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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ________ to
________
Commission file number 0 - 22332
INSITE VISION INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 94-3015807
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
965 Atlantic Avenue
Alameda, CA 94501
(Address of Principal Executive Offices, including Zip Code)
Registrant's telephone number, including area code: (510) 865-8800
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 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 the 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. [X]
The aggregate market value of Common Stock, $.01 par value, held by
non-affiliates of the registrant as of January 30, 1998: $34,227,080 (based upon
the closing sale price of the Common Stock on January 30, 1998). Number of
shares of Common Stock, $.01 par value, outstanding as of January 30, 1998:
14,411,402.
DOCUMENTS INCORPORATED BY REFERENCE
Designated portions of the following document are incorporated by
reference into this Report on Form 10-K where indicated: portions of the Proxy
Statement for the registrant's 1998 Annual Meeting of Stockholders which is
estimated to be held on or about June 8, 1998 are incorporated by reference into
Part III.
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ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business....................................................................... 1
Item 2. Properties..................................................................... 20
Item 3. Legal Proceedings.............................................................. 20
Item 4. Submission of Matters to a Vote of Security Holders............................ 20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......... 20
Item 6. Selected Financial Data........................................................ 22
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.................................................................. 23
Item 8. Financial Statements and Supplementary Data.................................... 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure..................................................................... 39
PART III
Item 10 Directors and Executive Officers of the Registrant............................. 39
Item 11. Executive Compensation......................................................... 39
Item 12. Security Ownership of Certain Beneficial Owners and Management................. 39
Item 13. Certain Relationships and Related Transactions................................. 39
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............... 39
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PART I
ITEM 1. BUSINESS
Except for the historical information contained herein, the discussion
in this Annual Report on Form 10-K contains certain forward-looking statements
that involve risks and uncertainties, such as statements of the Company's plans,
objectives, expectations and intentions. The cautionary statements made in this
document should be read as applicable to all related forward-looking statements
wherever they appear in this document. The Company's actual results could differ
materially from those discussed here. Factors that could cause or contribute to
such differences include those discussed below in "Risk Factors," as well as
those discussed elsewhere herein.
THE COMPANY
InSite Vision Incorporated ("InSite," "InSite Vision" or the "Company")
is developing three technology platforms in the field of ophthalmology: (1)
genetically-based tools for the diagnosis and prognosis of glaucoma; (2)
ophthalmic pharmaceutical products based on the Company's proprietary
DuraSite(R) eyedrop-based drug delivery technology; and (3) a delivery system
for the administration of drugs to the retina and the posterior chamber of the
eye.
Glaucoma Genetics. The Company's glaucoma genetics program, which is
being carried out in collaboration with academic researchers, is focused on
discovering genes that are associated with glaucoma, and the mutations on these
genes that cause the disease. This genetic information then may be applied to
develop new glaucoma diagnostic and prognostic tools. To date, the Company's
academic collaborators have identified genes associated with primary open-angle
glaucoma (the most prevalent form of the disease in adults), juvenile glaucoma
and primary congenital glaucoma. A prototype diagnostic/prognostic technology,
ISV-900, which is capable of identifying multiple glaucoma genetic markers from
a single sample, has been developed and the Company is discussing its
commercialization with several potential partners. The Company's academic
collaborators for its glaucoma genetics program are at the University of
California, San Francisco ("UCSF"), at the University of Connecticut Health
Center ("UCHC") and other institutions in the U.S. and Europe.
DuraSite-Based Product and Candidates. The DuraSite delivery system is
a patented eyedrop formulation comprising a cross-linked carboxyl-containing
polymer which incorporates the drug to be delivered to the eye. The formulation
is instilled in the cul-de-sac of the eye as a small volume eyedrop and remains
in the eye for up to several hours during which time the active drug ingredient
is gradually released. This increased residence time is designed to permit lower
concentrations of a drug to be administered over a longer period of time,
thereby minimizing the inconvenience of frequent dosing and reducing potential
related adverse side effects. Eyedrops delivered in the DuraSite system contrast
to conventional eyedrops which typically only last a few minutes in the eye,
thus requiring delivery of a highly concentrated burst of drug and frequent
administration to sustain therapeutic levels. DuraSite can be customized to
deliver a variety of compounds with a broad range of molecular weights and other
properties.
The first product utilizing the DuraSite technology, AquaSite(R) dry
eye treatment, was launched as an over-the-counter ("OTC") medication in 1992 by
CIBA Vision Ophthalmics ("CIBA Vision"), to which the Company has licensed
certain co-exclusive rights. Four DuraSite-based product candidates are in Phase
I or Phase II clinical testing and others are in preclinical testing. In
connection with its DuraSite development efforts, the Company has established
collaborations with Pharmacia & Upjohn, Inc. ("P&U") and British Biotechnology
Pharmaceuticals, Inc. ("British Biotech"), among others and has licensed
marketing rights to certain DuraSite-based product candidates to CIBA Vision and
Bausch & Lomb Incorporated ("B&L"). The Company is currently in discussions with
potential partners to out-license other product candidates.
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Due to the rapid development of the glaucoma genetics program, during
1997 the Company elected to utilize additional resources in this area rather
than continue to employ substantially all of its resources toward the
development of its DuraSite-based product candidates. Accordingly, the Company
has deferred further development of its BetaSite(R), PilaSite(R) and
MethaSite(TM) product candidates.
Retinal Delivery System. The Company's third technology platform
comprises a patented device for the controlled, non-surgical delivery of
ophthalmic drugs to the retina and other tissues in the posterior chamber (rear)
of the eye. The device, ISV-014, is designed to be inserted by the
ophthalmologist above the globe of the eye and beneath the upper eyelid,
extending around the globe to the back of the eye. Its features include an
adjustable collar that controls the depth of penetration, a curved neck to fit
around the globe, a metering pump to regulate the amount of drug to be delivered
and fiberoptics to guide placement. The combination of this device technology
with polymer-based drug platforms may permit long term delivery of therapeutic
agents to treat several retinal diseases, most of which cannot be treated at the
present time. During 1997, the Company signed an exclusive license agreement
with the University of Rochester ("U. Roch.") to commercialize the cannular
delivery device.
Business Strategy. The Company's business strategy is to license
promising product candidates and technologies from academic institutions and
other companies, to conduct preclinical and limited clinical testing, if
necessary, and to partner with pharmaceutical companies to complete clinical
development and regulatory filings as needed and to market its products. The
Company also has internally developed DuraSite-based product candidates using
either non-proprietary drugs or compounds developed by others for non-ophthalmic
indications. As with in-licensed product candidates, the Company either has or
plans to partner with pharmaceutical companies to complete clinical development
and commercialization of its own product candidates.
OPHTHALMIC PHARMACEUTICAL MARKET
In 1997, the market for ophthalmic prescription pharmaceuticals in the
U.S. was approximately $1.3 billion. The principal categories of ophthalmic
drugs are glaucoma treatments ($556 million), anti-biotics ($221 million),
anti-allergic ($186 million), and anti-viral ($160 million) products.
However many eye conditions, including those that involve damage to the retina,
are untreated at present. For example, macular degeneration, which affects 10
million or more people in the U.S., and diabetic retinopathy, a frequent
complication of diabetes, have no effective drug treatments and surgical
interventions for these diseases carry risks of significant side effects.
Glaucoma is the leading cause of preventable blindness in the U.S.,
affecting 2 to 3 million people. The prevalence of the disease in first-degree
relatives of affected patients has been documented to be as high as 7 to 10
times that of the general population. Glaucoma also may occur as a complication
of conditions such as diabetes, or as a result of extended steroid use.
The prevalence of eye disease is ten times greater in persons over the
age of 65 than under age 65, and the U.S. Census Bureau projects that the U.S.
population over age 65 will increase from 34 million in 1997 to approximately 69
million by the year 2030. This aging of the population in the U.S. and other
developed countries is a significant factor which the Company believes will
contribute to increased demand for new ophthalmic products.
In addition to changing demographics, the Company believes that recent
improvements in medical technology, such as increasingly sophisticated
diagnostic techniques, will allow identification of ocular diseases at an
earlier stage, enabling more effective treatments and expanding the range of
treatment regimens available to the ophthalmologist. Further, the Company
believes that the recent emergence of new laser-based procedures to correct
certain vision problems may substantially increase the need for comfortable,
extended-release drug therapy during the post-surgical ocular healing process.
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PRODUCTS AND PRODUCT CANDIDATES
The following table summarizes the current status of the Company's
principal products and product candidates. A more detailed description of each
product and product candidate follows the table. There can be no assurance that
any of the listed products or product candidates will progress beyond its
current state of development, receive necessary regulatory approval or be
successfully marketed.
PRODUCTS AND PRODUCT CANDIDATES
ANTICIPATED
PRODUCT INDICATIONS BENEFITS STATUS(1)
------- ----------- -------- ---------
GLAUCOMA GENETICS
ISV - 900 Glaucoma prognostic/ Detect disease susceptibility Pre-commercialization
diagnostic (2)
GLAUCOMA PRODUCT CANDIDATES
ISV - 205 Steroid-induced IOP Treat/prevent disease Phase I
elevation, glaucoma progression
ISV - 208 Glaucoma Once daily product with Phase I
improved comfort
OTHER TOPICAL PRODUCT AND
PRODUCT CANDIDATES
AquaSite Dry eye Reduced dosing frequency and Marketed (OTC)
extended duration of action
ISV - 611 Allergic conjunctivitis Improved safety and efficacy Phase II
ISV - 120 Pterygium recurrence No satisfactory existing Phase II
prevention therapy
ISV - 205 Inflammation and Reduced dosing frequency Preclinical
analgesia
ToPreSite(TM) Inflammation and Reduced dosing frequency Preclinical
infection
RETINAL DEVICE AND PRODUCT
ISV - 014 Retinal drug delivery Non-surgical delivery of Research
device drugs to the retina
ISV - 600 Diabetic retinopathy, No satisfactory existing drug Research
Cataract, Macular therapy
degeneration
1) All products except ISV-900, AquaSite and ISV-014 are expected to be
prescription pharmaceuticals. As denoted in the table, "Preclinical"
indicates that a specific compound is being tested in preclinical studies
in preparation for filing an investigational new drug application ("IND").
For a description of preclinical trials, IND, Phase I, Phase II and Phase
III clinical trials and NDA, see "---Government Regulation."
2) A prototype diagnostic/prognostic technology has been developed and the
Company is discussing its commercialization with several potential
partners.
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GLAUCOMA GENETICS
Glaucoma is the leading cause of preventable blindness in the U.S.,
affecting an estimated 2 to 3 million people. Glaucoma-related pharmaceutical
sales were approximately $550 million in the U.S. in 1997. The most prevalent
form of glaucoma in adults is primary open-angle glaucoma. Other forms of the
disease include primary congenital glaucoma, a leading cause of blindness in
infants, and juvenile glaucoma which affects children and young adults.
Often called the "silent thief of sight" because of its lack of
symptoms, glaucoma is believed to result when the flow of fluid through the eye
is impaired. This may lead to elevated intraocular pressure (IOP"), which
increases pressure on the optic nerve and can cause irreversible vision loss if
left untreated.
ISV-900. There is accumulating evidence that genetic predisposition is
a major factor in the development of several forms of glaucoma. (Recent data has
indicated the prevalence of primary open-angle glaucoma (POAG) in first-degree
relatives of affected patients to be as high as 7 to 10 times that of the
general population.) In January 1997, the journal SCIENCE published a paper
authored by, among others, the Company's collaborators at UCSF, which described
a gene associated with primary open-angle glaucoma and juvenile glaucoma. In
April 1997, a publication in the journal HUMAN MOLECULAR GENETICS authored by
the Company's collaborators at UCHC reported the identification of a gene
responsible for primary congenital glaucoma.
Current glaucoma tests are generally unable to detect the disease
before substantial damage to the optic nerve has occurred. Gene-based tests may
make it possible to identify patients at risk and initiate treatment before
permanent optic nerve damage and vision loss occurs. The Company's ISV-900
program is intended to discover the appropriate genetic markers for certain
forms of glaucoma and to incorporate those markers into prognostic and
diagnostic tests.
In August 1997, the Company exercised its option to obtain an exclusive
worldwide license from UCHC for the rights to commercialize research related to
genetic mutations associated with primary congenital glaucoma. In November 1994,
the Company obtained an exclusive worldwide license from the Regents of the
University of California (UC Regents) for a gene and associated mutations that
cause open angle glaucoma. Through these collaborations, scientists at both
institutions are evaluating the potential use of several gene sequences to
develop genetic markers which may identify individuals susceptible to developing
glaucoma.
GLAUCOMA CANDIDATES
ISV-205. InSite Vision's ISV-205 product candidate contains the drug
diclofenac formulated in the DuraSite sustained-release delivery vehicle.
Diclofenac is a non-steroidal anti-inflammatory drug ("NSAID") currently used to
treat ocular inflammation. Co-exclusive rights, in the U.S., to develop,
manufacture, use and sell ISV-205 to treat inflammation and infection or
analgesia, were licensed to CIBA Vision in May 1996. At higher concentrations
than currently prescribed, NSAIDs can block steroid-induced IOP elevation by
inhibiting the production of a protein (the "55/66 kDa protein") that appears to
affect the fluid balance in the eye. The ISV-205 product candidate contains
concentrations of diclofenac which have been shown in cell and organ culture
systems to inhibit the production of 55/66 kDa protein.
A Phase I study was completed in 1997 which evaluated the safety of
concentrations as high as 0.6% diclofenac. The initial indication to be studied
is expected to be the prevention of IOP elevation following steroid use. Other
potential indications may include glaucoma prevention, analgesia and other
anti-inflammatory indications.
ISV-208. During 1996, the Company entered into an agreement with B&L to
develop a DuraSite-based formulation of an ophthalmic beta-blocker for the
once-daily treatment of elevated IOP associated with glaucoma and ocular
hypertension. Under the terms of the agreement, B&L obtained worldwide exclusive
rights to manufacture, use and sell the new formulation. Phase III clinical
trials of ISV-208 are scheduled to begin in 1998.
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OTHER TOPICAL PRODUCT AND PRODUCT CANDIDATES
AquaSite. The first product utilizing InSite's DuraSite technology was
introduced to the OTC market in the U.S. in October 1992 by CIBA Vision. The
Company receives a royalty on sales of AquaSite by CIBA Vision. The product
contains the DuraSite formulation and demulcents for the symptomatic treatment
of dry eye. Dry eye is an extremely common condition frequently associated with
adverse environmental conditions such as heat and dryness. The post-menopausal
state in women is the most frequent underlying medically related cause of the
condition. In addition, some patients with rheumatoid arthritis and Sjogren's
syndrome are severely afflicted. Dry eye products are designed to augment
diminished natural tear production and to lubricate and protect the ocular
surface. AquaSite is designed to have a longer ocular residence time than
currently available artificial tear products. The dry eye market is highly
fragmented and characterized by numerous products, many of which have relatively
small market share.
ISV-611 is an ophthalmic formulation of lexipafant which the Company is
evaluating as a potential alternative for treatment of allergic conjunctivitis.
Lexipafant is an antagonist of platelet activating factor, a substance known to
be involved in a variety of acute and chronic inflammatory and ischemic
diseases. The Company obtains lexipafant through a 1993 collaborative agreement
with British Biotech, developer of the substance. British Biotech is conducting
Phase III clinical testing of lexipafant for pancreatitis. In March 1997, the
Company announced the completion of a Phase I study which indicated that ISV-611
was safe and well-tolerated in concentrations up to 0.1%. Based on these results
and preclinical evaluations, the Company initiated a Phase II study in January
1998. See "Risk Factors - Dependence on Third Parties."
ISV-120 is a DuraSite-based ophthalmic formulation of batimastat which
the Company is evaluating for its potential in preventing the recurrence of
pterygium, a vascular overgrowth which occurs on the front of the eye and may
impair vision. In August 1997, the Company began a Phase II trial which will
evaluate the safety and preliminary efficacy of a three-month course of
treatment with ISV-120 following surgical removal of pterygia. Patients will be
followed for one year after surgery. The Company obtains batimastat through a
1992 agreement with British Biotech, which in December 1996 advised the Company
that it had discontinued development and manufacturing of this product. See
"Risk Factors - Dependence on Third Parties."
ToPreSite is a compound containing the antibiotic tobramycin and the
steroid prednisolone acetate, for use when both infection and inflammation are
present in the eye. In May 1996, the Company entered into a licensing agreement
with CIBA Vision which grants CIBA Vision the co-exclusive right to manufacture,
use and sell ToPreSite in the U.S.
RETINAL DEVICE AND PRODUCT
Ophthalmic conditions that involve retinal damage include macular
degeneration, which affects 10 million or more people in the U.S., and diabetic
retinopathy, a common side effect of diabetes. Approximately 9 million people in
the U.S. are diabetics. Both macular degeneration and diabetic retinopathy can
lead to irreversible vision loss and blindness. Current treatment of retinal
diseases may generally involve surgery and laser treatments which can lead to
loss of vision, retinal detachment and infection. There is no effective drug
therapy for these conditions.
ISV-014 is a patented device for the controlled, non-surgical delivery
of ophthalmic drugs to the back of the globe for drug delivery to the posterior
chamber (rear) of the eye. The Company licensed the technology from U. Roch.
The device has a needle with an adjustable collar that limits its depth of
penetration, attached to a curved neck. It is inserted above the eyeball and
beneath the upper eyelid by the ophthalmologist and reaches around the globe to
the back of the eye. A metering pump regulates the amount of drug to be
delivered and fiberoptics guide placement.
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ISV-600 is an ophthalmic formulation of tirilazad mesylate, which the
Company is evaluating in preclinical studies for its potential to treat various
retinal ischemic diseases. Tirilazad mesylate is a potent lipid peroxidation
inhibitor/free radical scavenger which may protect the retina from ischemic
damages caused by certain pathological conditions such as macular degeneration
or diabetic retinopathy.
COLLABORATIVE AND LICENSING AGREEMENTS
As a key element of its business strategy, the Company has entered
into, and expects to enter into additional, research collaborations, licensing
agreements and corporate collaborations. However, there can be no assurance that
the Company will be able to negotiate acceptable collaborative or licensing
agreements, or that its existing collaborative agreements will be successful or
will be renewed when they expire.
CIBA Vision Ophthalmics (CIBA Vision). The Company has entered into
license agreements with CIBA Vision (the "CIBA Vision Agreements"), pursuant to
which the Company granted CIBA Vision a co-exclusive license to manufacture,
have manufactured, use and sell fluorometholone and tear replenishment products
utilizing the DuraSite technology in the U.S. and Canada, ToPreSite, a product
candidate for ocular inflammation/infection, and ISV-205 for non-glaucoma
indications.
Bausch and Lomb. In July 1996, the Company entered into a license
agreement ("the B&L Agreement") with B&L whereby InSite granted B&L an exclusive
worldwide royalty bearing license to make, use and sell PilaSite and ISV-208.
B&L paid InSite an up-front license fee of $500,000 and is obligated to pay
royalties on net sales of the licensed products. In addition, B&L made a $2.0
million investment in the Company, is sharing the cost of developing ISV-208 and
agreed to manufacture other InSite products, on behalf of InSite.
Pharmacia & Upjohn. InSite has an agreement with P&U (the "P&U
Agreement") pursuant to which P&U granted InSite an option, exercisable until
December 31, 1998, to obtain an exclusive, worldwide license of certain rights
with respect to the active ingredient in the Company's ISV-600 candidate.
British Biotech. In November 1992, InSite entered into a collaboration
agreement with British Biotech (the "ISV-120 Agreement"), pursuant to which
British Biotech has granted InSite the right to conduct, at InSite's own
expense, preclinical and clinical trials on British Biotech's batimastat
compound and the exclusive option to initiate negotiations with British Biotech
to pursue further development of ISV-120. In December 1996 British Biotech
advised the Company that it had discontinued its development and manufacturing
of this product. Subject to certain rights of early termination, the ISV-120
Agreement will continue until the earlier of a specified period following
completion of InSite's last human clinical trial on the compound or June 30,
1998.
In April 1993, InSite and British Biotech entered into a collaboration
agreement with respect to another British Biotech compound (the "ISV-611
Agreement") on terms substantially similar to the ISV-120 Agreement
UC Regents. In March 1993, the Company entered into an exclusive
license agreement with the UC Regents for the development of ISV-205 and, in
August 1994, the parties entered into another exclusive license agreement for
the use of a nucleic acid sequence that codes for a protein associated with
glaucoma. Under both agreements, the Company paid initial licensing fees and
will make royalty payments to the UC Regents on future product sales, if any.
University of Connecticut Health Center ("UCHC"). In August 1997 the
Company exercised its option to obtain an exclusive worldwide license from UCHC
for diagnostic uses of the newly discovered gene for primary congenital
glaucoma. The Company also has an option for a worldwide exclusive license to
commercialize technologies related to certain research UCHC is conducting in the
area of Adult-Onset
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Primary Open Angle Glaucoma. Under the agreements, the Company will pay a
licensing fee and will make royalty payments on future product sales, if any.
University of Rochester. In August 1997, the Company entered into an
exclusive license agreement with U. Roch. to commercialize technologies related
to an intraretinal delivery device. Under the agreement, the Company paid an
initial licensing fee and will pay royalties to U. Roch. on future sales of
licensed products, if any.
Columbia Laboratories, Inc. In February 1992, InSite entered into a
cross-license agreement (the "Columbia Agreement") with Columbia Laboratories,
Inc. ("Columbia"), pursuant to which Columbia granted InSite a perpetual,
exclusive, irrevocable, royalty-free license to a polymer technology upon which
DuraSite is based. This license permits InSite to make, use and sell products
using such polymer technology for non-veterinary ophthalmic indications in the
OTC and prescription market in North America and East Asia (the "Columbia
Territory"), and in the prescription market in countries outside the Columbia
Territory. In exchange, InSite granted Columbia a perpetual, exclusive,
irrevocable, royalty-free license, with the right to sublicense, to use certain
DuraSite technology in the OTC market outside the Columbia Territory. In
addition, InSite also granted Columbia a perpetual, exclusive, irrevocable,
worldwide license to certain DuraSite technology in the veterinary field. Under
certain circumstances, certain of the licenses in the Columbia Agreement become
non-exclusive. Subject to certain rights of early termination, the Columbia
Agreement continues in effect until the later of January 2002 or expiration of
all patents covered by the DuraSite technology to which Columbia has certain
rights.
Other. As part of InSite's basic strategy, InSite continually discusses
entering into agreements with other companies, universities and research
institutions concerning the licensing of additional therapeutic agents and drug
delivery technologies to complement and expand InSite's family of proprietary
ophthalmic products. InSite intends to continue exploring licensing and
collaborative opportunities.
PATENTS AND PROPRIETARY RIGHTS
Patents and other proprietary rights are important to the Company's
business. The Company's policy is to file patent applications seeking to protect
technology, inventions and improvements to its inventions that are considered
important to the development of its business. Additionally, the Company's policy
is to assist the UC Regents and UCHC in filing patent applications seeking to
protect inventions which are the subject of the Company's agreements with those
institutions. The Company also relies upon trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
its competitive position. InSite's DuraSite drug delivery products are made
under patents and applications, including four U.S. patents, owned by Columbia
and exclusively licensed to InSite in the field of human ophthalmic
applications. See " -- Collaborative and Licensing Agreements." In addition, the
Company has filed a number of patent applications in the U.S. relating to the
Company's DuraSite technology, as well as foreign versions of certain of these
applications in many countries. Of these applications, four U.S. patents have
been issued. In addition, the Company has obtained two U.S. patents on its unit
dose dispenser. The Company has received six additional U.S. patents directed
toward certain uses of lazaroids in topical ophthalmic applications. Of the
patent applications licensed from the UC Regents, three patents have issued.
Several other patent applications by the Company and by the UC Regents and UCHC
relating to the foregoing and other aspects of the Company's business and
potential business are also pending.
The patent positions of pharmaceutical companies, including InSite, are
uncertain and involve complex legal and factual questions. In addition, the
coverage claimed in a patent application can be significantly reduced before a
patent is issued. Consequently, the Company does not know whether any of its
pending patent applications will result in the issuance of patents or if any of
its patents will provide significant proprietary protection. Since patent
applications are maintained in secrecy until patents issue in the U.S. or their
foreign counterparts, if any, publish, the Company cannot be certain that it or
any licensor was the first to file patent applications for such inventions.
Moreover, the Company might have to participate in interference proceedings
declared by the U.S. Patent and Trademark Office to determine
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priority of invention, which could result in substantial cost to the Company,
even if the eventual outcome were favorable. There can be no assurance that the
Company's patents will be held valid or enforceable by a court or that a
competitor's technology or product would be found to infringe such patents.
A number of pharmaceutical companies and research and academic
institutions have developed technologies, filed patent applications or received
patents on various technologies that may be related to the Company's business.
Some of these technologies, applications or patents may conflict with the
Company's technologies or patent applications. Such conflict could limit the
scope of the patents, if any, that the Company may be able to obtain or result
in the denial of the Company's patent applications. In addition, if patents that
cover the Company's activities have been or are issued to other companies, there
can be no assurance that the Company would be able to obtain licenses to these
patents, at all, or at a reasonable cost, or be able to develop or obtain
alternative technology.
In addition to patent protection, the Company also relies upon trade
secret protection for its confidential and proprietary information. There can be
no assurance that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the Company's
trade secrets, that such trade secrets will not be disclosed or that the Company
can effectively protect its rights to unpatented trade secrets.
ACCESS TO PROPRIETARY COMPOUNDS
The Company believes its drug delivery technology may expand the
ophthalmic pharmaceutical market by permitting the novel use of drugs for
ophthalmic indications that are currently used or being developed for
non-ophthalmic indications. However, the Company may be required to obtain
licenses from third parties that have rights to these compounds in order to
conduct certain research, to develop or to market products that contain such
compounds. There can be no assurance that such licenses will be available on
commercially reasonable terms, if at all. See "Business - Collaborative and
Licensing Agreements."
RESEARCH AND DEVELOPMENT
The Company's research and development group at December 31, 1997
numbered 35 people, of whom nine have Ph.D. or D.V.M. degrees. Research and
development expenses sponsored by the Company during 1997 were $7.2 million,
which is net of $534,000 funded by B&L as part of the 1996 ISV-208 joint
development agreement. During 1996 and 1995, research and development expenses
were $5.5 million, which is net of $366,000 funded by B&L, and $8.1 million,
respectively. See "Business - Collaborative and Licensing Agreements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
MANUFACTURING
The Company has no experience or facilities for the manufacture of
products for commercial processes. Moreover, the Company currently has no
intention of developing such experience or implementing such facilities. The
Company has a pilot facility, licensed by the State of California, to produce
potential products for Phase I and certain Phase II clinical trials. However, as
stated above, the Company has no large-scale manufacturing capacity and relies
on third parties, such as B&L, for supplies and materials necessary for all of
its Phase III clinical trials. For example, the Company and B&L have entered
into an agreement to establish facilities capable of manufacturing and supplying
certain Phase III clinical supplies and commercial products at the B&L site in
Tampa, Florida. If the Company should encounter delays or difficulties in
establishing and maintaining its relationship with B&L or other qualified
manufacturers to produce, package and distribute its finished products, then
clinical trials, regulatory filings, market introduction and subsequent sales of
such products would be adversely affected. See "Risk Factors - No Commercial
Manufacturing Experience."
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MARKETING AND SALES
In connection with its November 1995 restructuring, the Company elected
not to proceed with plans to establish its own sales and marketing organization.
Instead, the Company plans to enter into arrangements with one or more
pharmaceutical companies to market its products. There can be no assurance that
the Company will be able to conclude such arrangements on acceptable terms, if
at all.
CIBA Vision. In 1991, the Company entered into a co-exclusive rights
agreement to market the AquaSite product in the U.S. and Canada. Additionally,
in May 1996, the Company granted CIBA Vision a co-exclusive U.S. license for
ISV-205 for non-glaucoma indications, and co-exclusive marketing rights within
the USA to sell and use ToPreSite. InSite Vision's trademark is being used,
under license, by CIBA Vision for AquaSite dry eye treatment and the Company's
patents are identified on the AquaSite packaging. The Company received a one
time licensing fee and is entitled to royalties based on the net sales of the
products, if any.
Bausch and Lomb. In July 1996, the Company entered into an exclusive
worldwide royalty bearing license agreement whereby B&L has agreed to market and
sell ISV-208. Under the terms of the agreement, the Company is entitled to
royalties based on net sales of the products, if any. See "Risk Factors -
Marketing and Sales."
COMPETITION
There are many competitors of the Company in the U.S. and abroad. These
companies include ophthalmic-oriented companies that market a broad portfolio of
products, as well as large integrated pharmaceutical companies that market a
limited number of ophthalmic pharmaceuticals in addition to many other
pharmaceuticals. Many of these companies have substantially greater financial,
technical, marketing and human resources than those of the Company and may
succeed in developing technologies and products that are more effective, safer
or more commercially acceptable than any which have been or are being developed
by the Company. These competitors may also succeed in obtaining cost advantages,
patent protection or other intellectual property rights that would block the
Company's ability to develop its potential products, or in obtaining regulatory
approval for the commercialization of their products more rapidly or effectively
than the Company. The ophthalmic prescription pharmaceutical market in the U.S.
is dominated by six companies: Allergan Pharmaceuticals, a division of Allergan,
Inc.; Alcon Laboratories, Inc., a division of Nestle Company; Bausch and Lomb;
CIBA Vision, a division of Novartis Ltd.; Merck, Sharp & Dohme, a division of
Merck & Co., Inc.; and Pharmacia & Upjohn, Inc.
The Company believes that there will be increasing competition from new
products entering the market that are covered by exclusive marketing rights and,
to a lesser degree, from pharmaceuticals that become generic. The Company is
aware of certain products manufactured or under development by competitors that
are used for the treatment of certain ophthalmic indications which the Company
has targeted for product development. The Company's competitive position will
depend on its ability to develop enhanced or innovative pharmaceuticals,
maintain a proprietary position in its technology and products, obtain required
governmental approvals on a timely basis, attract and retain key personnel and
develop effective products that can be manufactured on a cost-effective basis
and marketed successfully.
Over the longer term, the Company's (and its partners') ability to
successfully market the current product, expand its usage and bring new products
to the marketplace will depend on many factors, including the effectiveness and
safety of the products, FDA and foreign regulatory agencies' approvals, the
degree of patent protection afforded to particular products, and the effect of
the advent of managed care as an important purchaser of pharmaceutical products.
See "Risk Factors - Competition."
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GOVERNMENT REGULATION
The manufacturing and marketing of the Company's products and its
research and development activities are subject to regulation by numerous
governmental authorities in the U.S. and other countries. In the U.S., drugs are
subject to rigorous FDA regulation. The Federal Food, Drug and Cosmetic Act and
regulations promulgated thereunder govern the testing, manufacture, labeling,
storage, record keeping, approval, advertising and promotion in the U.S. of the
Company's products. In addition to FDA regulations, the Company is also subject
to other federal and state regulations such as the Occupational Safety and
Health Act and the Environmental Protection Act. Product development and
approval within this regulatory framework take a number of years and involve the
expenditure of substantial resources.
While the FDA currently does not regulate genetic tests it has stated
that it has the right to do so, and there can be no assurance that the FDA will
not seek to regulate such tests in the future. If the FDA should require that
genetic tests receive FDA approval prior to their use there can be no assurance
such approval would be received on a timely basis, if at all. The failure to
receive such approval could require the Company to develop alternative testing
methods, which could result in the delay of such tests reaching the market, if
at all. Such a delay could have a materially adverse effect on the Company.
The steps required before a pharmaceutical agent may be marketed in the
U.S. include (i) preclinical laboratory and animal tests, (ii) the submission to
the FDA of an Investigational New Drug application ("IND"), (iii) adequate and
well-controlled human clinical trials to establish the safety and efficacy of
the drug, (iv) the submission of an NDA or Product License Application ("PLA")
to the FDA and (v) the FDA approval of the NDA or PLA prior to any commercial
sale or shipment of the drug. In addition to obtaining FDA approval for each
product, each domestic drug 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 in compliance with
separate regulatory requirements.
Preclinical tests include laboratory evaluation of product chemistry
and animal studies to assess the potential safety and efficacy of the product
and its formulation. The results of the preclinical tests are submitted to the
FDA as part of an IND and, unless the FDA objects, the IND will become effective
30 days following its receipt by the FDA.
Clinical trials involve the administration of the drug to healthy
volunteers or to patients under the supervision of a qualified principal
investigator. Clinical trials are conducted in accordance with protocols that
detail the objectives of the study, the parameters to be used to monitor safety,
and the efficacy criteria to be evaluated. Each protocol is submitted to the FDA
as part of the IND. Each clinical study is conducted under the auspices of an
independent Institutional Review Board which considers, among other things,
ethical factors and the rights, welfare and safety of human subjects.
Clinical trials are typically conducted in three sequential phases, but
the phases may overlap. In Phase I, the initial introduction of the drug into
human subjects, the drug is tested for safety (adverse effects), dosage
tolerance, metabolism, distribution, excretion and clinical pharmacology. Phase
II involves studies in a limited patient population to (i) determine the
efficacy of the drug for specific targeted indications, (ii) determine dosage
tolerance and optimal dosage and (iii) identify possible adverse effects and
safety risks. When a compound is found to be effective and to have an acceptable
safety profile in Phase II evaluations, Phase III trials are undertaken to
further evaluate clinical efficacy and to further test for safety within an
expanded patient population at multiple clinical study sites. The FDA reviews
both the clinical plans and the results of the trials and may discontinue the
trials at any time if there are significant safety issues.
The results of the preclinical studies and clinical studies are
submitted to the FDA in the form of an NDA or PLA for marketing approval. The
testing and approval process is likely to require substantial time and effort
and there can be no assurance that any approval will be granted on a timely
basis, if at all.
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Additional animal studies or clinical trials may be requested during the FDA
review period and may delay marketing approval. After FDA approval for the
initial indications, further clinical trials are necessary to gain approval for
the use of the product for additional indications. The FDA may also require
post-marketing testing to monitor for adverse effects, which can involve
significant expense.
Among the conditions for manufacture of clinical drug supplies and for
NDA or PLA approval is the requirement that the prospective manufacturer's
quality control and manufacturing procedures conform to GMP. Prior to approval,
manufacturing facilities are subject to FDA and/or other regulatory agency
inspection to ensure compliance with GMP. Manufacturing facilities are subject
to periodic regulatory inspection to ensure ongoing compliance.
For marketing outside the U.S., the Company also is subject to foreign
regulatory requirements governing human clinical trials and marketing approval
for drugs. The requirements governing the conduct of clinical trials, product
licensing, pricing and reimbursement vary widely from country to country.
SCIENTIFIC AND BUSINESS ADVISORS
The Company has access to a number of academic and industry advisors
with expertise in clinical ophthalmology and pharmaceutical development,
marketing and sales. The Company's advisors meet with management and key
scientific employees of the Company on an ad hoc basis to provide advice in
their respective areas of expertise and further assist the Company by
periodically reviewing with management the Company's preclinical, clinical and
marketing activities. The Company plans to make arrangements with other
individuals to join as advisors as appropriate. Although the Company expects to
receive guidance from the advisors, all of such advisors are employed on a
full-time basis by other entities, or are primarily engaged in business
activities outside the Company, and may have other commitments to or consulting
or advisory contracts with other entities that may conflict or compete with
their obligations to the Company.
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The Company's advisors are as follows:
Name Position
---- --------
Barbara L. Handelin, Ph.D. Advisor and Consultant on Genetics
Roy Karnovsky Advisor and Consultant in Business Development and Marketing
Steven G. Kramer, M. D., Ph.D. Chairman, Department of Ophthalmology, Director of Beckman Vision
Center and Professor, University of California, San Francisco
Richard Lewis, M. D. Ophthalmologist; Assistant Clinical Professor, University of
California, Davis; Chief of Ophthalmology, Mercy General Hospital,
Sacramento
Michael Marmor, M. D. Professor, Department of Ophthalmology, Stanford University School of
Medicine
Thai D. Nguyen, Ph.D. Assistant Professor, University of California, San Francisco
Gary D. Novack, Ph.D. Founder and President, PharmaLogic Development, Inc.; former Associate
Director for Glaucoma Research at Allergan, Inc.
Jon R. Polansky, M. D. Associate Professor of Ophthalmology, University of California, San
Francisco
Mansoor Sarfarazi, Ph.D. Associate Professor, Department of Surgery, University of Connecticut
Health Center
Roger Vogel, M. D. Medical Director
EMPLOYEES
As of December 31, 1997, the Company employed 48 persons, including 43
full time employees. None of the Company's employees is covered by a collective
bargaining agreement. The Company considers its employee relations to be good.
The Company also utilizes independent consultants to advise the Company in
certain areas of its scientific and business operations.
RISK FACTORS
EARLY STAGE OF DEVELOPMENT; TECHNOLOGICAL UNCERTAINTY
InSite is at an early stage of development. Only one product utilizing
the Company's DuraSite technology, an over-the-counter ("OTC") dry eye
treatment, is currently being marketed. Most of the potential products currently
under development by the Company will require significant additional research
and development, and preclinical and clinical testing, prior to submission to
regulatory authorities for marketing approval. The Company's potential products
are subject to the risks of failure inherent in the development of products
based on new technologies. These risks include the possibilities that the
Company's technology or any or all of its potential products will be found to be
unsafe, ineffective, or otherwise fail to receive necessary marketing clearance;
that the potential products, if safe and effective, will be difficult to
manufacture or market; that proprietary rights of third parties will preclude
the Company from marketing products; or that third parties will market superior,
equivalent or more cost-effective products. As a result, there can be no
assurance that the Company's research and development activities will result in
any commercially viable products.
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FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company will require substantial additional funds to conduct the
development and testing of its potential products and to manufacture and market
any products that may be developed. The Company's future capital requirements
will depend on numerous factors, including the progress of its research and
development programs, the progress of preclinical and clinical testing, the time
and costs involved in obtaining regulatory approvals, the cost of filing,
prosecuting, defending and enforcing patent claims and other intellectual
property rights, competing technological and market developments, changes in the
Company's existing collaborative and licensing relationships, the ability of the
Company to establish corporate partnerships for the manufacture and marketing of
its potential products, and the purchase of additional capital equipment. The
Company intends to seek additional funding through public or private equity or
debt financings, collaborative or other arrangements, or from other sources.
There can be no assurance that additional financing will be available from any
of these sources or, if available, that it will be available on acceptable
terms. Any failure by the Company to obtain additional funding on acceptable
terms, or at all, would have a material adverse effect on the Company's
business, financial condition and results of operations. If additional funds are
raised by issuing equity securities, significant dilution to existing
stockholders may result. If adequate funds are not otherwise available, the
Company may be required to delay, scale back or eliminate one or more of its
research, discovery or development programs, or to obtain funds through entering
into arrangements with collaborators or others that may require the Company to
relinquish rights to certain of its technologies, product candidates or
products, or to cease operations.
The Company believes that its cash and cash equivalents will be
sufficient to finance its working capital and capital expenditure requirements
through 1998.
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE FINANCIAL RESULTS
The Company has incurred significant operating losses since its
inception in 1986 and, as of December 31, 1997, the Company's accumulated
deficit was approximately $76.8 million. The amount of net losses and the time
required by the Company to reach profitability are uncertain. The Company's
ability to achieve profitability depends upon its ability, alone or with others,
to complete successful development of its potential products, conduct clinical
trials, obtain required regulatory approvals and successfully manufacture and
market its products. There can be no assurance that the Company will ever
achieve significant revenue or profitability.
DEPENDENCE ON THIRD PARTIES
In connection with its restructuring in November 1995, the Company
elected not to proceed with plans to establish a dedicated sales and marketing
organization. Therefore, in order to successfully commercialize its product
candidates, the Company will be required to enter into arrangements with one or
more companies that will: provide for Phase III clinical testing, commercial
scale-up and manufacture of the Company's potential products; obtain or assist
the Company in other activities associated with obtaining regulatory approvals
for its product candidates; and market and sell the Company's products, if
approved.
To date, the Company has entered into agreements with CIBA Vision for
co-exclusive rights with the Company in the U.S. to manufacture and market
AquaSite, ToPreSite and ISV-205 for certain non-glaucoma-related indications. Of
these, only AquaSite, an OTC product for which regulatory approval is not
required, has been marketed. CIBA Vision assumed all subsequent product
development, clinical and regulatory responsibility for ToPreSite, but has no
obligation to fund the further development of ISV-205.
In July 1996, the Company entered into agreements with B&L pursuant to
which: (i) B&L has agreed to manufacture InSite product candidates at B&L's
facility in Tampa, Florida using equipment owned by InSite; B&L and InSite have
agreed to share the cost of certain leasehold improvements in connection with
the installation and operation of the equipment; (ii) B&L will receive, for a
license fee of $500,000, an exclusive worldwide royalty-bearing license to
manufacture and market PilaSite; (iii) B&L and InSite have agreed to collaborate
to develop and sell a new DuraSite based eyedrop formulation; and
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(iv) B&L made a $2 million equity investment in the Company. In connection with
this equity investment, the Company has issued an aggregate of 415,655 shares of
Common Stock to B&L. The Company has determined it will not proceed with
PilaSite at this time.
There can be no assurance that, even if regulatory approvals are
obtained, the Company's products will be successfully marketed, or that the
Company will be able to conclude arrangements with other companies to support
the commercialization of such products on acceptable terms, if at all.
The Company's strategy for research, development and commercialization
of certain of its products requires the Company to enter into various
arrangements with corporate and academic collaborators, licensors, licensees and
others, and is dependent on the diligent efforts and subsequent success of these
outside parties in performing their responsibilities. For example, the Company
is dependent upon Columbia for the polymer technology upon which the DuraSite
technology is based. Additionally, the Company is dependent upon British
Biotech for the supply of batimastat and lexipafant, the active drugs
incorporated into the Company's ISV-120 and ISV-611 product candidates,
respectively. British Biotech is conducting clinical testing of lexipafant for
non-ophthalmic indications, but it has discontinued clinical testing of
batimastat and informed the Company that it will no longer manufacture the
product. The Company may have no source of ongoing raw materials for ISV-120
and, in the future, may also lose its source of supply of lexipafant for
ISV-611, and its business may be adversely affected. See " -- Collaborative and
Licensing Agreements." In addition, there can be no assurance that the Company's
collaborators will not take the position that they are free to compete using the
Company's technology without compensating or entering into agreements with the
Company, or will not pursue alternative technologies or develop alternative
products either on their own or in collaboration with others, including the
Company's competitors, as a means for developing treatments for the diseases or
disorders targeted by these collaborative programs.
UNCERTAINTY OF PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in large part on its ability to
obtain patents, protect trade secrets and operate without infringing upon the
proprietary rights of others. A substantial number of patents in the field of
ophthalmology have been issued to pharmaceutical, biotechnology and
biopharmaceutical companies. Moreover, competitors may have filed patent
applications, may have been issued patents or may obtain additional patents and
proprietary rights relating to products or processes competitive with those of
the Company. There can be no assurance that the Company's patent applications
will be approved, that the Company will develop additional proprietary products
that are patentable, that any issued patents will provide the Company with
adequate protection for its inventions or will not be challenged by others, or
that the patents of others will not impair the ability of the Company to
commercialize its products. The patent position of firms in the pharmaceutical
industry generally is highly uncertain, involves complex legal and factual
questions, and has recently been the subject of much litigation. No consistent
policy has emerged from the U.S. Patent and Trademark Office or the courts
regarding the breadth of claims allowed or the degree of protection afforded
under pharmaceutical patents. There can be no assurance that others will not
independently develop similar products, duplicate any of the Company's products
or design around any patents of the Company.
A number of pharmaceutical and biotechnology companies and research and
academic institutions have developed technologies, filed patent applications or
received patents on various technologies that may be related to the Company's
business. Some of these technologies, applications or patents may conflict with
the Company's technologies or patent applications. Such conflicts could limit
the scope of the patents, if any, that the Company may be able to obtain or
result in the denial of the Company's patent applications. In addition, if
patents that cover the Company's activities have been or are issued to other
companies, there can be no assurance that the Company would be able to obtain
licenses to these patents, at all, or at a reasonable cost, or be able to
develop or obtain alternative technology. If the Company does not obtain such
licenses, it could encounter delays or be precluded from introducing products to
the market. Litigation may be necessary to defend against or assert claims of
infringement, to enforce patents issued to the Company or to protect trade
secrets or know-how owned by the Company, and could result in substantial cost
to and diversion of effort by, and may have a material adverse effect on, the
Company. In addition,
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there can be no assurance that these efforts by the Company will be successful
or, even if successful, will not result in substantial cost to the Company.
The Company's competitive position is also dependent upon unpatented
trade secrets. There can be no assurance that others will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's trade secrets, that such trade secrets
will not be disclosed or that the Company can effectively protect its rights to
unpatented trade secrets. To the extent that the Company or its consultants or
research collaborators use intellectual property owned by others in their work
for the Company, disputes also may arise as to the rights in related or
resulting know-how and inventions.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS
The Company may, at any time in the future, pursue acquisitions of
companies, product lines, technologies or businesses that its management
believes are complementary or otherwise beneficial. In the event that such an
acquisition does occur, there can be no assurance as to the effect thereof on
the Company's business, financial condition and operating results. Future
acquisitions by the Company may result in substantial dilution to the Company's
stockholders, the incurrence by the Company of additional debt and amortization
expenses related to goodwill, research and development and other intangible
assets, which could materially adversely affect the Company's business,
financial condition and results of operations. In addition, acquisitions involve
numerous risks, including difficulties in the assimilation of the employees,
operations, technologies and products of the acquired companies, the diversion
of management's attention from other business concerns, risks of entering
markets in which the Company has no or limited direct experience and the
potential loss of key employees of the acquired company.
NO COMMERCIAL MANUFACTURING EXPERIENCE
The Company has no experience in the manufacture of products for
commercial purposes. The Company has a pilot facility licensed by the State of
California to manufacture certain of its products for Phase I and Phase II
clinical trials. In July 1996, the Company entered into an alliance under which
B&L has agreed to manufacture Company products. If the Company should encounter
delays or difficulties in establishing and maintaining its relationship with B&L
or other qualified manufacturers to produce, package and distribute its finished
products, then clinical trials, regulatory filings, market introduction and
subsequent sales of such products would be adversely affected.
Contract manufacturers must adhere to Good Manufacturing Practices
("GMP") regulations strictly enforced by the FDA on an ongoing basis through its
facilities inspection program. Contract manufacturing facilities must pass a
pre-approval plant inspection before the FDA will approve an NDA. Certain
material manufacturing changes that occur after approval are also subject to FDA
review and clearance or approval. There can be no assurance that the FDA or
other regulatory agencies will approve the process or the facilities by which
any of the Company's products may be manufactured. The Company's dependence on
third parties for the manufacture of products may adversely affect the Company's
ability to develop and deliver products on a timely and competitive basis.
Should the Company be required to manufacture products itself, the Company will
be required to expend significant amounts of capital to install a manufacturing
capability, will be subject to the regulatory requirements described above, will
be subject to similar risks regarding delays or difficulties encountered in
manufacturing any such products and will require substantial additional capital.
There can be no assurance that the Company will be able to manufacture any such
products successfully or in a cost-effective manner. In addition, certain of the
raw materials the Company uses in formulating its DuraSite drug delivery system
are available from only one source. Any significant interruption in the supply
of these raw materials could delay the Company's clinical trials, product
development or product sales and could have a material adverse effect on the
Company's business.
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GOVERNMENT REGULATION AND PRODUCT APPROVAL
FDA and comparable agencies in state and local jurisdictions and in
foreign countries impose substantial requirements upon preclinical and clinical
testing, manufacturing and marketing of pharmaceutical products. Lengthy and
detailed preclinical and clinical testing, validation of manufacturing and
quality control processes, and other costly and time-consuming procedures are
required. Satisfaction of these requirements typically takes several years and
the time needed to satisfy them may vary substantially, based on the type,
complexity and novelty of the pharmaceutical product. The effect of government
regulation may be to delay or to prevent marketing of potential products for a
considerable period of time and to impose costly procedures upon the Company's
activities. There can be no assurance that the FDA or any other regulatory
agency will grant approval for any products developed by the Company on a timely
basis, or at all. Success in preclinical or early stage clinical trials does not
assure success in later stage clinical trials. Data obtained from preclinical
and clinical activities are susceptible to varying interpretations which could
delay, limit or prevent regulatory approval. If regulatory approval of a product
is granted, such approval may impose limitations on the indicated uses for which
a product may be marketed. Further, even if regulatory approval is obtained,
later discovery of previously unknown problems with a product may result in
restrictions on the product, including withdrawal of the product from the
market. Delay in obtaining or failure to obtain regulatory approvals would have
a material adverse effect on the Company's business.
The FDA's policies may change and additional government regulations may
be promulgated which could prevent or delay regulatory approval of the Company's
potential products. Moreover, increased attention to the containment of health
care costs in the U.S. could result in new government regulations which could
have a material adverse effect on the Company's business. The Company is unable
to predict the likelihood of adverse governmental regulation which might arise
from future legislative or administrative action, either in the U.S. or abroad.
See "Risk Factors -- Uncertainty of Product Pricing, Reimbursement and Related
Matters."
COMPETITION
The Company's success depends upon developing and maintaining a
competitive position in the development of products and technologies in its
areas of focus. There are many competitors of the Company in the U.S. and
abroad, including pharmaceutical, biotechnology and other companies with varying
resources and degrees of concentration on the ophthalmic pharmaceuticals market.
The Company's competitors may have existing products or products under
development which may be technically superior to those of the Company or which
may be less costly or more acceptable to the market. Competition from such
companies is intense and expected to increase as new products enter the market
and new technologies become available. The Company's competitors, many of which
have substantially greater financial, technical, marketing and human resources
than the Company, may also succeed in developing technologies and products that
are more effective, safer, less expensive or otherwise more commercially
acceptable than any which have been or are being developed by the Company. The
Company's competitors may obtain cost advantages, patent protection or other
intellectual property rights that would block or limit the Company's ability to
develop its potential products, or may obtain regulatory approval for the
commercialization of their products more effectively or rapidly than the
Company. To the extent that the Company determines to manufacture and market its
products by itself, it will also compete with respect to manufacturing
efficiency and marketing capabilities, areas in which it has limited or no
experience.
MARKETING AND SALES
The Company plans to market and sell its products through arrangements
with one or more companies with expertise in the ophthalmic drug or diagnostic
industries. There can be no assurance that the Company will be able to enter
into such arrangements on acceptable terms, if at all. If the Company is not
successful in concluding such arrangements, it may be required to establish its
own sales and marketing organization, although the Company has no experience in
sales, marketing or distribution. There can be no assurance that the Company
will be able to build such a marketing staff or sales force, or that the
Company's sales and marketing efforts will be cost-effective or successful. To
the extent the Company has
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entered into or enters into co-marketing, co-promotion or other licensing
arrangements for the marketing and sale of its products, any revenues received
by the Company will be dependent on the efforts of third parties (such as CIBA
Vision and B&L), and there can be no assurance that such efforts will be
successful.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on Dr. Chandrasekaran and other
principal members of its scientific and management staff, the loss of whose
services might significantly delay the achievement of planned development
objectives. Furthermore, recruiting and retaining qualified personnel will be
critical to the Company's success. Competition for skilled individuals in the
biotechnology business is highly intense and there can be no assurance that the
Company will be able to continue to attract and retain personnel necessary for
the development of the Company's business. The loss of key personnel or the
failure to recruit additional personnel or to develop needed expertise could
have a material adverse effect on the Company's business, financial condition
and results of operations.
PRODUCT LIABILITY EXPOSURE; LIMITED INSURANCE COVERAGE
The Company's business exposes it to potential product liability risks
which are inherent in the development, testing, manufacturing, marketing and
sale of human therapeutic products. Product liability insurance for the
pharmaceutical industry generally is expensive. There can be no assurance that
the Company's present product liability insurance coverage is adequate. Such
existing coverage will not be adequate as the Company further develops its
products, and no assurance can be given that adequate insurance coverage against
potential claims will be available in sufficient amounts or at a reasonable
cost.
UNCERTAINTY OF PRODUCT PRICING, REIMBURSEMENT AND RELATED MATTERS
The Company's business may be materially adversely affected by the
continuing efforts of governmental and third party payers to contain or reduce
the costs of health care through various means. For example, in certain foreign
markets the pricing or profitability of health care products is subject to
government control. In the U.S., there have been, and the Company expects there
will continue to be, a number of federal and state proposals to implement
similar government control. While the Company cannot predict whether any such
legislative or regulatory proposals or reforms will be adopted, the announcement
of such proposals or reforms could have a material adverse effect on the
Company's ability to raise capital or form collaborations, and the adoption of
such proposals or reforms could have a material adverse effect on the Company's
business, financial condition or results of operations.
In addition, in the U.S. and elsewhere, sales of health care products
are dependent in part on the availability of reimbursement from third party
payers, such as government and private insurance plans. Significant uncertainty
exists as to the reimbursement status of newly approved health care products,
and third party payers are increasingly challenging the prices charged for
medical products and services. If the Company succeeds in bringing one or more
products to the market, there can be no assurance that reimbursement from third
party payers will be available or will be sufficient to allow the Company to
sell its products on a competitive or profitable basis.
HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS
The Company's research, development and manufacturing processes involve
the controlled use of small amounts of radioactive and other hazardous
materials. The Company is subject to federal, state and local laws, regulations
and policies governing the use, manufacture, storage, handling and disposal of
such materials and certain waste products. Although the Company believes that
its safety procedures for handling and disposing of such materials comply with
the standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, the Company could be held liable for any damages
that result, and any such liability could exceed the resources of the Company.
Moreover, the Company may be required to incur significant costs to comply with
environmental laws and regulations, especially to the extent that the Company
manufactures its own products.
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CONTROL BY MANAGEMENT AND EXISTING STOCKHOLDERS
As of December 31, 1997, the Company's management and principal
stockholders in the aggregate owned beneficially approximately 22% of the
Company's outstanding shares of Common Stock. As a result, these stockholders,
acting together, would be able to effectively control most matters requiring
approval by the stockholders of the Company, including the election of a
majority of the directors and the approval or disapproval of business
combinations.
VOLATILITY OF STOCK PRICE; NO DIVIDENDS
The market prices for securities of biopharmaceutical and biotechnology
companies (including the Company) have been highly volatile, and the market has
from time to time experienced significant price and volume fluctuations that are
unrelated to the operating performance of particular companies. In addition,
future announcements concerning the Company, its competitors or other
biopharmaceutical companies including the results of testing and clinical
trials, technological innovations or new therapeutic products, governmental
regulation, developments in patent or other proprietary rights, litigation or
public concern as to the safety of products developed by the Company or others
and general market conditions may have a significant effect on the market price
of the Common Stock. The Company has not paid any cash dividends on its Common
Stock and does not anticipate paying any dividends in the foreseeable future.
ANTI-TAKEOVER EFFECT OF DELAWARE LAW AND CERTAIN CHARTER AND BYLAWS PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and
Bylaws may have the effect of making it more difficult for a third party to
acquire, or discouraging a third party from attempting to acquire, control of
the Company. Such provisions could limit the price that certain investors might
be willing to pay in the future for shares of the Company's Common Stock. The
Company's Board of Directors has the authority to issue up to 5,000,000 shares
of Preferred Stock, 7,070 of which have been designated as Series A Convertible
Preferred Stock. Furthermore, the Company's Board of Directors has the authority
to determine the price, rights, preferences, privileges and restrictions of the
remaining unissued shares of Preferred Stock without any further vote or action
by the stockholders. The rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any Preferred
Shares and of Preferred Stock that may be issued in the future. The issuance of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. Certain provisions of Delaware law
applicable to the Company could also delay or make more difficult a merger,
tender offer or proxy contest involving the Company, including Section 203 of
the Delaware General Corporation Law, which prohibits a Delaware corporation
from engaging in any business combination with any interested stockholder for a
period of three years unless certain conditions are met.
CONVERTIBLE SECURITIES; DILUTION; REDEMPTION
Sales of substantial amounts of the shares of Common Stock issuable
upon conversion of the Series A Convertible Preferred Stock ("Preferred Shares")
could adversely affect the market value of the Common Stock, depending upon the
timing of such sales, and may effect a substantial dilution of the book value
per share of Common Stock.
As of January 30, 1997, 4,357 Preferred Shares were issued and
outstanding. The actual number of shares of Common Stock issuable upon
conversion of the Preferred Shares after January 26, 1998 will equal (i) the
aggregate stated value of the Preferred Shares then being converted ($1,000 per
share) plus a premium in the amount of 6% per annum accruing from September 12,
1997 through the date of conversion, divided by (ii) a conversion price equal to
the lower of $2.127 or the product of the average of the lowest closing bid
prices for the Common Stock for any five (5) trading days during the twenty-two
(22) consecutive trading day period immediately preceding the date of conversion
(subject to adjustment in
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accordance with the terms of the Certificate, as defined below) multiplied by a
conversion percentage equal to (A) 90% if the conversion occurs prior to June
10, 1998, (B) 87.5% if the conversion occurs on or after June 10, 1998 and prior
to September 13, 1998, (C) 85% if the conversion occurs on or after September
13, 1998 and prior to December 7, 1998, or (D) 82.5% if the conversion occurs on
or after December 7, 1998. For a complete description of the relative rights,
preferences, privileges, powers and restrictions of the Preferred Shares, see
the Certificate of Designations, Preferences and Rights (the "Certificate")
attached as Exhibit 4.1 to the Registration Statement on Form S-3 filed with the
Commission on September 29, 1997. Depending on market conditions at the time of
conversion, the number of shares of Common Stock issuable could increase
significantly in the event of a decrease in the trading price of the Common
Stock. Purchasers of Common Stock could therefore experience substantial
dilution upon conversion of the Preferred Shares. In addition, in the event that
any holder of Preferred Shares is unable to convert any such securities into
Common Stock, any or all such holders may cause the Company to redeem any such
Preferred Shares that cannot be so converted. In the event that the Company
fails to so redeem such shares, the holders of the Preferred Shares shall have
additional remedies as set forth in the Certificate.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are:
NAME AGE TITLE
---- --- -----
S. Kumar Chandrasekaran, Ph.D. 54 Chairman of the Board and Chief Executive Officer
Lyle M. Bowman, Ph.D. 49 Vice President, Development and Operations
Michael D. Baer 53 Chief Financial Officer
S. Kumar Chandrasekaran joined the Company in September 1987 as Vice
President, Development. From 1988 to 1989, Dr. Chandrasekaran served as Vice
President, Research and Development. From 1989 to 1993, he served as President
and Chief Operating Officer. Since August 1993, Dr. Chandrasekaran has served as
Chairman of the Board of Directors, Chief Executive Officer and, from December
1995 to December 1997, as Chief Financial Officer. Dr. Chandrasekaran holds a
Ph.D. in Chemical Engineering from the University of California, Berkeley.
Lyle M. Bowman joined the Company in October 1988 as Director of Drug
Delivery Systems. From 1989 to 1991, Dr. Bowman served as Vice President,
Science and Technology. From 1991 to 1995 he served as Vice President,
Development, and since 1995 has served as Vice President Development and
Operations. Dr. Bowman holds a Ph.D. in Physical Chemistry from the University
of Utah.
Michael D. Baer was appointed Chief Financial Officer in December 1997.
Prior to his appointment, Mr. Baer served as Vice President, Finance and
Administration since June 1996 and had served as the Company's controller since
February 1995. Before joining the Company, Mr. Baer served as Chief Financial
Officer of the U.S. operations of Simsmetal Limited from 1993 to 1994; the
regional Chief Financial and Administrative Officer for Deloitte & Touche from
1990 to 1993 and was the partner in charge of the Sacramento office of Deloitte
Haskins & Sells from 1984 to 1990. Mr. Baer is a Certified Public Accountant and
holds an MBA in Finance from the University of California, Berkeley.
Officers are appointed to serve, at the discretion of the Board of
Directors, until their successors are appointed. There are no family
relationships between any directors or executive officers of the Company.
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ITEM 2. PROPERTIES
InSite currently leases approximately 29,402 square feet of research
laboratory and office space located in Alameda, California. The facility
includes laboratories for formulation, analytical, microbiology, pharmacology,
quality control and development as well as a pilot manufacturing plant. The
lease expires on December 31, 2001, but may be renewed by the Company for an
additional 5-year term. The Company believes its existing facilities will be
suitable and adequate to meet its needs for the immediate future.
ITEM 3. LEGAL PROCEEDINGS.
(a) The Company is not a party to any legal proceedings.
(b) No legal proceedings were terminated in the fourth quarter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's stockholders
during the quarter ended December 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The Company's common stock trades on The Nasdaq National Market under
the symbol "INSV." Prior to its initial public offering on October 18, 1993,
there was no public market for the Company's common stock. The following table
sets forth the high and low sales price for the common stock as reported by The
Nasdaq National Market for the periods indicated. These prices do not include
retail mark-ups, mark-downs or commissions.
1996 HIGH LOW
- ---- ---- ---
First Quarter $8.25 $3.50
Second Quarter $7.50 $5.13
Third Quarter $6.13 $3.50
Fourth Quarter $6.00 $3.13
1997 HIGH LOW
- ---- ---- ---
First Quarter $6.75 $3.63
Second Quarter $6.23 $3.44
Third Quarter $5.50 $4.06
Fourth Quarter $5.06 $2.00
(b) Holders
As of December 31, 1997, the Company had approximately 6,000
stockholders. On January 30, 1998, the last sale price reported on The Nasdaq
National Market for the Company's common stock was $2.375 per share.
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(c) Dividends
The Company has never paid dividends and does not anticipate paying any
dividends in the foreseeable future. It is the present policy of the Board of
Directors to retain the Company's earnings, if any, for the development of the
Company's business.
(d) Recent Sales of Unregistered Securities
The Company sold an aggregate of 7,000 Preferred Shares to various
institutional investors (the "Selling Stockholders") pursuant to a Securities
Purchase Agreement, dated September 12, 1997, by and among the Company and the
Selling Stockholders and granted a Warrant to purchase 70 Preferred Shares to
William Blair & Company LLC which acted as placement agent for the transaction.
The Selling Stockholders paid $1,000 per share for the Preferred Shares, and the
exercise price under the Warrant is $1,000 per share subject to standard
adjustments. Based upon the limited number of Selling Stockholders and their
representations, including that they were accredited investors acquiring the
Preferred Shares for investment and with no present intention of distributing
the shares, the Company relied upon the private placement exemption under
Section 4(2) of the Securities Act of 1933, as amended.
The Preferred Shares are convertible into the Company's Common Stock
based on (i) the aggregate stated value of the shares of Series A Stock then
being converted ($1,000 per share) plus a premium in the amount of 6% per annum
accruing from September 12, 1997 through the date of conversion, divided by (ii)
a conversion price equal to the lower of $2.127 (subject to adjustment as set
forth in the Certificate) or the product of the average of the lowest closing
bid prices for the Common Stock for any five (5) trading days during the
twenty-two (22) consecutive trading day period immediately preceding the date of
conversion multiplied by a conversion percentage equal to (A) 90% if the
conversion occurs prior to June 10, 1998, (B) 87.5% if the conversion occurs on
or after June 10, 1998 and prior to September 13, 1998, (C) 85% if the
conversion occurs on or after September 13, 1998 and prior to December 7, 1998,
or (D) 82.5 % if the conversion occurs on or after December 7, 1998. There are
certain limitations on Selling Stockholders' ability to convert based on their
post-conversion percentage ownership of the Company's Common Stock as set forth
in the Certificate. Depending on market conditions at the time of conversion,
the number of shares of Common Stock issuable could increase significantly in
the event of a decrease in the trading price of the Common Stock. In the event
that any holder of Preferred Shares is unable to convert any such securities
into Common Stock, any or all such holders may cause the Company to redeem any
such Preferred Shares that cannot be so converted. In the event that the Company
fails to so redeem such shares, the holders of the Preferred Shares shall have
additional remedies as set forth in the Certificate.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the
Company for the five years ended December 31, 1997:
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
Revenues $ 50 $ 544 $ 65 $ 112 $ 558
Operating expenses:
Research and development 7,224 5,458 8,079 9,944 6,712
General and administrative 3,034 2,902 3,801 4,961 2,629
Loss on vacated facility -- 1,412 -- -- --
Restructuring -- -- 1,031 -- --
-------- -------- -------- -------- --------
Total expenses 10,258 9,772 12,911 14,905 9,341
Net interest and other income 390 466 224 845 296
-------- -------- -------- -------- --------
Net loss (9,818) (8,762) (12,622) (13,948) (8,487)
Non cash preferred dividend 1,326 -- -- -- --
-------- -------- -------- -------- --------
Net loss applicable to common stockholders $(11,144) $ (8,762) $(12,622) $(13,948) $ (8,487)
======== ======== ======== ======== ========
Net loss per share applicable to common $ (0.85) $ (0.72) $ (1.38) $ (1.55) $ (2.69)
stockholders(1)
Shares used to calculate net loss per
share 13,053 12,131 9,160 8,998 3,154
DECEMBER 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
CONSOLIDATED BALANCE SHEET DATA
Cash and cash equivalents and short-term
investments $ 8,660 $ 10,518 $ 3,867 $ 17,546 $ 31,087
Working capital 7,983 9,512 2,376 16,269 30,895
Total assets 10,546 12,820 7,643 21,266 33,745
Long term notes payable -- -- 92 1,256 652
Redeemable preferred stock 7,533 -- -- -- --
Accumulated deficit (76,800) (65,656) (56,894) (44,272) (30,324)
Total stockholders' equity $ 2,031 $ 11,619 $ 5,847 $ 17,953 $ 31,847
- ------------
(1) The earnings per share amounts prior to 1997 comply with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share". For further
discussion of earnings per share and the impact of Statement No. 128, see
the notes to the consolidated financial statements beginning on page 32.
No dividends were declared or have been paid by the Company since its inception.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements and notes thereto included in Item 8 of this Form 10-K.
Except for the historical information contained herein, the
discussion in this Annual Report on Form 10-K contains certain forward-looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. The cautionary
statements made in this document should be read as being applicable to all
related forward-looking statements wherever they appear in this document. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include those
discussed under "Risk Factors" in Item 1 of this Form 10-K, as well as those
discussed elsewhere herein.
OVERVIEW
InSite Vision Incorporated ("InSite," "InSite Vision" or the
"Company") is developing genetically-based tools for the diagnosis and prognosis
of glaucoma, ophthalmic pharmaceutical products based on its proprietary
DuraSite eyedrop-based drug delivery technology, and therapeutic platforms for
the delivery of drugs to the retina.
The Company is collaborating with academic researchers to develop
new diagnostic and prognostic tools for primary congenital, juvenile and primary
open angle glaucomas. Primary congenital glaucoma is an inherited eye disorder
and is one of the leading causes of blindness and visual impairment affecting
infants. A gene-based diagnostic kit may allow early detection of the disease
before considerable irreversible damage has occurred and may improve the ability
to treat it successfully. Primary open angle glaucoma usually affects people
over the age of forty. Current glaucoma tests are generally unable to detect the
disease before substantial damage to the optic nerve has occurred. Gene-based
tests may make it possible to identify patients at risk and initiate treatment
before permanent optic nerve damage and vision loss occurs.
To date, the Company's academic collaborators have identified genes
associated with primary open-angle glaucoma (the most prevalent form of the
disease in adults), juvenile glaucoma and primary congenital glaucoma. A
prototype diagnostic/prognostic technology, ISV-900, which is capable of
identifying multiple glaucoma genetic markers from a single sample, has been
developed and the Company is discussing its commercialization with several
potential partners. The Company's academic collaborators for its glaucoma
genetics program are at UCSF and UCHC.
The DuraSite delivery system is a patented eyedrop formulation
comprising a cross-linked carboxyl-containing polymer which incorporates the
drug to be delivered to the eye. The formulation is instilled in the cul-de-sac
of the eye as a small volume eyedrop. DuraSite can be customized to deliver a
wide variety of potential drug candidates with a broad range of molecular
weights and other properties. The DuraSite formulation remains in the eye for up
to several hours during which time the active drug ingredient is gradually
released. DuraSite extends the residence time of the drug due to a combination
of mucoadhesion, surface tension and viscosity. Eyedrops delivered in the
DuraSite system contrast to conventional eyedrops which typically only last in
the eye a few minutes, thus requiring delivery of a highly concentrated burst of
drug and frequent administration to sustain therapeutic levels. The increased
residence time for DuraSite is designed to permit lower concentrations of a drug
to be administered over a longer period of time, thereby minimizing the
inconvenience of frequent dosing and reducing the potential related adverse side
effects.
The Company has also licensed a patented device for the controlled,
non-surgical delivery of ophthalmic drugs to the retina and other tissues in the
posterior (rear) chamber of the eye. The device has a needle with an adjustable
collar that limits its depth of penetration and is attached to a curved neck to
facilitate use. It is inserted above the eyeball and beneath the upper eyelid by
the ophthalmologist and reaches around the globe to the back of the eye. A
metering pump regulates the amount of drug to be
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delivered. The combination of this device technology with polymer based drug
platforms may permit long term delivery of therapeutic agents to treat retinal
disease.
The Company is focusing its research and development on (i) ISV-900
for prognosis and diagnosis of glaucoma, (ii) ISV-205 for the treatment of
inflammation and the prevention and treatment of glaucoma, (iii) ISV-208, a
glaucoma treatment product which is being developed in partnership with B&L,
(iv) ISV-611 for allergic conjunctivitis, (v) ISV-120 for prevention of
pterygium recurrence, and (vi) retinal drug delivery.
To date, InSite Vision has not received any revenues from the sale
of products, although it has received a small amount of royalties from the sale
of products using the Company's licensed technology. The Company has been
unprofitable since its inception due to continuing research and development
efforts, including preclinical studies, clinical trials and manufacturing of its
product candidates. The Company has financed its research and development
activities and operations primarily through private and public placement of its
equity securities and, to a lesser extent, from collaborative agreements.
In November 1995, InSite restructured its operations and reduced its
staff by approximately 50% to enable it to conserve its financial resources.
Self-funded product development was reduced substantially and the Company
discontinued plans to establish its own sales and marketing organization. The
Company is attempting, through corporate partnering and other potential business
opportunities, to recognize the value of its late-stage product candidates and
its drug delivery technology.
In May 1996, InSite entered into an agreement with CIBA Vision
whereby CIBA Vision received royalty-bearing, co-exclusive U.S. marketing rights
to InSite's ToPreSite product candidate for ocular inflammation/infection. CIBA
Vision assumed all subsequent product development, clinical and regulatory
responsibility for ToPreSite. In addition, CIBA Vision received royalty-bearing,
co-exclusive U.S. marketing rights to InSite Vision's ISV-205 product candidate
for certain non-glaucoma-related indications.
In July 1996, the Company entered into agreements with B&L pursuant
to which: (i) B&L agreed to manufacture InSite product candidates at B&L's
facility in Tampa, Florida using equipment owned by InSite; B&L and InSite
agreed to share the cost of certain leasehold improvements in connection with
the installation and operation of the equipment; (ii) B&L received, for a
license fee of $500,000, an exclusive worldwide royalty-bearing license to
manufacture and market PilaSite; (iii) B&L and InSite agreed to collaborate to
develop and sell a new DuraSite based eyedrop formulation; and (iv) B&L made a
$2 million equity investment in the Company.
As a result of these agreements, the Company elected to vacate its
co-tenancy of a manufacturing clean room at another manufacturer's plant and in
June 1996 wrote-off the amounts it had previously capitalized related to that
facility. This one-time write-off resulted in a non-cash charge to the Company's
results of operations of $1.4 million which is reported as a loss on vacated
facility in the accompanying financial statements.
As of December 31, 1997, the Company's accumulated deficit was
approximately $76.8 million. There can be no assurance that InSite Vision will
ever achieve either significant revenues from product sales or profitable
operations.
RESULTS OF OPERATIONS
The Company had total revenues of $50,000, $544,000 and $65,000 for
the years ended December 31, 1997, 1996 and 1995, respectively. The decrease
from 1996 to 1997 was attributable to the license fee received from B&L in 1996.
The Company earned royalty income of $50,000 $44,000 and $65,000 for the years
ended December 31, 1997, 1996 and 1995, respectively, from sales of AquaSite by
CIBA Vision. To date, the Company has not relied on royalty revenues to fund its
activities, nor has it received revenues from the sale of products.
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Research and development expenses increased 31% in 1997 to $7.2
million from $5.5 million in 1996 and decreased 32% in 1996 from $8.1 million in
1995. The increase in 1997 was primarily due to expenditures related to the
development of ISV-208, ISV-900 and the acquisition of the retinal drug delivery
device from the University of Rochester. The decrease from 1995 to 1996 was
primarily due to reduced personnel costs resulting from the 1995 restructuring
described above and lower expenditures for human clinical studies of the
Company's product candidates. The Company presently anticipates that research
and development expenses will be higher in 1998 than in 1997.
General and administrative expenses increased 4% during 1997 to $3.0
million from $2.9 million in 1996 and declined 24% in 1996 from $3.8 million in
1995. The increase in 1997 was primarily due to the cost of replacing outside
contractors with employees in the area of accounting and finance. The decrease
from 1995 to 1996 was primarily due to the decision, announced in November 1995,
that the Company would not establish its own sales and marketing organization,
and staff reductions in its administration and manufacturing areas.
Net interest and other income was $390,000, $466,000 and $224,000 in
1997, 1996 and 1995, respectively. These fluctuations are due principally to
changes in average cash balances. Interest earned in the future will be
dependent on the Company's funding cycles and prevailing interest rates.
Interest expense related to notes payable which were paid off during the first
quarter of 1997.
The Company incurred net losses of $9.8 million, $8.8 million and
$12.6 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Through 1995, InSite Vision financed its operations primarily
through private placements of preferred stock totaling approximately $32 million
and an October 1993 public offering of Common Stock, which resulted in net
proceeds of approximately $30 million. After 1995, the Company financed its
operations primarily through a January 1996 private placement of Common Stock
and warrants resulting in net proceeds of approximately $4.7 million and an
April 1996 public offering which raised net proceeds of approximately $8.1
million. In accordance with a July 1996 agreement between the Company and B&L,
the Company received a total of $2.0 million from the sale of Common Stock in
August 1996 and 1997. In September 1997, the Company completed a $7.0 million
private placement of 7,000 shares of redeemable convertible Series A Preferred
Stock resulting in net proceeds of approximately $6.5 million. At December 31,
1997, the Company had cash and cash equivalents totaling $8.7 million. It is the
Company's policy to invest these funds in highly liquid securities, such as
interest bearing money market funds, Treasury and federal agency notes and
corporate debt.
For the years ended December 31, 1997, 1996 and 1995, cash used for
operating activities and additions to capital equipment was $9.4 million, $7.6
million and $12.7 million, respectively. Of those amounts, $709,000, $91,000 and
$1.7 million were for additions to laboratory and other property and equipment
in 1997, 1996 and 1995, respectively. In 1997 $645,000 of the additional
expenditures related to the Company's portion of improvements at B&L's
facilities in Tampa, Florida. The timing of future expenditures will depend on
the timing of additional product development. During 1997 the Company wrote-off
its fully depreciated assets. This resulted in a decrease in both property and
equipment and accumulated depreciation of $3.4 million, with no change in net
fixed assets.
The Company's future capital expenditures and requirements will
depend on numerous factors, including the progress of its research and
development programs and preclinical and clinical testing, the time and costs
involved in obtaining regulatory approvals, the cost of filing, prosecuting,
defending and enforcing patent claims and other intellectual property rights,
competing technological and market developments, changes in the Company's
existing collaborative and licensing relationships, the ability of the Company
to establish additional collaborative arrangements, acquisition of new
businesses, products and technologies, the completion of commercialization
activities and arrangements, and the purchase of
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additional property and equipment.
The Company anticipates no material capital expenditures to be
incurred for environmental compliance in fiscal year 1998. Based on the
Company's good environmental compliance record to date, and its current
compliance with applicable environmental laws and regulations, environmental
compliance is not expected to have a material adverse effect on the Company's
operations.
The Company believes that its cash and cash equivalents will be
sufficient to meet its operating expenses and cash requirements through 1998.
InSite Vision might require substantial additional funds prior to reaching
profitability and the Company may seek private or public equity investments,
future collaborative agreements, and possibly research funding to meet such
needs. Even if the Company does not have an immediate need for additional cash,
it may seek access to the private or public equity markets if and when it
believes conditions are favorable. There is no assurance that such additional
funds will be available for the Company to finance its operations on acceptable
terms, or at all.
YEAR 2000
Based on a preliminary assessment, the Company believes that its
Year 2000 issues with respect to its own operations do not pose a significant
business risk. The Company has not yet initiated formal communications with all
of its significant suppliers and research partners to determine the extent to
which the Company is vulnerable to those third parties' failure to remediate
their own Year 2000 issues. There is no guarantee that the systems of other
companies on which the Company relies will be converted timely and would not
have an adverse effect on the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements and Report of
Independent Auditors are included on the pages which follow:
Page
----
Report of Independent Auditors 27
Consolidated Statements of Operations 28
Years Ended December 31, 1997, 1996 and 1995
Consolidated Balance Sheets - December 31, 1997 and 1996 29
Consolidated Statements of Stockholders' Equity 30
Years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows 31
Years Ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements 32-38
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REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
InSite Vision Incorporated
We have audited the accompanying consolidated balance sheets of InSite Vision
Incorporated as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of InSite
Vision Incorporated at December 31, 1997 and 1996, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Walnut Creek, California
January 30, 1998
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INSITE VISION INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
----------------------------------------
(in thousands, except per share amounts) 1997 1996 1995
-------- -------- --------
Revenues:
License fee $ -- $ 500 $ --
Royalties 50 44 65
-------- -------- --------
Total
50 544 65
Operating expenses:
Research and development 7,224 5,458 8,079
General and administrative 3,034 2,902 3,801
Loss on vacated facilities -- 1,412 --
Restructuring -- -- 1,031
-------- -------- --------
Total 10,258 9,772 12,911
Loss from operations (10,208) (9,228) (12,846)
Interest and other income 399 509 450
Interest expense (9) (43) (226)
-------- -------- --------
Net loss (9,818) (8,762) (12,622)
Non-cash preferred dividend 1,326 -- --
-------- -------- --------
Net loss applicable to common stockholders $(11,144) $ (8,762) $(12,622)
======== ======== ========
Basic net loss per share applicable to common stockholders $ (0.85) $ (0.72) $ (1.38)
Shares used to calculate basic net loss per share 13,053 12,131 9,160
See accompanying notes to consolidated financial statements.
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INSITE VISION INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------
(in thousands, except share and per share amounts) 1997 1996
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 8,660 $ 10,518
Prepaid expenses and other current assets 303 195
-------- --------
Total current assets 8,963 10,713
Property and equipment, at cost:
Laboratory and other equipment 2,731 4,416
Leasehold improvements 163 1,671
Furniture and fixtures 390 355
-------- --------
3,284 6,442
Accumulated depreciation 1,701 4,335
-------- --------
1,583 2,107
-------- --------
Total assets $ 10,546 $ 12,820
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 109 $ 562
Accrued liabilities 428 247
Accrued compensation and related expense 445 300
Current portion of notes payable -- 92
-------- --------
Total current liabilities 982 1,201
Commitments
Redeemable preferred stock, $.01 par value, 5,000,000 shares authorized;
6,700 issued and outstanding at December 31, 1997; redemption
value $10,590,000 7,533 --
Common stockholders' equity:
Common stock, $.01 par value, 30,000,000 shares authorized; 13,279,153
issued and outstanding at December 31, 1997; 12,935,927 issued and
outstanding at December 31, 1996; 133 129
Additional paid-in capital 78,698 77,146
Accumulated deficit (76,800) (65,656)
-------- --------
Common stockholders' equity 2,031 11,619
-------- --------
Total liabilities, redeemable preferred stock and stockholders' equity $ 10,546 12,820
======== ========
See accompanying notes to consolidated financial statements.
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INSITE VISION INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL TOTAL
COMMON PAID IN ACCUMULATED STOCKHOLDERS'
(dollars in thousands) STOCK CAPITAL OTHER DEFICIT EQUITY
-------- -------- -------- -------- --------
Balance, January 1, 1995 $ 91 $ 62,796 $ (662) $(44,272) $ 17,953
Issuance of 164,166 shares of common stock 2 149 -- -- 151
Unrealized gain on securities valuation -- -- 239 -- 239
Adjustment of deferred compensation for 1993 -- (294) 294 -- --
stock option grants
Compensation expense -- -- 126 -- 126
Net loss -- -- -- (12,622) (12,622)
-------- -------- -------- -------- --------
Balance, December 31, 1995 93 62,651 (3) (56,894) 5,847
Issuance of 1,469,232 shares of common stock 15 4,671 -- -- 4,686
and warrants to purchase 367,308 shares of
common stock in private placement
Issuance of 254,032 shares of common stock 2 768 -- -- 770
from exercise of options and employee stock
purchases
Issuance of 1,750,000 shares of common stock 17 8,062 -- -- 8,079
in public offering
Issuance of 210,527 shares of common stock to 2 994 -- -- 996
Bausch & Lomb in private placement
Other -- -- 3 -- 3
Net loss -- -- -- (8,762) (8,762)
-------- -------- -------- -------- --------
Balance, December 31, 1996 129 77,146 -- (65,656) 11,619
Issuance of 205,128 shares of common stock to 2 998 -- -- 1,000
Bausch & Lomb in private placement
Issuance of 43,968 shares of common stock from 1 128 -- -- 129
exercise of options and employee stock
purchases
Issuance of 94,130 shares of common stock from 1 308 -- -- 309
conversion of preferred shares
Non-employee stock option expense -- 118 -- -- 118
Net loss -- -- -- (9,818) (9,818)
Non-cash preferred dividend -- -- -- (1,326) (1,326)
-------- -------- -------- -------- --------
Net loss applicable to common stockholders -- -- -- (11,144) (11,144)
-------- -------- -------- -------- --------
Balance, December 31, 1997 $ 133 $ 78,698 $ -- $(76,800) $ 2,031
======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
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33
INSITE VISION INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
----------------------------------------
(in thousands) 1997 1996 1995
-------- -------- --------
OPERATING ACTIVITIES:
Net loss $ (9,818) $ (8,762) $(12,622)
Adjustments to reconcile net loss to net cash used by
operating activities:
Loss on vacated facilities -- 1,412 --
Depreciation and amortization 851 696 992
Amortization of deferred compensation -- -- 126
Changes in:
Prepaid expenses and other current assets (108) (44) 555
Accounts payable and accrued liabilities 373 (794) (101)
-------- -------- --------
Net cash used by operating activities (8,702) (7,492) (11,050)
INVESTING ACTIVITIES:
Maturity of short-term investments -- 3,000 7,510
Purchases of property and equipment (709) (91) (1,687)
-------- -------- --------
Net cash provided (used) by investing activities (709) 2,909 5,823
FINANCING ACTIVITIES:
Principal payments of notes payable and capital lease (92) (301) (1,367)
obligations
Issuance of preferred stock, net 6,516 -- --
Issuance of common stock, net 1,129 14,531 151
-------- -------- --------
Net cash provided (used) by financing activities 7,553 14,230 (1,216)
Net increase (decrease) in cash and cash equivalents (1,858) 9,647 (6,443)
Cash and cash equivalents, beginning of period 10,518 871 7,314
-------- -------- --------
Cash and cash equivalents, end of period $ 8,660 $ 10,518 $ 871
======== ======== ========
Supplemental disclosures:
Non-cash preferred dividends $ 1,326 $ -- $ --
======== ======== ========
Interest paid in cash $ 9 $ 43 $ 229
======== ======== ========
See accompanying notes to consolidated financial statements.
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34
INSITE VISION INCORPORATED
Notes to Consolidated Financial Statements
December 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The accompanying consolidated financial
statements include the accounts of InSite Vision and its wholly-owned United
Kingdom subsidiary, InSite Vision Limited. InSite Vision Incorporated (the
"Company" or "InSite Vision") is focused on developing ophthalmic drugs and
ophthalmic drug delivery systems. InSite Vision Limited was formed for the
purpose of holding and licensing intellectual property rights. All intercompany
accounts and transactions have been eliminated.
The Company has incurred losses since its inception and expects to
incur substantial additional development costs prior to reaching profitability,
including costs related to clinical trials and manufacturing expenses. As a
result, the Company will require substantial additional funds, and the Company
may seek research funding, private or public equity or debt investments, and
possible future collaborative agreements to meet such needs. If such funds are
not available, management may need to reassess its plans. Even if the Company
does not have an immediate need for additional cash, it may seek access to the
private or public equity markets if and when conditions are favorable. There is
no assurance that such additional funds will be available for the Company to
finance its operations on acceptable terms, if at all.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash and Cash Equivalents. The Company invests its excess cash in
investment grade, interest-bearing securities. As of December 31, 1997 and 1996,
cash equivalents consisted of money market mutual funds. All cash and cash
equivalents are stated at fair market value.
Management determines the classification of investments at the time of
purchase and re-evaluates such designations as of each balance sheet date. The
Company accounts for its investments in accordance with Statement of Financial
Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in
Debt and Equity Securities." Investments classified as available-for-sale are
stated at fair value based on quoted market prices, with unrealized gains and
losses reported in a separate component of stockholders' equity. The Company
considers highly liquid investments with original maturities of three months or
less as cash equivalents.
Property and Equipment. Property and equipment is stated at cost, less
accumulated depreciation. Depreciation of property and equipment is provided
over the estimated useful lives of the respective assets, which range from three
to five years, using the straight-line method. Leasehold improvements are
amortized over the lives of the related leases or their estimated useful lives,
whichever is shorter, using the straight-line method. Assets are written off
when they become fully depreciated. During 1997 the Company wrote-off its fully
depreciated assets. This resulted in a decrease in both property and equipment
and accumulated depreciation of $3.4 million, with no change in net fixed
assets.
Net Loss per Share. In 1997, the Financial Accounting Standards Board
issued Statement No. 128, "Earnings per Share." Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Basic net loss per share is computed, after giving
effect to non-cash preferred dividends, using the weighted average number of
shares of common stock outstanding. Diluted net loss per share is equal to basic
net loss per share and therefore is not separately disclosed. The potential
shares to be issued upon conversion of preferred stock are not added to the
denominator for the earnings per share computation because the inclusion of such
shares would be antidilutive due to the loss for the year. In addition, because
of the loss for the year, no shares resulting from the assumed exercise of the
options or warrants using the treasury stock method are added to the
denominator.
Accounting for Employee Stock Options. The Company accounts for stock
options granted to employees and directors using the intrinsic value method and,
accordingly, does not recognize compensation expense for options granted to
employees and directors at an exercise price equal to the fair value of the
underlying common stock.
Accounting for Material Purchased for Research and Development. The
Company expenses materials for research and development activities when the
items are purchased.
32
35
Accounting for Cost Sharing Agreements. The Company directly reduces
expenses for amounts reimbursed pursuant to cost sharing agreements. During 1997
and 1996 research and development expenses were reduced by $534,000 and $366,00
respectively, for costs reimbursed by Bausch and Lomb Pharmaceuticals, Inc.
(B&L) under the terms of the collaboration described in Note 3.
Key Suppliers. The Company is dependent on single or limited source
suppliers for certain materials used in its research and development activities.
The Company has generally been able to obtain adequate supplies of these
components. However, an extended interruption in the supply of these components
currently obtained from single or limited source suppliers could adversely
affect the Company's research and development efforts.
Impact of Recently issued Accounting Standards. In February 1997, the
Financial Accounting Standards Board issued Statement No. 129, "Disclosure of
Information about Capital Structure" ("FAS 129"). In June 1997, the Financial
Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive
Income" ("FAS 130"), and Statement No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("FAS 131"). The Company is required to
adopt these statements in fiscal year 1998. FAS 129 consolidates the existing
guidance from several other pronoucements relating to an entities' capital
structure. FAS 130 establishes new standards for reporting and displaying
comprehensive income and its components. FAS 131 requires disclosure of certain
information regarding operating segments, products and services, geographic
areas of operations and major customers. Adoption of these statements is
expected to have no impact on the Company's consolidated financial position,
results of operations or cash flows.
2. LOSS ON VACATED FACILITIES/RESTRUCTURING EXPENSE
Loss on Vacated Facilities. As a result of a new manufacturing
agreement with B&L, the Company ended its relationship with its previous
contract manufacturer and wrote-off its share of equipment and leasehold
improvements installed at the previous manufacturer's plant. This act resulted
in a one-time non-cash charge of $1.4 million which is reported separately in
the accompanying statement of operations.
Restructuring Expense. In November 1995, the Company implemented
certain changes in the structure of its operations. These changes included a
reduction in its work-force. Accordingly, the Company recorded a restructuring
charge of $1,031,000 in the fourth quarter of 1995. Such expenses included
termination benefits for 36 employees totaling $917,000, of which $393,000 was
paid during 1995, sublease losses of $107,000 and other costs of $7,000.
3. LICENSES
The Company has a license agreement with CIBA Vision Ophthalmics (CIBA
Vision), an ophthalmic company which is an affiliate of CIBA-GEIGY Limited.
Under the terms of the agreement, CIBA Vision has co-exclusive rights to
manufacture and market AquaSite and ToPreSite in the U.S. and AquaSite in
Canada. The license agreement requires CIBA Vision to pay royalties on net sales
of the licensed products. The Company recognized $50,000, $44,000 and $65,000 of
royalty revenue for sales of AquaSite in 1997, 1996 and 1995, respectively.
In July 1996, the Company entered into agreements with B&L which
provide for (i) B&L to receive, for a one-time license fee of $500,000, an
exclusive worldwide royalty-bearing license to manufacture and market PilaSite
and (ii) a collaboration between the Company and B&L to develop and sell a new
DuraSite based eye-drop formulation for which, after development, the Company
will issue an exclusive, worldwide, royalty bearing license to B&L.
4. LEASE COMMITMENTS
The Company leases its facilities under noncancelable operating lease
agreements which expire in 2001. Rent expense was $497,000, $605,000 and
$520,000 for 1997, 1996 and 1995, respectively. As of December 31, 1997, the
aggregate future minimum payments under noncancelable leases are:
1998 $ 511,915
1999 485,828
2000 499,941
2001 514,054
----------
Total $2,011,738
==========
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5. INCOME TAXES
Significant components of the Company's deferred tax assets for federal and
state income taxes as of December 31, 1997 and 1996 are as follows (in
thousands):
1997 1996
------- -------
Deferred tax assets:
Net operating loss carryforwards $25,042 $23,671
Research and development credit carryforwards 2,646 2,195
Capitalized research and development 3,880 1,404
Depreciation 580 670
Other 148 122
------- -------
Total 32,296 28,062
Valuation allowance -32,296 -28,062
------- -------
Net deferred tax assets $ -- $ --
======= =======
The valuation allowance increased by $4.2 million and $3.8 million
during the years ended December 31, 1997 and 1996 respectively.
At December 31, 1997, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $68.0 million, which expire in
the years 2001 through 2012 and net operating loss carryforwards for state
income tax purposes of approximately $29.0 million which expire in the years
1997 through 2002. The Company also has federal and state research and
development credit carryforwards of approximately $2.0 million and $950,000,
respectively, which expire in the years 2001 through 2012.
Utilization of the Company's federal and state net operating loss
carryforwards and research and development tax credits are subject to an annual
limitation against taxable income in future periods due to the ownership change
limitations provided by the Internal Revenue Code of 1986. As a result of this
annual limitation, a portion of these carryforwards will expire before
ultimately becoming available for offset against taxable income. Additional
losses and credits will be subject to limitation if the Company incurs another
change in ownership in the future.
6. REDEEMABLE PREFERRED STOCK
In September 1997, the Company received net proceeds of approximately
$6.5 million from a private placement of 7,000 shares of Series A Convertible
Preferred Stock with a $.01 par value ("Series A Preferred"). The number of
shares of Common Stock issuable upon conversion of the Series A Preferred will
be equal to the face value of each share of Series A Preferred divided by the
lower of the fixed conversion price of $2.127 or a variable conversion price.
The variable conversion price is determined by applying a discount, which ranges
from 10% if converted prior to June 10, 1998, to 17.5% if converted on or after
December 7, 1998, to an average of closing bid prices of the Company's Common
Stock at the time of conversion. Such conversion prices are subject to
adjustment in accordance with the terms of the Certificate of Designations,
Preferences and Rights of the Series A Preferred. The value of the Series A
Preferred shares to be converted will also include a 6% per annum premium which
accrues from the date of issuance until the date of conversion. Three years
after issuance, any remaining unconverted preferred shares will automatically be
converted into Common Stock. As of December 31, 1997, 94,130 shares of Common
Stock have been issued as a result of conversion of Series A Preferred.
Subsequent to December 31, 1997, 1,132,249 shares of Common Stock have been
issued as a result of conversions of Series A Preferred. The holders of the
Series A Preferred have no voting rights, except as required by applicable
Delaware law. The Company also issued a warrant to purchase 70 shares of Series
A Preferred which is subject to the same conversion
34
37
terms and premium. The Company has authorized 5,000,000 shares of Preferred
Stock, 7,070 of which have been designated Series A Preferred. Pursuant to the
agreement 6,000,000 shares of common stock have been reserved for issuance to
the holders of the Series A Preferred.
For the year ended December 31, 1997, in accordance with SEC Rules and
Regulations, the Company reported non-cash preferred dividends of $1.3 million
related to the discount at which Series A Preferred could be converted to Common
Stock at the first conversion date. Subsequently, a 6% per annum premium,
payable in additional Common Stock, is earned on the outstanding Series A
Preferred Stock. The initial discount and the dividends are used to determine
the net loss per share applicable to common stockholders.
In certain circumstances the Series A Preferred Stockholders have the
right to redeem their outstanding shares. The redemption amount is equal to the
number of shares of Common Stock issuable upon conversion multiplied by the
closing bid price of the Company's Common Stock as of the date of redemption
($10.6 million as of December 31, 1997).
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7. STOCKHOLDERS' EQUITY
In August 1997, the Company received $1.0 million from B&L for the
purchase of 205,128 shares of Common Stock in connection with a July 1996
agreement between the Company and B&L. B&L made an initial $1.0 million purchase
for 210,527 shares of common stock in August 1996.
In January 1996, the Company received net proceeds of approximately
$4.7 million from a private placement of 1,469,232 shares of its common stock
and 367,308 warrants. Each warrant entitles its holder to purchase one share of
the Company's common stock for $3.25 per share until January 2001. In April
1996, the Company received net proceeds of approximately $8.1 million from a
public offering of 1,750,000 shares of its common stock
Stock Option Plan.
At December 31, 1997, a total of 1,952,294 shares of common stock were
reserved under the 1994 Stock Plan for issuance upon the exercise of options or
by direct sale to employees, including officers, directors and consultants.
Options granted under the plan expire 10 years from the date of grant and become
exercisable at such times and under such conditions as determined by the
Company's Board of Directors (generally ratably over four years). Activity under
the 1994 Stock Plan has been as follows:
Shares
----------------------------------------------------
Options Weighted Average
Available Options Exercise Price of
for Grant Outstanding Option Price Shares Under Plan
--------- ----------- ------------ -----------------
Balance at January 1, 1995 671,449 1,194,461 0.60-9.25 $2.94
Granted -901,413 901,413 2.25-4.75 2.90
Exercised -139,873 0.60-3.00 .60
Forfeited 632,021 -632,021 0.60-8.50 4.73
------- ---------
Balance at December 31, 1995 402,057 1,323,980 0.60-9.25 2.29
Granted -277,250 277,250 4.25-6.38 5.67
Exercised -243,145 0.60-5.00 3.01
Forfeited 85,219 -85,219 0.60-7.25 3.74
------- ---------
Balance at December 31, 1996 210,026 1,272,866 $0.60-9.25 2.79
Additional Shares reserved 500,000
Granted -628,500 628,500 2.81-6.25 4.07
Exercised -30,598 0.60-4.38 2.86
Forfeited 204,927 -204,927 0.60-6.75 4.07
------- ---------
Balance at December 31, 1997 286,453 1,665,841 $0.60-9.25 3.12
======= =========
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The following table summarizes information concerning currently outstanding and
exercisable options:
Options Outstanding
-------------------------------------------- Options Exercisable
Weighted Average -----------------------
------------------------------ Weighted
Number Contractual Number Average
Range of Exercise Prices Outstanding Life Exercise Price Exercisable Exercise Price
------------------------ ----------- ---- -------------- ----------- --------------
$0.600 - $3.000 881,016 5.99 $1.809 395,392 $0.644
$3.750 - $5.875 605,459 9.47 4.057 55,035 4.728
$6.063 - $9.250 179,366 8.78 6.346 68,842 6.445
---------- ---- ------ -------- ------
1,665,841 7.55 $3.115 519,269 $1.846
========== ==== ====== ======== ======
At December 31, 1997 and December 31, 1996, options to purchase 519,269
and 470,091 shares, respectively, were exercisable at prices ranging from $0.60
to $9.25 per share. During 1995, 273,613 options to purchase shares were
canceled and regranted at a lower price per share. These options are shown above
as granted at the new price and forfeited at the original price. The weighted
average grant date fair value of options granted during 1997, 1996 and 1995 were
$3.58, $5.26 and $2.74, respectively.
Pursuant to the terms of the 1994 Stock Plan, generally each
non-employee director who is newly elected or appointed after October 25, 1993,
is granted an option to purchase 10,000 shares of common stock at a price per
share equal to the fair market value of the common stock on the grant date.
Assuming approval of an amendment to the 1994 Stock Plan by the Company
stockholders at the 1998 annual meeting each continuing non-employee director
receives an annual grant of an option to purchase 10,000 shares thereafter. Such
options vest one year after the grant date.
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In September 1993, the president and a consultant of the Company were
granted options to purchase 215,000 shares of common stock at $5.00 per share,
which the Company determined was below the fair market value at the date of the
grant. The Company recognized $126,000 of compensation expense in 1995 related
to these options. During 1995, the president resigned and stock options covering
97,993 shares and related deferred compensation of $294,000 were canceled.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting registration
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's 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
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its 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 for 1995, 1996 and 1997, respectively: risk-free interest rates
ranging from 5.35% to 6.58%; volatility factors for the expected market price of
the Company's common stock of 1.153, 1.1494 and 0.8946; and a weighted-average
expected life for the options of 4 years.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for earnings per share
information):
1997 1996 1995
---------- ---------- ----------
Net loss applicable to common
stockholders - as presented $ (11,144) $ (8,762) $ (12,622)
Net loss applicable to common
stockholders - pro forma (11,652) (9,240) (13,196)
Loss per share applicable to common
stockholders - as presented (0.85) (0.72) (1.38)
Loss per share applicable to common
stockholders - pro forma (0.89) (0.76) (1.44)
Employee Stock Purchase Plan.
On April 1, 1994, employees of the Company began participating in an
Employee Stock Purchase Plan which provides the opportunity to purchase common
stock at prices not less than 85% of market value at the time of purchase.
During the years ended December 31, 1997, 1996 and 1995, respectively, 13,370,
10,887 and 24,293 shares of common stock were issued pursuant to this plan. An
additional 65,125 shares are reserved for issuance under this plan. The effects
of the Stock Purchase Plan on the pro forma disclosures above are not material.
38
41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to the
identification of Directors is hereby incorporated by reference from the
information under the caption "Proposal One - Election of Directors" in the
Company's Proxy Statement for its Annual Meeting of Stockholders which is
estimated to be held on or about June 8, 1998 (the "Proxy Statement").
The information required by this item with respect to the
identification of Executive Officers is contained in Item 1 of Part I of this
report under the caption "Executive Officers."
The information required by Item 405 of Regulation S-K regarding
compliance with Section 16(a) of the Securities Exchange Act of 1934 is hereby
incorporated by reference from the information under the caption "Compliance
with Section 16(a) of the Securities Exchange Act of 1934" in the Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by
reference from the information under the caption "Executive Compensation and
Related Information" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is hereby incorporated by
reference from the information under the caption "Principal Stockholders" in the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is hereby incorporated by
reference from the information under the captions "Executive Compensation and
Related Information" and "Certain Relationships and Related Transactions" in the
Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The Financial Statements and Report of Independent Auditors are
included in a separate section of this Annual Report on Form 10-K.
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(2) Financial Statement Schedules
All financial statement schedules have been omitted because they are
not applicable or are not required or the required information to be set forth
therein is included in the Financial Statements or notes thereto included in a
separate section of this Annual Report on Form 10-K.
(3) Exhibits
The following exhibits are referenced or included in this report.
Number Exhibit Table
- ------ -------------
3.1(1) Restated Certificate of Incorporation.
3.2(7) Amended and Restated Bylaws.
4.1(4) Registration Rights Agreement, dated January 24, 1996 (the
"Registration Rights Agreement"), between the Registrant and the
investors listed on Schedule 1 thereto.
4.2(4) Form of Warrant to Purchase Shares of Common Stock between the
Registrant and each of the investors listed on Schedule 1 to the
Registration Rights Agreement.
4.3(10) Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock as filed with the Delaware Secretary
of State on September 11, 1997.
4.4(10) Certificate of Correction of the Certificate of Designations,
Preferences and Rights of Series A Convertible Preferred Stock as
filed with the Delaware Secretary of State on September 26, 1997.
10.5(2) InSite Vision Incorporated Employee Stock Purchase Plan.
10.6(2) Form of Indemnity Agreement Between the Registrant and its
directors and officers.
10.7(2) Form of Employee's Proprietary Information and Inventions
Agreement.
10.13(3H) License Agreement dated as of October 9, 1991 by and between the
Company and CIBA Vision Corporation, as amended October 9, 1991.
10.14(3H) Letter Agreement dated February 27, 1992 by and among the
Company, Columbia Laboratories, Inc. and Joseph R. Robinson, as
amended October 23, 1992.
10.15(2H) Collaboration Agreement dated as of November 24, 1992 by and
between the Company and British Bio-technology Limited.
10.16(2H) Collaboration Agreement dated as of April 30, 1993 by and between
the Company and British Bio-technology Limited.
10.17(8) Facilities Lease, dated September 1, 1996, between the Registrant
and Alameda Real Estate Investments.
10.18(1H) Agreement dated as of February 15, 1994 by and between the
Company and Timm A. Carpenter.
10.19(9HH) InSite Vision Incorporated 1994 Stock Option Plan (Amended and
Restated as of March 17, 1997).
10.20(1HH) Form of InSite Vision Incorporated Notice of Grant of Stock
Option and Stock Option Agreement, with Addenda.
10.21(9HH) Form of InSite Vision Incorporated Notice of Automatic Option
Grant and Non-Employee Director Option Agreement.
10.22(1) InSite Vision Incorporated 1994 Employee Stock Purchase Plan.
10.23(1) Form of InSite Vision Incorporated Stock Purchase Agreement.
10.24(1) Form of InSite Vision Incorporated Employee Stock Purchase Plan
Enrollment/Change Form.
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Number Exhibit Table
- ------ -------------
10.25(4) Letter Agreement dated February 3, 1995 between the Company and
David G. Harper.
10.26(4) Settlement Agreement and General Release dated March 3, 1995
between the Company and Clifford Orent.
10.27(5) Common Stock Purchase Agreement dated January 19, 1996 between
the Registrant and the Investors listed on Schedule 1 thereto.
10.28(6H) ISV-205 License Agreement dated May 28, 1996 by and between the
Company and CIBA Vision Ophthalmics.
10.29(6H) ToPreSite License Agreement dated May 28, 1996 by and between the
Company and CIBA Vision Ophthalmics.
10.30(6H) BetaSite Contract Manufacturing Agreement dated July 18, 1996 by
and between the Company and Bausch & Lomb Pharmaceuticals, Inc.
10.31(6H) PilaSite License Agreement dated July 18, 1996 by and between
the Company and Bausch & Lomb Pharmaceuticals, Inc.
10.32(6H) Timolol Development Agreement dated July 18, 1996 by and between
the Company and Bausch & Lomb Pharmaceuticals, Inc.
10.33(6H) Stock Purchase Agreement dated July 18, 1996 by and between the
Company and Bausch & Lomb Pharmaceuticals, Inc.
10.34(10) Engagement Agreement, dated April 1, 1997, by and between the
Company and William Blair & Company LLC.
10.35(10H) License Agreement, dated July 1, 1997, by and between the
University of Connecticut Health Center and the Company.
10.36(10H) License Agreement, dated August 19, 1997, by and between the
University of Rochester and the Company.
10.37(10) Form of Securities Purchase Agreement, dated September 12, 1997,
by and among the Company and the Selling Stockholders thereunder.
10.38(10) Form of Registration Rights Agreement, dated September 12, 1997,
by and among the Company and the Selling Stockholders thereunder.
10.39(10) Form of Warrant, dated September 12, 1997, to William Blair &
Company LLC.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (included in Part IV of this Annual Report on
Form 10-K under the caption "Signatures").
27 Financial Data Schedule.
1 Incorporated by reference to exhibit of the same number in the
Company's Annual Report on Form 10-K for the year ended December 31,
1993.
2 Incorporated by reference to exhibit of the same number in the
Company's Registration Statement on Form S-1 (Registration No.
33-68024) as filed with the Securities and Exchange Commission on
August 27, 1993.
3 Incorporated by reference to exhibit of the same number in Amendment
No. 1 the Company's Registration Statement on Form S-1 (Registration
No. 33-68024) as filed with the Securities and Exchange Commission on
September 16, 1993.
4 Incorporated by reference to exhibit of the same number in the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1995.
5 Incorporated by reference to Exhibit 10.25 in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
6 Incorporated by reference to exhibit of the same number in the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996.
41
44
7 Incorporated by reference to exhibit of the same number in the
Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997.
8 Incorporated by reference to exhibit of the same number in the
Company's Annual Report on Form 10-K for the year ended December 31,
1996.
9 Incorporated by reference to Exhibits 99.1 and 99.5, respectively, in
the Company's Registration Statement on Form S-8 (Registration No.
333-29801) as filed with the Securities and Exchange Commission on
June 23, 1997.
10 Incorporated by reference to Exhibits 4.1, 4.2, 10.1, 10.2, 10.3,
10.4, 10.5 and 10.6, respectively, in the Company's Registration
Statement on Form S-3 (Registration No. 333-36673) as filed with the
Securities and Exchange Commission on September 29, 1997.
H Confidential treatment has been granted with respect to certain
portions of this agreement.
HH Management contract or compensatory plan.
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the fourth
quarter of fiscal 1997.
(c) Exhibits
See list of exhibits under (a)(3) above.
(d) Financial Statement Schedules
See (a)(2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: February 4, 1998
INSITE VISION INCORPORATED
By: /s/ S. KUMAR CHANDRASEKARAN
-------------------------------
S. Kumar Chandrasekaran, Ph.D.
Chairman of the Board and
Chief Executive Officer
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