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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
COMMISSION FILE NO. 0-23556
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INHALE THERAPEUTIC SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3134940
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
150 INDUSTRIAL ROAD, SAN CARLOS, CA 94070
(Address of principal executive offices and zip code)
(650) 631-3100
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
$0.0001 PAR VALUE
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 /X/ No / /
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 Registrant's 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. / /
The approximate aggregate market value of voting stock held by
non-affiliates of the Registrant, based upon the last sale price of the Common
Stock on February 1, 2001 as reported by Nasdaq National Market was
approximately $1,922,029,208. Determination of affiliate status for this purpose
is not a determination of affiliate status for any other purpose.
51,414,532
(Number of shares of common stock outstanding as of February 1, 2001)
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement to be filed for our 2001
Annual Meeting of Shareholders are incorporated by reference into Part III
hereof.
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INHALE THERAPEUTIC SYSTEMS, INC.
2000 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 30
Item 3. Legal Proceedings........................................... 30
Item 4. Submission of Matters to a Vote of Security Holders......... 30
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters......................................... 31
Item 6. Selected Consolidated Financial Data........................ 33
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 34
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 38
Item 8. Consolidated Financial Statements and Supplementary Data.... 38
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 38
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 38
Item 11. Executive Compensation...................................... 41
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 41
Item 13. Certain Relationships and Related Transactions.............. 41
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 41
SIGNATURES.................................................................. 46
2
PART I
ITEM 1. BUSINESS
OVERVIEW
Inhale Therapeutic Systems, Inc. was incorporated in the state of California
in 1990 and reincorporated in the state of Delaware in 1998. Inhale's mission is
to be the pre-eminent supplier of drug delivery solutions. We are creating a
drug delivery system to deliver a wide range of drugs, including peptides,
proteins, nucleic acids and other molecules, by inhalation to the deep lung. We
are using this system principally to enable non-invasive delivery of
macromolecule drugs currently administered by injection. Our most advanced
program, which is sponsored by Pfizer Inc., is inhaleable insulin. Pfizer
commenced dosing for its Phase III clinical trials in June 1999. In addition to
our insulin program with Pfizer, we have development collaborations with
Biogen, Inc., Aventis Behring L.L.C. (formerly Centeon L.L.C., a joint venture
of Hoechst AG and Rhone-Poulenc S.A., which have now merged to form Aventis
S.A.) and Eli Lilly & Co. We also have early stage feasibility and research
collaborations with several other companies and have tested eight drugs in
clinical trials.
Currently there are approximately 35 macromolecule drugs marketed in the
United States and about 120 other such drugs in clinical trials. Sales of the
top 15 genetically engineered protein drugs (a subset of macromolecule drugs)
were estimated at $15.6 billion worldwide in 1999. Most of these drugs are
currently delivered by injection. Injections are undesirable for numerous
reasons including patient discomfort, inconvenience and risk of infection. Poor
patient acceptance of, and compliance with, injectable therapies can lead to
increased incidence of medical complications and higher disease management
costs. Alternatives to injection such as oral, transdermal and nasal delivery
have to date been commercially unattractive due to low natural
bioavailability--the amount of drug absorbed from the delivery site into the
bloodstream relative to injection. As an alternative to the invasiveness of
injection, we believe a deep lung or pulmonary delivery system could expand the
market for macromolecule drug therapies and may enable new therapeutic uses of
certain macromolecule drugs.
We are creating a proprietary platform integrating customized formulation,
dry powder processing and packaging with a proprietary inhalation device to
enable efficient, reproducible delivery of macromolecule drugs for systemic and
local lung indications. For specific drug products, we formulate and process
bulk drugs supplied by collaborative partners into dry powders, which are
packaged into individual dosing units referred to as "blisters." The blisters
are designed to be loaded into our device, which patients then activate to
inhale the aerosolized drugs whose particle size permits deep lung delivery. We
have developed an inhalation device that is being used several times per day in
outpatient trials to deliver insulin to treat diabetes. In addition, we have
demonstrated room temperature stability of a year or more for a number of
macromolecule drugs, and have scaled-up our powder processing and packaging for
late-stage clinical trials and intermediate scale commercial production.
As an alternative to invasive delivery techniques, we believe that a deep
lung delivery system could potentially expand the market for macromolecule drug
therapies by increasing patient acceptance and improving compliance, which in
turn could decrease medical complications and the associated costs of disease
management. Additionally, deep lung delivery may enable new therapeutic uses of
certain macromolecule drugs. We are focusing development efforts on applying our
pulmonary delivery system primarily to drugs that are approved for marketing or
have proven efficacy in late stage clinical trials. These drugs may be used to
treat local lung diseases or may be systemic drugs that are currently
administered through another route, such as injection.
A cornerstone of our business strategy is to work with collaborative
partners to develop and commercialize drugs for deep lung delivery. In a typical
collaboration, our partner supports the application of our technology to a
particular drug by supplying bulk quantities of the active drug, funding the
development program, overseeing clinical development, and marketing the
resulting commercial product. We typically will formulate the product and supply
the delivery system. In return, we will receive research
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and development and milestone payments during development, and revenues from dry
powder manufacturing, device supply, and royalties from sales of any commercial
products. Additionally, after the product has been approved for marketing, we
will receive royalties on commercial sales of the product and manufacturing
revenues from supplying packaged drug and devices.
In addition to Pfizer's sponsorship of the inhaleable insulin program, we
have active pulmonary delivery development programs with Biogen for
AVONEX-Registered Trademark-, an interferon beta drug used for the treatment of
Multiple Sclerosis, Aventis Behring for an alpha-1 proteinase inhibitor used to
treat genetic emphysema, and with Lilly for Forteo-TM-, a form of parathyroid
hormone being developed for the treatment of osteoporosis. We are also engaged
in early stage feasibility and research programs with respect to other
compounds. We anticipate that any product that may be developed would be
commercialized with a collaborative partner and believe that our partnering
strategy will enable us to reduce the investment required to develop a large and
diversified product portfolio.
In January 2001, we acquired all of the capital shares of Bradford Particle
Design plc, a United Kingdom company, for approximately 3.75 million in newly
issued shares of our common stock and approximately $20 million in cash.
Bradford Particle Design plc's supercritical fluid processing technology reduces
what is commonly now a multi-stage powder manufacturing process to a single step
while improving product purity and consistency. The use of this technology to
create powder particles has many potential benefits including: increasing the
number of molecules that can be formulated into drug products, improving drug
efficacy, shortening drug product development timelines, lengthening product
shelf life, reducing the risk of product recalls, and decreasing production
costs.
In late 1999, we completed the sale of approximately $108.5 million
aggregate principal amount of 6 3/4% convertible subordinated debentures due
October 13, 2006. In 2000, we entered into agreements with certain holders of
these outstanding debentures to convert their debentures into common stock in
exchange for a cash payment. To date, we have made net payments of approximately
$15.2 million in the aggregate in connection with agreements that provide for
the conversion of approximately $100.7 million aggregate principal amount of
outstanding debentures into approximately 6.3 million shares of common stock.
In February 2000, we received approximately $222.4 million in net proceeds
from the issuance of $230.0 million aggregate principal amount of convertible
subordinated notes to certain qualified institutional buyers under Rule 144A of
the Securities Act of 1933, as amended. Interest on the notes will accrue at a
rate of 5.0% per year, subject to adjustment in certain circumstances. The notes
will mature in February 2007 and are convertible into shares of our common stock
at a conversion price of $38.355 per share, subject to adjustment in certain
circumstances. In late 2000, we entered into agreements with certain holders of
these outstanding notes to convert their notes into common stock in exchange for
a cash payment. To date, we have made cash payments of approximately
$25.5 million in the aggregate in connection with agreements that provide for
the conversion of approximately $168.6 million aggregate principal amount of
outstanding notes into approximately 4.4 million shares of common stock.
In October 2000, we received approximately $223.0 million in net proceeds
from the issuance of $230.0 million aggregate principal amount of convertible
subordinated notes to certain qualified institutional buyers under Rule 144A of
the Securities Act of 1933, as amended. Interest on the notes accrue at a rate
of 3.5% per year, subject to adjustment in certain circumstances. The notes will
mature in October 2007 and are convertible into shares of our common stock at a
conversion price of $50.46 per share, subject to adjustment in certain
circumstances.
OPPORTUNITIES FOR PULMONARY DRUG DELIVERY
MACROMOLECULES
Innovations in biotechnology and recombinant techniques have led to a large
increase in the number of protein therapeutics and other macromolecule drugs
over the last several years. These drugs, which are
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identical or similar to the body's natural molecules, are enabling new therapies
for many previously untreated or poorly treated diseases. Currently,
approximately 35 macromolecule drugs are approved for marketing in the United
States and approximately 120 additional biotechnology macromolecule drugs are in
human clinical trials, many for chronic and subchronic diseases. Sales of
genetically engineered protein drugs were estimated at $15.6 billion worldwide
in 1999.
Drugs typically enter the body through one of five routes of delivery. The
four natural routes are through the digestive tract (oral), the skin
(transdermal), the mucosal surfaces (for example, nasal and sublingual), and the
lung (inhalation). Drugs are also commonly delivered by injection (subcutaneous,
intramuscular, or intravenous), bypassing the natural barrier to entry of
foreign substances provided by the skin.
Oral delivery is a common method of delivery for many small molecule drugs.
However, proteins and other macromolecules are typically destroyed by the
digestive process and are therefore delivered poorly by the oral route. In
addition, we believe that this low oral bioavailability may result in poor
dosage reproducibility for macromolecules delivered by the oral route. While
several companies are working on oral delivery for macromolecule drugs, no
commercially viable system is currently being marketed.
The size of most macromolecules makes non-invasive penetration through the
skin inefficient or ineffective. Passive transdermal delivery using "patch"
technology has not been successful to date for these large molecules since the
skin is less naturally permeable than the gastrointestinal tract. No
macromolecule drugs have been approved for marketing in the United States using
patch technology. High pressure "needleless" injection devices, which inject
proteins like insulin through the skin into the body, have been available for
many years. However, we believe these devices have not been well accepted due to
patient discomfort and relatively high cost.
Nasal delivery of proteins and peptides has been limited by low and variable
bioavailability of these molecules through the nasal mucosa. As a result of
these limitations, penetration enhancers are often used with nasal delivery
systems to achieve higher bioavailability. These enhancers may cause local
irritation to the nasal tissue and result in safety concerns with long-term use.
Only a limited number of peptides have been approved for marketing in the United
States utilizing nasal delivery. We believe these same obstacles will affect
sublingual drug delivery, which also relies on the penetration of similar tissue
in the mouth.
The principal route of administration of macromolecule drugs, particularly
proteins, has been injections. Drug injections administered in hospitals or
doctors' offices can be expensive and inconvenient to patients. Many patients
find self-injectable therapies unpleasant. As a result, injected drugs for many
chronic and subchronic diseases meet with varying degrees of patient acceptance
and compliance with the prescribed regimens, which can lead to increased
incidence of medical complications and potentially higher disease management
costs. In addition, some elderly, infirm or pediatric patients cannot administer
their own injections and require assistance, thereby increasing both the
inconvenience to these patients and the cost of therapy.
Delivery of protein and other drugs to the lungs via inhalation (pulmonary
delivery) has the potential to be a more effective route of administration of
macromolecules, with a relatively higher absorption into the bloodstream, or
bioavailability, than all alternative routes except injection. As an alternative
to invasive injections, we believe a deep lung inhalation delivery system could
increase patient acceptance and improve compliance and may enable new
therapeutic uses of certain macromolecule drugs. Pulmonary delivery is already
in use for a variety of small molecule drugs.
Approximately 35 drugs are currently approved for marketing by the Food and
Drug Administration for respiratory delivery using delivery devices such as
metered dose inhalers (MDIs), dry powder inhalers (DPIs) and nebulizers, but
none of these respiratory delivery devices were designed to optimize drug
delivery to the deep lung for absorption into the bloodstream. MDIs, DPIs and
nebulizers typically deliver only a fraction of the drug to the deep lung, with
most of the drug being lost in the delivery device or in the
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mouth and throat. Consequently, we believe that the total efficiency of such
systems is generally not high enough to be commercially feasible for systemic
delivery of most macromolecule drugs.
Pulmonary drug delivery devices currently do not provide the dosage
reproducibility and formulation stability generally needed for commercially
viable systemic macromolecule drug delivery. We believe that many MDI and DPI
systems do not provide the deep lung dosage reproducibility necessary for many
systemic applications because the patient must coordinate the breathing maneuver
with the generation of the aerosol. Further, we believe that many macromolecules
currently cannot be formulated for use in MDI systems, since macromolecule drugs
could be inactivated by the MDI formulating ingredients. In addition, we believe
that some macromolecules may also be inactivated by nebulization and that
reservoir type dry powder systems do not provide the protection needed for
long-term stability of protein and other macromolecule formulations.
We believe that an efficient and reproducible deep lung delivery system for
systemic macromolecule drugs used in the treatment of chronic and subchronic
diseases represents a significant commercial opportunity. Such a system could
improve patient acceptance of systemic macromolecule drug therapy and compliance
with prescribed regimens, thereby improving therapeutic outcomes and reducing
the costs of administration and treatment of disease. Additionally, pulmonary
delivery may enable new therapeutic uses of certain macromolecule drugs.
We also believe that the limitations of current pulmonary devices create
opportunities for a deep lung delivery system in the delivery of macromolecules
for local lung diseases. Biotechnology and pharmaceutical companies are
developing new macromolecule drugs for pulmonary diseases such as asthma, cystic
fibrosis, emphysema, lung cancer, pneumonia and bronchitis. Pulmonary delivery
is the preferred route for treating most lung diseases since application of the
drug directly to the site of action (lung) requires much less drug than systemic
administration, thereby potentially reducing systemic side effects.
OTHER MOLECULES
In addition to developing a deep lung delivery system for macromolecules, we
are investigating opportunities for pulmonary delivery of small molecules where
there is a clear, demonstrable need for an alternative drug delivery system and
where our existing technology can be applied without significant modification.
Examples include molecules that require rapid systemic absorption for efficacy,
such as analgesics and anti-emetics, molecules that undergo massive first pass
metabolism when delivered by the oral route or molecules used for local lung
delivery for diseases such as asthma that are currently delivered by sub-optimal
aerosol systems.
MDIs, existing DPIs and nebulizers have been used primarily to deliver drugs
to the upper airways of the lung for local lung applications. Some of the
problems associated with traditional small molecule aerosol delivery systems
include poor reproducibility, low efficiency, low drug payload per puff, poor
moisture barrier and, in the case of wet systems, long dosing time and potential
for microbial growth.
We believe that our technology could be used to address these problems by
providing efficient dispersion of the drug into the lungs resulting in the
reproducible delivery of a consistent amount of drug into the bloodstream. We
further believe our technology could potentially be applied economically in
market segments where it is essential that significant drug doses reach the
lung. Large amounts of drugs taken orally or through inefficient inhalers can
result in side effects, which could be avoided or reduced through more efficient
and targeted pulmonary delivery.
STRATEGY
Our goal is to become the pre-eminent supplier of drug delivery solutions.
We focused initially on inhaleable macromolecules because of the need for
non-invasive delivery of these drugs. Our growth strategy is to continue to
build on our leadership position in this field, while at the same time leverage
our
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strengths in inhalation, macromolecule formulations, and powder technologies to
enter large opportunity, non-commodity markets in these areas. Our approach is
to pick technologies and markets where we can build leadership positions through
developing or acquiring platform technologies with broad applications.
We are leveraging our technology base for other applications where our
system can provide significant market advantages. Our strategy incorporates the
following principal elements:
- DEVELOP A BROADLY APPLICABLE PULMONARY DELIVERY SYSTEM. We are developing
our non-invasive deep lung drug delivery system to be applicable to a wide
range of peptides, proteins and other molecules currently delivered by
injection or poorly delivered by inhalation or other routes. We intend to
develop effective non-invasive delivery alternatives that can: (1) expand
market penetration for existing therapeutics currently delivered by
injection, infusion or other routes; (2) commercialize new indications by
using deep lung delivery as a new route of administration; and (3) extend
existing patents or seek new patents to gain important competitive
advantages for ourselves and our partners.
- BUILD COMPETITIVE ADVANTAGE THROUGH AN INTEGRATED SYSTEMS APPROACH. We are
developing a commercially viable deep lung delivery system through an
integrated systems solution. We are combining our expertise in pulmonary
physiology and biology, aerosol science, powder science, aerosol
engineering, chemical engineering, mechanical engineering and product
design, protein formulation, fine powder processing and filling to build a
proprietary, fully-integrated system for pulmonary delivery of therapeutic
drugs. We believe that building expertise in technology across several
disciplines provides us with a significant competitive advantage.
- PARTNER WITH PHARMACEUTICAL AND BIOTECHNOLOGY COMPANIES. Our strategy is
to market our proposed products through collaborative partners. We are
seeking to work with partners that have significant clinical development
and marketing resources, and currently have collaborations with several
large pharmaceutical and biotechnology companies. For patented drug
products, we intend to partner with owners or licensees. For drugs that
are off-patent or licensed-in, we may perform initial feasibility
screening work, formulations development and early stage human clinical
trials before entering into a partner relationship for further
development. We believe this partnering strategy enables us to reduce our
cash requirements while developing a large and diversified potential
product portfolio.
- FOCUS ON APPROVED OR LATE STAGE DRUGS. To date, we have focused primarily
on drugs that either have proven efficacy and are approved for marketing
or are in late stage clinical trials. We believe that working primarily
with drugs with demonstrated efficacy reduces the technical risk of our
projects. In the future, we anticipate working on drugs at earlier stages
of development.
- EXPAND MANUFACTURING CAPABILITY. We intend to formulate, manufacture and
package dry powders for most of our drugs and to subcontract manufacturing
of our device. We believe that this strategy will provide manufacturing
economies of scale across a range of therapeutic products and expand
capacity for additional partnerships and commercial scale production.
With the acquisition of Bradford Particle Design plc, a United Kingdom
company that has pioneered the use of supercritical fluid technology, Inhale has
made a major step toward achieving its long-term goal of being the pre-eminent
supplier of drug delivery solutions. Bradford Particle Design plc, has a leading
position in the field of supercritical fluid processing technology for
pharmaceutical applications. We believe its technology has compelling advantages
and over time will become the preferred method for producing powders for a wide
range of oral, inhaleable, injectable, and other delivery applications. Bradford
Particle Design plc, has entered feasibility and collaboration agreements with
15 major pharmaceutical companies to evaluate Bradford Particle Design plc's
supercritical fluid processing technology for use with 24 different compounds.
Current partners include GlaxoSmithKline plc, AstraZeneca, and Bristol-Myers
Squibb.
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OUR DEEP LUNG DRUG DELIVERY SYSTEM
We believe that the following criteria are necessary for a commercially
viable non-invasive deep lung drug delivery system:
- SYSTEM EFFICIENCY/COST: The system must attain a certain minimum
efficiency in delivering a drug to the bloodstream as compared to
injection. Bioavailability (the percentage of drug absorbed into the
bloodstream from the lungs relative to that absorbed from injection) is
the most important element of system efficiency. Total system efficiency
is critical due to the high cost of macromolecule drugs. Total delivery
system efficiency is determined by the amount of drug lost during
manufacture, in the delivery device, in reaching the site of absorption,
and during absorption from that site into the bloodstream. We believe that
for most systemic macromolecule drugs, a non-invasive delivery system must
show total delivery system efficiency of at least 5% to 25% compared to
injection for the system to be commercially viable.
- REPRODUCIBILITY: The system must deliver a consistent and predictable
amount of drug to the lung and into the bloodstream.
- FORMULATION STABILITY: Formulations used in the system must remain
physically and chemically stable over time and under a range of storage,
shipping and usage conditions.
- SAFETY: The system should not introduce local toxicity problems during
chronic or subchronic use by a wide population of patients.
- CONVENIENCE: The system must be convenient to the patient in terms of
comfort, ease of operation, transportability and required dosage time.
We approach pulmonary drug delivery with the objective of maximizing overall
delivery system efficiency while addressing commercial requirements for
reproducibility, formulation stability, safety and convenience. To achieve this
goal, our delivery system integrates customized drug formulations and packaging
with our proprietary inhalation device. We combine an understanding of lung
biology, aerosol science, chemical engineering, mechanical engineering and
protein formulations in our system development efforts. We believe that this
interdisciplinary capability provides an important competitive advantage.
We have chosen to base our deep lung delivery system on dry powders for
several reasons. Many proteins are more stable in dry powders than in liquids.
In addition, dry powder aerosols can carry approximately five times more drug in
a single breath than typical MDIs and, for many drugs, at least 25 times more
than currently marketed liquid or nebulizer systems. We believe that a dry
powder system for drugs requiring higher doses, such as insulin and alpha-1
proteinase inhibitor, could decrease dosing time as compared with nebulizers.
We take bulk drugs supplied by our partners and then formulate and process
them into fine powders that are packaged into individual blister packages. The
blisters are designed to be loaded into our device, which patients activate to
inhale the aerosolized drugs. Once inhaled, the aerosol particles are deposited
in the deep lung, dissolved in the alveolar fluid and absorbed into the
bloodstream. Although we are in the advanced stages of developing our system
technologies, there can be no assurance that our products will ever be
successfully commercialized.
FORMULATIONS
Each macromolecule drug poses different formulation challenges due to
differing chemical and physical characteristics and dosing requirements. This
requires significant optimization work for each specific drug. We have assembled
a team with expertise in protein formulation, powder science and aerosol
science, and we are applying this expertise to develop proprietary techniques
and methods that we believe will produce stable, fillable, shippable and
dispersible dry powder drug formulations. We have developed several protein
powders which remain stable at room temperature in excess of one year. Through
our work
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with numerous macromolecules, we are developing an extensive body of knowledge
on aerosol dry powder formulations, including knowledge relating to the
physiochemical properties of particles that make up powders and the resulting
characteristics such as flowability, dispersability and solubility within the
lung, as well as the related properties and influences of various excipients. We
have filed and expect to continue to file patent applications on several of our
formulations and, through strategic acquisitions, have acquired rights to
certain U.S. and foreign patents and patent applications relating to
stabilization of macromolecule drugs in dry powder formulations.
POWDER PROCESSING
We are modifying standard powder processing equipment and developing custom
techniques to enable us to produce fine dry powders with particle aerosol
diameters of between one and five microns without significant drug degradation
or significant loss. We have scaled up powder processing to levels sufficient
for producing candidate powders for late stage clinical trials. It is expected
that production at these levels will be more than sufficient to satisfy the
needs of small volume commercial products. We are also in the process of further
scaling up our powder processing systems in order to produce quantities
sufficient for commercial production of products we believe we will need to
supply in high volumes, such as insulin. However, there can be no assurance that
we will be successful in further scaling up our powder processing on a timely
basis or at a reasonable cost, or that the powder processing system will be
applicable for every drug.
POWDER FILLING AND PACKAGING
Powders made up of fine particles intended for inhalation typically require
handling that is different than for powders comprised of larger or more massive
particles. Common practice in the pharmaceutical industry is to increase the
powder's effective particle size by various agglomerative techniques such as
pelletization, spheronization, or blending with an excipient of significantly
larger particle size, in order to yield materials that handle more favorably in
existing processing equipment such as tablet presses and capsule fillers. Thus,
currently available commercial filling and packaging systems are generally
designed for filling powders of larger particle size and mass, and are most
commonly applied to oral dosage forms. Although applications of these capsule
filling approaches to aerosol products do exist, they typically can only deliver
accurate and precise fills for much higher dose masses than one may desire.
Further still, by their method of operation they may overcompress or even damage
the morphology of fine, low density powders, and may make them much more
difficult to disperse than when in their uncompressed state. We have developed
and internally qualified a proprietary automated filling system suitable for use
in production of clinical trial supplies and, for certain products, commercial
quantities. The system has been tested across a wide variety of powders
encountered to date and its performance yields highly accurate and precise fills
across a wide range of dose masses, down to the order of a single milligram.
Subsequent aerosol performance observed with both active and passive devices is
essentially equivalent to the powder's performance when filled by hand, where it
is essentially uncompressed. We are further developing a high through-put system
for use with products whose market requirements dictate increased capacity. The
underlying technology is intended to allow its application to a broad variety of
powder types, characteristics, and a wide range of target fill masses, but there
can be no guarantee that technology will work for any or all of the intended
uses.
INHALATION DEVICE
Our proprietary pulmonary delivery device is designed to provide deep lung
delivery of therapeutic powders in a reproducible, safe and efficient manner.
The first of a series of patents applied for covering the device was granted in
the United States in October 1995. To achieve our objectives, we have designed
our pulmonary delivery device to perform the following:
- EFFECTIVELY DISPERSE FINE PARTICLES INTO AN AEROSOL CLOUD. Fine powders
have different dispersion requirements or characteristics than large
powders. Most current dry powder inhalers use larger
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powders and are not efficient in dispersing powders with aerosol diameters
of one to five microns. We have developed and are refining the dispersion
system for our device specifically for fine powders. Our device has been
designed to efficiently remove powders from the packaging, effectively
break up the powder particles and create an aerosol cloud while
maintaining the integrity of the drug.
- EFFICIENTLY AND REPRODUCIBLY DELIVER THE AEROSOL CLOUD TO THE DEEP
LUNG. We are developing a proprietary aerosol cloud handling system in our
device that is intended to facilitate deep lung powder deposition and
reproducible patient dosing. The handling system design is intended to
enable the aerosolized particles to be transported from the device to the
deep lung during a patient's breath, reducing losses in the throat and
upper airways. In addition, the aerosol cloud handling system, in
conjunction with the dispersion mechanism and materials used in the
device, is designed to reduce powder loss in the device itself.
- ELIMINATE THE USE OF PROPELLANTS TO AVOID ASSOCIATED ENVIRONMENTAL
CONCERNS AND FORMULATION DIFFICULTIES. Unlike MDIs, our device does not
use propellants. The oily surfactants required to stabilize propellant
formulations can cause aggregation of macromolecules. Current
chlorofluorocarbon propellants, which are used in most commercial MDI
systems, are being phased out in many countries due to environmental
concerns.
Leveraging our experience in aerosol physics, powder science, device
technology, and a strong understanding of patient behavior, biological
parameters, and product design, we are currently developing a new technology
platform called Solo-TM- which we believe will lead to a pocket size inhaler,
driven by a patient's breath, that has high delivery efficiency and
reproducibility. While preliminary results have been encouraging, there can no
assurance that the system will work as intended, or that it will be
manufacturable in the large volumes and at the cost levels required. In
addition, review of any drug device system by regulatory authorities introduces
many uncertainties, and there can be no guarantee of an approval for use.
The success of our deep lung drug delivery system will depend upon our
achieving sufficient formulation stability, safety, dosage reproducibility and
total system efficiency which is measured by the percentage of bulk drug
entering the manufacturing process that eventually is absorbed into the
bloodstream relative to injection for systemic indications, or the amount of
drug delivered to the lung tissue for local lung indications. The initial
screening determinant for the feasibility of pulmonary delivery of any systemic
drug is pulmonary bioavailability, which measures the percentage of the drug
absorbed into the bloodstream when delivered directly to the lungs. In addition,
a certain percentage of each drug dose may be lost at various stages of the
manufacturing process, including drug formulation, dry powder processing, or
powder filling and packaging, and in moving the drug from a delivery device into
the lungs. Excessive drug loss at any one stage or cumulatively in the
manufacturing and delivery process could render a drug commercially unfeasible
for pulmonary delivery. Formulation stability, the physical and chemical
stability of the formulated drug over time and under various storage, shipping
and usage conditions, and safety will vary with each macromolecule and the type
and amount of excipients that are used in the formulation. Dose reproducibility,
the ability to deliver a consistent and predictable amount of drug into the
bloodstream over time both for a single patient and across patient groups,
requires the development of an inhalation device that consistently delivers
predictable amounts of dry powder formulations to the deep lung, accurate unit
dose packaging of dry powder formulations and moisture resistant packaging.
There can be no assurance that we will be able to successfully develop such an
inhalation device and attendant technologies, or overcome all obstacles to
reproducible dosing.
CLINICAL STATUS SUMMARY
The following table sets forth, for both our partner development programs
and internal programs available for partnering, the drugs currently in
development, the indication(s) for the particular drug, its
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present stage of clinical development and, with respect to our partner
development programs, the identity of the corporate partner for such drug.
PARTNER DEVELOPMENT PROGRAMS
DRUG INDICATION(S) CLINICAL STATUS(1) PARTNER
- ---- --------------------- ------------------ ---------------
Insulin............................... Type 1 and 2 Diabetes Phase III Pfizer
Alpha-1 Proteinase Inhibitor.......... Genetic Emphysema Phase I Aventis Behring
AVONEX-Registered Trademark-.......... Multiple Sclerosis Phase I Biogen
Forteo-TM-............................ Osteoporosis Phase I Lilly
PROGRAMS AVAILABLE OR EXPECTED TO BE AVAILABLE FOR PARTNERING
CLINICAL
DRUG INDICATION(S) STATUS(1)
- ---- --------------------------------------- -----------
Osteoporosis, Bone Pain, Paget's
Calcitonin............................. Disease Phase I
Interleukin-1 Receptor................. Asthma Phase I/II
Undisclosed Non-Protein, Non-Peptide... Not Released Phase II
Undisclosed Non-Protein, Non-Peptide... Not Released Phase I
Undisclosed Non-Protein, Non-Peptide... Not Released Preclinical
Undisclosed Protein.................... Not Released Preclinical
- ------------------------
(1) Clinical Status means:
Phase III--large-scale clinical trials conducted to obtain regulatory
approval to market and sell a drug; initiated following encouraging Phase II
trial results.
Phase II--clinical trials to establish dosing and efficacy in patients.
Phase I--clinical trials in healthy subjects to test safety, and for drugs
with systemic applications, to test bioavailability compared with injection.
Preclinical--formulation development and animal testing in preparation for
human trials.
OUR PARTNER DEVELOPMENT PROGRAMS
In general, our partnership arrangements provide funding for development,
payments upon the achievement of certain milestones and royalty and
manufacturing revenues upon the commencement of commercial sales. The
arrangements are cancelable by the partner at any time without significant
penalty.
INSULIN PROGRAM
Insulin is a protein hormone naturally secreted by the pancreas to induce
the removal of glucose from the blood into cells. Diabetes, the inability of the
body to properly regulate blood glucose levels, is caused by insufficient
production of insulin by the pancreas or insufficient use of the insulin that is
secreted. Over time, high blood glucose levels can lead to failure of the
microvascular system, which may lead to blindness, loss of circulation, kidney
failure, heart disease or stroke. Insulin is currently marketed only in
injectable form. Insulin is supplied by various manufacturers, including Lilly,
Novo-Nordisk A/S and Aventis.
According to the United States Centers for Disease Control and Prevention,
approximately 16 million people in the United States have diabetes;
10.3 million of which are diagnosed with diabetes and another 5.4 million of
which have undiagnosed diabetes, and 798,000 new cases are diagnosed each year.
All Type 1 diabetics, estimated at between 5% and 15% of all diabetics, require
insulin therapy. Type 1 diabetics require both a baseline treatment of
long-acting insulin and multiple treatments of regular, or short acting, insulin
throughout the day. Type 2 diabetics, depending on the severity of their
disease, may or may not
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require insulin therapy. Type 2 diabetics who use insulin are best treated with
regular insulin and sometimes require long-acting insulin as well. Because of
the inconvenience and unpleasantness of injections, many Type 2 patients who do
not require insulin to survive, despite the fact that they would benefit from
it, are reluctant to start treatment.
Regular insulin is generally administered 30 minutes before mealtimes and
generally is given only twice a day. A ten-year study by the National Institutes
of Health, however, demonstrated that the side effects of diabetes could be
significantly reduced by dosing more frequently. The NIH study recommended
dosing regular insulin three to four times per day, a regimen which would more
closely mirror the action of naturally produced insulin in non-diabetics.
Because of the risk of severe hypoglycemia, this course of treatment is not
recommended for children, older adults, people with heart disease or with a
history of frequent severe hypoglycemia. In addition, many patients are
reluctant to increase their number of daily doses because they find injections
unpleasant and inconvenient.
Pursuant to a collaborative agreement originally entered into in
January 1995, Pfizer and we are developing an inhaled version of regular insulin
that can be administered in one to three blisters per dose using our deep lung
delivery system. We believe that our delivery system could provide increased
user convenience and result in greater patient compliance by eliminating some
injections for Type 1 and Type 2 patients and all injections for some Type 2
patients. In addition, we believe that because inhaleable insulin has a more
rapid onset of action than injectible insulin, it offers simpler pre-meal dosing
than the slower acting regular insulin.
Phase I and Phase IIa clinical trials indicated that pulmonary insulin was
absorbed systemically, reduced blood glucose levels and provided the same
control of diabetes as injected insulin. In October 1996, Pfizer initiated a
multi-site Phase IIb outpatient trial to include up to 240 diabetes patients,
the results of which were announced in June 1998. In 70 Type 1 diabetics treated
with either inhaled or conventional injected insulin therapy for three months,
blood levels of hemoglobin A1c, or "HbA1c," the best index of blood glucose
control, were statistically equivalent. Virtually identical results were
obtained in a group of Type 2 diabetics. In September 1998, Pfizer released
additional Phase II data from a study of diabetics whose blood glucose was
poorly controlled by oral agents alone. In that study, patients who were given
inhaleable insulin in addition to their oral medications showed marked
improvement in their blood glucose control.
In November 1998, Pfizer and Aventis announced that they entered into a
worldwide agreement to manufacture insulin and to co-develop and co-promote
inhaleable insulin. Under the terms of the agreement, Pfizer and Aventis agreed
to construct a jointly owned, state-of-the-art insulin manufacturing plant in
Frankfurt, Germany. Pfizer and Aventis have reported plans to invest over
300 million DM in this new plant which is projected to be the largest of its
kind worldwide and would employ about 200 people. The building's foundation was
laid at the Frankfort Hoechst Industrial Park in Spring 1999 and is still under
construction. Until its completion, Pfizer will provide us with biosynthetic
recombinant insulin for powder processing from Aventis's existing plant. We will
continue to have responsibility for manufacturing powders and supplying delivery
devices and will receive a royalty on inhaleable insulin products marketed
jointly by Pfizer and Aventis.
In June 1999, Pfizer began dosing in the Phase III clinical trials and is
currently testing inhaleable insulin at more than 120 Phase III sites.
In June 2000, we reported new data on patients using inhaleable insulin
therapy from a Phase II continuation, or extension, study being conducted by
Pfizer and Aventis. The goal of the extension study was to determine if safety
and efficacy results from previously reported short-term Phase II clinical
trials could be maintained long term. These data showed that HbA1c, the
long-term measurement of blood glucose control, remained stable in patients for
up to 30 months of therapy. At the time that this data was compiled, 83 patients
had completed 24 months of inhaleable therapy. Further data presented indicated
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similar results for patients who completed 30 months of therapy. Additionally,
the results of four different lung function tests showed that lung function was
sustained during the course of treatment.
In January 1995 and October 1996, Pfizer made two $5.0 million equity
investments in our company.
ALPHA-1 PROTEINASE INHIBITOR PROGRAM
In January 1997, we entered into a collaborative agreement with Aventis
Behring to develop a pulmonary formulation of alpha-1 proteinase inhibitor to
treat patients with alpha-1 antitrypsin deficiency, or genetic emphysema.
Alpha-1 proteinase inhibitor is approved in the United States and several
European countries for augmentation treatment of alpha-1 antitrypsin deficiency.
Current treatment is given by systemic intravenous infusion on a weekly basis.
This "replacement therapy" consists of a concentrated form of alpha-1 proteinase
inhibitor derived from human plasma. Under the terms of the collaboration,
Aventis Behring will receive commercialization rights worldwide excluding Japan
and we will receive royalties on product sales, an up-front signing fee and up
to an estimated $15.0 million in research and development funding and milestone
payments.
The two companies have completed preclinical work that indicates our dry
powder formulation of Aventis Behring's alpha-1 proteinase inhibitor has the
potential to significantly improve the efficiency of delivery compared with
current infusion therapy. We believe our pulmonary delivery system could
significantly reduce the amount of drug needed for genetic emphysema therapy
since alpha-1 proteinase inhibitor could be delivered directly to the lung where
it acts. Aventis Behring is currently negotiating to secure rights under patents
that have been granted in Europe directed to aerosol formulations for the
treatment of the lung containing serine protease inhibitors, including alpha-1
proteinase inhibitor. Phase I clinical trials have been completed.
AVONEX-REGISTERED TRADEMARK- PROGRAM
In February 1999, we entered into a collaborative agreement with Biogen to
develop an inhaleable formulation of Biogen's proprietary Interferon-Beta-1a,
marketed as AVONEX-Registered Trademark-, for the treatment of Multiple
Sclerosis. Multiple Sclerosis is a neurological disorder characterized by
plaques or lesions on the myelin sheath, a protective covering that shields the
nerve fibers in the brain and spinal cord. Multiple Sclerosis is reported to be
the most common chronic neurological condition of young adults in North America
and Europe, with an estimated prevalence in the U.S. of more than 250,000
people. AVONEX-Registered Trademark- is the first product in North America that
has been proven in a clinical trial to reduce the rate at which high-risk
individuals develop clinically definite Multiple Sclerosis.
Dosing for the Phase IA clinical trial of inhaleable
AVONEX-Registered Trademark- began in April 2000 and is now complete. Under the
terms of the collaboration agreement, Biogen provides us with bulk
AVONEX-Registered Trademark- for formulation into a dry powder for inhalation
into the deep lung. We manufacture and package the dry powder and supply
inhalation devices. Biogen is responsible for clinical development,
commercialization and worldwide marketing of inhaleable
AVONEX-Registered Trademark-. In return for developing inhaleable
AVONEX-Registered Trademark-, we will receive royalties on product sales,
milestone payments and an estimated $25.0 million in research and development
funding.
FORTEO-TM- PROGRAM
In January 1997, we entered into a collaborative agreement with Lilly to
develop an inhalable formulation of Forteo-TM-, a version of parathyroid
hormone, PTH 1-34, used in the treatment of osteoporosis. At that time,
osteoporosis was estimated to affect approximately 25 million Americans, mostly
women. If not prevented or left untreated, osteoporosis can progress painlessly
until a bone breaks. As many as 35,000 people die each year from a cause
associated with hip fractures caused by osteoporosis, primarily due to
complications that result from surgery or from being confined to bed.
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In late 1998, unexpected observations from a long-term test in rats of the
injectable version of this osteoporosis drug led Lilly to suspend further
clinical development of the injectable and pulmonary versions of Forteo-TM-
pending further analysis. In September 2000, we announced the reinitiation of
the Forteo-TM- development program with Lilly. Under the terms of the agreement
we will receive up to an estimated $20.0 million in research, development and
milestone payments. Lilly will receive global commercialization rights for the
pulmonary delivery of the products and we will receive royalties on any marketed
products. We will manufacture packaged powders for and supply inhalation devices
to Lilly.
OUR PROGRAMS AVAILABLE FOR PARTNERING
CALCITONIN PROGRAM
We are funding a proprietary program to develop a pulmonary formulation of
calcitonin for the treatment of osteoporosis, bone pain and Paget's disease.
Calcitonin is a peptide hormone secreted by the thyroid gland that inhibits bone
resorption and lowers serum calcium. Calcitonin is available in two forms, fish
and human. Calcitonin is administered daily or every other day by injection in
the United States. In the United States, salmon calcitonin is approved for the
treatment of postmenopausal osteoporosis, Paget's disease, hypercalcemia of
cancer and bone pain. Human calcitonin is approved for Paget's disease and bone
pain. Paget's disease is a chronic disorder of the adult skeleton, in which
localized areas of bone become hyperactive and are replaced by a softened and
enlarged bone structure. About 3% of Caucasians in the United States over age 60
have Paget's disease. Hypercalcemia occurs as a result of excessive serum
calcium levels caused by hyperparathyroidism and malignancy. It occurs in
approximately 10-20% of cancer patients.
In April 1997, we announced the successful completion of Phase I trials to
investigate the tolerability and bioavailability of pulmonary delivery of a dry
powder, aerosolized form of salmon calcitonin as a potential treatment for
osteoporosis, Paget's disease, hypercalcemia and other bone diseases. The
single-dose study conducted in the United Kingdom with a total of 36 fasted
healthy subjects indicated that the drug was systemically absorbed when
delivered by the pulmonary route with our pulmonary delivery system. We are
continuing work on this program while we seek a partner for further clinical
development.
INTERLEUKIN-1 RECEPTOR PROGRAM
Interleukin-1 is a cytokine that helps initiate the inflammatory response to
foreign pathogens and is believed to be a causative factor for asthma. The
interleukin-1 receptor is a molecule which can block the inflammatory action of
Interleukin-1. We collaborated with Immunex Corp. to develop a pulmonary
formulation of interleukin-1 receptor as a therapeutic product for asthma.
Initial formulation development and animal toxicology have been completed, and
the two companies successfully completed Phase I/II trials demonstrating
pulmonary delivery. This program is awaiting further work and/or licensing by
Immunex.
MOLECULE PROGRAMS FORMERLY PARTNERED WITH BAXTER
In March 1996, we entered into a collaborative agreement with Baxter
International Inc. to use our dry powder pulmonary delivery system as a
technology platform for developing and launching therapeutic products. In
connection with the collaboration, Baxter made a $20.0 million equity investment
in our company. At that time, Baxter received worldwide commercialization rights
for four non-protein/peptide drugs in exchange for up to an estimated
$60.0 million in research and development funding and progress payments.
In April 1998, we announced that the first two compounds from our
collaboration with Baxter had successfully completed Phase I and Phase II trials
respectively. In addition, it was announced that the program would focus on the
product that had completed Phase I trials as it was the product with the most
commercial potential. The technology from one of the three remaining products
was returned to us,
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leaving the development of the other two compounds in abeyance. In
October 1998, we announced that we had reached an agreement with Baxter to amend
their collaborative agreement to facilitate signing a new corporate partner to
fund further development and commercialization of the undisclosed compound that
had been their focus since April 1998. Baxter's obligations under that amendment
expired in September 1999. As a result, rights to the compounds reverted to us
and are now available for other partnering opportunities.
PROPRIETARY MOLECULE PROGRAM FORMERLY PARTNERED WITH LILLY
In December 1997, we entered into a collaborative agreement with Lilly to
develop an aerosol formulation for an undisclosed protein product based on our
deep lung drug delivery system. In September 2000, Lilly announced that it had
decided to discontinue development of this therapeutic product which is
currently in preclinical development. As a result, we are free to develop the
product further independently or in collaboration with another partner.
OTHER PROGRAMS
In addition to the above mentioned programs, we have conducted and continue
to conduct feasibility studies of additional drug formulations both on our own
account and in cooperation with potential partners. We will continue to pursue
these and other feasibility programs to determine the potential for
collaborative development programs with respect to these drugs. Included among
such studies is initial research on a long-acting inhaleable insulin. Some
diabetic patients require a long-acting insulin to maintain baseline insulin
levels. A long-acting, inhaleable form of insulin could be used by these
patients as a supplement to short-acting, mealtime inhaleable insulin. This
program is part of a broader sustained release program announced by us in
January 1999.
MANUFACTURING
We generally plan to formulate, manufacture and package the powders for our
deep lung delivery products and to subcontract the manufacture of our
proprietary pulmonary delivery devices. Under our collaborative agreement with
Pfizer to develop inhaleable insulin, we will manufacture insulin powders and
Pfizer will be primarily responsible for filling blisters. The terms of the
collaborative agreement with Pfizer provide that prior to the commercialization
of its first products, we must build and have validated a powder processing
facility and must have validated a device manufacturer or manufacturers. We
believe our manufacturing strategy will enable it to achieve the following:
- provide economies of scale by utilizing manufacturing capacity for
multiple products;
- improve our ability to retain any manufacturing know-how; and
- allow our customers to bring pulmonary delivery products to market faster.
We have built a powder manufacturing and packaging facility in San Carlos,
California capable of producing powders in quantities sufficient for clinical
trials. This facility has been inspected and licensed by the State of California
and is used to manufacture and package powders under current good manufacturing
practices. We are expanding our facility to meet our future commercial
manufacturing commitments.
We are working to further scale-up our powder processing to a larger
production scale system and to further develop the necessary powder packaging
technologies. Fine particle powders and small quantity packaging (such as those
to be used in our delivery system) require special handling. Current commercial
packaging systems are designed for filling larger quantities of larger particle
powders and therefore must be modified to dispense finer particles in the small
quantities we require. We have developed and internally qualified a proprietary
prototype automated filling system which we believe is capable of supporting our
requirements through Phase III trials and into commercial production for some
products.
15
We are developing a higher capacity automated filling unit capable of filling
blisters on a production scale for moderate and large volume products. There can
be no assurance that we will be able to successfully manufacture product on this
autofiller system in a timely manner or at commercially reasonable cost. Any
failure or delay in further developing such technology would delay product
development or inhibit commercialization of our products and would have a
materially adverse effect on us.
Our proprietary inhalation device has been developed for commercial use and
is being used in the Phase III insulin and other trials. We have identified and
have established formal supply agreements with contract manufacturers that we
believe have the technical capabilities and production capacity to manufacture
our pulmonary delivery devices. It is believed that these contract manufacturers
can successfully receive the device technology and know-how transferred from our
device development group, scale up the manufacturing process, and meet the
requirements of current good manufacturing practices. There can be no assurance
that we will be able to maintain satisfactory contract manufacturing on
commercially acceptable terms, if at all. Our dependence upon third parties for
the manufacture of our inhalation device may adversely affect our cost of goods
and our ability to develop and commercialize products on a timely and
competitive basis.
GOVERNMENT REGULATION
The research and development, clinical testing, manufacture and marketing of
pulmonary drug delivery systems are subject to regulation by the United States
Food and Drug Administration and by comparable regulatory agencies in other
countries. These national agencies and other federal, state and local entities
regulate, among other things, research and development activities and the
testing (in vitro and in clinical trials), manufacture, safety, effectiveness,
labeling, storage, record keeping, approval, advertising and promotion of our
products.
The process required by the FDA before a pulmonary drug delivery system may
be marketed in the United States depends on whether the compound has existing
approval for use in other dosage forms. If the drug is a new chemical entity
that has not been approved, the process includes the following:
- extensive preclinical laboratory and animal testing;
- submission of an Investigational New Drug application, or IND
- adequate and well-controlled human clinical trials to establish the safety
and efficacy of the drug for the intended indication: and
- submission to the FDA for approval of a New Drug Application, or NDA, with
respect to drugs or a Biological License Application, or BLA, with respect
to biological products.
If the drug has been previously approved, the approval process is similar,
except that certain preclinical tests relating to systemic toxicity normally
required for the IND and NDA/BLA application may not be necessary.
Preclinical tests include laboratory evaluation of product chemistry and
animal studies to assess the potential safety and efficacy of the product and
its formulation. Pulmonary drug products must be formulated according to current
good manufacturing practices, and pre-clinical safety tests must be conducted by
laboratories that comply with FDA good laboratory practices regulations. The
results of the pre-clinical tests are submitted to the FDA as part of an IND
application and are reviewed by the FDA before clinical trials can begin.
Clinical trials may begin 30 days after receipt of the IND by the FDA, unless
the FDA raises objections during that period.
Clinical trials involve the administration of the drug to healthy volunteers
or to patients under the supervision of a qualified medical investigator
according to an approval protocol. Clinical trials are conducted in accordance
with protocols that detail the objectives of the study, the parameters to be
used to monitor participant safety and efficacy or other criteria to be
evaluated. Each protocol is submitted to the
16
FDA as part of the IND. Each clinical study is conducted under the auspices of
an independent Institutional Review Board, or IRB. The IRB considers, among
other things, ethical factors, the potential risks to subjects participating in
the trial and the possible liability of the institution. The IRB also approves
the consent form signed by the trial participants.
Clinical trials are typically conducted in three sequential phases, but the
phases may overlap. In Phase I, the initial introduction of the drug into
healthy human subjects, the product generally is tested for tolerability,
pharmacokinetics, absorption, metabolism and excretion. Phase II involves
studies in a limited patient population to:
- determine the efficacy of the product for specific targeted indications;
- determine dosage tolerance and optimal dosage and regimen of
administration; and
- identify possible adverse effects and safety risks.
After Phase II trials demonstrate that administration of the drug by the
pulmonary route is effective and has an acceptable safety profile, Phase III
trials are undertaken to evaluate further clinical efficacy and safety within an
expanded patient population at geographically dispersed clinical study sites.
The FDA, the clinical trial sponsor, the investigators or the IRB may suspend
clinical trials at any time if any one of them believe that study participants
are being exposed to an unacceptable health risk.
The results of product development, pre-clinical studies and clinical
studies are submitted to the FDA as an NDA/BLA for approval of the marketing and
commercial shipment of the pulmonary drug product. The FDA may deny an NDA/BLA
if applicable regulatory criteria are not satisfied or may require additional
clinical testing. Even if such data are submitted, the FDA may ultimately decide
that the NDA/ BLA does not satisfy the criteria for approval. Product approvals,
once obtained, may be withdrawn if compliance with regulatory standards are not
maintained or if safety concerns arise after the product reaches the market. The
FDA may require post-marketing testing and surveillance programs to monitor the
effect of pulmonary drug products that have been commercialized and has the
power to prevent or limit future marketing of the product based on the results
of such programs.
Each domestic drug product manufacturing establishment must be registered
with, and approved by, the FDA. Drug product manufacturing establishments
located in California also must be licensed by the State of California.
Establishments handling controlled substances must be licensed by the United
States Drug Enforcement Administration. Domestic manufacturing establishments
are subject to biennial inspections by the FDA for compliance with current good
manufacturing practices. We are also subject to U.S. federal, state and local
regulations regarding workplace safety, environmental protection and hazardous
and controlled substance controls, among others.
Many of the drugs we are working on are already approved for marketing by
the FDA in another form and by another route. We believe that when working with
approved drugs, the approval process for delivery by pulmonary drug products may
require less time and fewer tests than for new chemical entities. However, we
expect that our formulations may use excipients not currently approved for
pulmonary use. Use of these excipients will require additional toxicological
testing that may increase the costs of or lengthen the time to gain regulatory
approval. In addition, regulatory procedures as they relate to our products may
change as regulators gain experience in the area of macromolecules, and any such
changes may delay or increase the cost of regulatory approval.
For products currently under development, our device is considered to be
part of a drug/device combination for deep lung delivery of each specific
molecule. Prior to submission of an IND, the FDA Center and division within the
FDA Center responsible for the review of the IND and NDA/BLA will be identified.
In the case of our products, either the Center for Drug Evaluation and Research
or the Center for Biologics Evaluation and Research, in consultation with the
Center for Devices and Radiological Health, could be involved in the review.
However, one Center is designated as the Center which has the
17
lead responsibility for regulating the product. The jurisdiction within the FDA
is based on the primary mode of action of the drug and is identified in the
FDA's intercenter agreement.
We expect that our partners generally will be responsible for clinical and
regulatory approval procedures, but we may participate in this process by
submitting to the FDA a drug master file developed and maintained by us which
contains data concerning the manufacturing processes for the device or drug
product. The clinical and manufacturing development and regulatory review
process generally takes a number of years and requires the expenditure of
substantial resources. Our ability to manufacture and sell products developed
under contract depends upon the partner's completion of satisfactory clinical
trials and success in obtaining marketing approvals. We may prepare and submit
an IND application and perform initial clinical studies before licensing a
product to a corporate partner. Our business strategy contemplates performing
more of these studies in the future.
Sales of our products outside the United States are subject to local
regulatory requirements governing clinical trials and marketing approval for
drugs and pulmonary delivery systems. Such requirements vary widely from country
to country.
Prior to marketing a new dosage form of any drug, including one developed
for use with our pulmonary drug delivery system, the product must undergo
rigorous preclinical and clinical testing and an extensive review process
mandated by the FDA and equivalent foreign authorities regardless of whether or
not such drug was already approved for marketing in another dosage form. These
processes generally take a number of years and require the expenditure of
substantial resources. None of our proposed products has yet been submitted to
the FDA for marketing approval. We have no experience obtaining such regulatory
approval and intend to rely on our partners to fund clinical testing and to
obtain product approvals.
In developing the device component of our technology, we have sought to
develop our quality systems and design engineering function in adherence to the
principles of design control for medical devices as set out in the applicable
regulatory guidance. Although hybrid drug-device products are typically reviewed
as a drug, we have sought to adhere to the design control approach both as a
good business practice, and because it is clear that the drug and biologic
Centers of the FDA and other worldwide agencies are moving in this direction. In
the EU, this has already taken place and delivery devices are viewed as separate
entities and are subject to review as such under the Medical Device Directive.
In the US, although not yet formally required, it is our intention to comply
with the FDA regulations for devices and develop our device technology in
compliance with design control principles. We have not yet successfully applied
for and been granted approval for any of our device products or technologies,
and there can be no assurance that products designed by us and built by our
contract manufacturers will be approved, or meet approval requirements on a
timely basis.
PATENTS AND PROPRIETARY RIGHTS
Our policy is to apply for patent protection for the technology, inventions
and improvements deemed important to the success of our business. We also rely
upon trade secrets, know-how, continuing technological innovations and licensing
opportunities to maintain and further develop our competitive position. We plan
to defend aggressively our proprietary technology and any issued patents.
We expect that our integrated system for pulmonary delivery of both large
and small molecule drugs will yield innovations in dry powder formulations,
powder processing, powder packaging and device design. It is our strategy to
build proprietary positions in each of these technological areas. Our success
will depend in part upon our ability to protect our proprietary technology from
infringement, misappropriation, duplication and discovery. We have filed patent
applications covering certain aspects of our device and powder processing
technology and powder formulations and pulmonary route of delivery for certain
molecules, and plan to file additional patent applications. There can be no
assurance that any of the patents applied for by us will issue, or that any
patents that issue will be valid and enforceable. Even if
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such patents are enforceable, we anticipate that any attempt to enforce our
patents could be time consuming and costly.
We currently have 106 issued U.S. and foreign patents covering certain
aspects of our technology and have a number of patent applications pending.
Among the significant patents we have received from the United States Patent and
Trademark Office, or the "PTO", are the following:
- Patent No. 5,458,135 (October 17, 1995) and Patent No. 6,138,668
(October 31, 2000) for a pulmonary delivery device and its use in a method
for delivering aerosolized (including powder) formulations of drugs to the
lung.
- Patent No. 5,607,915 (March 4, 1997), Patent No. 5,814,607 (September 29,
1998) and Patent No. 6,080,721 (June 27, 2000) for pulmonary delivery of
active fragments of parathyroid hormone (PTH).
- Patent No. 5,654,007 (August 5, 1997), Patent No. 5,922,354 (July 13,
1999) and Patent No. 6,103,270 (August 15, 2000) for systems and methods
for processing fine dispersible powders.
- Patent No. 5,740,794 (April 21, 1998) for a method and means to access a
packaged drug, to break up a dry powder drug into particles with
compressed air (aerosolize), and to transport the aerosolized drug into a
holding chamber.
- Patent No. 5,775,320 (July 7, 1998) for a method and means for dispersing
a dry-powder or liquid drug, and transferring the drug in its aerosolized
"cloud" form to a holding chamber where it is held until a patient is
ready to inhale, as well as a method and means to pull in atmospheric
"chase" air following the initial inhalation to help push the drug into
the deep lung.
- Patent No. 5,780,014 (July 14, 1998) and Patent No. 5,993,783
(November 30, 1999) for methods, means and compositions for pulmonary
delivery of dry powder alpha1-antitrypsin, a proteinase inhibitor, for
administration to a patient.
- Patent No. 5,785,049 (July 28, 1998) and Patent No. 6,089,228 (July 18,
2000) for methods and means for aerosolizing dry powders through use of a
high pressure gas stream to draw dry powder from a receptacle such as a
blister pack. We utilize the design described therein to achieve efficient
aerosolization of fine dry powders to enable deep lung delivery for
systemic absorption.
- Patent No. 5,826,633 (October 27, 1998) relating to our powder handling
technologies, including the process of transferring fine powder particles
into blister packs in an un-compacted state so that they can be easily
dispersed in our pulmonary delivery system.
- Patent No. 5,928,469 (July 27, 1999) for a method for preparing storage
stable compositions. In this method, a material to be stored and a glass
forming substance are spray-dried to form stable particles.
- Patent No. 5,976,574 (November 2, 1999), Patent No. 5,985,248
(November 16, 1999), Patent No. 6,001,336 (December 14, 1999) and Patent
No. 6,077,543 (June 20, 2000) for processes for spray-drying hydrophobic
drugs in various solutions and suspensions and compositions formed by the
processes.
- Patent No. 5,994,314 (November 30, 1999) for dry powder nucleic acid
compositions and methods for their preparation.
- Patent No. 5,997,848 (December 7, 1999) for pulmonary administration of
dry powder insulin which is rapidly absorbed through the alveoli into the
systemic circulation.
- Patent No. 6,019,968 (February 1, 2000) and Patent No. 6,165,463
(December 26, 2000) for an antibody-based dry powder that is in the form
of respirable dry particles of less than 10 microns.
19
- Patent No. 6,051,256 (April 18, 2000) for our proprietary spray drying
method for preparing dry powder macromolecules.
- Patent No. 6,071,428 (June 6, 2000) for storage stable pharmaceuticals or
biological cells that are in an amorphous glassy phase and contain a
crystalline sugar hydrate.
- Patent No. 6,123,936 (September 26, 2000) for a dispersible dry powder
form of interferon in combination with a hydrophobic amino acid.
- Patent No. 6,136,346 (October 24, 2000) for a dispersible spray-dried
pharmaceutical composition containing a polypeptide excipient.
In January 2001, we acquired all the outstanding share capital of Bradford
Particle Design, providing access to its supercritical fluid processing
technology together with its intellectual property portfolio. This technology
potentially reduces what is commonly now a multi-stage powder manufacturing
process to a single step while, we believe, improving product purity and
consistency. The use of this technology to create powder particles has many
potential benefits including: increasing the number of molecules that can be
formulated into drug products, improving drug efficacy, shortening drug product
development timelines, lengthening product shelf life, reducing the risk of
product recalls, and decreasing production costs. The intellectual property
portfolio of Bradford Particle Design plc includes two issued U.S. patents, two
granted European patents and a number of applications that are pending in
various countries around the world.
In November 1999, we acquired the Alliance Pharmaceutical Corp.
PulmoSphere-TM- technology and other related assets for particle formulation and
powder processing, subject to the terms and conditions of an asset purchase
agreement. The PulmoSphere-TM- technology utilizes an emulsification process to
produce a powder having characteristics that we believe may improve efficiency
and reproducibility for drugs delivered to the lung through alternative
technologies such as MDIs as well as potentially improve drug delivery through
our proprietary deep lung drug delivery system. The assets acquired included
Alliance's intellectual property portfolio for the PulmoSphere-TM- technology
consisting of, among other things, several patent applications. With respect to
applications of the PulmoSphere-TM- technology outside the respiratory field, we
have licensed the technology back to Alliance. While Alliance has made several
representations in its agreement with us regarding its ownership rights of the
PulmoSphere-TM- technology, it is possible that third parties might assert
claims challenging Alliance's rights, and thus our rights. Even if we can defend
our rights successfully, the uncertainty regarding the status of our rights
during the time any such litigation is pending may prevent us from using the
underlying technology.
In March 1998, Initiatech, Inc. signed an agreement with us under which we
licensed technology, intellectual property, and patents for protecting
biologically active compounds in the dry state. We intend to use this technology
to expand our current technology base in stabilizing dry powder aerosol
formulations for peptides, proteins, and other macromolecules at room
temperature. Our license is exclusive for the fields of respiratory delivery of
pharmaceutical products and for any delivery form of insulin. The license
includes rights to two issued U.S. patents and a Canadian patent covering the
protection of biological materials from degradation in the dry state. Initiatech
has licensed exclusive rights to this technology from the Boyce Thompson
Institute for Plant Research, Inc.
In June 1997, we acquired the intellectual property portfolio of the
BioPreservation Division of Pafra. This portfolio includes issued U.S. and
foreign Letters Patent and pending applications relating to the stabilization of
macromolecule drugs in dry formulations. An application for reissue of the
original U.S. patent included in this portfolio is pending in the PTO. There can
be no assurance that we will be successful in obtaining a reissued patent. A
second U.S. patent from this portfolio issued to us on July 27, 1999. A granted
European patent included in this portfolio was the subject of an opposition
proceeding before the European Patent Office. The opposition hearing was held on
December 16, 1999. We successfully defended the patent and our method claims
relating to glass stabilization technology against
20
four opposing parties. In addition, in late 1999, based on claims of this
granted European patent, we filed an infringement action in the courts of the
United Kingdom against Quadrant Healthcare plc. There can be no assurance that
any of the other Pafra patent applications will be held to be valid and
enforceable. The inability to obtain or defend the Pafra patents could have a
material adverse effect on us.
We have obtained license rights to certain know-how and patent applications
owned by Genentech, Inc. covering formulations, powder processing and pulmonary
delivery of certain molecules, which we believe could be important to the
development of our business. These license rights are worldwide, nonexclusive,
sublicensable and royalty free. In 1997, Genentech successfully defended an
opposition proceeding involving a pending European patent licensed to us.
Recently, this decision was upheld on appeal. The patent issued in the United
States as Patent No. 6,099,517 and covers the pulmonary delivery of cytokines
and growth factors.
The patent positions of pharmaceutical, biotechnology and drug delivery
companies, including ourselves, are uncertain and involve complex legal and
factual issues. Additionally, the coverage claimed in a patent application can
be significantly reduced before the patent is issued. As a consequence, we do
not know whether any of our patent applications will be granted with broad
coverage or whether the claims that eventually issue will be circumvented. Since
patent applications in the United States are maintained in secrecy until patents
issue, and since publication of discoveries in scientific or patent literature
often lag behind actual discoveries, we cannot be certain that we were the first
inventor of inventions covered by our issued patents or pending patent
applications or that we were the first to file patent applications for such
inventions. Moreover, we may have to participate in interference proceedings
declared by the PTO to determine priority of invention, which could result in
substantial cost to us, even if the eventual outcome is favorable. An adverse
outcome could subject us to significant liabilities to third parties, require
disputed rights to be licensed from or to third parties or require us to cease
using the technology in dispute.
We are aware of numerous pending and issued U.S. and foreign patent rights
and other proprietary rights owned by third parties that relate to aerosol
devices and delivery, pharmaceutical formulations, dry powder processing
technology and the pulmonary route of delivery for certain powder formulations
of macromolecules. We cannot predict with any certainty which, if any, patent
references will be considered relevant to our technology by authorities in the
various jurisdictions where such rights exist, nor can we predict with certainty
which, if any, of these rights will or may be asserted against it by third
parties. There can be no assurance that we can obtain any license to any
technology that we determine we need on reasonable terms, if at all, or that we
could develop or otherwise obtain alternate technology. The failure to obtain
licenses if needed would have a material adverse effect on us.
We also rely upon trade secret protection for our confidential and
proprietary information. No assurance can be given that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets or disclose such
technology, or that we can meaningfully protect our trade secrets.
Third parties from time to time have asserted or may assert that we are
infringing their proprietary rights based upon issued patents, trade secrets or
know-how that they believe cover our technology. In addition, future patents may
issue to third parties which our technology may infringe. We could incur
substantial costs in defending ourself and our partners against any such claims.
Furthermore, parties making such claims may be able to obtain injunctive or
other equitable relief, which could effectively block our ability to further
develop or commercialize some or all of our products in the United States and
abroad, and could result in the award of substantial damages. In the event of a
claim of infringement, our partners and ourselves may be required to obtain one
or more licenses from third parties. There can be no assurance that our partners
and us will be able to obtain such licenses at a reasonable cost, if at all.
Defense of any lawsuit or failure to obtain any such required license could have
a material adverse effect on us.
21
Our ability to develop and commercialize our technology will be affected by
ours or our partners' access to the drugs which are to be formulated. Many
biopharmaceutical drugs, including some of those which are presently under
development by us, are subject to issued and pending United States and foreign
patent rights which may be owned by competing entities. There are issued patents
and pending patent applications relating to the pulmonary delivery of
macromolecule drugs, including several for which we are developing pulmonary
delivery formulations. We intend generally to rely on the ability of our
partners to provide access to the drugs which are to be formulated for pulmonary
delivery. There can be no assurance, however, that our partners will be able to
provide access to drug candidates for formulation for pulmonary delivery or
that, if such access is provided, we or our partners will not be accused of, or
determined to be, infringing a third party's rights and will not be prohibited
from working with the drug or be found liable for damages that may not be
subject to indemnification. Any such restriction on access or liability for
damages would have a material adverse effect on us.
It is our policy to require our employees and consultants, outside
scientific collaborators, sponsored researchers and other advisors who receive
confidential information from us to execute confidentiality agreements upon the
commencement of employment or consulting relationships with us. These agreements
provide that all confidential information developed or made known to the
individual during the course of the individual's relationship with us is to be
kept confidential and not disclosed to third parties except in specific
circumstances. The agreements provide that all inventions conceived by an
employee shall be our property. There can be no assurance, however, that these
agreements will provide meaningful protection or adequate remedies for our trade
secrets in the event of unauthorized use or disclosure of such information.
COMPETITION
We believe that products developed using our technology will compete on the
basis of system efficiency, dosage reproducibility, safety, patient convenience
and cost. There is intense competition to develop a solution to the non-invasive
delivery of drugs from several drug delivery and pharmaceutical companies, many
of which are much larger and have far greater resources than we do. These
include companies working on developing systems for other non-invasive routes of
delivery, such as oral, transdermal, bucal, nasal, and needle-less injections,
as well as companies working on pulmonary delivery systems. In addition, several
companies are working on sustained release injectable systems. While these
latter systems involve injections, the lower number of injections could be
competitive with our pulmonary delivery technology in certain applications. We
believe our technology and integrated pulmonary delivery systems approach
provides us with important competitive advantages in the delivery of drugs
compared with currently known alternatives. However, new drugs or further
developments in alternative drug delivery methods may provide greater
therapeutic benefits for a specific drug or indication, or may offer comparable
performance at lower cost than our proprietary deep lung drug delivery system.
With respect to pulmonary delivery, several companies are marketing and
developing DPI, MDI, liquid and nebulizer devices that could have applications
for drug delivery, including Elan Corporation, plc, which completed the
acquisition of Dura Pharmaceuticals, Inc. on November 10, 2000, Advanced
Inhalation Research, a subsidiary of Alkermes, Inc., AeroGen, Inc., and Aradigm
Corporation. Several of these companies may have or may be developing devices
that could be used for pulmonary delivery of proteins such as insulin as well as
other macromolecules. In addition, Generex Biotechnology Corporation has a
collaborative arrangement for the development of buccal delivery systems for
insulin. There can be no assurance that competitors will not introduce products
or processes competitive with or superior to ours. We intend to monitor
competitive device, powder formulations and processing activities and to
continue to focus our activities on those products for which we believe we have
and can maintain a competitive advantage. If a device or system is developed
that is superior to ours for certain applications, we may seek to obtain a
license to allow our partners to use such device with our developed powders,
although there can be no assurance that we would be able to do so.
22
Our success depends upon maintaining a competitive advantage in the
development of products and technologies for pulmonary delivery of
pharmaceutical drugs. If a competing company were to develop or acquire rights
to a better system for efficiently and reproducibly delivering macromolecule
drugs to the deep lung, a non-invasive drug delivery system which is more
attractive for delivery of drugs to the deep lung, a non-invasive delivery
system which is more attractive for the delivering of drugs than pulmonary
delivery, or an invasive delivery system which overcomes some of the drawbacks
of current invasive systems for chronic or subchronic indications (such as
sustained release systems), our business would be negatively impacted.
We are in competition with pharmaceutical, biotechnology and drug delivery
companies, hospitals, research organizations, individual scientists and
nonprofit organizations engaged in the development of alternative drug delivery
systems or new drug research and testing, as well as with entities producing and
developing injectable drugs. We are aware of a number of companies currently
seeking to develop new products and non-invasive alternatives to injectable drug
delivery, including oral delivery systems, intranasal delivery systems,
transdermal systems, buccal and colonic absorption systems. Several of these
companies may have developed or are developing dry powder devices that could be
used for pulmonary delivery of macromolecules. Many of these companies and
entities have greater research and development capabilities, experience,
manufacturing, marketing, financial and managerial resources than we do and
represent significant competition for us. Acquisitions of competing drug
delivery companies by large pharmaceutical companies could enhance competitors'
financial, marketing and other resources. Accordingly, our competitors may
succeed in developing competing technologies, obtaining FDA approval for
products or gaining market acceptance more rapidly than us. Developments by
others may render our products or technologies noncompetitive or obsolete.
EMPLOYEES AND CONSULTANTS
As of December 31, 2000, we had 485 employees, of which 419 were engaged in
research and development, including manufacturing and quality activities and 66
in general administration and business development. One hundred seventy-eight of
the employees hold advanced degrees, of which 77 are Ph.D.s. We employ
scientists and engineers with expertise in the areas of pulmonary biology,
aerosol science, powder technology, mechanical engineering, protein chemistry
and chemical engineering. None of our employees are covered by a collective
bargaining agreement and we have experienced no work stoppages. We believe that
we maintain good relations with our employees.
To complement our own expertise, we utilize specialists in regulatory
affairs, pulmonary toxicology, process engineering, manufacturing, quality
assurance, device design, clinical trial design and business development. These
individuals include certain of our scientific advisors as well as independent
consultants. See Item 10 "Directors and Executive Officers of the Registrant."
RISK FACTORS
THE FOLLOWING RISK FACTORS SHOULD BE READ CAREFULLY IN CONNECTION WITH
EVALUATING OUR BUSINESS. ANY OF THE FOLLOWING RISKS COULD MATERIALLY ADVERSELY
AFFECT OUR BUSINESS AND OPERATING RESULTS OR FINANCIAL CONDITION.
WE DO NOT KNOW IF OUR DEEP LUNG DRUG DELIVERY SYSTEM IS COMMERCIALLY FEASIBLE.
We are in an early stage of development. There is a risk that our deep lung
drug delivery technology will not be commercially feasible. Even if our deep
lung delivery technology is commercially feasible, it may not be commercially
accepted across a range of large and small molecule drugs. We have tested eight
deep lung delivery formulations in humans, but many of our potential
formulations have not been tested in humans.
23
Many of the underlying drug compounds contained in our deep lung
formulations have been tested in humans by other companies using alternative
delivery routes. Our potential products require extensive research, development
and pre-clinical (animal) and clinical (human) testing. Our potential products
also may involve lengthy regulatory review before they can be sold. We do not
know if and cannot assure that, any of our potential products will prove to be
safe and effective or meet regulatory standards. There is a risk that any of our
potential products will not be able to be produced in commercial quantities at
acceptable cost or marketed successfully. Failure to achieve commercial
feasibility, demonstrate safety, achieve clinical efficacy, obtain regulatory
approval or, together with partners, successfully market products will
negatively impact our revenues and results of operations.
WE DO NOT KNOW IF OUR DEEP LUNG DRUG DELIVERY SYSTEM IS EFFICIENT.
We may not be able to achieve the total system efficiency needed to be
competitive with alternative routes of delivery. Total system efficiency is
determined by the amount of drug loss during manufacture, in the delivery
device, in reaching the site of absorption, and during absorption from that site
into the bloodstream. Deep lung bioavailability is the percentage of a drug that
is absorbed into the bloodstream when that drug is delivered directly to the
lungs as compared to when the drug is delivered by injection. Bioavailability is
the initial screen for whether deep lung delivery of any systemic drug is
commercially feasible. We would not consider a drug to be a good candidate for
development and commercialization if our drug loss is excessive at any one stage
or cumulatively in the manufacturing and delivery process or if our deep lung
bioavailability is too low.
WE DO NOT KNOW IF OUR DEEP LUNG DRUG FORMULATIONS ARE STABLE.
We may not be able to identify and produce powdered versions of drugs that
retain the physical and chemical properties needed to work with our delivery
device. Formulation stability is the physical and chemical stability of the drug
over time and under various storage, shipping and usage conditions. Formulation
stability will vary with each deep lung formulation and the type and amount of
ingredients that are used in the formulation. Problems with powdered drug
stability would negatively impact our ability to develop and market our
potential products or obtain regulatory approval.
WE DO NOT KNOW IF OUR DEEP LUNG DRUG DELIVERY SYSTEM IS SAFE.
We may not be able to prove potential products to be safe. Our products
require lengthy laboratory, animal and human testing. Most of our products are
in preclinical testing or the early stage of human testing. If we find that any
product is not safe, we will not be able to commercialize the product. The
safety of our deep lung formulations will vary with each drug and the
ingredients used in our formulation.
WE DO NOT KNOW IF OUR DEEP LUNG DRUG DELIVERY SYSTEM PROVIDES CONSISTENT DOSES
OF MEDICINE.
We may not be able to provide reproducible dosages of stable formulations
sufficient to achieve clinical success. Reproducible dosing is the ability to
deliver a consistent and predictable amount of drug into the bloodstream over
time both for a single patient and across patient groups. Reproducible dosing
requires the development of:
- an inhalation device that consistently delivers predictable amounts of dry
powder formulations to the deep lung;
- accurate unit dose packaging of dry powder formulations; and
- moisture resistant packaging.
We may not be able to develop reproducible dosing of any potential product.
The failure to do so means that we would not consider it a good candidate for
development and commercialization.
24
WE DEPEND ON PARTNERS FOR REGULATORY APPROVALS AND COMMERCIALIZATION OF OUR
PRODUCTS.
Because we are in the business of developing technology for delivering drugs
to the lungs and licensing this technology to companies that make and sell
drugs, we do not have the people and other resources to do the following things:
- make bulk drugs to be used as medicines;
- design and carry out large scale clinical studies;
- prepare and file documents necessary to obtain government approval to sell
a given drug product; and
- market and sell our products when and if they are approved.
When we sign a collaborative development agreement or license agreement to
develop a product with a drug company, the drug company agrees to do some or all
of the things described above. If our partner fails to do any of these things,
we cannot complete the development of the product.
WE MAY NOT OBTAIN REGULATORY APPROVAL FOR OUR PRODUCTS ON A TIMELY BASIS, OR AT
ALL.
There is a risk that we will not obtain regulatory approval for our products
on a timely basis, or at all. Our product must undergo rigorous animal and human
testing and an extensive review process mandated by the FDA or equivalent
foreign authorities. This process generally takes a number of years and requires
the expenditure of substantial resources. The time required for completing such
testing and obtaining such approvals is uncertain. We have not submitted any of
our products to the FDA for marketing approval. We have no experience obtaining
such regulatory approval.
In addition, we may encounter delays or rejections based upon changes in FDA
policy, including policy relating to good manufacturing practice compliance, or
"cGMP", during the period of product development. We may encounter similar
delays in other countries.
Even if regulatory approval of a product is granted, the approval may limit
the indicated uses for which we may market our product. In addition, our
marketed product, our manufacturing facilities and we, as the manufacturer, will
be subject to continual review and periodic inspections. Later discovery from
such review and inspection of previously unknown problems may result in
restrictions on our product or on us, including withdrawal of our product from
the market. The failure to obtain timely regulatory approval of our products,
any product marketing limitations or a product withdrawal would negatively
impact our revenues and results of operations.
WE DO NOT KNOW IF OUR TECHNOLOGIES CAN BE INTEGRATED SUCCESSFULLY TO BRING
PRODUCTS TO MARKET.
We may not be able to integrate all of the relevant technologies to provide
a deep lung drug delivery system. Our integrated approach to systems development
relies upon several different but related technologies:
- dry powder formulations;
- dry powder processing technology;
- dry powder packaging technology; and
- deep lung delivery devices.
At the same time we must:
- establish collaborations with partners;
- perform laboratory and clinical testing of potential products; and
25
- scale-up our manufacturing processes.
We must accomplish all of these steps without delaying any aspect of
technology development. Any delay in one component of product or business
development could delay our ability to develop, obtain approval of or market
therapeutic products using our deep lung delivery technology.
WE MAY NOT BE ABLE TO MANUFACTURE OUR PRODUCTS IN COMMERCIAL QUANTITIES.
POWDER PROCESSING. We have no experience manufacturing products for
commercial purposes. We have only performed powder processing on the small scale
needed for testing formulations and for early stage and larger clinical trials.
We may encounter manufacturing and control problems as we attempt to scale-up
powder processing facilities. We may not be able to achieve such scale-up in a
timely manner or at a commercially reasonable cost, if at all. Our failure to
solve any of these problems could delay or prevent late stage clinical testing
and commercialization of our products and could negatively impact our revenues
and results of operations.
To date, we have relied on one particular method of powder processing. There
is a risk that this technology will not work with all drugs or that the cost of
drug production will preclude the commercial viability of certain drugs.
Additionally, there is a risk that any alternative powder processing methods we
may pursue will not be commercially practical for aerosol drugs or that we will
not have, or be able to acquire the rights to use, such alternative methods.
POWDER PACKAGING. Our fine particle powders and small quantity packaging
require special handling. We have designed and qualified automated filling
equipment for small and moderate quantity packaging of fine powders. We face
significant technical challenges in scaling-up an automated filling system that
can handle the small dose and particle sizes of our powders in commercial
quantities. There is a risk that we will not be able to scale-up our automated
filling equipment in a timely manner or at commercially reasonable costs. Any
failure or delay in such scale-up would delay product development or bar
commercialization of our products and would negatively impact our revenues and
results of operations.
INHALATION DEVICE. We face many technical challenges in further developing
our inhalation device to work with a broad range of drugs, to produce such a
device in sufficient quantities and to adapt the device to different powder
formulations. In addition, we are attempting to develop a smaller inhalation
device, which presents particular technical challenges. There is a risk that we
will not successfully achieve any of these challenges. Our failure to overcome
any of these challenges would negatively impact our revenues and results of
operations.
For late stage clinical trials and initial commercial production, we intend
to use one or more contract manufacturers to produce our drug delivery device.
There is a risk that we will not be able to maintain arrangements with our
potential contract manufacturers or effectively scale-up production of our drug
delivery devices through contract manufacturers. Our failure to do so would
negatively impact our revenues and results of operations.
WE DEPEND ON SOLE OR EXCLUSIVE SUPPLIERS FOR OUR INHALATION DEVICE AND BULK
DRUGS.
We have agreed to subcontract the manufacture of our pulmonary delivery
device before commercial production of our first product. We have identified
contract manufacturers that we believe have the technical capabilities and
production capacity to manufacture our devices and which can meet the
requirements of good manufacturing practices. We cannot be assured that we will
be able to maintain satisfactory contract manufacturing on commercially
acceptable terms, if at all. Our dependence on third parties for the manufacture
of our inhalation device may negatively impact our cost of goods and our ability
to develop and commercialize products on a timely and competitive basis.
We obtain the bulk drugs we use to formulate and manufacture the dry powders
for our deep lung delivery system from sole or exclusive sources of supply. For
example, with respect to our source of bulk
26
insulin, we have entered into a collaborative agreement with Pfizer which has,
in turn, entered into an agreement with Aventis to manufacture biosynthetic
recombinant insulin. Under the terms of their agreement, Pfizer and Aventis
agreed to construct a jointly owned manufacturing plant in Frankfurt, Germany.
Until its completion, Pfizer will provide us with insulin from Aventis's
existing plant. If our sole or exclusive source suppliers fail to provide bulk
drugs in sufficient quantities when required, our revenues and results of
operations will be negatively impacted.
WE DO NOT KNOW IF THE MARKET WILL ACCEPT OUR DEEP LUNG DRUG DELIVERY SYSTEM.
The commercial success of our potential products depends upon market
acceptance by health care providers, third-party payors like health insurance
companies and Medicare, and patients. Our products under development use a new
method of drug delivery and there is a risk that our potential products will not
be accepted by the market. Market acceptance will depend on many factors,
including:
- the safety and efficacy of products demonstrated in our clinical trials;
- favorable regulatory approval and product labeling;
- the frequency of product use;
- the availability of third-party reimbursement;
- the availability of alternative technologies; and
- the price of our products relative to alternative technologies.
There is a risk that health care providers, patients or third-party payors
will not accept our deep lung drug delivery system. If the market does not
accept our potential products, our revenues and results of operations would be
significantly and negatively impacted.
IF OUR PRODUCTS ARE NOT COST EFFECTIVE, GOVERNMENT AND PRIVATE INSURANCE PLANS
MAY NOT PAY FOR THEM.
In both domestic and foreign markets, sales of our products under
development will depend in part upon the availability of reimbursement from
third-party payors, such as government health administration authorities,
managed care providers, private health insurers and other organizations. In
addition, such third-party payors are increasingly challenging the price and
cost effectiveness of medical products and services. Significant uncertainty
exists as to the reimbursement status of newly approved health care products.
Legislation and regulations affecting the pricing of pharmaceuticals may change
before our proposed products are approved for marketing. Adoption of such
legislation and regulations could further limit reimbursement for medical
products. A government or third-party payor decision to not provide adequate
coverage and reimbursements for our products would limit market acceptance of
such products.
WE EXPECT TO CONTINUE TO LOSE MONEY FOR THE NEXT SEVERAL YEARS.
We have never been profitable and, through December 31, 2000, we have an
accumulated deficit of approximately $191.9 million. We expect to continue to
incur substantial and increasing losses over at least the next several years as
we expand our research and development efforts, testing activities and
manufacturing operations, and as we further expand our late stage clinical and
early commercial production facility. All of our potential products are in
research or in the early stages of development except for our insulin
collaboration. We have generated no revenues from approved product sales. Our
revenues to date have consisted primarily of payments under short-term research
and feasibility agreements and development contracts. To achieve and sustain
profitable operations, we must, alone or with others, successfully develop,
obtain regulatory approval for, manufacture, introduce, market and sell products
using our deep lung drug delivery system. There is a risk that we will not
generate sufficient product or contract research revenue to become profitable or
to sustain profitability.
27
WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE.
We anticipate that our existing capital resources will enable us to maintain
currently planned operations through at least the next 32 months. However, this
expectation is based on our current operating plan, which is expected to change
as a result of many factors, and we may need additional funding sooner than
anticipated. In addition, we may choose to raise additional capital due to
market conditions or strategic considerations, even if we believe we have
sufficient funds for our current or future operating plans. To the extent that
additional capital is raised through the sale of equity or convertible debt
securities, the issuance of such securities could result in dilution to our
stockholders.
We have no credit facility or other committed sources of capital. To the
extent operating and capital resources are insufficient to meet future
requirements, we will have to raise additional funds to continue the development
and commercialization of our technologies. Such funds may not be available on
favorable terms, or at all. In particular, our substantial leverage may limit
our ability to obtain additional financing. If adequate funds are not available
on reasonable terms, we may be required to curtail operations significantly or
to obtain funds by entering into financing, supply or collaboration agreements
on unattractive terms. Our inability to raise capital could negatively impact
our business.
IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS MAY SUFFER.
Our ability to commercialize our products, achieve our expansion objectives,
manage our growth effectively and satisfy our commitments under our
collaboration agreements depends on a variety of factors. Key factors include
our ability to develop products internally, enter into strategic partnerships
with collaborators, attract and retain skilled employees and effectively expand
our internal organization to accommodate anticipated growth including
integration of any potential businesses that we may acquire. If we are unable to
manage growth effectively, there could be a material adverse effect on our
business, financial condition and results of operations.
OUR PATENTS MAY NOT PROTECT OUR PRODUCTS AND OUR PRODUCTS MAY INFRINGE ON
THIRD-PARTY PATENT RIGHTS.
We have filed patent applications covering certain aspects of our device,
powder processing technology, powder formulations and deep lung route of
delivery for certain molecules, and we plan to file additional patent
applications. We currently have 106 issued U.S. and foreign patents that cover
certain aspects of our technology and we have a number of patent applications
pending. There is a risk that many of the patents applied for will not issue, or
that any patents that issue or have issued will not be valid and enforceable.
Enforcing our patent rights would be time consuming and costly.
Our access or our partners' access to the drugs to be formulated will affect
our ability to develop and commercialize our technology. Many drugs, including
powder formulations of certain drugs that are presently under development by us,
are subject to issued and pending U.S. and foreign patents that may be owned by
competitors. We know that there are issued patents and pending patent
applications relating to the deep lung delivery of large molecule drugs,
including several for which we are developing deep lung delivery formulations.
This situation is highly complex, and the ability of any one company, including
us, to commercialize a particular drug is unpredictable.
We intend generally to rely on the ability of our partners to provide access
to the drugs that are to be formulated by us for deep lung delivery. There is a
risk that our partners will not be able to provide access to such drug
candidates. Even if such access is provided, there is a risk that our partners
or we will be accused of, or determined to be, infringing a third-party's patent
rights and will be prohibited from working with the drug or be found liable for
damages that may not be subject to indemnification. Any such restriction on
access to drug candidates or liability for damages would negatively impact our
revenues and results of operations.
28
OUR COMPETITORS MAY DEVELOP AND SELL BETTER DRUG DELIVERY SYSTEMS.
We are aware of other companies engaged in developing and commercializing
pulmonary drug delivery systems and enhanced injectable drug delivery systems.
Many of these companies have greater research and development capabilities,
experience, manufacturing, marketing, financial and managerial resources than we
do and represent significant competition for us. Acquisitions of or
collaborations with competing drug delivery companies by large pharmaceutical
companies could enhance our competitors' financial, marketing and other
resources. Accordingly, our competitors may succeed in developing competing
technologies, obtaining regulatory approval for products or gaining market
acceptance before us. Developments by others could make our products or
technologies uncompetitive or obsolete. Our competitors may introduce products
or processes competitive with or superior to ours.
INVESTORS SHOULD BE AWARE OF INDUSTRY-WIDE RISKS.
In addition to the risks associated specifically with Inhale described
above, investors should also be aware of general risks associated with drug
development and the pharmaceutical industry. These include, but are not limited
to:
- changes in and compliance with government regulations;
- handling of hazardous materials;
- hiring and retaining qualified people; and
- insuring against product liability claims.
WE EXPECT OUR STOCK PRICE TO REMAIN VOLATILE.
Our stock price is volatile. In the last twelve-month period ending
February 1, 2001, based on closing prices on the Nasdaq National Market, our
stock price ranged from $23.16 to $63.31. We expect it to remain volatile. A
variety of factors may have a significant effect on the market price of our
common stock, including:
- fluctuations in our operating results;
- announcements of technological innovations or new therapeutic products;
- announcement or termination of collaborative relationships by Inhale or
our competitors;
- governmental regulation;
- clinical trial results or product development delays;
- developments in patent or other proprietary rights;
- public concern as to the safety of drug formulations developed by Inhale
or others; and
- general market conditions.
Any litigation brought against us as a result of this volatility could result in
substantial costs and a diversion of our management's attention and resources,
which could negatively impact our financial condition, revenues and results of
operations.
OUR INDEBTEDNESS MAY RESULT IN FUTURE LIQUIDITY PROBLEMS.
As of December 31, 2000, we had approximately $319.3 million in long-term
obligations, which represents an increase of $205.9 million from the prior year.
In October 2000, in connection with our build-to-suit lease transaction we
incurred additional lease liabilities. Also, in October 2000 we issued
29
approximately $230.0 million of 3.5% convertible subordinated notes due
October 2007. This increased indebtedness has and will continue to impact us by:
- increasing our interest expense and related debt service costs;
- making it more difficult to obtain additional financing; and
- constraining our ability to react quickly in an unfavorable economic
climate.
Currently, we are not generating sufficient cash flow to satisfy the annual
debt service payments that will be required as a result of the consummation of
sale of the notes. This may require us to use a portion of the proceeds from the
sales of the notes to pay interest or borrow additional funds or sell additional
equity to meet our debt service obligations. If we are unable to satisfy our
debt service requirements, substantial liquidity problems could result, which
would negatively impact our future prospects. As of December 31, 2000 we had
cash and short-term investments valued at approximately $484.8 million.
ITEM 2. PROPERTIES
We currently lease facilities in San Carlos, Palo Alto and Belmont,
California.
We currently occupy a facility in San Carlos that covers approximately
157,000 square feet and is leased pursuant to a 15-year lease agreement. This
facility serves as our corporate headquarters and is used for research and
development, manufacturing and administration. The lease provides us with an
option to lease approximately 73,000 additional square feet in the same
facility. This manufacturing facility operates under cGMP and has been approved
and licensed by the State of California to manufacture clinical supplies for use
in human clinical trials.
In October 1999, we commenced construction of a second San Carlos facility
on a 4.7 acre parcel of land that we had acquired in October 1998, in order to
expand our administrative offices and research and development capacity. This
facility consists of approximately 80,000 square feet. In October 2000, we
leased back the facility pursuant to a build-to-suit lease agreement for a
16-year term, with a 10-year option and a second 8-year option to extend the
lease. In November 2000 we began occupancy of this facility. The lease also
provides us with approximately 45,500 additional square feet in a second phase
to be built in the future along with an option to lease an additional
approximately 46,500 square feet.
Our Palo Alto facility is used for research, development and administration.
The lease covers approximately 20,000 square feet, has a five-year term, and
expires on May 31, 2003.
Our Belmont facility is used for administration, consists of approximately
8,000 square feet of offices and has a lease term expiring November 30, 2002.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our shareholders in the quarter ended
December 31, 2000.
30
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Our Common Stock trades on the Nasdaq National Market under the symbol INHL.
A two-for-one split was declared, which was effected as a 100% common stock
dividend on August 22, 2000. All share prices in the following table have been
retroactively restated to reflect this split. The table below sets forth the
high and low closing sales prices for our Common Stock (as reported on the
Nasdaq National Market) during the periods indicated.
PRICE RANGE OF
COMMON STOCK
-------------------
HIGH LOW
-------- --------
YEAR ENDED DECEMBER 31, 1999:
1st Quarter............................................... $17.313 $11.938
2nd Quarter............................................... 14.844 11.500
3rd Quarter............................................... 17.438 11.813
4th Quarter............................................... 21.844 13.438
YEAR ENDED DECEMBER 31, 2000:
1st Quarter............................................... $63.313 $20.844
2nd Quarter............................................... 54.344 23.156
3rd Quarter............................................... 56.375 40.594
4th Quarter............................................... 55.188 38.500
YEAR ENDED DECEMBER 31, 2001:
1st Quarter (through February 1, 2001).................... $48.250 $31.000
As of December 29, 2000, there were approximately 224 holders of record of
our Common Stock. We have not paid any cash dividends since our inception and do
not intend to pay any cash dividends in the foreseeable future.
SALES OF UNREGISTERED SECURITIES
In January 2001 we issued 3,752,456 shares of our common stock to the
holders of all of the existing issued ordinary share capital of Bradford
Particle Design, plc, a United Kingdom company. We issued these shares as
consideration for the acquisition of the outstanding share capital of Bradford
in a private placement exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended (the "Act") and/or Regulation D or
Regulation S promulgated under the Act. For each share of Bradford Particle
Design plc common stock we issued 1.8354 new shares of our common stock and paid
approximately $9.80 cash, for an aggregate cash payment of approximately
$20 million. The acquirers relying upon the exemption from registration afforded
by Regulation S signed forms of acceptances indicating respectively their intent
to acquire the securities for investment only and not with a view to
distribution, and also indicated that if they were an individual, then they were
residents of the United Kingdom, or if they were a corporation, limited
liability company or other entity, then the offices of the Bradford Particle
Design plc shareholder in which its investment decision was made was located in
the United Kingdom. The acquirers relying upon the exemption from registration
afforded by Regulation D signed forms of acceptances indicating respectively
their intent to acquire the securities for investment only and not with a view
to distribution, and also represented that they were "accredited investors" as
that term is defined under Rule 501 of Regulation D. Appropriate legends are
affixed to the shares issued in this transaction. Cazenove & Co. served as
financial advisor and broker to the Company in connection with the acquisition
of Bradford Particle Design plc and received $650,000 in payment of certain
fees. On February 5, 2001, a shelf registration statement for these shares of
common stock was declared effective by the SEC.
31
On November 15, 2000, Inhale issued warrants representing the right to
purchase up to an aggregate of 6,000 shares of our common stock to a University,
and several individuals who are affiliated with the University, in partial
consideration for our acquisition of certain intellectual property rights
pursuant to a License Agreement between the University and ourself. These
warrants are exercisable at $45.875 per share and terminate on November 15,
2010. These warrants and the shares of our common stock issued upon exercise of
these warrants were sold in a private placement exempt from registration under
Section 4(2) of the Act. No underwriters were involved in this offering and no
commission or remuneration was paid in connection with the sale of these
securities. The acquirers respectively indicated their intent to acquire the
securities for investment only and not with a view to distribution and
appropriate legends are affixed to the warrants issued in the transaction. The
entities acquiring the warrants were each sophisticated and deemed to be an
"accredited investor" as that term is defined under Rule 501 of Regulation D
promulgated under the Act with access to adequate information about us.
In October 2000, we issued $230 million aggregate principal amount of 3.5%
convertible subordinated notes, which are convertible at the option of the
holder, at any time on or prior to maturity into shares of our common stock. The
October 2000 notes were sold only in the United States to certain qualified
institutional buyers under an exemption from registration provided by Rule 144A
of the Act. The October 2000 notes are convertible at a conversion price of
$50.46 per share, which is equal to a conversion rate of approximately 19.8177
shares per $1,000 principal amount of notes, subject to adjustment. Interest on
the October 2000 notes will accrue at a rate of 3.5% per year subject to
adjustment in certain circumstances. We will pay interest on the October 2000
notes on April 17 and October 17 of each year, beginning April 17, 2001. The
October 2000 notes mature on October 17, 2007. We may redeem some or all of the
October 2000 notes at any time before October 17, 2003 at a redemption price
equal to $1,000 per $1,000 principal amount of notes, if the closing price of
our common stock has exceeded 150% of the conversion price then in effect for at
least 20 trading days within a period of 30 consecutive trading days ending on
the trading day before the date of mailing of the provisional redemption notice.
Upon any such provisional redemption, we will make additional payment in cash or
shares of our common stock, at our option, to compensate investors for interest
payments not yet received through the provisional redemption date. This
additional payment will be equal to $105.00 per $1,000 principal amount of
notes, less the amount of any interest actually paid on the October 2000 notes
before the call for redemption. We may redeem some or all of the October 2000
notes at any time after October 17, 2003 at certain redemption prices dependent
upon the date of redemption if the closing price of our common stock has
exceeded 120% of the conversion price then in effect for at least 20 trading
days within a period of 30 connective days. The October 2000 notes are unsecured
and subordinated to our existing and future senior indebtedness. The initial
purchasers of the 3.5% convertible notes, Merrill Lynch & Co., Deutsche Banc
Alex. Brown, Lehman Brothers, and U. S. Bancorp Piper Jaffray, received an
aggregate of $6.9 million in the form of discounts to the offering price of
these notes.
32
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
YEARS ENDED DECEMBER 31
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Contract research revenue................ $ 51,629 $ 41,358 $ 21,795 $ 16,249 $ 6,890
Operating costs and expenses:
Research and development............... 101,544 64,083 35,398 23,645 14,376
General and administrative............. 13,932 7,869 8,387 6,328 4,004
Acquired in-process research and
development.......................... 2,292 9,890 -- -- --
-------- -------- -------- -------- --------
Total operating costs and expenses....... 117,768 81,842 43,785 29,973 18,380
Loss from operations..................... (66,139) (40,484) (21,990) (13,724) (11,490)
Debt conversion premium, net............. (40,687) -- -- -- --
Interest and other income (expense),
net.................................... 9,423 2,036 3,634 3,741 1,581
-------- -------- -------- -------- --------
Net loss................................. $(97,403) $(38,448) $(18,356) $ (9,983) $ (9,909)
======== ======== ======== ======== ========
Net loss per share......................... $ (2.32) $ (1.13) $ (0.58) $ (0.36) $ (0.44)
======== ======== ======== ======== ========
Shares used in computation of net loss
per share(1)........................... 41,998 34,016 31,438 27,584 22,414
-------- -------- -------- -------- --------
DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments........................... $484,841 $138,185 $ 82,862 $100,173 $ 36,309
Working capital......................... 462,840 122,239 71,784 83,811 31,304
Total assets............................ 629,540 226,806 134,496 119,762 41,492
Long-term debt.......................... 20,118 4,895 4,940 5,102 187
Convertible subordinated debentures..... 299,149 108,450 -- -- --
Accumulated deficit..................... (191,869) (94,466) (56,018) (37,662) (27,691)
Total stockholders' equity.............. 277,883 86,629 115,881 97,093 35,061
QUARTERLY FINANCIAL DATA
The following table sets forth certain unaudited quarterly financial data
for the eight quarters ending December 31, 2000. In our opinion, the unaudited
information set forth below has been prepared on the same basis as the audited
information and includes all adjustments necessary to present fairly the
information set forth herein. The operating results for any quarter are not
indicative of results for any future period. All data is in thousands except per
common share data.
FISCAL YEAR 1999 FISCAL YEAR 2000
----------------------------------------- -----------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-------- -------- -------- -------- -------- -------- -------- --------
Contract research revenue......... $ 7,780 $ 9,877 $10,628 $ 13,073 $ 10,633 $ 13,789 $ 14,061 $ 13,146
Net loss.......................... $(5,223) $(6,006) $(7,045) $(20,174) $(28,832) $(15,747) $(13,215) $(39,609)
Net loss per share(1)............. $ (0.16) $ (0.18) $ (0.21) $ (0.59) $ (0.76) $ (0.38) $ (0.31) $ (0.87)
33
We have experienced fluctuations in our quarterly results. Our results have
included costs associated with the conversion of convertible notes and
debentures in 2000, acquisitions of various technologies, increases in research
and development expenditures, expansion of late stage clinical and early stage
commercial manufacturing facilities. We expect these fluctuations to continue
into the future.
(1) Basic and diluted net loss per share is based upon the weighted average
number of common shares outstanding. All share amounts have been adjusted to
reflect the implementation of FASB Statement No. 128 and Staff Accounting
Bulletin No. 98. The shares shown above retroactively reflect a two-for-one
split, effective August 22, 2000. See Note 1 of Notes to Financial
Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. INHALE'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS SECTION AS WELL AS IN
PART I OF THIS ANNUAL REPORT UNDER THE HEADING "RISK FACTORS."
OVERVIEW
Since our inception in July 1990, we have been engaged in the development of
a drug delivery system to deliver a wide range of drugs, including peptides,
proteins, nucleic acids and other molecules, by inhalation to the deep lung and
as part of our long-term goal to be the pre-eminent provider of the drug
delivery solutions. We have been unprofitable since inception and expect to
incur significant and increasing additional operating losses over the next
several years primarily due to increasing research and development expenditures
and expansion of late stage clinical and early stage commercial manufacturing
facilities. To date, we have not sold any commercial products and do not
anticipate receiving revenue from product sales or royalties in the near future.
For the period from inception through December 31, 2000, we incurred a
cumulative net loss of approximately $191.9 million. Our sources of working
capital have been equity and debt financings, revenues from development
contracts and short-term research and feasibility agreements, financings of
equipment acquisitions and tenant improvements and interest earned on
investments of cash.
We have generally been compensated for research and development expenses
during initial feasibility work performed under collaborative arrangements.
Partners that enter into collaborative agreements generally pay for some or all
research and development expenses and make additional payments to us as we
achieve certain key milestones. We expect to receive royalties from our partners
based on their revenues received from product sales, and to receive revenue from
the manufacturing of powders and the supply of devices. In certain cases, we may
enter into collaborative agreements under which our partners would manufacture
or package powders or supply inhalation devices, thereby potentially limiting
one or more sources of revenue for us. To achieve and sustain profitable
operations, we, alone or with others, must successfully develop, obtain
regulatory approval for, manufacture, introduce, market and sell products
utilizing our pulmonary drug delivery system. There can be no assurance that we
can generate sufficient product or contract research revenue to become
profitable or to sustain profitability.
In January 2001 we issued 3,752,456 shares of our common stock to the
holders of all of the existing issued ordinary share capital of Bradford
Particle Design, plc, a United Kingdom company. We issued these shares as
partial consideration for the acquisition of the outstanding share capital of
Bradford Particle Design plc in a private placement exempt from registration
under Section 4(2) of the Securities Act of 1933, as amended and/or
Regulation D or Regulation S promulgated under the Act. For each share of
Bradford Particle Design plc's common stock we issued 1.8354 new shares of our
common stock and paid approximately $9.80 cash, for an aggregate cash payment of
approximately $20 million.
In October 2000 we issued $230 million aggregate principal amount of 3 1/2%
convertible subordinated notes, which are convertible at the option of the
holder, at any time on or prior to maturity into shares of
34
our common stock. The October 2000 notes were sold only in the United States to
certain qualified institutional buyers under an exemption from registration
provided by Rule 144A of the Act. The October 2000 notes will mature in 2007 and
are convertible into shares of our common stock at a conversion price of $50.46
per share, subject to adjustment in certain circumstances.
In February 2000 we issued $230 million aggregate principal amount of 5%
convertible subordinated notes, which are convertible at the option of the
holder, at any time on or prior to maturity into shares of our common stock. The
February 2000 notes were sold only in the United States to certain qualified
institutional buyers under an exemption from registration provided by Rule 144A
of the Securities Act of 1933, as amended. The February 2000 notes mature in
2007 and are convertible at a conversion price of $38.355 per share, subject to
adjustment in certain circumstances. In October and November 2000 we entered
into privately negotiated agreements with certain holders of these outstanding
February 2000 notes to convert their notes into shares of our common stock in
exchange for a cash payment made by us. To date, we have made cash payments of
approximately $25.5 million in the aggregate in connection with agreements that
provide for the conversion of approximately $168.6 million principal amount of
outstanding February 2000 notes into approximately 4.4 million shares of our
common stock.
In February 2000, we entered into privately negotiated agreements with
certain holders of our outstanding 6 3/4% convertible subordinated debentures
sold in October and November 1999, providing for the conversion of approximately
$100.7 million aggregate principal amount of the outstanding debentures into
approximately 6.3 million shares of common stock for net payments of
approximately $15.2 million.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Contract research revenue was $51.6 million for the year ended December 31,
2000 compared to $41.4 million and $21.8 million for the years ended
December 31, 1999 and 1998, respectively. Revenue increased 25% in 2000 from
1999 levels and 90% in 1999 from 1998 levels. Costs of contract research revenue
approximate such revenue and are included in research and development expense.
The 25% increase in revenue for the year ended December 31, 2000 as compared
to December 31, 1999, and the 90% increase in revenue for the year ended
December 31, 1999 as compared to December 31, 1998 were both primarily due to
expansion of our existing collaborative agreement with Pfizer, and include
activities associated with the manufacture of Phase III clinical supplies.
Pfizer represented approximately 69% of our revenues for the year ended
December 31, 2000. Revenue for 2000 and 1999 included reimbursed research and
development expenses as well as the amortization of deferred up-front signing
and progress payments received from our collaborative partners. Contract
revenues are expected to fluctuate from year to year, and future contract
revenues cannot be predicted accurately. The level of contract revenues depends
in part upon future success in obtaining new collaborative agreements, timely
completion of feasibility studies, the continuation of existing collaborations
and achievement of milestones under current and future agreements.
Research and development expenses were $101.5 million for the year ended
December 31, 2000, as compared to $64.1 million and $35.4 million for the years
ended December 31, 1999 and 1998, respectively. The 58% increase in 2000 as
compared to 1999 was due to increased spending related to the scale-up of
technologies for current partnered projects, the continuing development of our
global manufacturing operations in order to support Phase III inhaleable insulin
clinical trials and commercial production, increased investment in internally
funded research and development projects for next-generation products and
non-cash compensation associated with stock options. The 81% increase in
research and development expenses in 1999 from 1998 was primarily due to
increased headcount, supplies and services to support our on-going research and
development efforts. We expect research and development spending to increase
over the next few years as we expand our development efforts under collaborative
agreements and start up our commercial operations.
35
General and administrative expenses were $13.9 million for the year ended
December 31, 2000 as compared to $7.9 million and $8.4 million for the years
ended December 31, 1999 and 1998, respectively. The 77% increase in general and
administrative expenses in 2000 from 1999 was due primarily to a non-cash
compensation charge associated with stock options and the costs associated with
supporting our increased manufacturing and development efforts, including
administrative staffing and business development activities. The 6% decrease in
expenses in 1999 from 1998 is attributed to an increased percentage of general
and administrative related costs allocated to research and development
operations. General and administrative expenses are expected to continue to
increase over the next few years as we expand our operations.
Interest income was $20.6 million for the year ended December 31, 2000 as
compared to $4.1 million and $3.9 million for the years ended December 31, 1999
and 1998, respectively. The $16.5 million increase in interest income in 2000
from 1999 and the $0.2 million increase in interest income in 1999 from 1998
were primarily due to our maintaining larger cash and investment balances,
including the proceeds of our issuance of several offerings of convertible
subordinated debentures and higher interest rates. Interest expense was
$12.1 million for the year ended December 31, 2000, as compared to $2.1 million
and $0.3 million for the years ended December 31, 1999 and 1998, respectively.
The $10 million increase in interest expense in 2000 from 1999 primarily relates
to interest paid on the various convertible subordinated notes and debentures
issued. The $1.8 million increase in interest expense in 1999 from 1998 related
to the convertible subordinated debentures issued in October 1999.
At December 31, 2000, we had federal and state net operating loss
carryforwards of approximately $187 million. These carryforwards will expire
beginning in the year 2000. Utilization of net operating loss carryforwards may
be subject to substantial annual limitations due to the ownership change
limitations provided for by the Internal Revenue Code of 1986. The annual
limitations may result in the expiration of net operating loss carryforwards
before utilization.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
On November 4, 1999, we concluded an agreement with Alliance Pharmaceutical
Corp. to acquire Alliance's PulmoSphere-TM- particle and particle processing
technology for use in respiratory drug delivery. Under the terms of the
agreement, we received the rights to PulmoSphere-TM- technology, other related
assets (including research materials, laboratory records, and certain equipment
that had been used in the development of PulmoSphere-TM- technology and the
manufacturing and testing of particles using such PulmoSphere-TM- technology),
and Alliance stock valued at $5.0 million in exchange for $15.0 million in cash
and $5.0 million of our stock. Additionally, we incurred approximately
$0.4 million of acquisition costs, which are included in the total purchase
consideration. Alliance also has the right to additional substantial payments
upon the achievement of certain milestones and royalties on a defined number of
products commercialized using the technology. Of the total purchase
consideration, $15.4 million was allocated to the assets acquired based on their
fair value on the date of acquisition. Approximately $9.9 million of the
purchase price was allocated to IPR&D and was charged as an expense in the year
ended December 31, 1999.
In the second quarter of 2000, we recorded a $2.3 million charge for
acquired in-process research and development costs ("IPR&D"). The acquisition
was recorded as a purchase and a portion of the purchase price was allocated to
IPR&D, which under current accounting rules is immediately expensed. At the date
of the acquisition, the in-process technology had no alternative future use and
did not qualify for capitalization.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily through public and private
placements of our debt and equity securities, revenues from development
contracts and short-term research and feasibility agreements,
36
financing of equipment acquisitions and tenant improvements, and interest income
earned on it's investments of cash. At December 31, 2000, we had cash, cash
equivalents and short-term investments of approximately $484.8 million.
Our operations used cash of $35.7 million, $15.3 million and $19.2 million
for the years ended December 31, 2000, 1999 and 1998, respectively. These
amounts differed from our net operating losses in these periods principally due
to increased debt conversion incentives, non-cash compensation charges
associated with stock options and depreciation expense. Additionally, we
recorded a $2.3 million and $9.9 million write-off of IPR&D charges for the
years ended December 31, 2000 and 1999, respectively.
In October 2000, we entered into a financing arrangement with a special
purpose entity to complete construction of existing office facilities and
provide financing for future capital improvements of up to $51 million. As a
result of our continuing involvement and significant influence in the special
purpose entity, and other provisions in the leasing transactions, the facility
costs and capital lease obligations of the special purpose entity are recorded
in our consolidated financial statements.
We purchased net property and equipment of approximately $53.9 million,
$20.5 million and $34.6 million during the years ended December 31, 2000, 1999
and 1998, respectively. The $33.4 million increase in 2000 is primarily due to
the purchase of property and equipment, our investment in our commercial
manufacturing facilities, including device manufacturing at third-party contract
manufacturers, and expansion of our San Carlos powder processing facilities. The
Company also invested $15.3 million in the purchase of PulmoSphere-TM-
technology in 1999, in addition to our non-cash exchange of common stock for
shares of Alliance valued at $5.0 million.
In October 1999, we received approximately $105.2 million in net proceeds
from the sale of convertible subordinated debentures. In February 2000 and
October 2000, we received approximately $206 million and $197 million,
respectively, in net proceeds from the sale of convertible subordinated notes.
This includes net payments of approximately $15.2 million and $25.5 million in
connection with agreements that provide for the conversion of approximately
$100.7 million and $168.6 million of our October 2006 and February 2007
debentures, respectively, that were outstanding at December 31, 2000.
We expect our cash requirements to continue at an accelerated rate due to
expected increases in costs associated with further research and development of
our technologies, development of drug formulations, process development for the
manufacture and filling of powders and devices, marketing and general and
administrative costs. These expenses include, but are not limited to, increases
in personnel and personnel related costs, purchases of capital equipment,
investments in technologies, inhalation device prototype construction and
facilities expansion, including the completion of our manufacturing facility and
start-up of commercial operations.
Given our current cash requirements, we believe that we will have sufficient
cash to meet our operating expense requirements for at least the next
32 months. However, we plan to continue to invest heavily in our growth and the
need for cash will be dependent upon the timing of these investments. Our
capital needs will depend on many factors, including continued scientific
progress in our research and development arrangements, potential acquisitions of
technologies, progress with preclinical and clinical trials, the time and costs
involved in obtaining regulatory approvals, the costs of developing and the rate
of scale-up of our powder processing and packaging technologies, the timing and
cost of our late stage clinical and early commercial production facility, the
costs involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims, the need to acquire licenses to new technologies and the status
of competitive products. To satisfy our long-term needs, we intend to seek
additional funding, as necessary, from corporate partners and from the sale of
securities. There can be no assurance that additional funds, if and when
required, will be available to us on favorable terms, if at all.
37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal
while at the same time maximizing yields without significantly increasing risk.
To achieve this objective, we invest in highly liquid and high quality debt
securities. Our investments in debt securities are subject to interest rate
risk. To minimize the exposure due to an adverse shift in interest rates, we
invest in short term securities and maintain an average maturity of one year or
less. A hypothetical 50 basis point increase in interest rates would result in
an approximate $0.6 million decrease (less than 0.126%) in the fair value of our
available-for-sale securities.
The potential change noted above is based on sensitivity analyses performed
on our financial position at December 31, 2000. Actual results may differ
materially. The same hypothetical 50 basis point increase in interest rates
would have resulted in an approximate $0.3 million decrease (less than 0.217%)
in the fair value of our available-for-sale securities at December 31, 1999.
Increases in interest rates could adversely affect the fair market value of
our convertible subordinated debentures, which pay a fixed rate of interest.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements for the years ended December 31, 2000,
1999 and 1998 are submitted as a separate section of this report. See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
We incorporate by reference the information concerning our directors set
forth under the heading "Election of Directors" in our definitive Proxy
Statement to be filed for our 2001 Annual Meeting of Stockholders.
EXECUTIVE OFFICERS AND DIRECTORS.
The following table sets forth the names, ages and positions of the
executive officers and directors as of December 31, 2000:
NAME AGE POSITION
- ---- -------- ----------------------------------------------------------
Robert B. Chess................... 44 Chairman
Ajit S. Gill...................... 52 Chief Executive Officer, President and Director
Brigid A. Makes................... 45 Vice President, Finance and Administration, Chief
Financial Officer and Assistant Secretary
John S. Patton, Ph.D.............. 54 Vice President, Research and Director
James B. Glavin................... 65 Director
Melvin Perelman, Ph.D............. 70 Director
Irwin Lerner...................... 70 Director
Roy A. Whitfield.................. 47 Director
Stephen L. Hurst.................. 45 Vice President, General Counsel, Secretary
ROBERT B. CHESS has served as Chairman of the Board of Directors since
April 1999. Mr. Chess served as Co-Chief Executive Officer from August 1998 to
April 2000. Mr. Chess served as President from December 1991 to August 1998 and
as Chief Executive Officer from May 1992 to September 1998.
38
Mr. Chess was elected a Director in May 1992. From September 1990 until
October 1991, he was an Associate Deputy Director in the White House Office of
Policy Development. In March 1987, Mr. Chess co-founded Penederm Incorporated, a
topical dermatological drug delivery company, and served as its President until
February 1989. He left Penederm in October 1989. Prior to co-founding Penederm,
Mr. Chess held management positions at Intel Corp., a semiconductor
manufacturer, and Metaphor, a computer software company (acquired by
International Business Machines). Mr. Chess holds a BS in Engineering from the
California Institute of Technology and an MBA from the Harvard Business School.
Mr. Chess is a director of Pharsight Corp., a software company.
AJIT S. GILL has served as Chief Executive Officer since April 2000, as
President since April 1999, and as a Director since April 1998. Mr. Gill served
as Co-Chief Executive Officer from August 1998 to April 2000. Mr. Gill served as
Chief Operating Officer from October 1996 to August 1998 and Chief Financial
Officer from January 1993 until October 1996. Before joining Inhale, Mr. Gill
was Vice President and General Manager of Kodak's Interactive Systems division.
Mr. Gill has served as Chief Financial Officer for TRW-Fujitsu, Director of
Business Development for Visicorp, and as start-up President for three high
technology companies. He completed a BTech at the Indian Institute of
Technology, an MS in Electrical Engineering from the University of Nebraska, and
holds an MBA from the University of Western Ontario.
BRIGID A. MAKES has served as Vice President of Finance and Administration
and Chief Financial Officer since June 1999. Ms. Makes has also served as
Assistant Secretary since January 2001. From 1998 until joining Inhale,
Ms. Makes served as Vice President, Chief Financial Officer and Treasurer for
Oravax, Inc., a life sciences company. From 1992 to 1998, Ms. Makes served in
various management positions for Haemonetics Corporation, a developer of
automated blood processing systems, including, from 1995 to 1998, Vice President
Finance, Chief Financial Officer and Treasurer. Prior to Haemonetics
Corporation, Ms. Makes held a number of financial management positions a Lotus
Development Corp. (now IBM) and General Electric Co. Ms. Makes holds a Bachelor
of Commerce degree from McGill University in Finance and International Business
and an MBA from Bentley College.
JOHN S. PATTON, PH.D., a co-founder of Inhale, has been Vice President,
Research since December 1991 and a Director of since July 1990. He served as
President of Inhale from its incorporation in July 1990 to December 1991. From
1985 to 1990, Dr. Patton was a Project Team Leader with Genentech, Inc., a
biotechnology company, where he headed their non-invasive drug delivery
activities. Dr. Patton was on the faculty of the Marine Science and Microbiology
Departments at the University of Georgia from 1979 through 1985, where he was
granted tenure in 1984. Dr. Patton received a BS in Zoology and Biochemistry
from Pennsylvania State University, an MS from the University of Rhode Island, a
Ph.D. in Biology from the University of California, San Diego and received post
doctorate fellowships from Harvard Medical School and the University of Lund,
Sweden both in biomedicine.
JAMES B. GLAVIN has been a Director since May 1993. Mr. Glavin is Chairman
of the Board of The Immune Response Corporation, a biotechnology company. He was
President and Chief Executive Officer of The Immune Response Corporation from
1987 until September 1994. From 1987 to 1990, Mr. Glavin served as Chairman of
the Board of Smith Laboratories, Inc. and was President and Chief Executive
Officer from 1985 to 1989. From 1985 to 1987, he was a partner in CH Ventures, a
venture capital firm. From 1983 to 1985, he served as Chairman of the Board of
Genetic Systems Corporation, a biotechnology firm, and as its President and
Chief Executive Officer from 1981 to 1983. Mr. Glavin is a director of The
Meridian Funds and Avenir Pharmaceuticals, Inc.
MELVIN PERELMAN, PH.D. has been a Director since January 1996. Dr. Perelman
spent 36 years at Eli Lilly & Company, most recently as Executive Vice-President
and President of Lilly Research Laboratories, a position which he held from 1986
until his retirement in 1993. Dr. Perelman served as President of Lilly
International from 1976 until 1986. He was a member of the Board of Directors of
Lilly from 1976 until
39
1993. Dr. Perelman is a member of the Board of Directors of Immusol, Inc. and of
The Immune Response Corporation.
IRWIN LERNER has been a Director since April 1999. Mr. Lerner served as
Chairman of the Board of Directors and of the Executive Committee of Hoffmann-La
Roche Inc., a pharmaceutical and health care company, from January 1993 until
his retirement in September 1993, and from 1980 through December 1992, also
served as President and Chief Executive Officer. From September 1995 until
present, Mr. Lerner has served on the Board of Medarex Inc., a monoclonal
antibodies products company and became Chairman of the Board in May 1997. He has
served for 12 years on the Board of the Pharmaceutical Manufacturers'
Association where he chaired the Association's FDA Issues Committee. Mr. Lerner
received a B.S. and an MBA from Rutgers University. He is currently
Distinguished Executive-in-Residence at Rutgers University Graduate School of
Management. Mr. Lerner is also a director of Public Service Enterprise Group
Incorporated, a diversified public utility holding company, Humana Inc., a
health care company, Covance, Inc., a contract drug development company, V.I.
Technologies, Inc., a blood products company, and Axys Pharmaceuticals, Inc., a
biotechnology company.
ROY A. WHITFIELD has been a Director since August 2000. Mr. Whitfield is a
member of the Board of Directors of Incyte Genomics, Inc., a genomic information
company which he co-founded in 1991, and from June 1993 to present, has served
as Chief Executive Officer. He also served as President of Incyte from
June 1991 until January 1997 and as Treasurer from April 1991 until
October 1995. From 1984 to 1989, Mr. Whitfield held senior operating and
business development positions with Technicon Instruments Corporation, a medical
instrumentation company, and its predecessor company, Cooper Biomedical, Inc., a
biotechnology and medical diagnostics company. Prior to his work at Technicon,
Mr. Whitfield spent seven years with the Boston Consulting Group's international
consulting practice. Mr. Whitfield received a BS in mathematics from Oxford
University and an MBA from Stanford University. Mr. Whitfield also serves as a
director of Aurora Biosciences Corp., a biotechnology company, and the
Biotechnology Industry Organization (BIO).
STEPHEN L. HURST has been Vice President, General Counsel and Secretary
since August 1998. Mr. Hurst served as Vice President, Intellectual Property and
Licensing from March 1994 to August 1998. From July 1990 to February 1994,
Mr. Hurst was in private law practice and consulted with COR
Therapeutics, Inc., a biotechnology company, on intellectual property and
business development issues. From November 1987 to June 1990, he was the Campus
Patent Coordinator for the University of California, San Francisco. He also
worked as an Associate Counsel at Townsend & Townsend, a San Francisco based law
firm. He received a BS degree in Environmental Science from the University of
California at Berkeley and his JD from Golden Gate University in San Francisco.
SCIENTIFIC ADVISORY GROUP
We have assembled scientific and development advisors that provide us with
expertise in critical scientific, development, engineering, manufacturing and
business issues facing Inhale. The scientific advisory group assists us on
issues related to pulmonary delivery, pulmonary toxicology, aerosol science,
40
government regulation, product selection and clinical trial design. Our members
are called upon individually as needed and include, among others:
NAME AFFILIATION AREA OF EXPERTISE
- ---- ---------------------------------------- -------------------------------
Joseph Brain, Ph.D.......... Professor, Chairman, Department of Pulmonary safety
Environmental Health, Director,
Physiology Program, Harvard School of
Public Health
Peter Byron, Ph.D........... Professor of Pharmacy, Virginia Pharmaceutical aerosols
Commonwealth University, Medical College
of Virginia
Carl Grunfeld, M.D.......... Professor of Medicine, University of Endocrinology
California, San Francisco
Michael Matthay, M.D........ Professor of Medicine and Pulmonology
Anesthesiology, University of
California, San Francisco
Gerald Smaldone, M.D........ Professor of Medicine, State University Aerosol medicine
of New York at Stony Brook
REGULATORY AND DEVELOPMENT ADVISORY BOARD
In August 1999, we formed a regulatory affairs board to assist and advise us
on matters relating to efficient and effective regulatory processing and to
better assist us and our collaborative partners in obtaining regulatory approval
for our products. The board currently includes the following:
NAME AFFILIATION AREA OF EXPERTISE
- ---- ---------------------------------------- -------------------------------
Carl C. Peck, M.D........... Professor of Pharmacology and Medicine, Clinical and regulatory
Director, Center for Drug Development, development strategy
Georgetown University Medical Center
David Savello, Ph.D......... Executive Vice President and Chief Pharmaceutical research and
Technology Officer, R.P. Scherer, Inc. development and regulatory
affairs
Phillip B. White............ Director, Medical Device Consulting, AAC Device regulatory affairs
Consulting
ITEM 11. EXECUTIVE COMPENSATION
We incorporate by reference the information set forth under the heading
"Executive Compensation" in our definitive Proxy Statement to be filed for our
2001 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We incorporate by reference the information set forth under the heading
"Security Ownership of Certain Beneficial Owners and Management" in our
definitive Proxy Statement to be filed for our 2001 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We incorporate by reference the information set forth under the heading
"Certain Transactions" in our definitive Proxy Statement to be filed for our
2001 Annual Meeting for Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Consolidated Financial Statements
41
The Consolidated Financial Statements required by this item, with the report
of independent auditors, are submitted in a separate section beginning on page
F-1 of this report.
(2) Consolidated Financial Statement Schedules
Schedules have been omitted because the information required to be set forth
therein is not applicable or is shown in the Consolidated Financial Statements
or notes thereto.
(3) Exhibits
The following exhibits are filed herewith or incorporated by reference:
EXHIBIT
NUMBER EXHIBIT INDEX
- ------- ------------------------------------------------------------
2.1 (1) Agreement and Plan of Merger between Inhale Therapeutic
Systems, a California corporation, and Inhale Therapeutic
Systems (Delaware), Inc., a Delaware corporation.
2.2 (16) Recommended Offer, dated December 21, 2000 by Cazenove & Co.
on behalf of Inhale Therapeutic Systems, Inc. for Bradford
Design plc.
3.1 (1) Certificate of Incorporation of Inhale.
3.2 (1) Bylaws of Inhale.
3.3 (14) Certificate of Amendment of the Amended Certificate of
Incorporation.
4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3.
4.2 (2) Restated Investor Rights Agreement among Inhale and certain
other persons named therein, dated April 29, 1993, as
amended October 29, 1993.
4.3 (3) Stock Purchase Agreement between Inhale and Pfizer Inc.,
dated January 18, 1995.
4.4 (9) Form of Purchase Agreement between Inhale and the individual
Purchasers, dated January 28, 1997.
4.5 (10) Stock Purchase Agreement between Inhale and Capital Research
and Management Company, dated December 8, 1998.
4.6 (12) Purchase Agreement among Inhale and Lehman Brothers Inc.,
Deutsche Bank Securities Inc. and U.S. Bancorp Piper Jaffray
Inc. dated October 6, 1999.
4.7 (12) Registration Rights Agreement among Inhale and Lehman
Brothers Inc., Deutsche Bank Securities Inc. and U.S.
Bancorp Piper Jaffray Inc., dated October 13, 1999.
4.8 (12) Indenture between Inhale as Issuer and Chase Manhattan Bank
and Trust Company, National Association, as Trustee, dated
October 13, 1999.
4.9 (12) Form of Inhale Registration Rights Agreement, between Inhale
and Selling Shareholder, dated January 25, 2000.
4.10 (13) Purchase Agreement among Inhale and Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Deutsche Bank Securities Inc.,
Lehman Brothers Inc., and U.S. Bancorp Piper Jaffray Inc.,
dated February 2, 2000.
4.11 (13) Resale Registration Rights Agreement among Registrant and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Deutsche
Bank Securities Inc., Lehman Brothers Inc., and U.S. Bancorp
Piper Jaffray Inc., dated February 8, 2000.
4.12 (13) Indenture between Registrant as Issuer and Chase Manhattan
Bank and Trust Company, National Association, as Trustee,
dated February 8, 2000.
4.13 (14) Specimen common stock certificate.
4.14 (15) Specimen warrants to purchase shares of common stock.
4.15 (17) Purchase Agreement among Inhale and Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Deutsche Bank Securities Inc.,
Lehman Brothers Inc., and U.S. Bancorp Piper Jaffray Inc.,
dated October 11, 2000.
42
EXHIBIT
NUMBER EXHIBIT INDEX
- ------- ------------------------------------------------------------
4.16 (17) Resale Registration Rights Agreement among Registrant and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Deutsche
Bank Securities, Inc., Lehman Brothers Inc., and U.S.
Bancorp Piper Jaffray Inc., dated October 17, 2000.
4.17 (17) Indenture between Registrant, as Issuer, and Chase Manhattan
Bank and Trust Company, National Association, as Trustee,
dated October 17, 2000.
5.1 (18) Opinion of Cooley Godward LLP.
10.1 (4) Registrant's 1994 Equity Incentive Plan, as amended.
10.2 (7) Registrant's 1994 Non-Employee Directors' Stock Option Plan,
as amended.
10.3 (2) Registrant's 1994 Employee Stock Purchase Plan, as amended.
10.4 (2) Standard Industrial Lease between Inhale and W.F. Batton &
Co., Inc., dated September 17, 1992, as amended
September 18, 1992.
10.5 (2) Addendum IV dated April 1, 1994 to Lease dated
September 17, 1992, between Inhale and W.F. Batton and
Marie A. Batton, dated September 17, 1992.
10.6 (6) Amendment Agreement Number One, dated October 20, 1995, to
Lease dated September 17, 1992, between Inhale and W.F.
Batton & Co., Inc.
10.7 (6) Amendment Agreement Number Two, dated November 15, 1995, to
Lease, dated September 17, 1992, between Registrant and W.F.
Batton and Marie A. Batton, Trustees of the W.F. Batton and
Marie A. Batton Trust UTA dated January 12, 1998 ("Batton
Trust").
10.8 (11) Amendment Agreement Number Three, dated February 14, 1996,
to Lease, dated September 17, 1992, between Registrant and
Batton Trust.
10.9 (11) Amendment Agreement Number Four, dated September 15, 1996,
to Lease, dated September 17, 1992, between Registrant and
Batton Trust.
10.10 (2) Sublicense Agreement between Inhale and John S. Patton,
dated September 13, 1991.
10.11 (5) Stock Purchase Agreement between Inhale and Baxter World
Trade Corporation, dated March 1, 1996.
10.12 (8) Sublease and Lease Agreement, dated October 2, 1996, between
Inhale and T.M.T. Associates L.L.C. ("Landlord").
10.13 (11) First Amendment, dated October 30, 1996, to Sublease and
Lease Agreement, dated October 2, 1996, between Registrant
and Landlord.
10.14 (11) Letter Agreement, dated April 9, 1997, amending Sublease and
Lease Agreement, dated October 2, 1996, between Inhale and
Landlord.
10.15 (11) Third Amendment, dated April 16, 1997, to Sublease and Lease
Agreement, dated October 2, 1996, between Registrant and
Landlord.
10.16 (11) Fourth Amendment, dated November 5, 1997, to Sublease and
Lease Agreement, dated October 2, 1996, between Registrant
and Landlord.
10.17 (13) Sublease by and between Webvan Group, Inc., as sublessor and
Registrant, as sublessee, dated November 3, 1999.
10.18 (15) Registrant's 2000 Equity Incentive Plan
10.19 (15) Registrant's Stock Option Agreement issued in accordance
with Inhale's 2000 Equity Incentive Plan.
10.20 (15) Agreement for the Contribution of 201 Industrial Road
Project made and entered into as of September 14, 2000 by
and among Inhale, Inhale 201 Industrial Road, L.P., a
California limited partnership and Bernardo Property
Advisors, Inc., a California corporation.
43
EXHIBIT
NUMBER EXHIBIT INDEX
- ------- ------------------------------------------------------------
10.21 (15) Agreement of Limited Partnership of Inhale 201 Industrial
Road., L.P., a California limited partnership made and
entered into September 14, 2000, by and among SCIMED PROP
III, Inc., a California corporation, as general partner, 201
Industrial Partnership, a California general partnership, as
limited partner, and Inhale, as limited partner.
10.22 (15) Build-To-Suit Lease made and entered into as of
September 14, 2000 by and between Inhale 201 Industrial
Road, L.P., a California limited partnership, as Landlord,
and Inhale, as Tenant.
10.23 (15) Amendment to Lease dated October 3, 2000 by and between
Inhale 201 Industrial Road, L.P., a California limited
partnership, as Landlord, and Inhale, as Tenant.
10.24 (15) Parking Lease Agreement entered into as of September 14,
2000 by and between Inhale 201 Industrial Road, L.P., a
California limited partnership, as Landlord, and Inhale, as
Tenant.
10.25 (18) Registrant's 2000 Non-Officer Equity Incentive Plan
10.26 (18) Registrant's Stock Option Agreement issued in accordance
with Inhale's 2000 Non-Officer Equity Incentive Plan
10.27 (19) Manufacturing and Supply Agreement among Inhale, Tech Group
North America, Bespak Europe, LTD.
23.1 (19) Consent of Ernst & Young LLP, independent auditors.
24.1 (19) Power of Attorney. Reference is made to Signature Page.
- ------------------------
(1) Incorporated by reference to the indicated exhibit in Inhale's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.
(2) Incorporated by reference to the indicated exhibit in Inhale's Registration
Statement on Form S-1 (No. 33-75942), as amended.
(3) Incorporated by reference to the indicated exhibit in Inhale's Registration
Statement on Form S-1 (No. 33-89502), as amended.
(4) Incorporated by reference to Inhale's Registration Statement on Form S-8
(No. 333-59735).
(5) Incorporated by reference to the indicated exhibit in Inhale's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996.
(6) Incorporated by reference to the indicated exhibit in Inhale's Annual Report
on Form 10-K for the year ended December 31, 1995.
(7) Incorporated by reference to the indicated exhibit in Inhale's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996.
(8) Incorporated by reference to the indicated exhibit in Inhale's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996.
(9) Incorporated by reference to Inhale's Registration Statement on Form S-3
(No. 333-20787).
(10) Incorporated by reference to the indicated exhibit in Inhale's Registration
Statement on Form S-3 (No. 333-68897), as amended.
(11) Incorporated by reference to the indicated exhibit in Inhale's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.
(12) Incorporated by reference to the indicated exhibit in Inhale's Registration
Statement on Form S-3 (No. 333-94161), as amended.
(13) Incorporated by reference to the indicated exhibit in Inhale's Annual
Report on Form 10-K for the year ended December 31, 1999.
44
(14) Incorporated by reference to the indicated exhibit in Inhale's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000.
(15) Incorporated by reference to the indicated exhibit in Inhale's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000.
(16) Incorporated by reference to the indicated exhibit in Inhale's Current
Report on Form 8-K, filed on January 11, 2001.
(17) Incorporated by reference to Inhale's Registration Statement on Form S-3
(No. 333-53678), filed on January 12, 2001.
(18) Incorporated by reference to Inhale's Registration Statement on Form S-8
(No. 333-54078), filed on January 19, 2001.
(19) Filed herewith.
(b) Reports on Form 8-K.
The following Reports on Form 8-K were filed during the quarter ended
December 31, 2000:
(i) A Report on Form 8-K dated December 21, 2000 pertaining to Inhale's
offer to acquire all of the outstanding share capital of Bradford
Particle Design, plc, a United Kingdom company.
(ii) A Report on Form 8-K dated October 27, 2000 pertaining to the
initial purchasers' exercise of their $30 million over-allotment
option granted pursuant to a purchase agreement dated October 11,
2000 with respect to Inhale's 3.5% convertible subordinated notes
due 2007.
(iii) A Report on Form 8-K dated October 12, 2000 pertaining to Inhale's
entering into a purchase agreement providing for the sale to
certain initial purchasers of $200 million aggregate principal
amount of convertible subordinated notes ($250 million if the
over-allotment option exercised in full.)
(iv) A Report on Form 8-K dated October 9, 2000 pertaining to Inhale's
intention to issue $150 million aggregate principal amount of
convertible subordinated notes ($172.5 million if an over-allotment
option is exercised in full).
(v) A Report on Form 8-K dated October 6, 2000 pertaining to Inhale's
entering into a build-to-suit lease transaction.
(c) See Exhibits listed under Item 14(a)(3).
(d) Not applicable. See Item 14(a)(2).
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on our
behalf by the undersigned, thereunto duly authorized, on the 1st day of
March 2001.
INHALE THERAPEUTIC SYSTEMS, INC.
By: /s/ AJIT S. GILL
-----------------------------------------
Ajit S. Gill
CHIEF EXECUTIVE OFFICER,
PRESIDENT AND DIRECTOR
/s/ BRIGID A. MAKES
-----------------------------------------
Brigid A. Makes
VICE PRESIDENT, FINANCE AND
ADMINISTRATION,
CHIEF FINANCIAL OFFICER AND ASSISTANT
SECRETARY
46
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints, Ajit S. Gill as his attorney-in-fact for him 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 the said attorney-in-fact, or his substitutes,
may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROBERT B. CHESS
------------------------------------------- Chairman March 1st, 2001
Robert B. Chess
Chief Executive Officer,
/s/ AJIT S. GILL President and Director
------------------------------------------- (PRINCIPAL EXECUTIVE March 1st, 2001
Ajit S. Gill OFFICER)
Vice President, Finance and
Administration, Chief
/s/ BRIGID A. MAKES Financial Officer and
------------------------------------------- Assistant Secretary March 1st, 2001
Brigid A. Makes (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER
/s/ JOHN S. PATTON
------------------------------------------- Vice President, Research and March 1st, 2001
John S. Patton Director
/s/ JAMES B. GLAVIN
------------------------------------------- Director March 1st, 2001
James B. Glavin
/s/ MELVIN PERELMAN
------------------------------------------- Director March 1st, 2001
Melvin Perelman
/s/ IRWIN LERNER
------------------------------------------- Director March 1st, 2001
Irwin Lerner
/s/ ROY A. WHITFIELD
------------------------------------------- Director March 1st, 2001
Roy A. Whitfield
47
INHALE THERAPEUTIC SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets at December 31, 2000 and 1999... F-3
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 2000............... F-4
Consolidated Statement of Stockholders' Equity for each of
the three years in the period ended December 31, 2000..... F-5
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2000............... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Inhale Therapeutic Systems, Inc.
We have audited the accompanying consolidated balance sheets of Inhale
Therapeutic Systems, Inc. as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the 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. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Inhale
Therapeutic Systems, Inc. at December 31, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Palo Alto, California
January 23, 2001
F-2
INHALE THERAPEUTIC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
DECEMBER 31,
-------------------
2000 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $136,012 $ 33,430
Short-term investments.................................... 348,829 104,755
Accounts receivable....................................... 7,234 1,756
Other current assets...................................... 968 7,377
-------- --------
Total current assets.................................... 493,043 147,318
Property and equipment, net................................. 110,457 63,852
Marketable equity securities................................ 9,140 6,328
Other assets................................................ 16,900 9,308
-------- --------
$629,540 $226,806
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 6,501 $ 13,374
Accrued liabilities....................................... 12,861 5,244
Interest payable.......................................... 4,910 1,605
Deferred revenue.......................................... 4,913 4,811
Capital lease obligation--current portion................. 977 --
Tenant improvement loan--current portion.................. 41 45
-------- --------
Total current liabilities............................... 30,203 25,079
Capital lease obligation.................................... 15,269 --
Tenant improvement loan..................................... 4,849 4,895
Convertible subordinated debentures and notes............... 299,149 108,450
Other long-term liabilities................................. 2,187 1,753
Commitments
Stockholders' equity:
Preferred stock, 10,000 shares authorized, no shares
issued or outstanding................................... -- --
Common stock, $0.0001 par value; 300,000 shares
authorized; 47,374 shares and 34,452 shares issued and
outstanding at December 31, 2000 and 1999,
respectively............................................ 5 3
Capital in excess of par value............................ 465,593 181,153
Deferred compensation..................................... (1,827) (1,530)
Accumulated other comprehensive gain...................... 5,981 1,469
Accumulated deficit....................................... (191,869) (94,466)
-------- --------
Total stockholders' equity.............................. 277,883 86,629
-------- --------
$629,540 $226,806
======== ========
See accompanying notes
F-3
INHALE THERAPEUTIC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
YEARS ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Contract research revenue................................... $ 51,629 $ 41,358 $ 21,795
Operating costs and expenses:
Research and development.................................. 101,544 64,083 35,398
General and administrative................................ 13,932 7,869 8,387
Acquired in-process research and development.............. 2,292 9,890 --
-------- -------- --------
Total operating costs and expenses........................ 117,768 81,842 43,785
Loss from operations........................................ (66,139) (40,484) (21,990)
Other income................................................ 995 -- --
Debt conversion premium, net................................ (40,687) -- --
Interest income............................................. 20,566 4,111 3,904
Interest expense............................................ (12,138) (2,075) (270)
-------- -------- --------
Net loss.................................................... $(97,403) $(38,448) $(18,356)
======== ======== ========
Basic and diluted net loss per share........................ $ (2.32) $ (1.13) $ (0.58)
======== ======== ========
Shares used in computing basic and diluted net loss per
share..................................................... 41,998 34,016 31,438
======== ======== ========
See accompanying notes
F-4
INHALE THERAPEUTIC SYSTEMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
COMMON STOCK CAPITAL IN OTHER TOTAL
-------------------- EXCESS OF DEFERRED COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
SHARES PAR VALUE PAR VALUE COMPENSATION GAIN DEFICIT EQUITY
-------- --------- ---------- ------------- -------------- ------------ -------------
Balance at December 31,
1997........................ 31,084 $3 $135,270 $(538) $20 $(37,662) $97,093
Issuance of common stock in
private placement, net of
issuance costs of $1,997.... 2,400 -- 35,202 -- -- -- 35,202
Issuance of common stock and
stock options in connection
with licensing agreement.... 12 -- 284 -- -- -- 284
Common stock issued upon
exercise of stock options... 352 -- 1,514 -- -- -- 1,514
Deferred compensation......... -- -- 576 (576) -- -- --
Amortization of deferred
compensation................ -- -- -- 183 -- -- 183
Unrealized loss on
available-for-sale
securities.................. -- -- -- -- (39) -- (39)
Net loss...................... -- -- -- -- -- (18,356) (18,356)
--------
Comprehensive loss............ -- -- -- -- -- -- (18,395)
------ -- -------- ------- ------ --------- --------
Balance at December 31,
1998........................ 33,848 3 172,846 (931) (19) (56,018) 115,881
Issuance of common stock for
technology acquisition...... 360 -- 5,000 -- -- -- 5,000
Common stock issued upon
exercise of stock options,
net of costs................ 244 -- 1,545 -- -- -- 1,545
Compensation in connection
with stock options granted
to consultants.............. -- -- 798 -- -- -- 798
Deferred compensation......... -- -- 964 (964) -- -- --
Amortization of deferred
compensation................ -- -- -- 365 -- -- 365
Unrealized gain on
available-for-sale
securities.................. -- -- -- -- 1,488 -- 1,488
Net loss...................... -- -- -- -- -- (38,448) (38,448)
--------
Comprehensive loss............ -- -- -- -- -- -- (36,960)
------ -- -------- ------- ------ --------- --------
Balance at December 31,
1999........................ 34,452 3 181,153 (1,530) 1,469 (94,466) 86,629
Common stock issued upon
exercise of stock options,
net of costs................ 2,177 2 17,320 -- -- -- 17,322
Compensation in connection
with stock granted to
employees................... 57 -- 1,900 -- -- -- 1,900
Compensation in connection
with stock options granted
to consultants.............. -- 3,196 -- -- -- 3,196
Conversion of convertible
subordinated debt into
common shares, net of
costs....................... 10,688 -- 260,862 -- -- -- 260,862
Deferred compensation......... -- -- 1,162 (1,162) --
Amortization of deferred
compensation................ -- -- -- 865 -- -- 865
Unrealized gain on
available-for-sale
securities.................. -- -- -- -- 4,512 -- 4,512
Net loss...................... -- -- -- -- -- (97,403) (97,403)
--------
Comprehensive loss............ -- -- -- -- -- -- (92,891)
------ -- -------- ------- ------ --------- --------
Balance at December 31,
2000........................ 47,374 $5 $465,593 $(1,827) $5,981 $(191,869) $277,883
====== == ======== ======= ====== ========= ========
See accompanying notes
F-5
INHALE THERAPEUTIC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss.................................................... $ (97,403) $ (38,448) $ (18,356)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 9,259 6,828 3,415
Amortization of deferred compensation..................... 865 365 183
Gain on sale of assets.................................... (159) 61 --
Issuance of common stock for services..................... 5,096 798 --
Issuance of common stock and stock options in connection
with licensing agreements............................... -- -- 284
Debt conversion premium, net.............................. 40,687 -- --
Acquired in-process research and development.............. 2,292 9,890 --
Changes in assets and liabilities:
Decrease in accounts receivable, other current assets, and
other assets............................................ (964) (8,004) (876)
Increase (decrease) in accounts payable and accrued
liabilities............................................. 4,483 12,724 (1,546)
Increase (decrease) in deferred revenue................... 102 452 (2,327)
--------- --------- ---------
Net cash used in provided by operating activities........... (35,742) (15,334) (19,223)
--------- --------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES
Acquisition of technology................................... (2,292) (15,288) --
Purchases of short-term investments......................... (462,278) (122,481) (219,414)
Sales of short-term investments............................. 13,643 28,658 65,189
Maturities of short-term investments........................ 206,261 47,174 182,309
Purchases of property and equipment, net.................... (53,850) (20,502) (34,584)
Other investing activities, net............................. (1,232) -- --
--------- --------- ---------
Net cash used in investing activities....................... (299,748) (82,439) (6,500)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of convertible subordinated debentures and notes,
net....................................................... 445,241 104,806 --
Payments of loan and capital lease obligations.............. (50) (64) (181)
Proceeds from capital lease financing....................... 16,246 -- --
Payments of debt conversion premium, net.................... (40,687) -- --
Issuance of common stock, net of issuance costs............. 17,322 1,545 36,716
--------- --------- ---------
Net cash provided by financing activities................... 438,072 106,287 36,535
--------- --------- ---------
Net increase in cash and cash equivalents................... 102,582 8,514 10,812
Cash and cash equivalents at beginning of year.............. 33,430 24,916 14,104
--------- --------- ---------
Cash and cash equivalents at end of year.................... $ 136,012 $ 33,430 $ 24,916
========= ========= =========
See accompanying notes
F-6
INHALE THERAPEUTIC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Inhale Therapeutic Systems, Inc. was incorporated in the State of California
in July 1990 and reincorporated in the State of Delaware in July 1998. Inhale's
mission is to be the pre-eminent supplier of drug delivery solutions. During
2000, we created two wholly-owned subsidiaries: Inhale Therapeutic Systems
Deutschland GmbH, incorporated in the Federal Republic of Germany; and Inhale
Therapeutic Systems UK Limited, incorporated in the United Kingdom and
consolidated the financial statements of a special purpose entity lessor. Since
inception, we have been engaged in the development of systems for the pulmonary
delivery of macromolecule drug therapies for systemic and local lung
applications.
Our Board of Directors approved a two-for-one split which was effected as a
100% common stock dividend on August 22, 2000 for stockholders of record as of
August 1, 2000. The stockholders also increased the number of authorized shares
of common stock to 300 million at the 2000 Annual Meeting of the stockholders.
All share and per share amounts in these consolidated financial statements have
been retroactively restated to reflect the split.
We expect increasing losses over the next several years as research and
development and manufacturing scale-up efforts continue, and as we expand our
facilities for manufacturing operations. We plan to continue to finance
ourselves primarily through issuances of equity or debt securities, research and
development contract revenue, and in the longer term, revenue from product sales
and royalties.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Inhale Therapeutic Systems, Inc.
include the accounts of the Company, its wholly owned subsidiaries and the
financial statements of a special purpose entity described in Note 6. All
significant intercompany balances and transactions have been eliminated.
CASH, CASH EQUIVALENTS AND INVESTMENTS
We consider all highly liquid investments with a maturity from date of
purchase of three months or less to be cash equivalents. Cash and cash
equivalents include demand deposits held in banks and interest bearing money
market funds. All other liquid investments are classified as short-term
investments. Short-term investments consist of federal and municipal government
securities, repurchase agreements or corporate commercial paper with A1 or P1
short-term ratings and A+ or better long-term ratings with remaining maturities
at date of purchase of greater than 90 days and less than one year. We limit our
concentration of risk by diversifying our investments among a variety of
industries and issuers. Our professional portfolio managers adhere to this
investment policy as approved by our Board of Directors. We have experienced no
material losses on our investments.
F-7
INHALE THERAPEUTIC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
At December 31, 2000, all short-term investments are designated as
available-for-sale and are carried at fair value, with material unrealized gains
and losses, if any, reported in stockholders' equity. The amortized cost of
securities is adjusted for amortization of material premiums and accretion of
discounts to maturity. Such amortization, if any, is included in interest
income. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities, if any, are included in
interest income. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in interest income.
The following is a summary of operating cash and available-for-sale
securities as of December 31, 2000:
NET
UNREALIZED ESTIMATED
COST GAINS FAIR VALUE
-------- ---------- ----------
(IN THOUSANDS)
Obligations of U.S. government agencies..................... $299,604 $1,013 $300,617
U.S. corporate commercial paper............................. 147,482 496 147,978
Repurchase agreements, secured by U.S. Government
securities................................................ 11,261 -- 11,261
Cash and other debt securities.............................. 24,984 1 24,985
Equity securities........................................... 4,669 4,471 9,140
-------- ------ --------
$488,000 $5,981 $493,981
======== ====== ========
Amounts included in cash and cash equivalents............... $135,873 $ 139 $136,012
Amounts included in short-term investments.................. 347,458 1,371 348,829
Amounts included in marketable equity securities............ 4,669 4,471 9,140
-------- ------ --------
$488,000 $5,981 $493,981
======== ====== ========
The following is a summary of operating cash and available-for-sale
securities as of December 31, 1999:
NET
UNREALIZED ESTIMATED
COST GAINS FAIR VALUE
-------- ---------- ----------
(IN THOUSANDS)
Obligations of U.S. government agencies..................... $ 81,692 $ 108 $ 81,800
U.S. corporate commercial paper............................. 41,081 33 41,114
Repurchase agreements, secured by U.S. Government
securities................................................ 3,845 -- 3,845
Cash and other debt securities.............................. 11,426 -- 11,426
Equity securities........................................... 5,000 1,325 6,328
-------- ------ --------
$143,044 $1,466 $144,513
======== ====== ========
Amounts included in cash and cash equivalents............... $ 35,376 $ 54 $ 33,430
Amounts included in short-term investments.................. 104,668 87 104,755
Amounts included in marketable equity securities............ 5,000 1,325 6,328
-------- ------ --------
$143,044 $1,466 $144,513
======== ====== ========
We have determined the estimated fair value amounts by using available
market information. The gross realized losses and gains on the sale of
available-for-sale debt securities during the years ended
F-8
INHALE THERAPEUTIC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
December 31, 2000 and 1999 were not material. At December 31, 2000 and 1999, the
average portfolio duration was approximately six months and five months,
respectively, and the contractual maturity of any single investment did not
exceed eighteen months at December 31, 2000 (eleven months at December 31,
1999).
We own common stock in Alliance Pharmaceutical Corp. and we account for this
equity investment as an available-for-sale long-term marketable security. In
1999, due to restrictions on the sale of this stock, we carried that portion of
our investment in Alliance that could be sold within one year at market value,
with material unrealized gains and losses, if any, reported in stockholders'
equity; that portion which could not be sold within one year was carried at
cost. As there were no restrictions on the sale of Alliance stock at
December 31, 2000, all shares held at that date were reported at market value
with unrealized gains and losses reported in stockholders' equity.
PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
2000 1999
-------- --------
(IN THOUSANDS)
Laboratory and other equipment........................... $ 34,553 $18,280
Building and leasehold improvements...................... 55,476 35,458
Land..................................................... 7,422 7,422
Construction in progress................................. 34,732 17,701
-------- -------
Property and equipment at cost......................... 132,183 78,861
Less accumulated amortization and depreciation........... (21,726) (15,009)
-------- -------
Property and equipment, net.......................... $110,457 $63,852
======== =======
Property and equipment are stated at cost. Major improvements are
capitalized, while maintenance and repairs are expensed when incurred.
Laboratory and other equipment is depreciated using the straight-line method
over estimated useful lives of three to seven years. Leasehold improvements and
building subject to build-to-suit lease are amortized using the straight-line
method over the shorter of an estimated useful life of fifteen years or the term
of the lease.
At December 31, 2000, Building and leasehold improvements included
$14.9 million related to a build-to-suit lease with a special purpose entity
(See Note 6). Accumulated amortization of the building under lease was
approximately $0.1 million in the year ending December 31, 2000.
F-9
INHALE THERAPEUTIC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets are included in other assets in the balance sheet and
consisted of the following at December 31:
REMAINING
2000 1999 LIFE
-------- -------- ---------
(IN THOUSANDS) (MONTHS)
Goodwill.......................................... $2,238 $2,030 70
Intellectual property............................. 3,544 3,171 70
------ ------
5,782 5,201
Less accumulated amortization..................... (813) (48)
------ ------
$4,969 $5,153
====== ======
Goodwill and other intangible assets arise from an acquisition accounted for
under the purchase method (See Note 3) and are amortized on the straight-line
basis over an estimated 7-year useful life of the assets. We periodically
evaluate whether changes have occurred that would require revision of the
remaining estimated useful life of these assets or otherwise render the assets
unrecoverable. If such an event occurred, we would determine whether the
goodwill or intangibles are impaired. To date, no impairment losses have been
recorded.
COMPREHENSIVE GAIN/LOSS
Comprehensive gain/loss includes only unrealized gains and losses on
securities held as available-for-sale and is shown in the Statement of
Stockholders' Equity. We have no other material components of other
comprehensive gain/loss and accordingly the comprehensive loss is the same as
net loss for all periods.
REVENUE RECOGNITION
Contract revenue from collaborative research agreements is recorded when
earned based on the performance requirements of the contract. Revenue from
non-refundable upfront license fees and certain guaranteed payments where we
continue involvement through collaborative development are deferred and
recognized as revenue over the period of continued involvement. Revenue from
grants and feasibility arrangements are recognized as the related costs are
incurred. Our research revenue is derived primarily from clients in the
pharmaceutical industry. Contract research revenue from three partners
represented 69%, 13% and 9% of our revenue in 2000. Three partners accounted for
71%, 10% and 9% of our revenue in 1999 and 51%, 22% and 18% of our revenue in
1998. Costs of contract research revenue approximate such revenue and are
included in research and development expenses.
STOCK-BASED COMPENSATION
As permitted by the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), we
continue to follow Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related interpretations in accounting
for our employee stock option plans. Under APB 25, if the exercise price of our
employee stock options equals or exceeds the fair market value of the underlying
stock on the date of grant as determined by the
F-10
INHALE THERAPEUTIC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
closing price of our common stock as quoted on the Nasdaq stock market, no
compensation expense is recognized. See Note 7 for pro forma disclosures
required by FAS 123.
RESEARCH AND DEVELOPMENT AGREEMENTS
We perform research and development for others pursuant to feasibility
agreements and development and license agreements. Under the feasibility
agreements, we are generally reimbursed for the cost of work performed.
Feasibility agreements are designed to evaluate the applicability of our
technologies to a particular molecule and therefore are generally completed in
less than one year. Under our development and license agreements, the partner
companies generally receive an exclusive license to develop, use and sell a dry
powder formulation and a suitable delivery device to be developed by us for one
of the partner's macromolecule drugs. Under these development agreements, we
will be reimbursed for development costs and may also be entitled to milestone
payments when and if certain development milestones are achieved. All of our
research and development agreements are generally cancelable by the partner
without significant financial penalty to the partner.
ACCOUNTING FOR INCOME TAXES
We account for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). Under FAS 109, the
liability method is used in accounting for income taxes.
NET LOSS PER SHARE
In accordance with Financial Accounting Standard No. 128, basic and diluted
net loss per share has been computed using the weighted average number of shares
of common stock outstanding during the period, less shares subject to
repurchase. Had we been in a net income position, diluted earnings per share
would have included the following outstanding options, warrants and convertible
debentures:
YEARS ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Warrants............................................. 56 40 40
Options.............................................. 10,064 9,106 6,326
Convertible debentures and notes..................... 6,644 6,776 --
------ ------ -----
16,764 15,922 6,366
====== ====== =====
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
is required to be adopted in years beginning after June 15, 2000. Because our
use of derivatives is minimal, management does not anticipate that the adoption
of the new Statement will have a significant effect on earnings or the financial
position of the Company.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the 2000
presentation.
F-11
INHALE THERAPEUTIC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 2--COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
We perform research and development for others pursuant to feasibility
agreements and development and license agreements. Under the feasibility
agreements, we are generally reimbursed for the cost of work performed.
Feasibility agreements are designed to evaluate the applicability of our
technologies to a particular molecule and therefore are generally completed in
less than one year. Under our development and license agreements, the partner
companies receive an exclusive license to develop, use and sell a dry powder
formulation and a suitable delivery device to be developed by us for one of the
partner's macromolecule drugs. Under these development agreements, we will be
reimbursed for development costs and may also be entitled to milestone payments
when and if certain development milestones are achieved. All of our research and
development agreements are generally cancelable by the partner without
significant financial penalty to the partner.
In February 1999, we entered into a collaborative agreement with
Biogen Inc. ("Biogen") to develop pulmonary delivery for Biogen's
AVONEX-Registered Trademark-, a drug used in the treatment of Multiple
Sclerosis. Under the terms of the agreement, we will receive royalties on
product sales, an up-front signing fee, and up to an estimated $25.0 million in
research and development funding and potential progress payments. Biogen will
provide bulk AVONEX-Registered Trademark- to us for formulation into a dry
powder which is stable at room temperature. We will manufacture and package the
dry powder and supply inhalation devices. Biogen will be responsible for
clinical trials, marketing and commercialization. We recognized revenue of
$4.7 million under this agreement in 2000 ($2.2 million in 1999).
In December 1997, we entered into a collaboration agreement with Eli Lilly
and Company to develop pulmonary delivery for an undisclosed protein based on
our deep-lung drug delivery system for macromolecules. Under this agreement we
recognized revenue of $3.1 million, $1.2 million and $0.9 million in 2000, 1999
and 1998, respectively. In September 2000, Lilly announced that it had decided
to discontinue development of this therapeutic product, which is currently in
preclinical. As a result we are free to develop the product further
independently or in collaboration with another partner.
In January 1997, we entered into a collaborative agreement with Lilly to
develop an inhalable formulation of Forteo-TM-, a version of parathyroid
hormone, PTH 1-34, used in the treatment of osteoporosis. Under the terms of the
agreement, we will receive funding of up to $20.0 million of initial fees,
research and development and progress payments. Lilly will receive global
commercialization rights for the pulmonary delivery of the products while we
receive royalties on any marketed products. We will manufacture packaged powders
for and supply devices to Lilly. Under this agreement, we recognized revenue of
$3.8 million in 1998. In late 1998, unexpected observations from a long-term
test in rats of the injectable version of parathyroid hormone led Lilly to
suspend further clinical development of the injectable and pulmonary versions of
Forteo-TM- pending further analysis. In September 2000, we announced the
reinitiation of the Forteo-TM- development program with Lilly.
In December 1996, we entered into a collaborative agreement with Aventis
Behring L.L.C.to develop a pulmonary formulation of alpha-1 proteinase inhibitor
to treat patients with alpha-1 antitrypsin deficiency, or genetic emphysema.
Under the terms of the collaboration, Aventis Behring will receive
commercialization rights worldwide excluding Japan and we will receive royalties
on product sales, an up-front signing fee and up to an estimated $15.0 million
in research and development funding and milestone payments. Aventis Behring will
manufacture the active ingredient for use in our delivery device. We will
manufacture and package the dry powder and supply inhalation devices to Aventis
Behring for commercialization and marketing. Under this agreement, we recognized
revenue of $6.8 million, $3.9 million and $1.6 million in 2000, 1999 and 1998,
respectively.
F-12
INHALE THERAPEUTIC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
In March 1996, we entered into a collaboration agreement with Baxter
Healthcare Corporation to use our dry powder pulmonary delivery system as a
technology platform for developing and launching therapeutic products. In
connection with the collaboration, Baxter made a $20.0 million equity investment
in Inhale at a 25% premium to the market price of Inhale stock at the time of
the investment. Baxter received worldwide commercialization rights in exchange
for up to an estimated $60 million in research and development funding and
milestone payments for four molecules. In October 1998, we announced that we had
reached an agreement with Baxter to amend our collaborative agreement to
facilitate signing a new corporate partner to fund further development and
commercialization of the undisclosed compound that had been the focus since
April, 1998. Baxter's obligations under this amendment expired in September,
1999. As a result, rights to the compounds reverted to us and are now available
for other partnering opportunities. We recognized revenue associated with this
program of $4.3 million and $4.0 million in 1999 and 1998, respectively.
In January 1995, we entered into a collaborative development and license
agreement with Pfizer Inc. ("Pfizer") to develop pulmonary delivery for inhaled
insulin based on our deep-lung delivery system for macromolecules. Under the
terms of the agreement, we will receive funding consisting of initial fees,
research and development and progress payments. Upon execution of the agreement
Pfizer purchased $5.0 million of Inhale common stock. In addition, in
October 1996, Pfizer purchased an additional $5.0 million of Inhale common
stock. Pfizer will receive global commercialization rights for the pulmonary
delivery of the products while we receive royalties on any marketed products. We
will manufacture inhaled insulin for, and supply devices to Pfizer. Under this
agreement we recognized revenue of $35.7 million, $29.5 million and
$11.1 million in 2000, 1999 and 1998, respectively.
Costs associated with research and development activities attributable to
these agreements are expected to approximate the revenues recognized.
NOTE 3--TECHNOLOGY ACQUISITIONS
PULMOSPHERE-TM- TECHNOLOGY
In November 1999, we concluded an agreement with Alliance Pharmaceutical
Corp. to acquire Alliance's PulmoSphere-TM- particle and particle processing
technology for use in respiratory drug delivery. Under the terms of the
agreement, we received the rights to PulmoSphere-TM- technology, other related
assets and Alliance stock valued at $5.0 million in exchange for $15.0 million
in cash and $5.0 million of Inhale stock. The purchase price, including
$0.4 million of acquisition costs, has been allocated to assets acquired and to
in-process research and development, which has been charged as an expense on the
Statement of Operations for the year ended December 31, 1999. The Company's
investment in Alliance
F-13
INHALE THERAPEUTIC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
and the assets acquired in connection with the PulmoSphere-TM- acquisition are
recorded at their fair market value at acquisition as follows:
Property and equipment, net................................. $ 200
Acquired in-process research and development charged to
operations in 1999........................................ 9,890
Intellectual property, net.................................. 3,171
Assembled workforce......................................... 96
Goodwill.................................................... 2,030
-------
Total cash purchase consideration........................... 15,387
Common stock of Alliance.................................... 5,000
-------
Total purchase consideration................................ $20,387
=======
Goodwill and other intangible assets are being amortized over seven years.
The purchased research and development was identified and valued through
extensive interviews and discussions with appropriate management and scientific
personnel and the analysis of data provided by Alliance regarding the
PulmoSphere-TM- technology, its stage of development at the time of acquisition,
the importance of the technology to our overall development plan, and the
projected incremental cash flows from the projects when completed and any
associated risks. Associated risks include the uncertainties in overcoming
significant technological risks, acquiring FDA approval and establishing
commercial viability.
OTHER PURCHASED TECHNOLOGY
In April 2000, the Company recorded a $2.3 million charge for acquired
in-process research and development ("IPR&D") costs. The acquisition was
recorded as a purchase and a portion of the purchase price was allocated to
IPR&D, which was immediately expensed. At the date of the acquisition, the
in-process technology had no alternative future use and did not qualify for
capitalization.
F-14
INHALE THERAPEUTIC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 4--OTHER ASSETS
Other Assets consist of the following at December 31:
2000 1999
-------- --------
(IN THOUSANDS)
Debt issuance costs, net.................................. $ 8,579 $ 3,514
Intellectual property, net................................ 3,091 3,172
Goodwill, net............................................. 1,878 1,982
Deposits and other assets................................. 3,352 640
------- -------
Total other assets.................................... $16,900 $ 9,308
======= =======
Debt issuance costs are associated with our outstanding series of
convertible subordinated notes and debentures (See Note 5) and are amortized
over the term of the related debt. Intellectual property and goodwill arise from
an acquisition accounted for under the purchase method (See Note 3) and are
amortized on the straight-line basis over the estimated useful life of the
assets. Deposits and other assets at December 31, 2000 included $1.9 million in
long-term receivables ($0.5 million in 1999) and $1.5 million in other assets.
NOTE 5--CONVERTIBLE SUBORDINATED DEBENTURES & NOTES
In October 2000, we received approximately $222.7 million in net proceeds
from the issuance of $230.0 million aggregate principal amount of convertible
subordinated notes to certain qualified institutional buyers pursuant to an
exemption under the Securities Act of 1933, as amended. Interest on the notes
accrues at a rate of 3.5% per year, subject to adjustment in certain
circumstances. The notes will mature in 2007 and are convertible into shares of
our common stock at a conversion price of $50.46 per share, subject to
adjustment under certain circumstances. The notes are redeemable in part or in
total at any time before October 17, 2003 at $1,000 per $1,000 principal amount
plus a provisional redemption exchange premium, payable in cash or shares of
common stock, of $105.00 per $1,000 principal amount, plus accrued and unpaid
interest, if any, to the redemption date, if the closing price of our common
stock has exceeded 150% of the conversion price then in effect for at least 20
trading days within a period of 30 consecutive trading days. The notes are also
redeemable in part or in total at any time after October 17, 2003 at certain
redemption prices dependent upon the date of redemption if the closing price of
our common stock has exceeded 120% of the conversion price then in effect for at
least 20 trading days within a period of 30 consecutive trading days. Interest
is payable semi-annually on April 17 and October 17. The notes are unsecured
obligations, which rank junior in right of payment to all of our existing and
future senior debt.
Also, in October 2000, we entered into privately negotiated agreements with
certain holders of our outstanding 5.0% convertible subordinated notes due 2007
and sold in February 2000 providing for the conversion of our notes into common
stock in exchange for a cash payment. To date, we have secured agreements that
provide for the conversion of $168.6 million aggregate principal amount of these
outstanding 5.0% convertible subordinated notes into approximately 4.4 million
shares of common stock for cash payments of approximately $25.5 million.
Approximately $61.4 million of these 5.0% convertible subordinated notes remain
outstanding at December 31, 2000.
F-15
INHALE THERAPEUTIC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
In February 2000, we received approximately $222.4 million in net proceeds
from the issuance of $230.0 million aggregate principal amount of convertible
subordinated notes to certain qualified institutional buyers pursuant to an
exemption under Rule 144A of the Securities Act of 1933, as amended. Interest on
the notes accrues at a rate of 5.0% per year, subject to adjustment in certain
circumstances. The notes will mature in 2007 and are convertible into shares of
our common stock at a conversion price of $38.355 per share, subject to
adjustment in certain circumstances. The notes are redeemable in part or in
total at any time before February 8, 2003 at an exchange premium of $137.93 per
$1000 principal amount, less any interest actually paid on the notes before the
call for redemption, if the closing price of our common stock has exceeded 150%
of the conversion price then in effect for at least 20 trading days within a
period of 30 consecutive trading days. We can redeem some or all of the notes at
any time after February 8, 2003. Interest is payable semi-annually on August 8
and February 8. The notes are unsecured subordinated obligations which rank
junior in right of payment to all of our existing and future Senior Debt.
Also in February 2000, we entered into privately negotiated agreements with
certain holders of our outstanding 6 3/4% convertible subordinated debentures
sold in October and November 1999, providing for the conversion of approximately
$100.7 million aggregate principal amount of the outstanding debentures into
approximately 6.3 million shares of common stock for net payments of
approximately $15.2 million. Approximately $7.8 million of these 6 3/4%
convertible subordinated debentures remain on the books at December 31, 2000.
These debentures will mature in 2007 and are convertible into shares of our
common stock at a conversion price of $16.01 per share, subject to adjustment in
certain circumstances. The debentures are redeemable in part or in total at our
option on or after October 13, 2002. Interest is payable semi-annually on
April 13 and October 13. The debentures are unsecured subordinated obligations
which rank junior in right of payment to all of our existing and future Senior
Debt.
Costs relating to the issuances of these notes and debentures are recorded
as long-term assets and are amortized over the term of the debt. As of
December 31, 2000, we had approximately $299 million in outstanding convertible
subordinated debentures with a fair market value of approximately $338 million.
The fair market was valued through quoted market prices.
NOTE 6--COMMITMENTS, LONG-TERM DEBT AND TENANT IMPROVEMENT LOAN
FACILITIES LEASE & FINANCING
We lease our office and laboratory facilities under several arrangements
expiring through the year 2012. Rent expense was approximately $3.1 million,
$2.5 million and $1.8 million for the years ended December 31, 2000, 1999 and
1998, respectively.
In November 1997, we received from the landlord of our facility in San
Carlos, California a loan of $5.0 million to fund a portion of the cost of
improvements made to the facility. The loan bears interest at 9.46% per annum,
and principal and interest payments are payable monthly over the ten-year loan
term with a balloon payment of $4.5 million due November 2007. The loan is
classified on the balance sheet as a tenant improvement loan.
F-16
INHALE THERAPEUTIC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
Future noncancelable commitments under operating leases and the tenant
improvement loan at December 31, 2000 are as follows:
TENANT
OPERATING IMPROVEMENT
LEASES LOAN
--------- -----------
(IN THOUSANDS)
Years ending December 31,
2001................................................. $ 2,000 $ 503
2002................................................. 2,492 503
2003................................................. 2,336 503
2004................................................. 2,273 503
2005................................................. 2,342 503
2006 and thereafter.................................. 16,879 5,467
------- -------
Total minimum payments required........................ $28,322 $ 7,981
=======
Less amount representing interest...................... (3,091)
-------
Present value of future payments....................... 4,890
Less current portion................................... (41)
-------
Non-current portion.................................... $ 4,849
=======
BUILD-TO-SUIT LEASE
In October 2000, we entered into a build-to-suit lease transaction with a
special purpose entity to finance and manage construction of a San Carlos
research and office facility. We contributed land and existing construction in
progress to the special purpose entity and leased to property back for a period
of 16 years. In addition, all costs related to the construction paid by us prior
to the October transaction were reimbursed to us, and are recorded as a
component of our capital lease financing obligations. Due to our continuing
involvement in the special purpose entity and other provisions of the agreement,
the special purpose entity is consolidated in our financial statements, as a
capital lease obligation.
The future minimum lease payments under the terms of this lease agreement
are as follows:
(IN THOUSANDS)
Years ending December 31,
2001...................................................... $ 3,792
2002...................................................... 5,508
2003...................................................... 5,619
2004...................................................... 5,731
2005...................................................... 5,846
2006 and thereafter....................................... 73,976
--------
Total minimum payments required............................. $100,472
========
F-17
INHALE THERAPEUTIC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 7--STOCKHOLDERS' EQUITY
COMMON STOCK
EMPLOYEE STOCK PURCHASE PLAN
In February 1994, our Board of Directors adopted the Employee Stock Purchase
Plan (the "Purchase Plan"). Under the Purchase Plan, 300,000 shares of common
stock have been reserved for purchase by our employees pursuant to
section 423(b) of the Internal Revenue Code of 1986. As of December 31, 2000, no
shares of common stock have been issued under the Purchase Plan.
STOCK OPTION PLANS
2000 EQUITY INCENTIVE PLAN
Our 1994 Equity Incentive Plan was adopted by the Board of Directors on
February 10, 1994 and was amended and restated in its entirety and renamed the
"2000 Equity Incentive Plan" on April 19, 2000. The purpose of the 2000 Equity
Incentive Plan is to attract and retain qualified personnel, to provide
additional incentives to our employees, officers, consultants and employee
directors and to promote the success of our business. Pursuant to the 2000
Equity Incentive Plan, we may grant or issue incentive stock options to
employees and officers and non-qualified stock options, rights to acquire
restricted stock and stock bonuses to consultants, employees, officers and
employee directors. Options granted to non-employees are recorded at fair value
based on the fair value measurement criteria of FAS 123.
The maximum term of a stock option under the 2000 Equity Incentive Plan is
ten years, but if the optionee at the time of grant has voting power of more
than 10% of our outstanding capital stock, the maximum term of an incentive
stock option is five years. The exercise price of incentive stock options
granted under the 2000 Equity Incentive Plan must be at least equal to 100% (or
110% with respect to holders of more than 10% of the voting power of our
outstanding capital stock) of the fair market value of the stock subject to the
option on the date of the grant. The exercise price of non-qualified stock
options, and the purchase price of rights to acquire restricted stock, granted
under the 2000 Equity Incentive Plan are determined by the Board of Directors.
The 2000 Equity Incentive Plan may be amended at any time by the Board,
although certain amendments would require shareholder approval. The 2000 Equity
Incentive Plan will terminate on February 9, 2010 unless earlier terminated by
the Board.
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
On February 10, 1994, our Board of Directors adopted the Non-employee
Directors' Stock Option Plan under which options to purchase up to 400,000
shares of our common stock at the then fair market value may be granted to our
non-employee directors.
2000 NON-OFFICER EQUITY INCENTIVE PLAN
Our 1998 Non-officer Equity Incentive Plan was adopted by the Board of
Directors in on August 18, 1998 and was amended and restated in its entirety and
renamed the "2000 Non-officer Equity Incentive Plan" on June 6, 2000 (the "2000
Plan"). The purpose of the 2000 Plan is to attract and retain qualified
personnel, to provide additional incentives to employees and consultants and to
promote the success of our business. Pursuant to the 2000 plan, we may grant or
issue non-qualified stock options, rights to acquire
F-18
INHALE THERAPEUTIC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
restricted stock and, stock bonuses to employees and consultants who are neither
Officers nor Directors of Inhale.
The maximum term of a stock option under the 2000 Plan is ten years. The
exercise price of stock options, and the purchase price of restricted stock
granted under the 2000 Plan are determined by the Board of Directors. The 2000
Non-officer Equity Incentive Plan may be amended by the Board of Directors at
any time.
A summary of activity under the 2000 Equity Incentive Plan, the Non-employee
Directors' Stock Option Plan and the 2000 Non-officer Equity Incentive Plan is
as follows:
OPTIONS OUTSTANDING
----------------------------- WEIGHTED-AVERAGE
OPTIONS AVAILABLE NUMBER OF EXERCISE PRICE EXERCISE PRICE PER
FOR GRANT SHARES PER SHARE SHARE
----------------- --------- ----------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
Balance at December 31, 1997........... 1,914 4,702 $ 0.01-17.63 $ 6.74
Shares authorized.................... 3,100 -- -- --
Options granted...................... (2,138) 2,138 0.01-17.07 14.08
Options exercised.................... -- (348) 0.03-11.38 4.35
Options canceled..................... 166 (166) 2.78-17.63 10.95
------ ------- ----------------- ------
Balance at December 31, 1998........... 3,042 6,326 0.01-17.63 9.24
Shares authorized.................... 2,500 -- -- --
Options granted...................... (3,150) 3,150 0.01-20.94 13.58
Options exercised.................... -- (248) 0.01-17.06 6.3
Options canceled..................... 122 (122) 5.01-17.06 13.23
------ ------- ----------------- ------
Balance at December 31, 1999........... 2,514 9,106 0.01-20.94 10.76
Shares authorized.................... 5,500 -- -- --
Options granted...................... (4,283) 4,283 0.01-61.63 33.62
Shares awarded....................... (57) -- -- --
Options exercised.................... -- (2,173) 0.01-42.50 8.40
Options canceled..................... 280 (280) 7.25-60.88 28.07
------ ------- ----------------- ------
Balance at December 31, 2000........... 3,954 10,936 $ 0.01-61.63 $19.79
====== =======
At December 31, 2000, 1999 and 1998, options were exercisable to purchase
2.9 million, 3.0 million and 2.1 million shares at weighted-average exercise
prices of $7.66, $7.46 and $5.68 per share, respectively.
F-19
INHALE THERAPEUTIC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
Weighted average fair value of options granted during the year ended
December 31, 2000, 1999 and 1998, was $34.20, $14.17 and $14.21, respectively.
The following table provides information regarding Inhale's stock option plans
as of December 31, 2000.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ---------------------------
WEIGHTED-AVERAGE
RANGE OF WEIGHTED-AVERAGE REMAINING WEIGHTED-AVERAGE
EXERCISE EXERCISE PRICE CONTRACTUAL EXERCISE PRICE
PRICES NUMBER PER SHARE LIFE (IN YEARS) NUMBER PER SHARE
- --------------------- -------- ---------------- ---------------- -------- ----------------
(IN THOUSANDS) (IN THOUSANDS)
$0.01-0.03 227 $ 0.01 8.0 47 $ 0.02
0.11-1.39 103 0.63 2.9 103 0.63
2.78-9.81 1,827 6.50 5.1 1,225 5.64
10.94-38.53 7,453 19.18 8.5 1,524 16.35
40.19-61.63 1,326 46.37 9.6 25 42.78
- --------------------- ------ ------ --- ----- ------
$0.01-61.63 10,936 $19.79 7.9 2,924 $11.27
===================== ====== ====== === ===== ======
In 2000, the Company granted approximately 0.1 million options to employees
and consultants with exercise prices below the market price of the stock on the
grant date. The weighted-average exercise price and weighted-average fair value
of these options as of December 31, 2000 were $20.07 and $26.61, respectively.
Pro forma information regarding net income and earnings per share is
required by FAS 123, which also requires that the information be determined as
if we had accounted for our employee stock options under the fair value method
of that Statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
2000 1999 1998
-------- -------- --------
Risk-free interest rate........................... 6.4% 5.6% 4.8%
Dividend yield.................................... 0.0% 0.0% 0.0%
Volatility factor................................. 0.688 0.600 0.700
Weighted average expected life.................... 5 years 5 years 5 years
The Black-Scholes options valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because our employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
our opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of our employee stock options. However, we have
presented the pro forma net loss and pro forma basic and diluted net loss per
common share using the assumptions noted above.
F-20
INHALE THERAPEUTIC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period, generally five
years. Our pro forma information follows (in thousands except for earnings per
share):
YEARS ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
--------- -------- --------
Pro forma net loss............................ $(122,989) $(48,077) $(24,325)
========= ======== ========
Pro forma basic and diluted net loss per
common share................................ $ (2.93) $ (1.42) $ (0.78)
========= ======== ========
WARRANTS
During the year ended 2000, we issued six warrants to purchase a total of
16,000 shares of common stock. Some of the warrants bear an exercise price of
$45.88 per share, expire in 10 years and are fully vested. Other warrants are
exercisable under certain circumstances at a price to be determined and expire
six years from the date on which any vested shares become exercisable. Total
charges recorded during 2000 as a result of these issuances was approximately
$0.1 million.
STOCK COMPENSATION
We recorded deferred compensation of approximately $1.2 million during the
year ended December 31, 2000. Deferred compensation of $0.1 million had been
recorded in the year ended December 31, 1999. These amounts represent the
difference between the exercise price and the deemed fair market value of
certain of our stock options granted in these periods and are being amortized to
expense over the three-year vesting period of the options.
RESERVED SHARES
A total of 14.9 million shares of common stock have been reserved for
issuance at December 31, 2000 for equity incentive plans and warrant exercises.
NOTE 8--INCOME TAXES
As of December 31, 2000, we had federal and state net operating loss
carryforwards of approximately $156.2 million and $30.8 million, respectively.
We also had federal and state research and other tax credit carryforwards of
approximately $3.1 million and $2.6 million, respectively. The federal and state
net operating loss and credit carryforwards will expire at various dates
beginning through 2020 if not utilized.
Utilization of the federal and state net operating loss and credit
carryforwards may be subject to a substantial annual limitation due to the
"change in ownership" provisions of the Internal Revenue Code of 1986 and
similar state provisions. The annual limitation may result in the expiration of
net operating losses and credits before utilization.
F-21
INHALE THERAPEUTIC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
Significant components of our deferred tax assets for federal and state
income taxes as of December 31 are as follows:
2000 1999
-------- --------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards........................ $55,000 $28,500
Research and other credits.............................. 4,900 3,700
Capitalized research expenses........................... 3,400 1,600
Deferred revenue........................................ 1,900 1,900
Depreciation............................................ 1,000 1,300
Other................................................... 1,900 2,100
------- -------
Total deferred tax assets................................. 68,100 39,100
Valuation allowance for deferred tax assets............... (68,100) (39,100)
------- -------
Net deferred tax assets................................... $ -- $ --
======= =======
Because of our lack of earnings history, the deferred tax assets have been
fully offset by a valuation allowance. The valuation allowance increased by
$29.0 million and $14.5 million during the years ended December 31, 2000 and
1999, respectively.
NOTE 9--STATEMENT OF CASH FLOWS DATA
YEARS ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Supplemental disclosure of cash flows information:
Interest paid............................................... $7,031 $ 470 $270
====== ====== ====
Supplemental schedule of non-cash investing and financing
activities:
Deferred compensation related to the issuance of stock
options................................................... $1,162 $ 964 $576
====== ====== ====
Issuance of common stock in connection with technology...... $ -- $5,000 $ --
====== ====== ====
Issuance of common stock and options in connection with
licensing agreement....................................... $ -- $ -- $284
====== ====== ====
NOTE 10--SUBSEQUENT EVENTS (UNAUDITED)
In January 2001, we acquired all of the capital shares of Bradford Particle
Design plc, a United Kingdom company, for approximately 3.75 million in newly
issued shares of our common stock and approximately $20 million in cash.
Bradford Particle Design plc's supercritical fluid processing technology reduces
what is commonly now a multi-stage powder manufacturing process to a single step
while improving product purity and consistency. A formal valuation by an
independent third party is currently in process which will result in a charge
reflecting purchased in-process research and development in connection with the
acquisition.
F-22