to the Companys
Form 10-Q
filed on August 14, 2006. |
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(11) |
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Incorporated by reference to the Companys
Form 8-K
filed on October 13, 2005. |
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(12) |
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Incorporated by reference to the Companys
Form 8-K
filed on July 11, 2007. |
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(13) |
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Incorporated by reference to the Companys
Form 8-K
filed on July 24, 2007. |
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(14) |
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Incorporated by reference to the Companys
Form 8-K
filed on August 14, 2007. |
|
(15) |
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Incorporated by reference to the Companys
Form 10-Q
filed on November 14, 2007. |
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(16) |
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Incorporated by reference to the Companys definitive proxy
statement filed on April 7, 2008. |
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(17) |
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Incorporated by reference to the Companys
Form 10-Q
filed on August 8, 2008. |
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(18) |
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Incorporated by reference to the Companys
Form 10-Q
filed on November 12, 2008. |
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(19) |
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Incorporated by reference to the Companys
Form 8-K
filed on December 19, 2008. |
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(20) |
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Incorporated by reference to the Companys
Form 8-K
filed on January 8, 2009. |
79